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

[Corporate]

Snoopy I don't think this table is correct. If you take a look at FMGs latest quarter the guidance for FY16 is a break even price of US$39p/t.

An interesting table was published on p8 of the AFR, dated Wednesday 8th April. It lists all the Austrlaian Iron oRe producers and their prospective break even prices.

Company	USD/tonne Breakeven Prices
Atlas Iron	$63.00
BC Iron	$59.00
Fortescue Metals	$53.00
Grange Resources	$50.00
Arrium	$46.00
Roy Hill	$43.00
Rio Tinto	$34.00
BHP	$34.00

More comment of interest from scanning the AFR of last week. Chiniese iron ore production is not reducing as fast as hoped, and the Chinese government have thrown their own domestic iron ore makers a tax halving lifeline. Several iron or producing minnows are in trouble. But even if all the minnows collapsed, that wouldn't reduce production enough to cause a revival in the world iron ore price. The two highest cost structure big players are Fortescue in Australia and Vale in Brazil. To end the iron ore production crisis one of these two will probably have to collapse. And guess what? It could happen!

SNOOPY

discl: Still holding ARI. Still comfortable with my position.

[Snoopy]

Snoopy I don't think this table is correct. If you take a look at FMGs latest quarter the guidance for FY16 is a break even price of US$39p/t.

Thanks for the update on the Fortescue iron ore extraction price Corporate. All these iron ore producers are looking at ways to reduce costs going forwards. So I guess the table will get more and more out of date. Nevertheless as a snapshot in time, the table makes for interesting reading.

Arrium are on record as saying they can reduce their cash costs to below $US46/tonne too. But whether that figure can get below $US40/tonne, time will tell.

Another factor occuured to me when reproducing that table, as least as far as Arrium was concerned. I think that $US46/tonne forecast is a wet ore cash cost for iron ore loaded on a boat calling into Australia. It is still necessary to adjust for drying the ore. The discount because the ore is less than reference quality is accounted for in the price received. Not sure who pays for transportation costs to China.

Finally that figure $US46/tonne does not include depreciation and mine licence amortisation of any already sunk exploration and mine development costs. I wonder if all those other figures from other companies require similar adjustments?

SNOOPY

PS quote from Arrium third quarter mining report

•Average Platts market index price (62% Fe CFR) US$6 2/dmt, down US$12/dmt on prior quarter
•Average realised price ~US$46/t CFR (dmt), down US$18/t on prior quarter.
•Average grade of shipments 59.1% Fe
•Average cash cost loaded on ship A$48.2/wmt (*)

(*) Includes mining, crushing, beneficiation, rail, road haulage and trans-shipping costs. Excludes capitalised costs (infrastructure, pre-stripping and mining licences) and depreciation and amortisation charges in respect of those costs, royalties, sales and marketing and corporate costs

[Joshuatree]

Ive taken the short term route and taken profits @ 17.5c re a 21% gain. Hope for another opp when I'm more confident of the long game or price drops back again. Thanks for sharing your research Snoopy; without peer imo.

[Snoopy]

Ive taken the short term route and taken profits @ 17.5c re a 21% gain. Hope for another opp when I'm more confident of the long game or price drops back again. Thanks for sharing your research Snoopy; without peer imo.

Not a problem Joshuatree. There is nothing like skin in the game to keep one's research on the boil! Glad I gave you the confidence to jump in and that you made a few bucks as a result. Sad that my research wasn't confidence inspiring enough to keep you there! I reckon you sold too early. But then again I have said several times myself how volatile I expect ARI to be going forwards. So it may yet prove that by selling up and looking to reenter later you have done the right thing.

SNOOPY

[Joshuatree]

Cheers Snoopy ;hope i get another shot.

A pretty positive article re Iron Ore ,steel etc from Ross Gittins

http://www.theage.com.au/business/c....html?promote_channel=edmail&mbnr=MTI4Mzg4NjA

[Snoopy]

Assuming no iron ore business in the future, but steel recovering to long term averages ( +$200m of EBITon current cost base) I think we are looking at a total Arrium NPAT of somewhere around $165m at the top of the cycle.

With 2937.3m Arrium shares now on issue this represents eps of 5.6c. At 20c, Arrium is on a potential top of the cycle PE of:

20/5.6 = 3.6

This tells me there is potentially a very high return for investors buying in today. At 40c, Arrium would only be on a forwrad PE of just over 7. Over the medium term, I don't think 40c is an unrealistic target even if all iron ore mining ceases.

Some updates on the steel market in Australia from p20 of the AFR dated 20-04-2015

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"Overcapacity is only going to get worse. China takes into consideration social policy as well (as economics). A lot of big SOEs would run at low return to uphold social policy." said an analyst who asked not to be named.

The steel does not necessarily come from China direct to Australia. But Chinese steel dumped in other markets, such as South Korea, can cause a displace,ment effect.

In March Arrium was delivered a favourable decision when the Anti Dumping Commission (ADC) whacked a temporary duty on a range of rebar products of up to 25%. Around 65% of Arriums steel production is either already protected by dumping duties or is currently being investigated by the ADC.

<snip>

One favoured method of avoiding duties is is the addition of boron to steel, so-called pixie dust.

Mr Roberts (Arrium CEO) said that boron did nothing to to change the integrity and composition of the steel but allowed it to be classed as a non like good.
"From a competitive position we need to ensure we have a level playing field against competition that is often subsidised."

