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

Snoopy

28-09-2014, 03:47 PM

It has been a bad week for Arrium

Current iron ore price is $82/tonne. ARI production cost $81/tonne (some say). Cash production cost $73/tonne (Arrium say).

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from 'The Australian' (16th September)

MINING and steel group Arrium’s recent decision to pay a dividend now looks “unwise” given it is tapping the market for $754 million to reduce its debt, analysts say.

Arrium yesterday blamed the dramatic drop in the iron ore price, which is affecting its iron ore operations, and concerns around the timing of a price recovery, for its decision to raise capital.

Credit Suisse analyst Michael Slifirski said the company was now treating its balance sheet seriously, adding that he hoped it meant a cessation of future dividends.

“Arrium’s capital raising from a depressed share price reflects the significant deterioration in operating earnings on an already stressed balance sheet,” he said.

Deutsche Bank analyst Emily Smith said while Arrium had announced further cost cutting measures for its steel business, she remained sceptical it would have a significant influence over profitability in the near term.

“We remain of the view further significant rationalisation is required for this business to return to profitability,” she said.

Arrium’s deeply discounted raising surprised the market, given that less than a month ago at its results, Arrium boasted about the performance of its mining division.

Chief executive Andrew Roberts told The Australian yesterday that the plunge in the iron ore price to five-year lows had affected market sentiment.

He said the company was still making a thin margin on its iron ore operations but the integrated steelmaker would need to pull more costs out of the business over the coming year.

“Until sentiment turns around, we have a difficult environment in the mining industry,” he said.

Mr Roberts said the decline in the iron ore price, which is now sitting around $US82 a tonne, had been rapid and led to an increase in the negative sentiment about the iron ore industry.

“There will be uncertainty related to the iron price going forward for a while, around what is the extent of the recovery, and what is the timing of that recovery,” he said. “With the adverse change over the last month, to reduce our debt we have taken the clear option of raising equity to take a step-change in our debt profile. It puts us in a position where we have a more appropriate capital structure for a mining and consumables and steel business in the current environment.”

Matthew Hodge, head of resources at Morningstar, said Arrium’s balance sheet had been poor for some time. “All their cashflow has come from the iron ore business and that part of the earnings was always going to come under pressure at some point,” he said.

“They didn’t set the business up for when it would eventually come. They have been trying to avoid taking their medicine.”

Mr Hodge said that Arrium could have done this raising six or more months ago at maybe three times the price of the offer *announced yesterday, which is priced at 48c. He said that would have been value-accretive, whereas he believes it is now doing the raising at a price that is possibly *dilutive.

Shares in the capital raising were being sold at a hefty 26 per cent discount to Friday’s close of 65c each.

Mr Hodge also pointed out that the company had paid 51c over the past six years in dividends, which was similar to what they were now raising.

“If they had admitted that the balance sheet had to be fixed first, we would be in a different situation, but this dilution is permanent now,” he said.

Macquarie’s team of analysts recently highlighted that if the iron ore price continued its slump then Arrium had to find a “plan B”, which it said could mean discontinuing mining at its higher-cost Southern Iron deposit or undertake further asset sales.

Mr Roberts said yesterday that the company was conscious that it had operational flexibility in the mining business. “In the event that the iron ore price drops to a (lower) level then we have the ability to decide to scale back Southern Iron and mothball that facility but at current prices we will continue to operate it,” he said, adding that while the company’s iron ore operations now had a “thinner margin”, its mining business was making a positive EBITDA result.

Arrium’s across-the-board production cash cost for its two iron ore operations sits around $73 a tonne ($US67 a tonne), and Mr Roberts said the company had *further cost reductions planned to lower its total cash cost below $73. “That will put us in good stead in the event the iron ore price remains as it is or goes lower.”

The capital raising will include a $656m fully underwritten 1-for-1 pro-rata accelerated renounce*able entitlement offer with retail entitlements, and a placement to institutional investors to raise a minimum $98m.

Arrium chairman Peter Smedley, who steps down this year to be replaced by Jerry Maycock, said the raising put the firm in a better position for “current markets”.

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The cash issue has collapsed the ARI share price to the extent the underwriters look like taking a bath.

Looks like the Onesteel to Arrium transformation has not been a success. So what do you think Sharechatters? Is ARI the best placed iron ore producer to ride out of the slump? Or are we looking at a death spiral as ARI disappear down their own steel plug hole?

SNOOPY

Discl: have a tiny legacy holding of ARI

Stranger_Danger

28-09-2014, 05:45 PM

Snoopy

29-09-2014, 04:10 PM

The underwritten offer ensures they will survive for the near to medium term future.

However, if the price doesn't go over the entitlement price, the underwriters will have a LOT of shares to sell. Such folk tend to move swiftly and without much regard to long term valuations.

I think ARI is possibly a buy at todays price, if you see iron ore recovering (I do, but it will hit new lows first).

I'm waiting until after the underwriters get left holding the bag, and unload, which I think will be the bottom. The risk is that the price moves above the offer price and the bulk of shareholders take up their entitlement, in which case I'm happy to miss out.

Disc : None yet.

My reading of the market is that analysts are in a state of near panic over ARI. But beagles are used to getiing their paws dirty, grubbing around at the bottom of a hole. I'm in today grabbing some head shares at 38c. I sniffed around this ARI year and decided the price was too high given the risks involved. But what we are looking at here is a thoroughly modern iron ore operation, with a state of the art port for distribution , well positioned to take advantage of the world's largest market for iron ore, China. Sure the economics may look marginal at current steel prices. But as a long term investor I am prepared to wait things out.

30th June 2014 results show net assets of $3,730.9m.
Within that figure are $1,964.1m of intangibles. So Net Tangible Assets are down to $1,766.8m

1,366.2m new shares are being issued in the 1:1 underwritten issue at $0.48, together with a placement of 204.9m at $0.48.

That should bring in net proceeds of $754.1m

Divide recapitalised net assets by the number of shares on issue after recapitalization and I get:

($1,766.8m+$754.1m)/(1,366.2*2+204.9) = $0.858

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.

And if a follow cash up issue is needed, as the more pessimistic commetators are writing, bring that on too.

SNOOPY

discl: not taking up my rights on my original tiny holding at 48c

Snoopy

30-09-2014, 04:45 PM

My reading of the market is that analysts are in a state of near panic over ARI. But beagles are used to getiing their paws dirty, grubbing around at the bottom of a hole. I'm in today grabbing some head shares at 38c.

Insiders are buying. From the AFR dated 23rd September:

"Arrium directors Peter Nankervis and Graham Smorgon have joined their incoming chairman Jerry Maycock in snapping up Arrium stock after a mass selloff sparked by the steel and mining group’s $754 million equity raising."

SNOOPY

Dej

30-09-2014, 05:36 PM

Insiders are buying. From the AFR dated 23rd September:

"Arrium directors Peter Nankervis and Graham Smorgon have joined their incoming chairman Jerry Maycock in snapping up Arrium stock after a mass selloff sparked by the steel and mining group’s $754 million equity raising."

