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

[winner69]

Were those announcements today anything new or just confirming what was already known

Chart still looks rather sad

One day this a buy?

[winner69]

It was good news apparently
From SMH

You have to have a bit of confidence to run a corporate dog like miner and steel maker Arrium.

And it is good to see that its boss, Andrew Roberts, hasn't lost any of his – despite announcing a $320 million hit on Monday, on top of the $1.3 billion impairment announced in January.

"My view is this is a positive announcement for Arrium," Roberts said.

"Our mining consumables business is continuing to perform strongly, and we are seeing significant improvement in the performance of steel."

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He did concede there were a few clouds around this silver lining.

"However, despite the benefits from restructuring mining, and stronger earnings in our mining consumables and steel businesses, the extent of the deterioration in the iron ore prices means we have had to adjust our expectations around timing and rate of debt reduction."

Roberts also flagged the fact it might have to flog a few assets as part of a strategic review seeking to cut its generous debt pile, which stands as high as $1.85 billion. Which is slightly ahead of its market value of $470 million.

That's always a sign of better days ahead.

At least they have a keen sense of humour at Arrium.

Former chairman Peter Smedley set up a wonderful prank last year for his replacement, Jerry Maycock, who walked in the door with 250,000 shares at 76.4¢ a pop.

Within a month – in one of his final acts as chairman – Smedley announced a $754 million capital raising at 48¢ a share.

The stock was trading below 16¢ a share on Monday.


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He did concede there were a few clouds around this silver lining.

"However, despite the benefits from restructuring mining, and stronger earnings in our mining consumables and steel businesses, the extent of the deterioration in the iron ore prices means we have had to adjust our expectations around timing and rate of debt reduction."

Roberts also flagged the fact it might have to flog a few assets as part of a strategic review seeking to cut its generous debt pile, which stands as high as $1.85 billion. Which is slightly ahead of its market value of $470 million.

That's always a sign of better days ahead.

At least they have a keen sense of humour at Arrium.

[Joshuatree]

Which assets will they sell thats the question; hopefully just smaller superfluous assets as you suggest Snoopy.No debt due until 2017 but are the banks putting pressure on with impairments taking them closer to the limit adding 3 % points to gearing ratio. They are predicting cash generating in 2016.
S/P back down to my last entry price ,14.5c.

[Snoopy]

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.

Time for an update on the NTA of Arrium. The actual half year NTA calculation was a little different to my prediction above. I got the balance between 'intangible' and 'tangible' asset writedowns wrong I think. So I will now be a little more pessimistic in my assumptions going forwards. Figures below are from the actual half year profit release.

Net tangible assets as at 31st December 2015 were ($2,962.2m- $1,789.8m) = $1,172.2m

($2,962.2 - $1,789.8) / (1,366.2*2+204.9) = 39.9c

Income for the half year ended 31-12-2015 was -$1,492.7m including impairment losses. Take out the $1,335m of asset impairments and the loss reduces to:

$1,492.7m -$1,335m = $157.7m

Now assume that level of operationing loss continues for 2HY2015 (a worst case assumption).

The latest announcement on 'impairments' (15th June 2015) is as follows:

-------

Impairments

The company expects to record a further asset impairment charge of ~A$320 million in its financial statements for the year ending 30 June 2015, primarily related to the impact of forecast lower iron ore prices on its future cash flows

This includes an impairment of ~A$245 million in Mining, ~$45 million related to lower forecast ferrous margins in Recycling and
~$30 million related to Metalcentre, which is part of Steel’s Retail business.

--------

Assuming all of those new impairment losses are tangible (the worst case), and all asset sales for the year to date were at net asset backing, then the net tangible asset position of Arrium as at 30th June 2015 will be:

[($2,962.2 - $1,789.8) -$320.0- $157.7] / (1,366.2*2+204.9) = 23.7c

We are told the company will be right sized and profit positive for the start of FY2016 (1st July 2015). So this is the worst case new asset base to work from. I had an order in the market for a few days that was triggered yesterday at 15c. My average buy price is now 22.7c. Not sweating, even though it seems I have used up almost all of my safety margin!

SNOOPY

[noodles]

Report out from Credit Suisse via FNARENA
ARI - ARRIUM LIMITEDCredit Suisse rates ARI as Underperform (5) - The company has announced another impairment which makes for over $1.6bn in FY15 and acknowledged that sale of assets must be contemplated.Credit Suisse considers the mining consumables business is the only obvious asset that could address the balance sheet issues. The broker notes the further restructure in iron ore now means the business is being run for cash and should be marginally positive in FY16 on consensus prices.
An Underperform rating and 15c target are maintained.

[percy]

I am going to wait for the announcement from management in August on the business restructure, then we will know if ARI has hit rock bottom and can choose to be the ambulance at the bottom of the cliff.
Or we could miss out - no big deal.

Be careful not to park your ambulance too close to the cliff.You could risk being crushed.!!!! lol.

[Snoopy]

Report out from Credit Suisse via FNARENA
ARI - ARRIUM LIMITEDCredit Suisse rates ARI as Underperform (5) - The company has announced another impairment which makes for over $1.6bn in FY15 and acknowledged that sale of assets must be contemplated.Credit Suisse considers the mining consumables business is the only obvious asset that could address the balance sheet issues. The broker notes the further restructure in iron ore now means the business is being run for cash and should be marginally positive in FY16 on consensus prices.
An Underperform rating and 15c target are maintained.

