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

[winner69]

Snoops

You started this post mortem with the intent of learning something from your losses

Good practice

What have your learnt - in bullet points?

[Snoopy]

Snoops

You started this post mortem with the intent of learning something from your losses

Good practice

What have your learnt - in bullet points?

I am still trying to figure out if, without the benefit of hindsight, if I could have seen the administration scenario unfolding as a near certainty. Did I miss any signals?

But what I have learned so far is as follows:

1/ New underestimate the savagery of Australian share shorters! Shorting is something that is not as widespread in New Zealand. With Arrium, every negative development seemed incredibly severely punished and in the end this took away the possibility of a further capital raising from existing shareholders to fix the debt:equity issue.

2/ Management kept highlighting 'the factors they could control'. That is sensible, but as an investor I should have been looking more closely at the factors they couldn't control. For example, the iron ore freight costs from Australia to China were hardly mentioned by CEO Roberts. You really had to dig deep into the mining quarterly reports to find them. Yet they seemed possibly more significant than the on shore costs that Roberts was focussed on controlling.

3/ I should have looked more closely at any potential 'off balance sheet debt'. If a large industrial site or mine has to be closed, then there are remediation costs that are not always on the company balance sheet

4/ I need to brush up on what is the tipping point for a company going into administration. Arrium was apparently still within its banking covenants when the voluntary administrators were called in! What is more cashflow seemed to be improving, and there was a year to go before any large loans had to be renegotiated. So why are they in administration? I still can't satisfactorily answer this question.

5/ When one company dominates a town as an employer, the banks are very cogniscant of their home owner customers as well as their large company customer that employs them. So under circumstances where a large business should be wound up or heavily downsized, the banks might not let that happen, even if it causes problems for the large company (and their shareholders!).

These are the five very expensive lessons I have learned so far :-(

SNOOPY

[percy]

Snoopy.
You ignored a lot of warnings from ;Stranger Danger,Dej,BFG,Corporate,KW and myself.
Phaedrus would have taken you out back and shot you for buying a stock in a down trend.
Don't do it again.!

[Snoopy]

Snoopy.
You ignored a lot of warnings from ;Stranger Danger, Dej, BFG, Corporate, KW and myself.
Phaedrus would have taken you out back and shot you for buying a stock in a down trend.
Don't do it again.!

I probably got a little cocky due to my on-going success on the NZX Percy. I marched into a situation in which I thought I knew more about iron ore mining than I did. You saw my post detailing lessons learned, and there are a few more to come.

I think the ASX has an underlyingly more volatile investment psychology driving it than the NZX. ARI has historically not been a growth company. IMO buying a company with little historical growth on a rising share price trend is a sure recipe for overpaying. Although as it has turned out, paying 'any price' looks like we shareholders were overpaying with hindsight :-(.

ARI was for me a 'Ben Graham' purchase. Ben Graham made his money by buying shares on the market, trading at well under book value. All the Arrium shares I purchased were well under book value at the time of purchase. So I don't have a problem with the philosophy behind my Arrium share purchases. If you buy value, you very often buy in downtrends by co-incidence, even if the trend itself has no relevance to a Ben Graham value purchase strategy.

SNOOPY

[percy]

I probably got a little cocky due to my on-going success on the NZX Percy. I marched into a situation in which I thought I knew more about iron ore mining than I did. You saw my post detailing lessons learned, and there are a few more to come.

I think the ASX has an underlyingly more volatile investment psychology driving it than the NZX. ARI has historically not been a growth company. IMO buying a company with little historical growth on a rising share price trend is a sure recipe for overpaying. Although as it has turned out, paying 'any price' looks like we shareholders were overpaying with hindsight :-(.

ARI was for me a 'Ben Graham' purchase. Ben Graham made his money by buying shares on the market, trading at well under book value. All the Arrium shares I purchased were well under book value at the time of purchase. So I don't have a problem with the philosophy behind my Arrium share purchases. If you buy value, you very often buy in downtrends by co-incidence, even if the trend itself has no relevance to a Ben Graham value purchase strategy.