SNOOPY

Sometimes directors buying doesn't mean much in my mind. They could be doing it specifically because of what you are saying, to stir investor confidence in a time of weakness. The real interesting point is if the EMPLOYEES that we don't have data from are buying at these levels as well, thats a true indicator (to me - really hard to find of course)

What are the thoughts about this drifting south until the raise is completed and on market? Could be a series of opportunities to buy over the coming month (think its mid October its completed)

Snoopy

01-10-2014, 10:30 AM

What are the thoughts about this drifting south until the raise is completed and on market? Could be a series of opportunities to buy over the coming month (think its mid October its completed)

Retail rights trading ceased 30th September. Subscription payments have to be in by this Friday (3rd October). New shares will be allocated by 8th October. After that the shortfall in rights will have to be dealt with by the underwriter. So your mid-October estimate to have everything dusted is probably not far from the mark Dej.

I have been around the market a few years now, but I have never seen anything like this. By 'this', I mean an established company with a fully underwritten share issue so scorned by its shareholder base that even professional investors do not want a bar of its heavily discounted rights issue.

Yes I understand the problems with the collapse of the iron ore price. But the amount of recapitalisation required to ameliorate this would have been discussed with ARI's banking syndicate. So there is no immediate risk of company failure. Yet the shares are being sold down on market as though ARI is a dead duck. I don't particularly like ARI (only came onto the register when it was spun out by BHP). But there comes a point when the share price gets so ridiculously cheap the investment case becomes compelling. That is why I greatly upped my stake to what is still in my terms a modest holding two days ago.

I saw a report that said the underwriter would want out of the shares they will get quickly and as a result ARI has been subject to some short selling. Can anyone shed some light on the short sold position of ARI? If it does go lower, I may have to pick up a few more!

SNOOPY

BFG

01-10-2014, 11:32 AM

Google Shortman ASX then type in ARI.

Dej

01-10-2014, 02:07 PM

11.5% is reasonably high... but it may be currently shorted, so they will close out their positions soon rather than an expectance for it to dip lower again.

Snoopy

01-10-2014, 04:35 PM

Google Shortman ASX then type in ARI.

No need to type in ARI. I can see it sitting there as the 7th most shorted share on the ASX. I can see it is 11.48% shorted, up 7.19 for the week. Not sure what that means. Was it only shorted 11.48-7.19= 4.29% only a week ago?

SNOOPY

Dej

02-10-2014, 08:46 AM

No need to type in ARI. I can see it sitting there as the 7th most shorted share on the ASX. I can see it is 11.48% shorted, up 7.19 for the week. Not sure what that means. Was it only shorted 11.48-7.19= 4.29% only a week ago?

SNOOPY

Not sure of the calculation, but thats what I would have taken from it.

IMHO its become a spec buy, but I believe at these levels they are oversold and could come back to approx 40c over the short term as it adjusts and settles.

IMHO of course. Anyone holding?

I maybe, as of 35.5c.

Stranger_Danger

02-10-2014, 09:17 AM

No need to type in ARI. I can see it sitting there as the 7th most shorted share on the ASX. I can see it is 11.48% shorted, up 7.19 for the week. Not sure what that means. Was it only shorted 11.48-7.19= 4.29% only a week ago?

SNOOPY

It means a bunch of generally smart people have *already* made bets that ARI will go down.

It also means guaranteed buying pressure at some stage in future as they cover their short.

I haven't bought yet. I could easily be wrong, but I think the "point of maximum pessimism" will be IF most rights aren't taken up and IF the underwriters act stupidly and IF markets are having a temporary glitch but BEFORE the impact of short covering.

Yes, I know there are a lot of if's in that sentence, but I do see at least the possibility of buying ARI at a stupidly low price, which is what I'm all about.

Snoopy

02-10-2014, 03:39 PM

IMHO its become a spec buy, but I believe at these levels they are oversold and could come back to approx 40c over the short term as it adjusts and settles.

IMHO of course. Anyone holding?

I maybe, as of 35.5c.

I jumped in at 38c as previously disclosed. Looks like I could have got an even better price, but I am not concerned. I may yet buy more anyway.

It is interesting what some people regard as a spec buy. Of course everything on the market is a spec buy in one sense. I have no idea where the ARI share price will bottom out, or what the price will be in a week, or a month.

What I do know for sure is that for every 38c I spent I bought 86c worth of tangible assets. Much more than 86c if I count the intangible assets. But I feel there may be some intangible asset writedowns soon, so anything I eventually realize as intangible assets will be a bonus.

I also know for sure that the banking syndicate is quite happy with ARI until FY2017 at least, when the next big parcel of debt is due to rollover.

I also know for sure that even with the huge number of new shares issued in the rights issue, I am buying on an historic PE of 3.9. No that is not a misprint. The historic PE for FY2014 just finished is under 4. In effect the market has already priced in a 50% drop in earnings for FY2015, and no recovery -ever- after that.

Will ARI be facing headwinds in FY2015? Almost certainly, although I note manufacturing figures out of China are already picking up.

Am I taking a risk? Yes, but I would argue my risk with this transaction is much less than say, buying an index fund.

They say if something looks too good to be true, then it often is. But in this case, I have gone over and over figures and all I can see is an unloved but sound company selling very cheaply. It is possibly the lowest risk asset buy I have ever done. Perhaps I am just in a dream and just imagining I purchased ARI? It seems the only rational explanation as to how I could have done it at this price.

SNOOPY

percy

02-10-2014, 03:49 PM

I would be very careful with your NTA.If ARI can not make the assets work,things like a steel mill are of very little value.
Could Ryman build a retirement village on the site for example?

Snoopy

02-10-2014, 03:54 PM

It means a bunch of generally smart people have *already* made bets that ARI will go down.

It also means guaranteed buying pressure at some stage in future as they cover their short.

I haven't bought yet. I could easily be wrong, but I think the "point of maximum pessimism" will be IF most rights aren't taken up and IF the underwriters act stupidly and IF markets are having a temporary glitch but BEFORE the impact of short covering.

Yes, I know there are a lot of if's in that sentence, but I do see at least the possibility of buying ARI at a stupidly low price, which is what I'm all about.

I think the price of ARI is already absurdly low.

I note on 'shortman' today that ARI has dropped down to 13th on the most hedged list of ASX shares. Now 'only' 9.19% of shares are hedged. Still high but a significant drop on the 11.48% of total shares hedged just yesterday. So maybe 'Shortman' is telling us the point of maximum pessimisism was yesterday?

I guess the great unknown is what UBS will do with the shares they collect in their underwriters bucket. If they had any sense they would at least try to recover what they paid by putting a moritorium on selling their shares for a year. Even 48c is well below asset backing. I woudl say that is achievable after twelve months.

SNOOPY

Snoopy

02-10-2014, 03:59 PM

I would be very careful with your NTA.If ARI can not make the assets work,things like a steel mill are of very little value.