It would be interesting to know when Credit Suisse first valued Arrium at 15c! Past writedowns are not indicative of future performance. But they are good at making Mr Market manic depressive, and that suits my investment style just fine.

Personally I believe the question as to whether Arrium will survive is already settled. I think the question here is whether Arrium will survive in its present form. The option of selling say 49% of the Mining Consumables business has been on the table for a while. The banks wouldn't let Arrium sell all of Mining Consumables, because it is the only profitable arm at the moment. This would be my worst outcome, because long term I think Mining Consumables has the best potential to drive earnings at Arrium.

Arrium are about to enter a two year window where debts are not yet due, but cashflow from particularly steel and iron ore mining is uncertain. Either steel picking up into profitability - or iron ore having a good six months - could see hundreds of millions of dollars flow Arrium's way that the likes of Creidt Suisse have not budgeted for. If this happens the share price could bounce significantly from the 15c base. If that happens the likes of Credit Suisse will surely give Arrium an upgrade after the event - a useless upgrade from an investor's today perspective.

The truth is no investment house knows exactly what will happen. Sheepishly changing your forecast to follow market sentiment will see the market analyst keep his job, that's all. It isn't good to pop your head up too far above the parapets if you are a market analyst! If Arrium comes out of this intact I will do very well. If not I still think I will get my money back. To me investing at 15c is a very attractive bet on balance. Waiting for the August update, if positive, will almost certainly mean a higher entry price. But even if the outlook in August is better, things could still head south after that. So it is best to buy in at the lowest price you can whatever direction teh market is moving. For me this week, that means buying in at around 15c.

SNOOPY

[Daytr]

I would keep my outlook on this stock very simple. There is no way a small scale steel producer or iron ore miner can compete with the big boys either offshore for steel or domestically for FE. They have archaic plant & the only positive I really saw for Arrium was when the FE price was at lofty levels & this has now been taken away from them for years if not decades to come. Arrium were a client of mine & I was never impressed with them at all. They were far too corporate with a management team that wouldn't know the industry if they walked through a blast furnace. They are overburdened with debt & the bankers are only keeping them alive to try & retrieve their money from the carcass. The only way for Arrium to survive is on the basis that world prices pick up & pick up dramatically.

[Daytr]

How was I wrong about STO?
I didn't tell anyone not to buy bat $7 in fact I said $6.92 was a big support line in the sand.
I did make calls for it to go lower than it did, however seeing I shorted several times between $9 & $9.50 & its averaged closer to $7 than $9 since I'm pretty happy. Where is that massive bounce in oil everyone was calling for? This is peak demand period northern summer, so enjoy oil prices while they last.

The PM made a remark in parliament at question time. When someone gets personal, its typically because they have lost the argument already.
What is hysterical about what I wrote? Is anything untrue?
Why are you so confident ARI will survive? Some might call that hysterical.
I'm not saying it will fall over, but there is every possibility it could & that is why the risk reward is high as it should be for a vulnerable stock.
My view however is that RIO, BHP & Vale are not going to back down from their supply war in iron ore & China will continue to pump out steel as will India at much cheaper rates than a company like ARI can handle.

You will prove wrong about this like you were wrong for STO please spare us your hysterics Daytr.

Snoopy I agree with you, the company will survive either way but the August update will tell us what form this will be in. I am not waiting for good news to buy because that will be too late.
Steel and mining consumables are the good bits of the company but Iron Ore is still what the market is focussing on.
If steel and iron recover a little which is certainly not unlikely ARI is a bargain but I have lost nothing for not buying, lots of companies do well which I don't buy because I am unsure about.
On the other hand if iron ore continues to decline then ARI won't have proven a bargain.
I think the probablities are slightly more likely in a recovery but I refuse to take the risk.

[Snoopy]

I would keep my outlook on this stock very simple. There is no way a small scale steel producer or iron ore miner can compete with the big boys either offshore for steel or domestically for FE.

From this weeks Arrium update:

"Mining business to lower the cash breakeven price of its Middleback Ranges (MBR) hematite export iron ore operation to ~US$50/dmt for FY16."

Arrium doesn't have to match the big boys on cost. It merely has to keep their own production cost below the market price. So far it looks like they can do that.

Arrium has chosen not to compete with the big boys offshore (except New Zealand). They are also not marketing their mined iron ore domestically. Not particpating in markets that they are not competitive in should not hurt Arrium.

They have archaic plant & the only positive I really saw for Arrium was when the FE price was at lofty levels & this has now been taken away from them for years if not decades to come.

Here is what Arrium said about their Steel Manufacturing Plant in their FY2010 annual report, p9.

"Following work undertaken in relation to the underlying causes of the Whyalla blast furnace interruption, we have decided to carry out some repair and redesign work to the blast furnace to address increased wear around the boosh and lower stack components of the furnace. <snip> The work is expected to extend the life of the blast furnace to beyond 2020."

That doesn't sound like an archaic plant to me!

They are overburdened with debt & the bankers are only keeping them alive to try & retrieve their money from the carcass.

If that was true the banks would change the bank covenants and put Arrium into receivership. The banks haven't done that.

SNOOPY