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

[Joshuatree]

Up re 17% today with re 40 million shares sold.Quarterly report just days away; mmmmhh.

[Snoopy]

.

http://www.theaustralian.com.au/bus...h-debt-covenants/story-e6frg90f-1227303904164

Footnote: Credit suisse are pretty negative here snoopy.Whats your opinion. cheers JT
Next to your research it looks pretty clueless actually.

To reprise the key points of the Credit Suisse article:

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Credit Suisse believes the slump in iron ore prices and modest steel spread forecasts could put mining and steel group Arrium at risk of breaching its debt covenants in FY 2016.

The bank’s analysts estimated Arrium’s FY16 finance costs at $85m and FY16 EBITDA (earnings before interest tax depreciation and amortisation) at $289.6m, generating an FY16 interest cover of 3.4 times, against a covenant of 3 to 3.5 times. They suggested possible restructuring is required to avert a breach, unless its earnings improve.

“Short of a rebound in iron ore which we do not expect, or a material recovery in steel spreads, the company appears to be running out of options with inadequate remaining scale to raise meaningful equity and the only readily saleable asset being equity in mining consumables,” Credit Suisse analysts said in a note today.

The bank also slashed its 12-month price target on the stock to 15c a share from 23c previously, and downgraded the rating to “underperform” from “neutral”.

Iron ore prices hit a decade low of $US46.70 a tonne. Credit Suisse expects prices to average $US45 in FY2016 and $US50 in FY2017.

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I don't believe the banks are looking to take over Arrium. Coming up with some low forecast figures that allow the EBITDA to net interest to just slip into the zone of concern does not constitute an imminent financing crisis, I don't dismiss what Credit Suisse says as a possible outcome. But I can't see the point in down rating your assumptions to meet the market share price.

The share price of ARI is very volatile. Last month most analysts were picking an iron ore price around $US60 going forwards a year. This month they are saying $US45-50.

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

The May 2015 futures price has risen from $US47/tonne at the beginning of the April to $US51/tonne now.

I wouldn't take any forecast heavily dependent on an gyrating variable like the iron ore price as gospel.

None of this is a one way bet with Arrium. A slumping iron ore price ultimately feeds into a lower input price for steel manufacturing and that should help Arrium's steel manufacturing division.

Personally I don't think what happens in FY2016 and FY2017 is an issue because major refinancing is not due over that time period. It is what happens in FY2018 that will likely determine the future of Arrium.

SNOOPY

[Snoopy]

Meanwhile Arrium itself is a little more upbeat on Iron Ore

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Indebted mining and steel group Arrium says it can "further optimise" its mining operations to cut costs if necessary as the iron ore price dive threatens the viability of smaller miners.

Based on Tuesday's benchmark spot price of $US47 a tonne, an Australian dollar fetching US77¢, and the fact Arrium's lower grade ores attract a discount to the benchmark price, Arrium Mining is likely to be losing cash.

"Arrium have a plan to transform their business to get their total cash cost down to $57 a tonne by 2015-16, so that's a big drop in cost that at current spot iron ore prices would be needed in a shorter period of time," Citi analyst Simon Thackray said.

"It is now hypothetically costing them money to produce."

An Arrium spokeswoman said the company was in a transition phase as it mothballs Southern Iron,

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Thackery is just highlighting that as Arrium moves to a lower cost base for iron ore, there will be a transition period where Arrium is burning cash. A fair point. But Arrium is ahead of their targets in their asset sales program. So I think they have the cash to bridge this gap.

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"The company releases its third-quarter mining report on April 20."

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The market will be expecting a bad result. Hopefully I will have my cash in place to buy some more shares before that date!

Third quarter mining report now out:

http://www.asx.com.au/asxpdf/2015042...fnk23jpxp9.pdf

Average realised cash price of $A58/dmt CFR, down $A16/dmt on the prior quarter.