Percy this isn't a run down old steel mill. It has just been refurbished. Likewise the port export facilities which ARI owns - mostly brand new. Also ARI holds a big advantage in being so close to their major market China. Note that China hasn't stopped buying iron ore. It has stopped buying iron ore at recent high prices. Everything is still operating, but the economics, at this window in time, are marginal. My gamble is that most market players are putting far too much emphasis on 'this window in time.' Whether I am right or not, time will tell.

SNOOPY

percy

02-10-2014, 04:14 PM

Percy this isn't a run down old steel mill. It has just been refurbished. Likewise the port export facilities which ARI owns - mostly brand new. Also ARI holds a big advantage in being so close to their major market China. Note that China hasn't stopped buying iron ore. It has stopped buying iron ore at recent high prices. Everything is still operating, but the economics, at this window in time, are marginal. My gamble is that most market players are putting far too much emphasis on 'this window in time.' Whether I am right or not, time will tell.

SNOOPY

Just go carefully as the market can stay wrong for a very long time.
I remember NZ building woolstores to handle all the wool the Chinese were not buying at "this window in time."
Better to buy a good business at a fair price,rather than a fair business at a good price.

Corporate

03-10-2014, 10:17 AM

I'd be very careful with this one. If you assume zero earnings for the next 12 months from the mining business + $200m capex, this will have a serious drag on the rest of the company's performance.

Snoopy

03-10-2014, 04:12 PM

Better to buy a good business at a fair price, rather than a fair business at a good price.

I absolutely agree with the above advice. I don't go out looking for deals on underpriced miners. It is not a field of particular interest to me. And there are plenty of mining tales of woe out there from over optimistic shareholders. I am not betting the farm on ARI. I made a measured entry and will see what happens when the rights issue shortfall is announced and what UBS announce they will do with their resulting shares.

The most important thing to me in these deals is my margin of safety. With this deal it is exceptionally large, so I can afford things to go a bit wrong operationally, yet still come out ahead.

Just go carefully as the market can stay wrong for a very long time.
I remember NZ building woolstores to handle all the wool the Chinese were not buying at "this window in time."

The market can be wrong as long as it likes. I have been sitting on my original stake for some thirteen years, because it was too small to economically sell. So I think I have the patience to wait out Mr Market until he comes around more to my way of thinking.

The market for ARI shares is not very relevant to how ARI progreeses from here anyway. ARI have all the money they were seeking, courtesy of a fully subscribed rights issue, even if the underwriter has to take up more shares than they might have envisaged!

SNOOPY

Snoopy

03-10-2014, 04:23 PM

I think the price of ARI is already absurdly low.

I note on 'shortman' today that ARI has dropped down to 13th on the most hedged list of ASX shares. Now 'only' 9.19% of shares are hedged. Still high but a significant drop on the 11.48% of total shares hedged just yesterday. So maybe 'Shortman' is telling us the point of maximum pessimisism was yesterday?

This 'shortman' website is getting addictive.

http://www.shortman.com.au/

Yesterday at around 4pm NZ time, 9.19% of ARI shares were 'short sold'. Today it is down to just 3.46%. Obviously someone is buying up big to close out their shorts! Yet the actual head share price is still falling, down 0.3c to 35.7c from yesterday's close. I get the feeling it is close to bottoming out. But next week is a whole new week!

SNOOPY

Snoopy

03-10-2014, 04:35 PM

I would be very careful with your NTA.If ARI can not make the assets work,things like a steel mill are of very little value.
Could Ryman build a retirement village on the site for example?

A good bit of lateral thinking there Percy. Retire all the workers, and put the retirees up in the shell of the of the old steel mill. You could even recycle the flaming iron ore cauldrons to cook porridge for the occupants! Do you think Ryman would go for it though? It would probably be a cheaper land to bank in Whyalla than what they are currently doing in Melbourne ;-)

SNOOPY

Snoopy

03-10-2014, 04:41 PM

It has been a bad week for Arrium, the entity that has emerged from the former Onesteel. The history of Onesteel you can find here.

http://www.sharetrader.co.nz/showthread.php?2578-OST&highlight=Onesteel

Perhaps a little more recent history, the FY2014 divisional results from AR2014, might put things into perspective.

MiningSteelConsumables

Revenue$1,568.6m$2875.2m$1538.1m

EBITDA$685.9m$50.8m $187.1m

I am using EBITDA here because I think that is the best indicator of cashflow from the divisional information we have been given.

The original 'Onesteel' was largely the 'Steel' bit of the above. 'Steel' also includes distribution and sale of steel within Australia. The steel factory was reconfigured so that it could use lower grade ore, thus freeing up the higher grade ore for export to Asia. With the Chinese boom, the mining and dispatch of higher grade ore operation was doubled in size just last year.

The 'consumables' division was bought off Anglo American plc and is a global business selling grinding consumables to principally gold and copper miners. I don't have a problem with this diversity of direction. I would much rather be selling the shovels to miners than digging myself!

It is clear though that in FY2014, by far the most profitible division was mining and shipping blended iron ore to Asia. And this division is where the trouble is brewing.

SNOOPY

Snoopy

03-10-2014, 05:12 PM

I'd be very careful with this one. If you assume zero earnings for the next 12 months from the mining business + $200m capex, this will have a serious drag on the rest of the company's performance.

Is assuming zero earnings realistic though? How did you come by that figure? I imagine many companies could be made to look bad if you assume zero earnings going forwards. But am happy to go along with your assumption if you can support it.

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

All this would have been approved by the banking syndicate when the rights issue was sized up.

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

The breakdown of other mining expenditure consists of:

1/ focussing on access to lower cost ores at KMA, Middle Back Ridge (MBR). Cut backs $135m.

(Not quite sure what the above means. Cutting back the side of a hillside perhaps? Perhaps someone more conversant with mining terms can confirm.)

2/ Ongoing exploration program at MBR of $25m. (I guess that could be postponed?)

3/ Completion of Southern Iron (SI) haul road for $15m. (perhaps that could be stopped if the SI ore proves too expensive in the short term?)

SNOOPY

Snoopy

03-10-2014, 05:50 PM

The breakdown of other mining expenditure consists of:

1/ focussing on access to lower cost ores at KMA, Middle Back Ridge (MBR). Cut backs $135m.

(Not quite sure what the above means. Cutting back the side of a hillside perhaps? Perhaps someone more conversant with mining terms can confirm.)

2/ Ongoing exploration program at MBR of $25m. (I guess that could be postponed?)

3/ Completion of Southern Iron (SI) haul road for $15m. (perhap sthat could be stopped if the SI ore proves too expensive in the short term?)

More information from a 27th November 2012 presentation

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Southern Iron - export program

Blending benefits

Blending of Peculiar Knob ore with MBR ores

Lower grade ores from MBR (~53% Fe) with PK (~63% Fe)

LGO from stockpiles and future mining at MBR

Target blending grade ~59-60% Fe

Blending ratio ~2:1

Increased volume and cost of lower grade material more than offsets lost premium for
>62% Peculiar Knob ores

Lower loaded cost due to low cost of lower grade ores

Indicative post ramp up loaded costs of SI blended ore ~$52-$57/wmt (excluding royalties and depreciation)

-----

SNOOPY

Corporate

03-10-2014, 11:46 PM

Hi Snoopy. My zero earnings comment was what based on a sustained period of iron ore prices at current levels.

