Styrelsemöte Sandvik AB 2007-01-31 Bilaga 1. Finansiell analys Acquisition Request Financial Analysis “Valuation method” Instruction KA/Group Business Control 70115Bil 1-Finansiell analys-Värderingsmetod

Document Information Version history Date Version Comment 2010-09-01 Title: Acquisition Request Description: Responsible: KA/Robert Lindström Valid as of: 1 September 2010 Version history Date Version Comment 2010-09-01 v.1 Financial analysis-Valuation method

Acquisiton Description Styrelsemöte Sandvik AB 2007-01-31 Bilaga 1. Finansiell analys Acquisiton Description Content: Background Company description Strategic adequacy Business plan and business organisation Financial analysis - valuation DCF - Cash flow based valuation of the acquisition candidate EBIT multiple - How listed capital goods companies are valued in relation to sales and profitability Key figures - Effects on Sandvik’s key figures from the acquisiton Management and integration of the company Risk analysis Funding Additional questions Formal Request Financial analysis-Valuation method 70115Bil 1-Finansiell analys-Värderingsmetod

Styrelsemöte Sandvik AB 2007-01-31 Bilaga 1. Finansiell analys Valuation Methods The DCF valuation (discounted cash flow) is based on future forecasted cash flows generated by the acquired company. WACC (weighted average cost of capital) is used when discounting the cash flows, based on capital and risk structure, currently 10% in Sandvik. Multiple valuation is based on the valuation of listed companies within similar market segments in relation to EBIT or Price/Earnings. When combining DCF with these two measures it gives you a valuation interval, which states the potential max- and minimum value of the acquired object. Guidelines have been established in accorance to the WACC-level. For a valuation of potential acquisiton obejcts, 10 % should be used. Financial analysis-Valuation method 70115Bil 1-Finansiell analys-Värderingsmetod

Acquisiton Description Styrelsemöte Sandvik AB 2007-01-31 Bilaga 1. Finansiell analys Acquisiton Description Discounted Cash Flow (DCF) The value of the company is based on the cash flow which is estimated Future-oriented assumptions are based on projections, market evaluation and at least three years historical data according to actual outcome of the coming three years The number of forecasted years are 5-8, after that, a long term growth rate is estimated, which shouldn’t exceed the last three years average outcome and the next three years future forecast The level of the discount rate (WACC) is based on 10% Multiple Valuation (see page 5) Indication on valuation of capital goods companies as a supplement to the discounted cash flow valuation, P/E or EBIT multiple Key Figures The analysis of the acquisition shall also show the effect on Sandvik’s key figures The effect on earnings per share for the future three year period The effect on SVA for the future three year period The effect on turnover, EBIT, ROCE, EPS Goodwill/Surplus Value Calculation of the effect on goodwill and effect on the performance depending on depreciation rate Balance sheet and income statement should be specified explicit Sensitivity analysis ±1 % growth rate and WACC-level should be illustrated Financial analysis-Valuation method 70115Bil 1-Finansiell analys-Värderingsmetod

Styrelsemöte Sandvik AB 2007-01-31 Bilaga 1. Finansiell analys Multiple Valuation The method is used to evaluate the value of the acquisition candidate P/E multiple should be used for an acquisition of listed companies were P refers to the contemplated price per stock and E refers to earnings per share. The contemplated P/E-ratio should be compared with the actual P/E ratio to which the company’s stock is traded on the stock exchange. EV/EBIT should be used when a company is being valuated partly, i.e. acquisition of assets, when the acquired assets are valued to a calculated value according DCF, i.e. Enterprise Value, which is compared to EBIT. A comparison of what the corresponding multiple should be can then be made. Financial analysis-Valuation method 70115Bil 1-Finansiell analys-Värderingsmetod

Styrelsemöte Sandvik AB 2007-01-31 Bilaga 1. Finansiell analys Multiple Valuation Multiple valuation To be used as a supplement/support to the DCF valuation to ensure that the value of the acquistion candidate is reasonable in relation to the valuation of capital goods companies on the stock exchange. As an example, the average valuation of companies is 1,30 x sales and 12 x EBIT, based on sales for year 2005 Multiple calculation is done after proposed price and compared to respectively Business Area standard/market level Enterprise Value (EV) Debt free value of the company EBIT Earnings before interest and tax P/E Price per share in relation to earnings per share Financial analysis-Valuation method 70115Bil 1-Finansiell analys-Värderingsmetod

Example of DCF-valuation Styrelsemöte Sandvik AB 2007-01-31 Example of DCF-valuation Bilaga 1. Finansiell analys Debt free value (EV value) of the company is 9.9 MSEK WACC 10.0 % EV/EBIT 6.6 based on terminal value, growth …………., EBIT …………. Financial analysis-Valuation method 70115Bil 1-Finansiell analys-Värderingsmetod