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

[h2so4]

I am pleased the nail biting is over SD........for now.

I'm not terribly concerned about either price.

If the quoted share price goes lower I will be happy to increase my stake.

[Snoopy]

I wanted to put some numbers on the table as to what the earnings might be in FY2015 from iron ore, in lieu of the company abdicating its responsibility to provide their own guidance.

I shall assume that EBIT is proportional to the difference between the cost of supplying ore and the price obtained by selling that ore.

1/Supply costs are in Australian dollars.
2/Sold costs are in US dollars.

For comparative purposes in my adjustment ratio, I have converted AUD costs to USD at the rate of 0.9121.

EBIT for FY2014 was based on average iron ore earnings of $US123m per dry metric tonne.

I am proposing to use an average EBIT using average iron ore earnings of $US83m per dry metric tonne. This was the spot price at the time of the capital raising. This is higher than the current spot price. But only 25% of the iron ore earnings are tied to current spot prices.

I have assumed that
1/ extraction costs do not change between FY2014 and FY2015.
2/ I also assume a constant AUD/USD exchange rate
3/ Steel prices are based on the Platts 62% Fe Index price in USD
4/ The same tonnage of ore is shipped out in FY2014 as FY2015 (12.5Mt)

EBIT(2015)= $481.3m x [($83m - ($73m x 0.9121)]/[($123m - ($73m x 0.9121)]

= $481.3m x 0.291 = $140m

I assume that depreciation and amortization will not change substantially from FY2014 ($204.6m).

EBITDA(2015) = $140m + $205m = $345m

For those interested I have rerun the same calculation based on a market steel price of $65/dmt

In this case EBIT(2015) for the iron ore division is -$13.5m

EBITDA (a measure of cashflow) is still strongly positive at $191m.

Consequently I believe that opinions that iron ore mining may become EBITDA negative in FY2015 are unlikely to be realised, even if the most pessimistic market ore price forecasts turn out to be correct.

Time to try my slightly different way of estimating EBITDA

I shall assume that EBITDA is proportional to the difference between the cost of supplying ore and the price obtained by selling that ore.

1/Supply costs are in Australian dollars.
2/Sold costs are in US dollars.

For comparative purposes in my adjustment ratio, I have converted AUD costs to USD at the rate of 0.9121.

EBITDA for FY2014 was based on average iron ore earnings of $US123m per dry metric tonne.

I am proposing to use an average EBITDA using average iron ore earnings of $US83m per dry metric tonne. This was the spot price at the time of the capital raising. This is higher than the current spot price. But only 25% of the iron ore earnings are tied to current spot prices.

I have assumed that
1/ extraction costs do not change between FY2014 and FY2015.
2/ I also assume a constant AUD/USD exchange rate
3/ Steel prices are based on the Platts 62% Fe Index price in USD
4/ The same tonnage of ore is shipped out in FY2014 as FY2015 (12.5Mt)

EBITDA(2015)= $685.9m x [($83m - ($73m x 0.9121)]/[($123m - ($73m x 0.9121)]

= $685.9m x 0.291 = $199.6m

I assume that depreciation and amortization will not change substantially from FY2014 ($204.6m).

EBIT(2015) = $199.6m - $204.6m = -$5.0m

For those interested I have rerun the same calculation based on a market steel price of $65/dmt

EBITDA(2015)= $685.9m x [($65m - ($73m x 0.9121)]/[($123m - ($73m x 0.9121)]

= $685.9m x -0.0281 = -$19.3m


In this case EBIT(2015) for the iron ore division is

EBIT(2015) = -$19.3m - $205m = -$224m

SNOOPY

[Snoopy]

Please forgive me the following data deluge, regarding forecast FY2015 EBITDA cover both divisionally and as a whole.

FY2015 (forecast)	Iron Ore	Mining Consumables	Recyclables	Steel	Total
EBIT	$170.6m	$140.0m	$1.3m	$-52.8m
EBIT (corporate)	-$15.9m	-$11.1m	-$11.0m	$-27.4m	$193.7m
D & A	$204.6m	$47.3m	$10.8m	$103.6m	$366.3m
EBITDA	$359.3m	$176.2m	$1.1m	$23.4m	$560.0m
Net Interest Bill	$23.6m	$21.6m	$12.2m	$37.4m	$94.8m
EBITDA/Interest	15.2	8.2	0.09	0.63	5.8
Tax Payable					$71.5m
Net Interest Bill					$94.8m
EBDA					$394m

The key figure (in the box) of 5.8 is very healthily in excess of the 3.0 to 3.5 covenant range. So I can say with confidence that this covenant is unlikely to be an issue either.

On an individual divisional basis, the EBITDA covenant is an issue, in Recycling and Steel. But Arrium is assessed by the banks in its entirety, not as divisions.

Finally EBDA is EBITDA with interest and tax removed. This is a proxy for free cashflow (before incremental capex), which to me looks healthy.

Time to rerun this table using my alternative method EBITDA estimate for iron ore.