I think they are quoting C1 cash costs of around $52. When you include royalties, admin, shipping, and product quality discount then the mining operating is probably breaking even at current prices.

Joshuatree

04-10-2014, 02:33 PM

Hi guys in case you havnt sighted it a good article in yest the australian re Smedleys team to blame for Arriums woes" "Capital raise cut int rates by$20 mill so earnings threshold falls from $370 mill to $300mill below this point and iron ore prices of $Us 71 tonne for remainder of year will see Arrium back in the hands of its bankers""Every 1cent fall in the $adds $17.5 mill earnings."Hudsons more bullish analysis shows roe falling to 0.3% from 8% last year and eps to 4c from 18.8 c" Sorry cant paste due to tech probs in Noosa Greetings From JT

Snoopy

05-10-2014, 03:54 PM

Hi guys in case you havnt sighted it a good article in yest the australian re Smedleys team to blame for Arriums woes" "Capital raise cut int rates by $20 mill so earnings threshold falls from $370 mill to $300mill.

Thanks for the heads up on the article Joshuatree.

Your above quote refers to ARI banking covenants, and I think the above $370m to $300m figure relates to forecast FY2015 EBITDA (EBITDA for FY2014 was $864m). Steel and Consumables EBITDA in FY2014 amounted to $240m. So if that can be maintained (steel may be up a little with consumables down a little) that only requires $60m from the iron ore export program to keep those bankers appeased. Zero earnings from iron ore would be a problem for the company in the next one to two years. But it wouldn't take much of a bounce in the iron ore price to appease the bankers. Last year Arrium managed nearly $700m in EBITDA from steel.

below this point and iron ore prices of $Us 71 tonne for remainder of year will see Arrium back in the hands of its bankers

I think the wording of the above quote is rather sensationalist.

Arrium has never been in the hands of its bankers, so by definition it can't go back there. Besides the last thing a banker wants is to be running a mining company. What the article means IMO, is that Arrium will require another cash issue with iron ore prices of $US 71 tonne for remainder of year.

""Every 1cent fall in the $adds $17.5 mill earnings.

The above is talking about the $A/$US exchange rate. The $A could easily depreciate by 4c over the next twelve months as the Australian economy falters and the US economy recovers.

"Hudsons more bullish analysis shows roe falling to 0.3% from 8% last year and eps to 4c from 18.8 c"

I would call Hudson's analysis less bearish than more bullish. I have never heard an analysis that forecasts a more than 75% decline in earnings described as 'bullish' before.

"Hudson can actually see upside in the stock from here, thinking a lower dollar and a recovery in domestic demand will take the stock up to 62c."

From 38c to 62c in a year? I think I can handle that. This might yet turn out to be the best investment on the whole of the ASK over the next twelve months.

"The value destruction at Arrium stands at $580m if you compare yesterday’s close at 36c to the 56c ex-rights price, and more like $1.6bn if you go back to the 78c a share offered for the company three years ago."

Bad news for shareholders viewed from back then back then, can still turn into good news for shareholders buying in today.

I appreciate all the links to the negative publicity on the Arrium capital raising, and the negative opinions. Sometimes one can fall into a hole by overloooking what is obvious to others. But I do think the hole that I have bought into is something that Arrium can climb out of. So far I believe that my 'asset play' is very much on track.

SNOOPY

Snoopy

05-10-2014, 04:00 PM

When you include royalties, admin, shipping, and product quality discount then the mining operating is probably breaking even at current prices.

'product quality discount'? Are you suggesting here that Arrium has got its blending mix wrong, so is having to accept a below market price for its end product?

SNOOPY

Corporate

05-10-2014, 09:36 PM

'product quality discount'? Are you suggesting here that Arrium has got its blending mix wrong, so is having to accept a below market price for its end product?

SNOOPY

Hi Snoopy, ARI produce 59% iron ore fines. The quoted price for iron ore is based on 62% fines. Therefore when sold the lower quality fines attracted a discount. For example FMG generally produce and sell 57% fines and receive 85% of the 62% fines price.

Based on the current price this is what FMGs margin looks like

Usd 80 for 62% fines
Less Usd 12 discount
Less Usd 49 all in cash costs ( incl royalties, admin, shipping etc.)
Margin Usd 19

Corporate

05-10-2014, 11:21 PM

I've taken a look at recent ARI and the costs aren't as bad as I initially thought,

they say all in cash costs are a$73 at current exchange rates is u$63 per tonne. This is at the bottom range of AGOs cost range and I believe ARIs product is slightly better.

By my calculations FMG, ARI and AGO are making the following cash margins per tonne: USD $19, $10 & $1

Snoopy

06-10-2014, 04:19 PM

Over at macrobusiness.com.au they refer to Arrium as the "iron ore zombie" - ie. its a dead man walking. I guess they, and the market, believe that Arrium will be bust before long, and it will be one of the first significant mine shutdowns as high cost producers are forced out of the market by BHP and RIO.

I found an article at "macrobusiness.com.au" titled:

"Thinking Iron ore miners? Think dot bomb stocks!"

This comes up on the site with today's date (October 6th). However, a web search on that header reveals the article was written back in July 2014.

http://sentirate.com/?p=30850

Furthermore it was written when the iron ore price was $97.17 for 62% FE futures. You'd have to give the authors kudos for predicting the subsequent decline of iron ore prices. But the rapid decline in iron ore price was what precipitated the Arrium recapitalisation. IOW the recapitalisation was designed with iron ore prices of $50, $60 in mind.

To use the 'macrobusiness' analogy KW, this is the view before the ambulance arrived. The 'dead man' (ARI) has received CPR from the emergency paramedics (the banks) and is now walking around again. Of course he is still fragile from his near death experience. But the correct treatament from here, IMO, is to watch him closely. Not knock up a coffin.

SNOOPY

Snoopy

06-10-2014, 04:28 PM

This 'shortman' website is getting addictive.

http://www.shortman.com.au/

Yesterday at around 4pm NZ time, 9.19% of ARI shares were 'short sold'. Today it is down to just 3.46%. Obviously someone is buying up big to close out their shorts! Yet the actual head share price is still falling, down 0.3c to 35.7c from yesterday's close. I get the feeling it is close to bottoming out. But next week is a whole new week!

Monday's installment from 'Short man'. The biggest weekly move is Arrium. One week ago it was 10.78% shorted. Now the shorting is only 1.89%, down from 3.46% on Friday. All those shorters are rapidly closing out their positions!

The head share price is down again today by 0.8c to 34.7c, which is a bit strange given the collapse in the short position. Maybe the longs are getting out and overwhelming the buying from the shorts? Is this short man stuff really useful?

SNOOPY

Snoopy

06-10-2014, 04:42 PM

The current value of the iron ore mines on their books are worth nowhere near what they could sell them on the open market for (who wants to buy an unprofitable mine now?), so that NTA per share is totally bogus. I would be expecting asset writedowns as well as negative earnings. And as soon as the asset writedowns hit the books, and the earnings interest cover falls, the miners are in breach of their banking covenants.