Average loaded cost $A48.2/wmt. Moisture reported at 4%. So this translates to:

$A48.2 /(1- 0.04) = $50.2/dmt

Average total cash cost $A66.9/dmt (down $A3.3 on prior quarter)

So we can work out the cash loss per dmt: $A58/dmt - $A66.9/dmt = -$A8.9/dmt

Sales and shipments 3.06/Mt (dmt)

So cash loss for iron ore mining over the quarter was: 3.06 Mdmt x $A8.9/dmt = -$A27.2m

Excuses made because the price of the shipment when loaded is not the final price received. The final price is lower because of the continuing decline in the iron ore price while the shipment is on the water. Also reported is a short term increase in costs due to an increase in waste to core strip ratios (+$A2.5/dmt).

What does this all mean? Given the cost reduction program is still in transition phase, maybe not much. But I think the Arrium balance sheet is strong enough to withstand this $27.2m hit (around $50m for the whole 2HY2015?). It will be interesting to see how the market reacts. I have some more $A now, lined up for a future ARI additional purchase. But am keeping my powder dry just for the moment.

SNOOPY

[Joshuatree]

Cheers PSE ; are you doing any research on GRR in Tasmania? Its the only other ;Iron Ore,Magnetite, pellet company I'm int in.
Bought a small position in ARI @ 14.5c.

I read somewhere that most of the iron ore projects in China are very poor quality ; 20% Iron mentioned and has to be "cooked 3 times before going in the furnace". Haven't verified this but if so its only a matter of time before they fold and quality rises to the surface.

[Snoopy]

Snoop I feel your pain mate and have been in this situation, Kia Kaha (stand strong) as I said before if you understand this beast you will come out all right. The future is always uncertain - therein lies the thrill
Don't try to control it just ride the wave.
Quantitative over qualitative analysis every time; true value investors always win the long game and get rich slow.

I am not feeling any pain PSE. I have been there from the beginning with Arrium (albeit with a parcel so small in those days it wasn't worth selling). How to make a small fortune in Arrium? Start by investing a large fortune!

I can outlast Mr Market on this one. Worst case. Iron Ore operations nailed up for good. Steel recovery painfully slow. The share really is only worth in the 20 cents bracket long term. I have to put more money into a new cash issue to shore up the debt position. Even if all that happens, I still think I will get my money back (invested at 25c). The only slight annoyance is not getting a dividend while I am waiting. I don't need to buy any more ARI shares on market. But I might just do it anyway. I am expecting ARI to be volatile for a few months.

SNOOPY

[Snoopy]

If the Iron Ore business was nailed up tommorrow - worth $0 then based on 2014 annual report ARI would have 1,569 million of shareholders equity in 5,841 million of total assets (shareholders own 27% of the business) and the debt to equity ratio would be 59%.
I see ARI are trying to hang on to Iron Ore planning to reduce cash costs to $57 AUD per tonne, I would compare this to the long term average price of Iron Ore - was it $50 in 2003?
Industry isn't going to shut down but China will require less and BHP are dominating/have increased output so that the ultimate worst case is their cash cost of $35 a tonne or something like that, I am not predicting that - I wouldn't have a clue really. Furthermore I think trying to understand more than the general outline only gives people a false sense of their ability to predict the future.

I wouldn't try to predict what will happen in the iron ore market either. Other than to say this.
1/ Long term the demand for steel, and hence iron ore, will be there.
2/ Australia will remain a globally competitive place from which to extract iron ore.

I suspect longer term development in the likes India and Indonesia will mean that iron ore prices will not revert to 2003 levels, particuarly as extraction costs are a lot higher today.

The size of the liabilities and debt in relation to the good business is a little high for my liking I will look to take a small punt maybe, if I can get a handle on steel and mining consumables business.
By contrast I have made a large investment in NWF as it has taken its writedowns, at 5c it was selling for about the value of it's cash and land so the windfarm which has had normal new power station troubles was selling for free. It has no debt and sherholders equity is 87% of total assets.
It is much smaller but much simpler to understand, it is a business any idiot could run but unfortunately there are serious deficiencies in it's management. Being an electrical engineer I understand the industry well.