FY2015 (forecast)	Iron Ore	Mining Consumables	Recyclables	Steel	Total
EBIT	-$5.0m	$140.0m	$1.3m	$-52.8m
EBIT (corporate)	-$15.9m	-$11.1m	-$11.0m	$-27.4m	$18.1m
D & A	$204.6m	$47.3m	$10.8m	$103.6m	$366.3m
EBITDA	$183.7m	$176.2m	$1.1m	$23.4m	$384.4m
Net Interest Bill	$23.6m	$21.6m	$12.2m	$37.4m	$94.8m
EBITDA/Interest	7.8	8.2	0.09	0.63	4.1
Tax Payable					$39.3m
Net Interest Bill					$94.8m
EBDA					$250.3m

The key figure (in the box) of 4.1 is in excess of the 3.0 to 3.5 covenant range. On these figures, the EBITDA to interest bill ratio covenant is (still) unlikely to be an issue. However, this is based on an iron ore price averaged over the year of $83/tonne (maybe too high?) with no further reduction in input costs (not true as some further cost savings have been already found) and no depreciation of the exchange rate from $US1= $A0.9121 (not a reflection of what has happened since). All of those assumptions are fair game to challenge.

SNOOPY

[Snoopy]

I am pleased the nail biting is over SD........for now.

I'm not terribly concerned about either price.

If the quoted share price goes lower I will be happy to increase my stake.

Share price down 5.7% today as I write this, but was down over 7% earlier. I guess that was the call for SSD to increase his stake? As an investor I am not used to this kind of volatility. But if I was a trader I might even be in a worse state, not sure how they cope, possibly by staying out?

I think I might put my ARI shares in the bottom drawer until the February half year announcement. Not sure if anything sensible can be gleaned by reading about Arrium until then!

SNOOPY

[h2so4]

Share price down 5.7% today as I write this, but was down over 7% earlier. I guess that was the call for SSD to increase his stake? As an investor I am not used to this kind of volatility. But if I was a trader I might even be in a worse state, not sure how they cope, possibly by staying out?

I think I might put my ARI shares in the bottom drawer until the February half year announcement. Not sure if anything sensible can be gleaned by reading about Arrium until then!

SNOOPY

Ha! Turn your browser off as well SD.

[Snoopy]

Share price down 5.7% today as I write this, but was down over 7% earlier. I guess that was the call for SSD to increase his stake? As an investor I am not used to this kind of volatility. But if I was a trader I might even be in a worse state, not sure how they cope, possibly by staying out?

I think I might put my ARI shares in the bottom drawer until the February half year announcement. Not sure if anything sensible can be gleaned by reading about Arrium until then!

I couldn't let the day close without noting that Arrium rose 15.9% in a single day today. The share closed at 25.5c, which means I am in the black... :-). However, I expect to be underwater again by the end of the week, such is the volatility of this share :-(.

SNOOPY

[cammo]

i closed end of day at 40% up. cant help wanting to drop out and buy in again with the profits . do i sit on my hands?

[Daytr]

I've never been impressed with these guys.
They used to be a client & thought they were a Sydney based corporate trying to play miner.
Cyclical play I suppose, but think there are much better operators .
I didn't realize how much debt they have! Even after massive CRs.
I suppose they are at least facing the music & reducing it, but boy do they need to.
How on earth were they allowed to get so much debt in the first place, quite incredible.

After interest costs I wonder what their break even on mining is?

[Snoopy]

i closed end of day at 40% up. cant help wanting to drop out and buy in again with the profits . do i sit on my hands?

Cammo, congratulations on your purchase timing. I would suggest that what you do from here depends on whether you believe a significant new capital raising is imminent. If you think it is, this could be a good time to take some profits.

If like me you consider a capital raising will not be needed, at least within the next two years, I see no reason not to 'hang about' until the Deutsche Bank ARI valuation of 40c is breached. The six month result is only a month away. So I will have my ear to the associated press release for further guidance from that.

SNOOPY

[Snoopy]

I've never been impressed with these guys.
They used to be a client & thought they were a Sydney based corporate trying to play miner.

Hi Daytr. I see you have been posting on oil and gold related threads over 2015. So I guess you follow mineral markets a bit.

The share price drop of ARI over the last year certainly wouldn't inspire confidence in ARI management. They were 'born' as Onesteel out of BHP over a decade ago as a vertically integrated steel producer/retailer. If they had remained like that, such has been the state of the Oz steel market since, one might argue such a 'Onesteel' would be broke already.

Talk in the market today is that Arrium paid too much for their grinding media diversification into Moly-Cop, paid for largely by debt funding. I have become annoyed by management comments on how much Moly-Cop would be worth on the market today, when the Moly Cop of which they speak includes a significant pre-existing Onesteel business that combined with what they bought, the whole lot being rolled into the Moly Cop of today. IOW the price for 'Moly Cop' is not reflective of the resources put into the businesses that makes up 'Moly Cop' today. This is an example of the asset shifting that Corporates can do to make the business development since acquisition look better than it really is.

Cyclical play I suppose, but think there are much better operators .

I would agree that Arrium are not the lowest cost iron ore producing operators. But even today iron ore production is more 'profitable' than the Australian steel making business. Is it fair to criticize management for trying to make more profit out of their iron or reserves, by moving to export? They have had three years of quite good iron ore mining profitability, before the current iron ore price slump.

I didn't realize how much debt they have! Even after massive CRs.
I suppose they are at least facing the music & reducing it, but boy do they need to.
How on earth were they allowed to get so much debt in the first place, quite incredible.

A large chunk of that debt was buying Moly Cop. One could argue that Arrium would already be broke if they hadn't done that.

After interest costs I wonder what their break even on mining is?

One article I read this year suggested break even could be reduced to $US60/dmt. Not competitive with BHP or Rio, but possibly the best of the medium cap iron ore mining minnows? Not sure if I read the article correctly (they may have been talking about cash costs, which nevertheless would include interest). Whether they can cover their depreciation expenses and mining licence amortisations is another matter. But those are not cashflow issues

SNOOPY