All the above is true, which is the reason for the soon to be completed recapitalisation of ARI.

The post recapitalisation net asset position for ARI is as follows:

($3,730.9m+$754.1m)/(1,366.2*2+204.9) = $1.53

Now I don't believe that asset value figure for a minute. I am expecting a huge loss of at least $2 billion for ARI this year as all the goodwill is written off. But guess what? Even with that huge loss booked my buy in position was still less than half of the net tangible asset position of ARI. So a loss of $2billion plus for ARI will still leave me in a very favourable position.

The net tangible asst value position, post recapitalisation, is as follows:

($1,766.8m+$754.1m)/(1,366.2*2+204.9) = $0.858

Now maybe even this is over inflated, and a further billion will have to be written off. But I will still be ahead, in surviving asset terms, even with this scenario. That is how cheap ARI is on the market at the moment. This is what buying with a margin of safety is all about.

And we all know how quick the banks are to shoot their dogs.

I have never met a banker who's secret dream is to become an iron ore miner. If the market goes down and you owe the bank $1m, then you have got a problem. If the market goes down and the company owes the bank $100m, then it is the bank that has a problem.

SNOOPY

Stranger_Danger

06-10-2014, 09:03 PM

> PS. Maybe the looming capital losses on mining company loans are the reason the banks are being sold down the river too?

Or maybe the mining and associated problems will lead to redundancies and mortgagee sales, shining a torch at the "enchanted" property market, and that is why the bank shares are being sold down the river?

Gosh. You mean Australia doesn't walk on water, perfect and oblivious, permanently? Whowouldathunkit, huh.

Re ARI, still haven't bought. Itchy trigger finger. Not yet.

percy

07-10-2014, 10:41 AM

Snoopy

08-10-2014, 04:28 PM

I found an article at "macrobusiness.com.au" titled:

"Thinking Iron ore miners? Think dot bomb stocks!"

This comes up on the site with today's date (October 6th). However, a web search on that header reveals the article was written back in July 2014.

http://sentirate.com/?p=30850

Furthermore it was written when the iron ore price was $97.17 for 62% FE futures. You'd have to give the authors kudos for predicting the subsequent decline of iron ore prices. But the rapid decline in iron ore price was what precipitated the Arrium recapitalisation. IOW the recapitalisation was designed with iron ore prices of $50, $60 in mind.

The decline in the iron ore spot price is certainly not helping ARI. However, it may not affect them as much as some here think.

ARI do sell on the spot market, but mostly into long term contracts. The contract/spot sales split trend is as follows (source Arrium Mining full explanation section of annual report in respective years):

YearContract Sale PercentageSpot Sale Percentage

201265%35%

201370%30%

201475%25%

It looks to me like Arrium have been busy locking in longer term contacts for some years to guard against just such a spot price iron ore downturn we are now seeing.

SNOOPY

Snoopy

08-10-2014, 04:43 PM

And as soon as the asset writedowns hit the books, and the earnings interest cover falls, the miners are in breach of their banking covenants.

Time to investigate exactly what the banking covenants for ARI are.

1/ Gearing ratio > 50%.

Not an issue since the October 2014 recapitalisation.

2/ EBITDA / Debt servicing > 3.0-3.5 (Interest cover)

After recapitalisation the historical interest cover ratio is 5.2.

For FY2014 the EBITDA contributions from the various business units are as follows:

EBITDA Mining$685.9m

EBITDA Mining Consumables $187.1m

EBITDA Steel$50.8m

EBITDA Total$923.8m

Assuming the other divisions when added hold their own (I believe a realistic scenario) , we can work out how far the EBITDA for mining has to fall before the banking covenants need to be revisited.

$928.3m x (3.5/5.2) = $624.8m

That is a reduction in EBITDA of

$928.3m - $624.8m = $303.5m

Assuming all that comes off the iron ore exporting, our 'danger' EBITDA figure to look out for is anything below:

$685.9m - $303.5m = $382.4m

This is the kind of figure that was achieved by the iron ore mining division in FY2013

SNOOPY

Snoopy

08-10-2014, 05:04 PM

Don't know what affect this will have,but BHP says it will now be able to produce iron ore ,excluding the cost of shipping and Govt royalties for less the $US 20 [A$21.64] per tonne in the medium term,after spending $25 billion on its supply chain over the past decade.

For comparison Arrium figures for FY2014 were as follows:

Loaded cash cost$A48-50 per tonne

Freight$A15 per tonne

Royalties$A3 per tonne

Overheads$A5 per tonne

Wet to Dry $A2 per tonne

Total Delivered Cash Cost$A73 per tonne

SNOOPY

Snoopy

08-10-2014, 05:14 PM

Is there any visibility into the length of the contracts and when they expire? If they expire quickly then it simply delays the problem. I found this with HDX - half their contracts were due to expire in a period of 12 months, and it was obvious that new contracts were not going to be renegotiated at the same rates (if at all). I believe most "long term" contracts are only 3 months.

http://www.ft.com/cms/s/0/2c49991e-ff1e-11e0-9b2f-00144feabdc0.html#axzz3FWSYcrfo

No mention was made by Arrium of how long a contacted period is. Perhaps that kind of information is commercially sensitive?

Up until 2012, Arrium and BHP were linked selling their iron ore through one agency. I think BHP tends to arrange one year contact deals with their big customers. At a guess I would say that one year deals are likely still. But I don't know for sure.

Secondly, what is stopping customers from defaulting on the contract, and instead buying at the cheaper spot price?

I doubt if even the Chinese could afford to be that blatant in disregarding the law. The purpose of a long term contact is to provide price certainty for both sides who arrange the deal. If the Chinese reneged on such a contract now, not only would they face legal action in Australia. They would probably never to trusted to sign any delivery contacts ever again. I really doubt the Chinese could afford to risk that.

SNOOPY

Snoopy

08-10-2014, 05:30 PM

Monday's installment from 'Short man'. The biggest weekly move is Arrium. One week ago it was 10.78% shorted. Now the shorting is only 1.89%, down from 3.46% on Friday. All those shorters are rapidly closing out their positions!

The head share price is down again today by 0.8c to 34.7c, which is a bit strange given the collapse in the short position. Maybe the longs are getting out and overwhelming the buying from the shorts?

A Wednesday update from 'short man'. ARI shorting has now reduced from 1.89% to 1.32%. That is nowhere near the top 100. Looks like the 'big ARI short' is over. Arrium is up on the market today, admittedly by a measly 0.6% or 0.2c to 34.7c as I write this.

SNOOPY

Snoopy

08-10-2014, 05:42 PM

Too true. I wonder how the banks plan on getting their $2.3 billion back. Guess they'll keep hitting the equity market until they get enough cash back, and hope the asset sales covers the rest.

Potential write downs at ARI won't affect the bank loans at all. The shareholders equity may suffer, but the bank loan balance remains intact.

ARI do have a (voluntary?) surplus asset sale program underway.