One advantage that Arrium has over the likes of a minnow company like New Zealand Wind Farms. Arrium is the largest distributor of steel in Australia. Arrium is the largest supplier of grinding balls in the world. Arrium has scale both nationally and internationally in their chosen markets.

NZ Windfarms is a minnow which may be able to be destroyed by market maniulation of the big players. If that happens the financial fundamentals of NWF count for nix.

SNOOPY

[PSE]

http://www.afr.com/brand/chanticleer...0150423-1ms0w1
Re the gearing, I reckon if times get tight ARI will probably be able to offload some junkbonds as Fortescue is doing to keep the levels healthy.
More I think about it the more I like it is a good sign, this Kahawai not as safe as my sprat though.

[Snoopy]

http://www.afr.com/brand/chanticleer...0150423-1ms0w1
Re the gearing, I reckon if times get tight ARI will probably be able to offload some junkbonds as Fortescue is doing to keep the levels healthy.

PSE, Arrium has EBITDA to net interest payable (I) covenants it must meet. Raising 'I' will require a corresponding rise in EBITDA to match. I don't think raising money via junk bonds is a workable solution for Arrium going forwards from FY2018, the time when some debt rolling over will be required.

SNOOPY

[Snoopy]

if I may wind you up a bit please don't take offence I thrive on giving and receiving criticism and I think it is useful.
My minnow has a healthier financial position and outlook (in as much as we try to predict) and is presently cashflow positive. Your proposition is that the bigger fish in the pond, rather than taking a chunk out of the minnow (and making me rich) would act together to lower the price of their produce so as to leave my little minnow out of the water (Beached As one might say).
Thats a bigger thing than just colluding in the market in a monopoly against the consumer as per usual and you give the importance of the wee minnow way too much impact, they are not going to make losses to drive it out of business.
BHP doesn't give two hoots about a minnow like Arrium but they have a cheaper supply.

I think any threat to NZ Windfarms will likely come from the mismatch of generation capacity to (retail) customers. Wholesale pricing of power can be stretched -both ways. NWF don't have any retail customers. I am not sure that large companies (big five gentailers, BHP/RIO) really worry that much about minnows (NWF/Arrium). But I think it is possible that natural movements in the market that the big boys take in their stride could make things very difficult for minnows (NWF and Arrium). The ultimate threat to Arrium's iron ore arm and NWF IMO will come because of market collatoral damage, not a targeted minnow attack.

Mr Market is going to keep freaking about Arrium until the situation with Iron Ore is clear so I think for yourself Snoopy you should have an idea about the Iron Ore cycle like I have for the electricity market. Until that is in place the story for ARI is not so compelling that I am forced to buy like the story for NWF was.

The sharp fall in iron ore prices has created the opportunity to invest in Arrium at a discount. If a recovery becomes clear , the ARI share price will shoot up and the investment opportunity is lost. The trading mentality is that once a price is on a downtrend, that downtrend will continue. A trader will not invest on that basis and will typically miss out on value investment opportunities. If you think like a trader you will certainly miss the Arrium boat. Forget about manic depressive Mr Market.

I don't see iron ore pricing following short or medium term trends. Traders who join the Arrium party thinking that it will IMO will likely lose. I expect the iron ore price in the short to medium term to be up and down based on news out of China with no particular identifiable pattern. Thus my strategy going forwards is a follows: Ignore all market signals, and just buy Arrium shares for as low a price as you can.

SNOOPY

[Snoopy]

Iron Ore down 4% and under $60. Is this a direct result of china predicting 7% growth(yeah right) next year. BHP RIO AGO MGX ARI(sub 20c) all down.

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 ore 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.