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

[h2so4]

G..........

[Snoopy]

Oh dear..!!!!! 30.5 cents ????

From:

http://www.theaustralian.com.au/busi...f6921ef3416e80

dated 7th November 2014
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On Wednesday night, iron ore prices monitored by Platts’ The Steel Index fell $US1.10, or 1.4 per cent, to a fresh five-year low of $US76 a tonne. Pointing to another fall overnight, Chinese iron ore futures slipped 1.6 per cent yesterday, which weighed further on iron ore stocks with slim margins at current prices.

Fortescue finished 28c, or 8.5 per cent, lower yesterday at a 16-month low of $3.03. Atlas Iron fell 4.5c, or 17 per cent, to a nine-year low of 22.5c and iron ore miner and steelmaker Arrium fell 1.5c, or 4.6 per cent, to 31c, its lowest since it was spun out of BHP in 2000. Rio Tinto and BHP Billiton, who are still making good money at current prices, fell 0.1 per cent and 0.3 per cent respectively.

<snip>

Mr McTaggart (Credit Suisse analyst) said he expected iron ore prices to rise towards the end of the year.

“Near-term challenges for the iron ore market are plentiful — however, the aggregate iron ore stock position is normal at 10 weeks and China domestic mill (iron ore) production will soon be heading into the winter’s shutdown,” he said.

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I have been doing some of my own data analysis on Arrium, which I will release here in the next few days. As a teaser, I do believe that Arrium is still profitable at current market (depressed) prices with their iron ore division. However, it is a very close run thing and margins are close to zero. Arrium Iron Ore IMO is certainly still cashflow positive, which is an easier target to reach!

SNOOPY

[Snoopy]

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.

A slight back pedal is in order here. The Arrium capital raising was in fact the maximum size they are allowed to do, without using other ASX provisions. I take that to mean they would have had to get a full independent analysts report on any new share (larger) rights offer, and give more notification time before rights started trading. IMO this would have been a good thing.

At next weeks AGM, Arrium are asking shareholders to vote to renew their authority for another quick and dirty small style (sic) cash issue like the one we have just had. I intend to vote against this motion. I think, given the state of the iron ore and steel industries, it is up to the Arrium directors to get an independent analysis of any future significant rights proposal. Voting against the directors quick and dirty alternative should achieve this.

SNOOPY

[percy]

I think you will find that they will for the next capital raising,
Should not be too far away.!!!!!!!!!!!!!!!!!!!!

[Snoopy]

I have pulled the projected ARI CAPEX from the 'Retail Entitlement Offer' booklet, slide 27. ARI are actually planning to spend a lot more than $200m in FY2015!

FY2015 Capital Expenditure -cash basis	FY2015 Est
Mining	$200-$240m
Mining Consumables	$80-$85m
Steel & Recycling	$70-$75m
Total CAPEX (excluding stripping asset)	$350-$400m
Mining stripping activity asset	$40-50m
Total	$390-$450m

I freely admit I do not know what a 'mining stripping activity asset' is. Can anyone fill me in?

To answer my own question...

'Stripping' is taking waste material out of the way.

There are two reasons to do what is termed 'mine stripping'.

1/ To create improved access to a high grade section of ore. The material stripped then lies as pure waste. The cost of the stripping is then added to the book cost of the richer mineral deposit that has been uncovered.

2/ To create a saleable inventory in its own right. In this case the 'stripped' material must be recorded at cost as inventory.

The accounting treatment of stripped material has only just been standardised (from FY2014).

SNOOPY

[Snoopy]

I think you will find that they will for the next capital raising,
Should not be too far away.!!!!!!!!!!!!!!!!!!!!

Given the level of shareholder rejection of the last shareholder rights issue, except by the directors who dutifully took up their entitlements at 48c, I am picking that the next share issue (if required) will have to be a share placement with a friendly corporate. That means we existing shareholders will suffer dilution. But I don't think another cash issue is a given. The company is still profitible, and they are well within their banking covenants, even if large asset writedowns diminish the balance sheet.

SNOOPY

[Corporate]

Snoopy, have you looked at valuing the respective components of ARI? I.e. Separating out the mining business that is probably breaking even at best, but more likely loss making.

Cheers,
cw

[Snoopy]

Snoopy, have you looked at valuing the respective components of ARI? I.e. Separating out the mining business that is probably breaking even at best, but more likely loss making.

Working through that exercise now Corporate. Actually it is the steelmaking and steel selling side of the business that is losing the big money, and is the real problem child. Managment say that with the upcoming infrastructure projects coming on stream this is set to change. I'm not so sure.

The mining consumables business is looking OK. It's a real global leader with something like 75% market share. There has been a lot of investment ahead of market demand. Main customers are gold and copper miners, particularly in the Americas. I am picking that once the investment phase winds down, profits should improve markedly.