SNOOPY

Snoopy

09-10-2014, 03:44 PM

Potential write downs at ARI won't affect the bank loans at all. The shareholders equity may suffer, but the bank loan balance remains intact.

ARI do have a (voluntary?) surplus asset sale program underway.

Quoting from an article published in "The Australian" today:

-------

The dramatic drop in the price of iron ore, which has fallen to five-year lows around $US80 a tonne, forced Arrium to announce the raising last month to reduce its debt.

Chief executive Andrew Roberts said at the time that the plunge in the iron ore price had *affected market sentiment and he warned of a difficult environment in the mining industry.

He said the company was still making a thin margin on its iron ore operations but the integrated steelmaker would need to pull more costs out of the business over the coming year.

Arrium raised about $367m from the institutional portion of the one-for-one rights issue at 48c, and $98m through an institutional placement. Institutional shareholders took up about 79 per cent of their entitlements, with the shortfall and the placement priced at 48c via a bookbuild, equal to the underwritten floor price.

The retail bookbuild would not clear at the 48c floor price given the share price had fallen well below that, one source said.

The raising is underwritten by UBS, which means Arrium will get the capital no matter how the process ends up. UBS had the issue fully sub-underwritten, so the sub-underwriters would carry the risk of any shortfall or price gap, the source said.

However, there is market talk that disputes this, meaning UBS will by hit with some of the shortfall.

Those who were hoping a recovery in Arrium’s share price would ease the pressure on the raising will be disappointed by a statement from ratings agency Standard & Poor’s, which has lowered its benchmark iron ore price outlook by 11 per cent to $US85 a tonne to 2016.

--------

Currently $A1 = $US0.8790

Arrium's total delivered cash cost as at EOFY2014 was $A73/tonne or $US64/tonne.

It looks like three is still a cash margin there for Arrium! Meanwhile the share price looks to have bottomed with a slow recovery ( + 0.7c to 35.2c ) as I write this.

SNOOPY

Snoopy

09-10-2014, 04:04 PM

A Wednesday update from 'short man'. ARI shorting has now reduced from 1.89% to 1.32%. That is nowhere near the top 100. Looks like the 'big ARI short' is over. Arrium is up on the market today, admittedly by a measly 0.6% or 0.2c to 34.7c as I write this.

One day on and the short position has not changed. It remains at 1.32%. The share price closed on its lows yesterday, but is up a massive 0.5c as I write this. Was 34.5c the bottom?

SNOOPY

Snoopy

10-10-2014, 04:29 PM

One day on and the short position has not changed. It remains at 1.32%. The share price closed on its lows yesterday, but is up a massive 0.5c as I write this. Was 34.5c the bottom?

To answer my own question, no. Arrium down 1c to 34c as I write this. The short man position is now only 1.09% though.

Just as an aside, careful reading of the 'Shortman' fine print shows me that all of this shortman data I have been quoting is four days old.

http://www.shortman.com.au/stock?q=ARI

"Data graphed above represents aggregate short sales, provided by ASIC with a lag of 4 trading days (T+4). The ASX releases non-aggregated daily short sales figures which can be used as an indication of short sales activity within this 4 day window. These figures are released by the ASX daily and cover the previous days activity. This activity is listed in the table below, and is usually updated at 11:30am Sydney time. Alert symbols indicate the stock has been shorted more than 0.5% on the day."

15.8m short sales were recorded on Thursday 9th October. That accounted for the 'alert' signal sent to shortman today, and know doubt means that the shorts may rise again on aggregate in coming days.

I must say, it is all a bit confusing for a 'shorts' newbie.

SNOOPY

Snoopy

22-10-2014, 07:58 PM

From the SMH, October 20th 2014.

-------

The Anti-Dumping Commission is investigating a claim by Arrium subsidiary OneSteel that a raft of steel exporters including South Korea, Thailand and Turkey are injuring the company by "dumping" cheap product in Australia.

The investigation comes in the wake of Arrium's shock $754 million equity raising, undertaken to reduce debt in the face of collapsing iron ore prices and sustained losses in the steel business.

On August 8 OneSteel lodged an application requesting that Bob Baldwin, parliamentary secretary to Industry Minister Ian Macfarlane, publish a dumping duty notice in respect of steel reinforcing bar (rebar) exported to Australia from Korea, Malaysia, Singapore, Spain, Taiwan, Thailand and Turkey.

OneSteel alleges the Australian steel industry has "suffered material injury" in the form of lost sales volumes, reduced market share, lower prices and reduced profits due to the export of rebar at prices below actual product value (dumping).

OneSteel is Australia's only producer of rebar, manufacturing rebar products at Whyalla, Laverton and Newcastle. The size of the Australian rebar market was between 750,000 tonnes and 1 million tonnes in 2013-14.

<snip>

OneSteel said that the size of the Australian rebar market contracted 2 per cent in 2013-14 and that its own sales declined 5 per cent, while exports of dumped rebar from the nominated countries increased by 33 per cent.

Read more: http://www.smh.com.au/business/dumping-squeezes-arrium-profits-20141019-118ckp.html#ixzz3Gr3EK1sz

------

I would quibble with the 'reduced profits' bit because AFAIK, Onesteel (hence Arrium) doesn't make any money at all in their steel division, and hasn't made any for some years.

This Oz market dumping makes me nervous about investing in the former 'Onesteel' subsidiary, the now fully divested 'Steel & Tube' in New Zealand. 'Steel & Tube' are doing OK, but are they only one dump away?

SNOOPY

Snoopy

22-10-2014, 08:09 PM

percy

23-10-2014, 01:17 PM

You have balls of steel to be invested in this one Snoopy [very funny pun intended LOL]

I would have thought "Pig Iron" brain!!!! lol

Snoopy

23-10-2014, 11:42 PM

I would have thought "Pig Iron" brain!!!! lol

Since pig dogs have to be quite intelligent, I'll take the pig iron brain, the steel balls (which are nevertheless probably hollow if made from a Onesteel extrusion) and a few brass buttons on my dog tunic which I think I can recycle as scrap.

I must admit this has been a steep learning curve as I come to grips with the headwinds facing the smaller iron ore producers. But can you imagine NZ -with cows- without a butter factory? That would be like Oz -with steel- stopping making Holden cars! Will Mr Abbott have the steel to keep making Oz steel? Or will the foreign steel dump send Onesteel to the dump? Keep your steel tuning forks tuned for the next instalment.

SNOOPY

P.S. And just look at Mr Market. ARI up another 0.5c today to 34.5c.

Snoopy

24-10-2014, 02:09 PM

Holden is closing down. As is Ford. And Toyota. No more homemade cars in Oz.

Next you'll be telling me that Tony Abbott's new car is a BMW.

SNOOPY

Snoopy

29-10-2014, 04:13 PM

P.S. And just look at Mr Market. ARI up another 0.5c today to 34.5c.

I see we have a new substantial shareholder on the register. "Allan Gray Australia". They seem to be tied up with the Orbis family of investment funds. Anyone know anything about them?