SNOOPY

I think we all get cocky/lazy when having a successful run.
I have often found the market gives me a good wake up call,"Percy you are still a dummy,"when I least expect it.
I think what saves me now days, is being able to judge the difference between a good company having a bad year,compared with a bad company having a good year.It means I look at what a company says it is going to do,then see if they deliver on that.
RDB agm was a great example of seeing clever management, well directed by a fully focussed board.Seeing and hearing them talking in simple language where the company is,what the issues are,and where they are going, is an excellent example of what a good company is all about.We know they will deliver on what they say they will do.
I agree with you that buying into companies in sectors we are not competent in, is extremely dangerous.I find I don't even bother,as there are more than enough companies to invest in,in sectors I do understand.
Yes the Aussie market is very volatile.Earnings downgrade and they murder you.Yet it is very rewarding when you get it right.
Warren Buffett has been known to get the odd one wrong,so we are not alone.!

[Joshuatree]

Hope springs......
http://www.adelaidenow.com.au/news/...m/news-story/0a87b89160cf66b15263c8b7b4686900

http://www.whyallanewsonline.com.au/...rrium/?cs=1550

Read the shareholder information

[Snoopy]

Hope springs......

http://www.whyallanewsonline.com.au/...rrium/?cs=1550

The above article refers to substantial extra duties that will have to be paid by Chinese Moly-Cop rivals, selling grinding balls into Australia. Despite headlines such as this, ARI shareholders have to remember that something less than one third of Moly-Cop sales are made within Australia. So any improvement in profit due to anti dumping duties in Australia, will only affect about one third of the Moly Cop profit in total.

Moly Cop profits on SAG grinding balls tend to remain stable through the business cycle. This is because changes in price of the largest manufacturing input costs - steel or grinding bar - is passed through to customers. This helps these miner customers lower their own costs, even as prices for the commodities that they themselves mine fall. But it also means there are no windfall profits for Moly Cop as their raw material input costs fall. And there is no guarantee that when Moly Cop input costs rise, that the commodity the end line customer is mining - mainly copper and gold - will also rise high enough to offset the higher input costs Moly Cop has negotiated to charge. Potentially Moly Cop may have to cut pricing to keep their end line customers in business, should the price of copper and gold rise less than the price of steel.

SNOOPY

[Snoopy]

Hope springs......
http://www.adelaidenow.com.au/news/...m/news-story/0a87b89160cf66b15263c8b7b4686900

The above article refers to the $50 billion dollar contract to build twelve new submarines for the Australian navy. Quoting from the above article:

----

Last week, Arrium administrator Mark Mentha expressed a strong interest in supplying steel to Australia’s future naval vessels.

But for this to occur a significant capital investment — the cost of which no one is willing to estimate — must be made to modernise South Australia’s steelmaking capabilities. At present, Whyalla is simply incapable of producing the vast majority of steel required for each of the multi-billion dollar projects.

------

The plate steel for ship and submarine construction would probably come from fellow Australian steelmaker Bluescope. Arrium might supply some of the long structural elements within the submarine skin, [and the periscope :-)]

Yet as it stands, Arrium does not have the capital to invest to modernize the plant to produce steel for this naval job.

From my wider reading on Whyalla's problems, I think the most pressing issue is input costs. I have read that the historically struck internal deal that Arrium's Whyalla has made with Arrium's company owned iron ore mining division means that currently Whyalla is paying way above market price for iron ore. IOW there is transfer pricing going on between Arrium's Mining division and Arrium's Whyalla Steel manufacturing plant. It is possible that if this transfer pricing was removed, Whyalla would suddenly become profitable!

While the submarine deal is medium term positive, I believe there could be more important issues - like transfer pricing - that requires the urgent attention of Arrium's voluntary administrators.

SNOOPY

[Snoopy]

Hope springs......
Read the shareholder information

The above is the standard KordaMentha guff sheet.

My optimistic reading of that is that we could get our company back. Historically a company coming out of voluntary administration and being handed back to shareholders is an against the odds event. If the state or federal governments put up money to modernize Whyalla, that will dilute existing shareholder interests for sure.

I think we shareholders have to assume that we have done our dough on this one. But, harking back to an earlier era metaphor, don't plaster your spare room with Arrium Share Certificate wall paper yet. There is still a slight hope that shareholders could recover something. Unfortunately according to the KordMentha statement, it might be months before we know. In the meantime there is no requirement to send shareholders financial statements, or even hold an AGM.

Sorry I can't bring better news for shareholders :-(

SNOOPY

[Joshuatree]

Tiny bubbles at Hope Springs

http://www.abc.net.au/news/2016-05-03/arrium-administrator-whyalla-talks-with-jay-weatherill/7377800