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

[Snoopy]

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.

RE-DESIGN OF ARRIUM MINING AND RESULTS UPDATE

<snip>

Results update

Earnings

Underlying EBITDA for HY2015 (to 30-12-2014): A$180 million to A$190 million.
Underlying NPAT for FY2015 (to 30-06-2015) year ending weighted to the second half, and less than the prior financial year. Second half earnings are expected to benefit from a lift in Steel and Mining Consumables earnings as well from cost reductions.

Trying not to be too smug about this, because my interest cover prediction from my most recent spreadsheet above was not entirely my work (thanks fellow sharechatters for arguing against my previous over optimistic version). But it does look like I am bang on the money. An improvement in 2HY2015 should see an EBITDA for FY2015 just more than twice the first half ($360m-$380m).

My EBITDA margin looks right even though I both overestimated the price for iron ore obtained and also overestimated the cash extraction cost for Arrium (a falling exchange rate and cost cutting have worked to Arrium's benefit). These two 'mistakes' have cancelled each other out.

With plans to be cashflow positive in FY2016 from iron ore, it looks more and more likely that no more capital raising will be needed. That is a huge positive for shareholders going forwards.

No doubt some are shocked by write downs of $1b plus. That could be affecting sentiment today. Come Monday, once those analysts have had the weekend to reflect, I think you might see a different story. I predicted that quantum of writedown too (albeit in the full year not the half year result). Well done Andrew Roberts. Given the circumstances you couldn't have done much better. Not sure the market has yet woken up to how good an underlying half year result has been flagged here, behind the awful headline figures.

SNOOPY

[Snoopy]

30th June 2014 results show net assets of $3,730.9m.
Within that figure are $1,964.1m of intangibles. So Net Tangible Assets are down to $1,766.8m

1,366.2m new shares are being issued in the 1:1 underwritten issue at $0.48, together with a placement of 204.9m at $0.48.

That should bring in net proceeds of $754.1m

Divide recapitalised net assets by the number of shares on issue after recapitalization and I get:

($1,766.8m+$754.1m)/(1,366.2*2+204.9) = $0.858

So if all turns out well I am buying close to 86c worth of assets for every share I buy for only 38c. Yes I am taking a big risk here but I have an appropriate safety margin to make it worthwhile. Things are not going down the gurgler quickly, as you can be sure the size of the cash issue has been carefully discussed with the supporting banks.

Time to update the net tangible asset backing, in view of the $1,335m dollar write down:

	tangible	intangible
Iron Ore	$956.5m	$209.5m
Steel & Recycling	$0m	$130m
Other	$0m	$39m
TOTAL	$956.5m	$378.5m

This represents and intangible asset writedown of 13cps and a tangible asset writedown of 32.3cps. A further loss of tangible assets will come from the net loss for the year of $100m. (3.4cps).

So NTA for FY2015 looks likely to be:

85.8c - (32.3c + 3.4c) = 50.1c

More than double the market price with cashflow turning positive in FY2016! This is looking like the real value play I thought it would become.

SNOOPY

[Daytr]

Well when the SP drops by 85% in a year you would hope its a value play!
Sorry being lazy here Snoop, but what's the MC & level of debt at the SP?
I might take a gander at them next week.

[Joshuatree]

"30 % of worlds iron ore production is loss making"

The muck is starting to hit the fan in Australia's iron ore industry, where companies reported more than $3 billion in asset writedowns this week, along with the probable loss of more than 500 Australian jobs.
Eight months after the price dipped to less than $US100 a tonne, Australian miners are giving up hope of a significant price recovery, and are instead cutting their businesses down to size.
Australia's fourth-biggest iron ore exporter, Arrium Limited, took a clear step in that direction on Friday when it announced the "mothballing" of one of its two operations in South Australia.
The closure of the Southern Iron assets is a symbolic retreat for Arrium, which has spent the past four years trying to change its brand from that of a pure-play steelmaker to a diversified group with a large iron ore export business.

