Here is a quote from an AFR article dated 25th March where Allan Gray outline their thoughts on investing in Arrium:
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"At the centre of this thesis is the value of the company's assets. Arrium has three separate businesses: an iron ore mining business, a steel business and a mining consumables business. The iron ore business is possibly the most broken: the company announced it was closing its loss-making mines in South Australia and investors should ascribe no value to this business. But the other two businesses have value: the mining consumables business is the strongest and generates about $150 million worth of earnings before interest and tax (EBIT). Management thinks it can get this figure up to about $200 million."
"The steel division has been hampered by the elevated Australian dollar and a global oversupply of steel. Chief executive Andrew Roberts seized on this last point when he admonished the government for slow progress on its anti-dumping legislation. Last year the business delivered underlying EBIT of just $54 million compared with a longer-term average of closer to $250 million EBIT. Favourable government policy and a lower dollar should help."
"Accounting for its debt load, the market currently values Arrium at about $1.2 billion. "That is a very conservative valuation, especially if you think Arrium's steel business can normalise its earnings," says Simon Mawhinney, a portfolio manager with turnaround specialist Allan Gray. The funds manager is betting on an Arrium turnaround and owns 13.4(*) per cent of the company. "You don't need the future to be bright to justify investing in this company," Mawhinney says."
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(*) Note Allan Gray Arrium stake increased to 14.56% from purchasing on 18th March since this interview was done.
This confirms my own view that the much talked about iron ore mining division is essentially no longer relevant for company valuation purposes going forwards. Nevertheless, any unexpected pick up in the iron ore margin is still the potential free lotto ticket that new shareholders should get when buying into Arrium in the sub 20c range.
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