ARI (Arrium) : At Rock bottom, ore not?

[Snoopy]

Here is what has happened, in $A terms, over the last three six monthly reporting periods.

	1HY2015	2HY2015	1HY2016
Export Tonnage	6.58MT	5.90MT	4.21MT
Exchange Rate AUD/USD	0.8947	0.7778	0.7241
Price Received /dmt	$US68	$US49	$US42
Price Received /dmt (A)	$A76	$A63	$A58
Cash Cost CFR China /dmt (B)	$A72.9	$A60.9	$A57.6
Net Cash Received /dmt {(A)-(B)}	$A3.1	$A2.1	$A0.4
Cash Cost Shipboard Aus /dmt (*) (C)	$A47.6	$A47.8	$A37.1
Implied Cartage Aus-China /dmt {(B)-(C)}	$A25.3	$A13.1	$A20.5

(*) Cash costs for ore as loaded in Australia per 'wet metric tonne' (wmt) have been increased by $2 to convert these to 'loaded costs' per (dmt)

'Cash Costs' delivered to China include:

1/ mining,
2/ crushing,
3/ beneficiation (blending to a specified grade),
4/ road haulage and
5/ transshipping costs.

BUT the cash costs exclude
6/ capitalised costs (infrastructure, pre-stripping and mining licences) (capitalised Cost was estimated at $US4t ($A6t) in the September 2015 Quarterly Mining Report) and
7/ depreciation, amortisation charges in respect of those costs,
8/ royalties,
9/ sales and marketing
10/ corporate overhead costs

Leaving out those "excluded costs" can really only be justified if the mining operation is not regarded as a going concern longer term.

We have identified overall company debt as the big issue. We have also seen that the potential closure of Whyalla triggers site remediation provisions which amount to hidden off balance sheet debt. Now let's combine this off balance sheet debt with the declared debt position as at EOHY2016 and see what happens to the gearing.

Not doing this calculation before was my mistake. Being a 'glass half full' kind of mutt, I did not consider any remediation costs should Whyalla and Middleback Ridge be completely shut down. I should have checked out this 'worst case' scenario :-(

'Gearing' = (Net Debt) / (Net Debt + Equity)

If I use that definition with the data that I used in the previous post:

Interest bearing liabilities = $20.2m + $2,359.3m +$145.0m = $2524.5m
Cash is $303.6m
Total Equity = $2,328.6m
Total Assets = $6,196.9m

then I get the following:

'Gearing' = ($2,524.5-$303.6) / ( ($2,524.5-$303.6) + $2,328.6) = 48.8%

That is creeping towards that critical 50%, yet still just within banking covenants. But have negative earnings over the second quarter for FY2016 pushed things over the edge? Our next point for investigation!

I want to take shareholders back to the period before the last half year reporting period results were declared, but after the half year mining reports were out.

The Question: If I had been a bit more meticulous with my figures, could I have predicted the voluntary administration? Let's see. I will focus on excluded cost 6 (see first quoted section) of the cash costs. There is no easy way to forecast what the other excluded cash costs (7,8,9,10) were. But I believe (6) to be the most significant.

Both the September and December Quarter Mining reports talked about CAPEX costs for mining of $A6/t

So knowing the 'cash cost profit margin' and the volume of iron ore sold as quoted in the quarterly mining reports, we can estimate the balance sheet damage caused by selling iron ore at a profit (positive figure) or loss (neagative figure) for the two quarters.

Q1

$A(8.6 -6)/t x 2.194Mt = +$5.7m

Q2

$A(-6.8 -6)/t x 2.126Mt = -$27.2m

So, Overall balance sheet damage estimated at:

+$5.7m -$27.2m = -$21.5m

Now we need to add this damage (now being used as a a forecast of what might happen over Q3 and Q4) back into our earlier balance sheet calculation (the second quoted block).

'Gearing' = (Net Debt) / (Net Debt + Equity)

If I use that definition with the data that I used in the previous post:

Interest bearing liabilities = $20.2m + $2,359.3m +$145.0m = $2524.5m
Cash is $303.6m -$21.5m = $282.1m
Total Equity = $2,328.6m
Total Assets = $6,196.9m

then I get the following:

'Gearing' = ($2,524.5-$282.1) / ( ($2,524.5-$282.1) + $2,328.6) = 49.1%

Really getting close to that 50% figure now. But still within banking covenants! So even if I had done these calculations at the time, it looks like I would not have predicted the Voluntary Administration :-(.

SNOOPY