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The closure will reduce Arrium's exports from 12.5 million tonnes a year to about nine million tonnes, and will force the company to shed 200 full-time workers. A further 380 contracting jobs on the project have also been thrown into doubt.
Arrium boss Andrew Roberts said an iron ore price significantly above the market's consensus view of future iron ore prices would be needed to reopen the assets, which were of very good quality but were located a troublesome 600 kilometres from port.
"There is some uncertainty around the nature of the price recovery and the time that it will take, and our mining business at this point in time is absorbing cash rather than contributing cash back to the group, so today we have announced the redesign of our mining business," he said.
Arrium bought Southern Iron from WPG Resources for $320 million near the top of the iron ore market in August 2011. It then spent hundreds of millions of dollars developing the assets and connecting them to the company's existing mines and ports near Whyalla.
Just months after the 2011 transaction, WPG chairman Bob Duffin lauded the "full" price paid for the assets on the grounds that "we felt that iron ore prices were unsustainably high and were likely to fall as new production comes into the market".
Mr Roberts conceded on Friday the acquisition had not realised full value yet for Arrium, and the company would record asset impairments of $1.1 billion on its mining business next month.
But he said the acquisition would continue to have benefits in the future.
"In terms of the original investment, plus the ongoing investment required to mine the business, we haven't realised the full value at this point," he said.
"Going forward the redesigned business will extract value because of the investments we made at that time. We wouldn't be able to do what we are proposing to do in the redesign without the investments in Southern Iron two or three years ago, so there is still ongoing value that we will extract from the investment."
The changes would strengthen Arrium's iron ore position by lowering its cost of production by 20 per cent to $57 a tonne, he said.
"We have a business that is going to be sustainable and it is a business that will be generating positive cash (in FY16)," he said.
The changes will push Arrium below the likes of Atlas Iron and Mt Gibson on what is an increasingly fluid cost curve.
Atlas Iron said this week that its all-in cost of production had fallen by 17 per cent in recent months to about $65 a tonne, while Fortescue is estimated by UBS to have a break-even price of $US59 a tonne.
The declining Australian dollar and slumping oil price has provided some relief to miners, who have been cutting spending on jobs and projects.
But with the price 65 per cent below its 2011 peaks at just $US66.79 a tonne on Friday, further asset impairments and job losses appear inevitable.
Last month Atlas said it would record up to $900 million in writedowns on assets it acquired between 2009 and 2011, while Hong Kong giant Citic Limited said on Tuesday it would impair the book value of its Sino Iron project in Western Australia by up to $US1.8 billion.
UBS analyst Glyn Lawcock believes about 30 per cent of the world's iron ore production is loss-making at current prices, and high-cost juniors will have to "cut costs materially to survive".
"We believe it will take time for high-cost supply to exhaust cost-cutting and financing options before they exit the trade," he said in a note to c


Read more: http://www.smh.com.au/business/minin...#ixzz3PgBbmHnd

[Snoopy]

Well when the SP drops by 85% in a year you would hope its a value play!

The problem is when the market price of what was previously your largest cash earner drops to near the extraction price, small variations in IO market prices can equate to wild swings in ARIs share price valuation. Mind you, dropping from 13Mt to 9Mt in terms of export volumes for FY2016.....

The contract sale percentage (as opposed to spot market sales that make up the balance) for FY2014 was 75%. 75% of 13Mt is 9.75Mt. So maybe Arrium, by reducing the amount of IO mined to 9Mt, are looking to pull out of the spot market altogether?

Sorry being lazy here Snoop, but what's the MC & level of debt at the SP?

Since the cash issue and placement, the number of shares on issue:

(1,366.2*2+204.9)= 2,937.3m

With the price at 20.5c, total market capitalisation is:

2,937.3m x 0.205 = $602m

or rather less than even the new capital of $754.1m, injected into the coffers in the recent recapitalisation! Anyone know how big the market capitalisation has to get before ARI is welcomed back into the ASX100?

Any share price change of ARI has no effect on the level of debt held within Arrium itself. The big change is the write down of assets. The debt in $A does fluctuate because some debt is denominated in USD. However, this is offset by theoretical gains in asset values valued in USD. So IMO, looking at debt on a constant AUD/USD exchange rate basis is easier and legitimate.

We are told net debt as at 31-12-2014 is $1,234m (exchange rate constant).

Total assets on the books are $8,009m (pro forma balance sheet capital raising slide 29). $1,335m in assets will be lost in the write down. Another $50m (my estimate ) from NPAT losses in 2HY2015. So at the end of FY2015 there will be:

$8,009m - ($1,335m+$50m) = $6,624m of assets left.

Line the exchange rate constant debt up with that (assuming no more write downs in 2HY2015) and I get debt as a percentage of assets to be.