Mining (Iron Ore) is difficult to get a handle on, because not all sales are into the spot market. ARI tell us 75% of sales are on longer term contract, but have never released the length of these contracts. I am hopeful of getting some more detail on that at the AGM next week. I made some pretty negative modelling assumptions on 'iron ore' and it still came out profitable, albeit not by much. So I'm fairly sure that iron ore production is still profitable for Arrium even at current prices.

I believe Arrium to be a very poorly understood company by the market, which is what makes it a potentially enticing recovery prospect.

SNOOPY

[JBmurc]

I remember reading / watching on CNBC etc that looking forward next decade there was a needed worldwide infrastructure spend of over 30 trillion..... many western nations needed to upgrade much of it's aging infrastructure along with emerging economies continuing to westernize ....

Now put that into context along with many Nations printing trillions of new dollars stabilizing there banking / debt / housing markets ...why isn't this money going into this much needed infrastructure and driving job growth ..increase Tax recipts etc Inflation basically etc ....heard CNBC Analyst say the exact idea today

when you look at the likes of the crash of the commodities .. looks mostly to be FEAR T/A driven not looking forward fact based ....now whats happening is really playing into China's hand ..and other major low cost manufacturing nation's to increase their investments outside their boarders (I read China is looking to make it much easier for their billion+ population to invest overseas)..

Now If I was in control of a Nation like China and had a very long term outlook like we know the Chinese culture does ...one of the best outcomes after dominating and relocating majority of bulk worldwide manufacturing to it's shores ...is to see the primary resources sectors crash , China is in may ways resource poor when you look at their massive usage rates...

And what a time to start buying many nations prime resource assets .... trillions of USD in reserves ...billion + hard working high saving people .....

then like all cycles soon enough there will be another Resources boom ...International Food demand set to double thats not going away ..Another Cold war ?? massive military spend up ....as I said above huge infrastructure needed to be upgraded worldwide ...

You have to be in la la land to think that resources will stay below costs to extract or that the human race is just going to stop consuming ..

We are just living through a major shift in the power base of the world towards the Asian nations and those that have close ties

[Joshuatree]

Be brave or foolish being a contrarian right now ; with M/S etc taking hits too.

Iron ore miners should steel themselves for falling demand, prices permanently below $US100 a tonne

By business reporter Michael Janda
Updated yesterday at 5:51pmTue 11 Nov 2014, 5:51pm
PHOTO: China's steel mills report that export demand has slumped. (Hugh Brown (supplied))
MAP: China

Australian miners are reeling from downgrades by a major broker and bearish outlooks for steel and iron ore.
The raw materials sector, which accounts for around 16 per cent of the market capitalisation of the ASX 200, was taking about 9 points off the benchmark index, which was down 3 points overall to 5,521.
Iron ore miners were behind the resources slump, with small player Atlas smashed with an 8.5 per cent slump to 24.25 cents.
Bigger rivals such as Fortescue, BHP Billiton and Rio Tinto are not seen as being in a struggle for mere survival, and were off 3.5, 1.6 and 0.7 per cent respectively.
A key trigger for the falls was a report from Citi's analysts cutting their iron ore price forecasts from around $US80 a tonne to $US65 for the next two years, triggering a downgrade for the the smaller miners to a sell and for Fortescue to a hold.
ANZ has also slashed its iron ore forecasts by 22 per cent to $US78 a tonne for 2015.
"Prices are unlikely to breach $US100/tonne again, particularly if high-cost iron ore supply in China is permanently closed – something we think is now occurring," it warned in a note to clients this morning.
The news does not get any better for the embattled sector, with commodity information service Platts reporting a steep fall in the Chinese steel sector that buys the vast bulk of Australia's ore.
Its latest China Steel Sentiment Index (CSSI) has dropped to the lowest level since the survey of 50-75 steel industry participants started in May last year.
The fall of 12.5 points to 25.6 in November takes the index even further away from the 50-point level that separates expansion from contraction.
Confidence among Chinese steelmakers has been smashed by a huge fall in new export orders from 71 points last month to just 32.6 this month.

Another report. Be brave or foolish being a contrarian right now.
Record steel exports this year had previously helped offset weak domestic demand as the Chinese property sector, notably apartment building, slows.
"Speculation that China is considering removing tax rebates on exports of certain construction steel products has massively dampened sentiment – particularly as the domestic property construction market remains extremely weak," Paul Bartholomew, Platts's managing editor for steel and raw materials, noted in the report.
Mr Batholomew said that the steel industry is normally at a seasonal low around this time of year, but there is usually some evidence of iron ore restocking ahead of winter which has been largely absent so far with the export worries.
"It could mean that smaller steel mills will adopt even more of a hand-to-mouth approach to buying raw materials and may undermine any seasonal restocking of iron ore," he added.
Commodity analysts say that the APEC summit currently underway in Beijing has probably delayed the normal seasonal rebound in iron ore prices as many mills around the capital have reduced or cut production to minimise air pollution.
They say the next month after the summit ends will be crucial to determining just how weak iron ore prices are likely to remain into the new year - if there is no seasonal rebound, the 2015 outlook could be grim indeed for many small producers.