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

[Snoopy]

Considering that Australia is the highest cost place in the world to make just about anything, is there any hope that the Australian steel mill will ever make a profit? Customers will simply keep importing steel until the local product is cheaper, which is unlikely to happen ever thanks to Unions who are determined to shut down businesses altogether rather than agree to pay cuts.

Some interesting comments on the state of the Australian steel industry on stuff

http://www.stuff.co.nz/business/indu...ds-could-lower

The key quotes:

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Engineers required New Zealand- based fabricators to track the origin of all its steel, from beams right down to cleats. "Everything's recorded so we know where it is in the building." (Chris) Chapman (of Chapman Engineering) says.

<snip>

In Australia, mining companies had gone overseas for pre-fab steel, Chapman said and

"Then you'd get the odd fabricator going 'oh, well, I'll go and bring it in and save a buck out of it'. But as more people followed suit, steel standards fell "to a lowest common denominator", Chapman said.

'They've really ruined their market. I've been over there recently and the market is really dead."

Steel products were normally created from 50 tonne blocks called billets. When buying 50 tonne of beams, a fabricator may get 50 tonne with all the same heat number but they may also get 50 lengths with 30 different heat numbers, Chapman said.

This could be because the product came from different suppliers. So, to run off and say 'I'll just get a building whipped up in China', you've got to know all the rules and regulations before you start."

<snip>

Chapman said his business was able to tell customers "where every stick of steel and what heat number went where".

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The article pretty much indicates the Australian steel market has become a wild west, (or maybe a wild east?). I am not sure you can blame Australian unions for that.

SNOOPY

[Snoopy]

Some interesting comments on the state of the Australian steel industry on stuff

http://www.stuff.co.nz/business/indu...ds-could-lower

And some counter point quotes:

http://www.stuff.co.nz/business/indu...than-it-should

Excerpts below:

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An Australian partner in the Christchurch's Cashel Square project estimates locally-finished steel has been costing developers up to 15 per cent more than it should.

The city's steel fabricators and customers would benefit from more competition, new entrant Darren Elphinstone says.

Jobs that would cost $4 million in Australia were being priced at up to $5.5m in New Zealand. The difference was "10-15 per cent" once adjusted for currency differences, he said.

<snip>

His company, Elphinstone and Morris, had a two-year goal to build a "globally competitive" steel fabrication facility.

It had expanded across the Tasman partly because of rebuild opportunities but also because Australia's mining-based economy was shrinking.

Elphinstone was wary of New Zealand steel fabricators introducing new quality standards, which could be used to justify a premium price and shut competitors out of the market.

His business said the cut and thrust of the more competitive Australian steel market had sharpened the company's service to customers, whereas existing Christchurch fabricators were typically "not there yet".

<snip>

Steel Construction New Zealand manager Alistair Fussell said its voluntary certification scheme had been triggered partly by "the globalisation of construction".

Twenty years ago, New Zealand builders sourced most of their steel from within the country or from Australia. Now it could come from anywhere.

"We're now not dealing with people that have necessarily the same level of confidence in products," the lobby group leader said.

A Christchurch-based fabricator, Chris Chapman, said he knew several developers who had decided against prefabricated imports.

"Because everyone now is very risk-orientated . . . if anything goes wrong, do you want to be sitting in the courtroom?"

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Point and counterpoint there. I wonder if these standards referred to are why Steel and Tube is doing OK on this side of the ditch, while former parent Arrium's steel division struggles?

SNOOPY

[Snoopy]

Share price up 0.5c to 33c as I write this. Arrium short position down to 1.46% as pe rthe latest available information (23rd October). That was the biggest fall in any short position for the week over the entire ASX.

We have had the AGM and it produced no new surprises. In particular there was no specific mention of the company requiring further capital, although I did note the quick and dirty capital raising permission was renewed.

Latest information from 'shortman' is dated 10th November. Share price is 28c as I write this and the short position is now 2.3%. I will be interested to see what the post AGM short position re shorting is. I was tempted to buy a few more today, but have decided to hold off. There is a lot of water to go under the bridge before the February 2015 half year announcement. And I don't see a dividend on the horizon for a while. So no hurry.

SNOOPY

[percy]

As I post sales at 27.75 cents.Good support at 27.5cents.

[h2so4]

As I post sales at 27.75 cents.Good support at 27.5cents.

Yes. Nothing posted on here has changed my thinking about ARI. Pass!

[percy]

A bit of support at 26.5 cents. Ugly.

[Snoopy]

Beleaguered miner Arrium may have to sell a stake in its grinding media business, Credit Suisse said, as its steel and iron ore businesses continue to consume cash amid depressed price conditi aons....Read more »

Quotes regarding the iron ore business from 'The Australian' article.

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"The company has struggled as iron ore prices have slid to $80 a tonne and steel prices remain weak."

<snip>

"Without an unexpected steel and iron ore recovery, we consider Arrium may have to sell an interest in its grinding media business."

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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 $US123 per dry metric tonne (p12 AR2014).
The average cost of extraction for FY2014 was A$73/dmt for FY2014.

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)
5/ Average annual $US market price for FY2014 assumed to be $123/wmt. This price is listed in the Arrium Annual Report for 2014 p12 as the average Platts 62% CFR index price for FY2014.

EBIT(2015)= $481.3m x [($US83m - ($A73m x 0.9121)]/[($US123m - ($A73m 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.

SNOOPY

[BFG]

FMG getting hammered today as well. Multi year lows being hit. Blood starting to flow all over the floors...

[h2so4]

Wait until Mrs Market gets wind of it.

......oh dear, looks like Mrs Market has got wind of it .25 as I write. I hope her nagging stops soon.

[Snoopy]

I have assumed that....

It is easy to make quick and dirty assumptions for ease of calculation. But how good are they?

1/ extraction costs do not change between FY2014 and FY2015.

In fact there is a significant 'cost out' program underway. Actual iron ore loaded costs for Q1 FY2015 were not $A73 but $A68.40

2/ I also assume a constant AUD/USD exchange rate

My modelling assumes $A1 = $US0.9121.

It is early in the financial year. But prevailing exchange rates are now:

$A1 = $US0.8672

3/ Steel prices are based on the Platts 62% Fe Index price in USD

Arrium's iron ore is typically a lower grade than 62% and is sold at a discounted price because of that. However, what I am interested in here is not an absolutely accurate price for Arrium, but a measure of the change in value with time. The Platts 62% Fe price is equally good for this than the actual price Arrium gets.

4/ The same tonnage of ore is shipped out in FY2014 as FY2015 (12.5Mt)

Plans for FY2015 are to ship out 13Mt.

This means that in terms of three of these four assumptions my EBIT assessments are conservative. The other assumption is neutral.

SNOOPY