SNOOPY

PS 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.

percy

29-10-2014, 09:03 PM

Joshuatree

29-10-2014, 09:26 PM

Yes they are the new name or a branch of Orbis.Think they have /had a pretty good success rate /reputation with their trades Snoopy. Im just watching the whole mining sector atm.

Stranger_Danger

29-10-2014, 10:08 PM

I see we have a new substantial shareholder on the register. "Allan Grey Australia". They seem to be tied up with the Orbis family of investment funds. Anyone know anything about them?

SNOOPY

PS 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.

I regard Simon Marais/Allan Gray as the best deep value investors in Australasia.

They don't get everything right and like all that like to play in the muck, they mistake the odd value trap for a hidden jewel. Overall though, they do very well. They've made good money on such dogs as F and P Appliances, Fairfax, amongst many others.

As a general rule, they buy too early - basically by design, as they're building pretty large positions - and their sell timing is usually pretty decent too.

If I'm playing with a deep value situation and terrified I'm missing something basic, the emergence of Allan Gray gives me heart that - normally - it'll turn out I'm not missing anything.

A google search on "Simon Marais profile/interview" will give you some insight into what sort of investors they are, I suspect they'll appeal to your investment style.

That said, STILL haven't bought yet, still being "too clever" in trying to time an entry.

Today's SSH probably suggests I should get moving.

cloggs

30-10-2014, 06:52 PM

Article in The Bull today about port capacity that may affect ARI (?)

MINING PORT CAPACITY GETTING TIGHT

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By AAP | 30.10.2014 12:08 AM
Australia's mining exports are growing to record levels but the capacity of ports to ship them appears to be running out.
A Deloitte report said the surge in export volumes is putting a strain on the current port and railway facilities.
"The looming increase still begs the question of whether Australia's stock of export infrastructure will be sufficient to support very large increases in mineral and energy exports," the report said.
Deloitte said that additional coal and iron ore projects already underway are expected to add 140 million tonnes per annum (Mtpa) in production capacity but that won't be matched by the capacity of ports to ship higher volumes.
Coal and iron ore port capacity is expected to only increase by 110 Mtpa.
"That suggests that a number of projects in the planning phase will need to go ahead to prevent bottlenecks occurring," Deloitte said.
Deloitte also said the continue growth of Australia's mining export boom will depend on Chinese demand for coal and iron ore.
"Australian iron ore exports to China have grown sharply over the last decade," the report said.
"In value terms, total exports of iron ore and concentrates to China over 2013/14 was around $57 billion, equivalent to over 76 per cent of total Australian iron ore exports and 20 per cent of total merchandise exports for the year."

Snoopy

03-11-2014, 04:13 PM

Article in The Bull today about port capacity that may affect ARI (?)

MINING PORT CAPACITY GETTING TIGHT

By AAP | 30.10.2014 12:08 AM
Australia's mining exports are growing to record levels but the capacity of ports to ship them appears to be running out.
A Deloitte report said the surge in export volumes is putting a strain on the current port and railway facilities.
"The looming increase still begs the question of whether Australia's stock of export infrastructure will be sufficient to support very large increases in mineral and energy exports," the report said.
Deloitte said that additional coal and iron ore projects already underway are expected to add 140 million tonnes per annum (Mtpa) in production capacity but that won't be matched by the capacity of ports to ship higher volumes.
Coal and iron ore port capacity is expected to only increase by 110 Mtpa.
"That suggests that a number of projects in the planning phase will need to go ahead to prevent bottlenecks occurring," Deloitte said.
Deloitte also said the continue growth of Australia's mining export boom will depend on Chinese demand for coal and iron ore.
"Australian iron ore exports to China have grown sharply over the last decade," the report said.
"In value terms, total exports of iron ore and concentrates to China over 2013/14 was around $57 billion, equivalent to over 76 per cent of total Australian iron ore exports and 20 per cent of total merchandise exports for the year."

Thanks for this Cloggs. Arrium fully own their own export port at Whyalla. So there will certainly be no shipping constraints on Arrium going forwards. They have also constructed their own rail line infrastructure to both primary mining areas: Middleback Range, and Southern Iron. So rail constraints won't affect them going forwards either.

As to whether their Whyalla port could use its capacity to service other outside exporter customers, well the port is being used to capacity by Arrium, so no. It is possible that Arrium might mothball some of its iron ore exporting capacity. That would free up export capacity. However, I suspect Whyalla is just too far away from other exporters mineral fields to be a competitive option.

I have read that some of Arriums marginally profitable steel production facilities in Newcastle are sitting on prime wharf precinct land. So perhaps if there was some plan to expand exports of other players through Newcastle, a deal could be done?

SNOOPY

Snoopy

03-11-2014, 04:40 PM

Some information on steel milling in China mentioning Arrium's principal customer "Tangshan Guofeng Iron and Steel," Article dated Monday 24th February 2014.

http://www.reuters.com/article/2014/02/24/us-china-steel-hebei-idUSBREA1N06Y20140224

-----

Many mills are already near bankruptcy because of slowing demand, plunging steel prices and a liquidity crisis that would have forced them to shut anyway, experts said.

…On the outskirts of Tangshan, a city of 7 million people that makes more steel a year than the whole of the United States, the hulking cranes and chimneys at the Qingquan Steel mill are frozen in inactivity. Workers unpaid for six months went on strike in October and haven’t returned.

Qingquan Steel is one of dozens of so-called zombie mills in Tangshan, where authorities have been ordered by the provincial government to draw up a list of plants to close so output can be cut by 10.8 million metric tons this year.

“In Tangshan and other parts of Hebei, the private mills are facing the most difficult time in their history,” said Xu. “Profits are poor and producers are all losing money – this has nothing to do with environmental measures: it is the economy.”

…Nevertheless, there has been some resistance.

An industry source said Tangshan had delayed an order to shut down 3 million metric tons of outdated steel production capacity at Tangshan Guofeng Iron and Steel, one of the city’s biggest producers, until next year because it was one of the few firms to make a profit in 2013.

While the Qingquan plant was reprimanded last year by local authorities no longer allowed to overlook environmental violations, orders to install costly new pollution controls would have made little difference to a facility with no access to funds and already incapable of paying its employees.

…”There are many others that have closed even though they haven’t declared bankruptcy. They aren’t formally shut because of the financial implications – they might be in debt and the banks would close in,” said a senior iron ore trader based in Tangshan.

-------

SNOOPY

Snoopy

05-11-2014, 07:45 PM

From
http://www.wkrb13.com/markets/411340/arrium-rating-reiterated-by-deutsche-bank-ari/

-------

Deutsche Bank reiterated their hold rating on shares of Arrium (ASX:ARI) in a research note released on Tuesday morning (04-11-2015). (after a site visit and a price target of 34¢ a share.)

Arrium (ASX:ARI) opened at 0.325 on Tuesday. Arrium has a 52 week low of A$0.320 and a 52 week high of A$1.6298. The stock has a 50-day moving average of A$0.36 and a 200-day moving average of A$0.6. The company has a market cap of A$442.4 million and a price-to-earnings ratio of 2.18.