The federal Minister of Industry and Science, Ian MacFarlane has proposed a number of reforms to the anti-dumping system which the government plans to implement in 2015.
"The package includes a range of measures such as greater onus on overseas businesses to co-operate with investigations, a more rigorous enforcement of submission deadlines, cracking down on un-cooperative exporters and and better assistance and information for Australian businesses" (said a spokesman for the minister).

Steps are also being taken to address circumvention.

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For a non interventionary government, I would say that things are looking as good as they can for Arrium on the regulatory side. I guess the big unknown is market demand.

The Australian motor industry has announced the closure of all remaining manufacturing plants at Holden, Ford and Toyota. As I write this though, all three of those plants are still going. I wonder where they get their steel from? I guess the steel industry has not yet felt the full effects of their closure? Or is the steel they use a different grade and fully imported? Anyone know?

SNOOPY

[Snoopy]

Cheers Snoopy ;hope i get another shot.

A pretty positive article re Iron Ore ,steel etc from Ross Gittins

http://www.theage.com.au/business/c....html?promote_channel=edmail&mbnr=MTI4Mzg4NjA

I repeat the part of the article directly relating to iron ore

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Many people see the resources boom as caused by the rapid development of China, whose economy is now growing more slowly. But Mark Cully, the chief economist of the federal Department of Industry and Science, sees China as just the first act, with other countries to follow.

"Economic growth in the highly populated emerging economies of Asia will continue to be a defining theme of this century," he says.

Per-person consumption of energy and materials in most countries in Asia lags the developed nations by a large margin and so is almost certain to grow. As incomes rise and they attract infrastructure and commercial investment, Asia's consumption of resources will grow by volumes that far outweigh whatever's happening in the rich countries.

Iron ore and coking coal are used to make steel, of course. Cully says China's steel production is estimated to have reached a record last year. He expects it to fall in the short term but, over the medium term, to reach a new peak almost 10 per cent higher by 2020.

"This will be required for China to continue expanding its infrastructure networks, especially rail, build more housing and grow its capital stock," he says.

Then there's India. Its Ministry of Steel wants present production to be four times higher by 2025. It may not achieve that target, but this still suggests rapid growth.

There've been highly publicised falls in the world price of iron ore in recent times, but Cully expects it to remain low this year and next before rebounding over the medium term as higher-cost producers exit the market and demand continues to grow. Australia has some high-cost producers, but most are in other countries, leaving Rio Tinto and BHP Billiton as the world's lowest-cost producers.

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It kind of ties in with my own view of India and Indonesia picking up the iron ore baton!

SNOOPY

[Snoopy]

The reason for the fall in Iron Ore price is supply lead, not demand lead. Iron ore and the downstream product steel are not luxury items. They will have ongoing use in society, whether a recession hits or not. A contraction of world economies often means goverenments ramp up spending on infrastructure projects (reinforcing steel).

Arrium has been a bit weak of late. Here is my theory why. Some were picking a pick up in infrastructure spending in the Australian budget. Instead Australian small businesses got tax concessions ($20,000 of block capital spent is immediately tax deductible). And there aren't may small businesses (turnover less than $2m) that can build tunnels, bridges and significant roads. The budget as it relates to infrastructure in Australia, I have summarized in bullet point form.

1/ The federal government remains committed to Melbourne's East West Link motorway, but won't redirect funding from other cancelled roading projects in Victoria.
2/ There is no new budget money for road or rail projects in Sydney or Melbourne beyond last years promises.
3/ The federal government remains committed to Sydney's new Badgery's Creek Airport, but not the proposed rail link to hook it up with the city.
4/ Northern Territory gets $5billion in cheap loans, but no extra money for new projects in the capital cities outside of Sydney and Melbourne either.

So, maybe the improvement in the steel division will not be a great as hoped?

SNOOPY

[Joshuatree]

Could be part of the reason Snoopy.
In another direction and not directly related to your theory;Cement and reinforcing steel go together and heres an int detail re Chinas use of; that i read in nz herald(i think).

Between 2011-13 China made more cement than the USA did in the entire 20th century!!!.

And china accounted for 85% of world growth in 2012 54% in 13, 30% in 14 and est 24% this year.

[Snoopy]

Interesting post on Hotcopper, pauljbo470, on 11-12-2014 regarding property assets of Arrirm up for sale

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This is whats for sale at the moment
http://www.realcommercial.com.au/pro...ield-501337111

it is pretty much the australian tube mill site there.

they do own the riverfront land behind it (see picture in the link) up to the cleared site closer to the ocean (old bhp steelworks site). I am sure the coalies would love to get their hands on it.

to give you an idea of what its worth the government just did a 98 year lease for the main part of the port for $1.75 B (700 hectares). But it obviously has existing port infrastructure

so definitely assets would outstrip market cap easily at this point.

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We are talking about Arrium land in Newcastle in the port precinct.

Land area is 39.25Ha. So scaling that government leasehold variation in proportion to area I get just under $A100m. Perhaps more to come if they could sell and lease back other land?

Obviously for comparative purposes, the government land is more developed in terms of port functionality. Not sure how selling land outright verses a 98 year lease would affect value.

Progress on the sale of Arrium's key site in Newcastle?

http://www.realcommercial.com.au/pro...ield-501337111

UNDER CONTRACT - Significant Freehold Investment Opportunity
•12+5+5+5 year lease term
•Leased to ASX listed company
•Passing income $2.93M pa

More capital for the ARI bank account soon?

SNOOPY