$1,234m/$6,624m = 18.6%

Or debt as a percentage of equity

$1,234m/($6,624m-$1,234m) = 22.8%

All looks very manageable, with the new slimmed down ARI able to put earnings into reducing those ratios from FY2016 forwards. So no more capital raising. And a dividend return in FY2017 just might be on the cards.

SNOOPY

[h2so4]

No doubt some are shocked by write downs of $1b plus. That could be affecting sentiment today. Come Monday, once those analysts have had the weekend to reflect, I think you might see a different story. I predicted that quantum of writedown too (albeit in the full year not the half year result). Well done Andrew Roberts. Given the circumstances you couldn't have done much better. Not sure the market has yet woken up to how good an underlying half year result has been flagged here, behind the awful headline figures.

Those analysts must still be asleep SD or it's in their too hard basket.

[percy]

I think they have been under water for so long they have drowned!!

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

Someone else of substance agreeing with you Daytr.

The boss of WPG resources has some pretty damning things to say about Arrium management in the AFR dated 24th-26th January

From p35
"WPG Resources Executive Chairman Bob Duffin said it was clear iron ore prices were going to fall when the tranaction (Arrium acquisition of Southern Iron) took place in 2011. <snip> Most of the executives involved in the acquisition have since left the company and Mr Duffin said it was clear he had sold the assets to people from the steel industry rather than miners.
'When I was dealing with them I never saw people with a mining industry mindset... the steel business is is very tough and it is full of tough menm without a lot of imagination' Duffin said"

The only sweetener in that is that 'most' involved in the deal for Arrium have gone!

SNOOPY

[Snoopy]

Snoopy wrote
"No doubt some are shocked by write downs of $1b plus. That could be affecting sentiment today. Come Monday, once those analysts have had the weekend to reflect, I think you might see a different story. I predicted that quantum of writedown too (albeit in the full year not the half year result). Well done Andrew Roberts. Given the circumstances you couldn't have done much better. Not sure the market has yet woken up to how good an underlying half year result has been flagged here, behind the awful headline figures."

Those analysts must still be asleep SD or it's in their too hard basket.

Of course now that Arrium is out of the ASX 100, the coverage from analysts has probably reduced. However costs for iron ore delivered to China are now projected to be $57 per tonne (I think USD?) which is below the declared costs of minnow miners Atlas and Mt Gibson.

Here is what Matthew Stevens of the AFR (24th-26 Jan 2015, p41) said about Arriums projected debt position:

"Arrium is sitting right back where it was before it agitated its retail and professional owners with a call for new equity in the in the face of iron ore's new downside volatility.

While its gearing sits below the 50 percent required by its lending covenants , it is clear the company sees 32% as way too high. And it is just as clear that it is carrying too much debt with $976m of borrowings in USD."

Two important points from that.
1/ Arrium will not be forced by their banks to raise more equity in a hurry.
2/ The criticisim of having too much debt denominated in USD is unfair IMO, because those US liabilities are offset by US based assets. The increase in value of US assets in AUD terms, becuase of AUD currency devaluation, would be apparent should Arrium choose to sell them, even if it is not apparent in the balance sheet now. Any US debt not offset against US assets is hedged.

In addition Stevens hasn't mentioned the ability to pay more US interest increases markedly as the AUD currency weakens against the USD. IMO Stevens, and other commentators are worrying about Arriums debt unecessarily.

SNOOPY

PS Arrium clawing its way back now up to 20.7c as I write this

[Snoopy]

Actually the latest price is $69.25 as of yesterday.
The forward curve has also deteriorated suggesting FE may head toward $65
The Aussie cyclone season is not far away & this may interrupt shipments from the Oz that may se some support for FE in the short term.
Overall though I think FE prices are heading to $60/ton.

http://www.cmegroup.com/trading/meta...p-futures.html

February 2015 iron ore price now $US62.87

http://www.cmegroup.com/trading/meta...p-futures.html

Nevertheless, the Oz interest rate cut means in $A terms the fall is cushioned. The same website futures contracts show iron ore to be at $US66.25 in January 2017, up from a slow deterioration to just under $US60 over the next two years.

Meanwhile Arrium itself is again 'on the tear' having risen 10% today to 22c as I write this. There is talk on other forums of a 'shorters trap' having been set.

SNOOPY