Other equities research analysts have also recently issued reports about the stock. Analysts at Citigroup Inc. downgraded shares of Arrium to a sell rating in a research note on Thursday, October 2nd. They now have a $754.00 price target on the stock.

--------

Not sure where that $754 came from. It isn't a typo by me!

SNOOPY

percy

05-11-2014, 09:24 PM

h2so4

05-11-2014, 10:49 PM

Not sure where that $754 came from. It isn't a typo by me!

SNOOPY
It's a pump and dump by snoopy.

You sly dog

percy

07-11-2014, 07:11 PM

It's a pump and dump by snoopy.

You sly dog

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

h2so4

07-11-2014, 07:46 PM

G..........

Snoopy

08-11-2014, 04:13 PM

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

From:

http://www.theaustralian.com.au/business/mining-energy/fortescue-atlas-arrium-shares-dive-as-iron-ore-prices-slide/story-e6frg9df-1227115219760?nk=e52079b9326d857364f6921ef3416e80

dated 7th November 2014
-----

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.

-------

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

10-11-2014, 03:21 PM

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

10-11-2014, 03:28 PM

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

Snoopy

10-11-2014, 03:40 PM

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

10-11-2014, 03:59 PM

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

10-11-2014, 07:55 PM

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

11-11-2014, 03:45 PM

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

11-11-2014, 10:21 PM

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

12-11-2014, 10:31 AM

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 (http://www.abc.net.au/news/michael-janda/166854)
Updated yesterday at 5:51pmTue 11 Nov 2014, 5:51pm
http://www.abc.net.au/news/image/5646550-3x2-340x227.jpg (http://www.abc.net.au/news/2014-11-11/steel-mill-china/5882844)PHOTO: China's steel mills report that export demand has slumped. (Hugh Brown (supplied)) (http://www.abc.net.au/news/2014-11-11/steel-mill-china/5882844)
MAP: China (http://maps.google.com/?q=35,105(China)&z=5)

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.

Snoopy

12-11-2014, 03:17 PM

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

Below is my somewhat different way at looking at Arrium.

6463

It looks complicated and I will explain what it is all about in more detail later. But it does sum up Arrium's position (or possible positions) going forwards in a succinct way.

The key to the chart is the total solid colour height of each column (representing EBITDA) and whether that height is above or below the red line (where the banking syndicate wants EBITDA to be).

SNOOPY

Snoopy

12-11-2014, 03:34 PM

It looks complicated and I will explain what it is all about in more detail later.

What is Scenario Analysis? This is a technique I use for mature companies where I overlay different EBITDA scenarios on the current funding position of a company. In this case I am looking at eight different scenarios that I have designated by letter , H to O. To create 'EBITDA' I have used actual divisional 'EBIT' figures, allowing for corporate EBIT costs to be allocated among income earning divisions.

Rather than make these scenarios up, I have used actual divisional EBITDA figures that I have derived from annual reports dating back to the financial year 2008. The 8th letter in the alphabet is 'H'. So scenario 'H' is based on actual EBITDA data derived from the FY2008 annual report. Likewise 'I' is the 9th letter of the alphabet, and is based on data from FY2009. The last scenario 'O' is derived from forecast data for FY2015, so this column and this one alone is a forecast (estimate).

At this point, dear reader, you may rightly ask why I have gone to the trouble of laying out these scenarios by letter? Why not just use the year they refer to and leave it at that? The reason is that one part of each scenario is made up, the 'iron ore' section. The 'iron ore' EBIT figure of some $80m, is what I estimate what the iron ore EBIT will be for FY2015. In previous years it has been far greater. But IMO it is unrealistic to expect earnings from iron ore to get back to anything like recent historical levels. So when assessing what is likely going forwards, it is best to keep iron ore expectations muted.

What we have then, in these 'scenarios' is how the company might be expected to perform with iron ore largely removed from the equation, as far as EBITDA goes. I say 'expected to perform' somewhat tongue in cheek, because any of the above scenarios I believe are possible, simply because that is exactly what has happened under different market conditions in the past. An investor in Arrium today needs to be prepared for all of these possible eventualities.

SNOOPY

Snoopy

12-11-2014, 04:06 PM

It looks complicated and I will explain what it is all about in more detail later.

One point to note is that scenario 'H' and 'J' are described by a single column made up of solid colours. This indicates that EBITDA, or specifically EBIT, from each operating division is positive.

All other scenarios have a two column representation. The second part of the column with a down arrow, shows that those divisions are making an EBIT loss. Those EBIT divisional losses reduce the height of the column, partially cancelling out the positive EBIT created by the other divisions. The effect of this loss is summed up by the solid height of each column. Thus the solid column height is a reflection of the net positive EBITDA from all divisions in those scenarios.

SNOOPY

Snoopy

12-11-2014, 04:13 PM

Snoopy

12-11-2014, 04:23 PM

At the end of this just completed capital raising, the 1,366.2 million shares on issue before were joined by another 1,366.2 million shares and 204.9m place shares. So total ARI shares on issue are now 2,937.3m.

I estimate NPAT from normal operations (not including one off writedowns) will be $36.6m or:

$36.6m / 2,937m = 1.25cps

So at 29.5c, Arrium is trading on a PE of:

29.5/1.25 = 23.6

Still very high. Ouch!

What is missing from my above analysis is what is happening to cashflow. Last year Arrium had $367.5m of depreciation and amortization in the result (p87 AR2014). So if you look at expected cash being generated, the picture is very different:

($36.6m+$367.5m) / 2,037m = 19.8cps

So at 29.5c, Arrium is trading on a P/(cashflow ratio) of only:

29.5 /19.8 = 1.5

Granted cashflow is not profit and eventually if Arrium is to retain their earnings profile going forwards some of this cashflow will have to be reinvested. But with their Iron Ore infrastructure investment largely done, Arrium can afford to run at a loss on iron ore for many years. That because in the case of iron ore, ARI can operate at a loss and still generate enormous positive cashflow. The way I see it, ARI is a cash generating monster even with current low iron ore prices.

SNOOPY

Snoopy

12-11-2014, 04:40 PM

Below is my somewhat different way at looking at Arrium.

The current scenario is scenario N, because that represents the earnings profile of FY2014, adjusted for much lower iron ore prices. The just completed capital raising, as well as allowing Arrium to complete their capital expenditure program for FY2015, with reduce the interest bill going forwards. So even if iron ore prices remain slumped, and there is no growth in any of the other divisions (steel and recycling continue to lose money), Arrium should retain EBITDA headroom for those hard to satisfy bankers of close to $200m. Why is that important? It means that Arrium will not need to raise any more capital in the short to medium term (IMO).

Now I want to direct you to my scenario 'O'. The big difference between 'O' and 'N' is the much greater contribution from mining consumables. Yes it is a big step up from what we have seen before. But mining consumables has been underperforming for a while, largely because they keep overinvesting. With less capital investment and those plants already expanded and those plants already built ramping up towards capacity I believe my scenario 'O' is very possible. Scenario 'O' is the basis for my profit and cashflow calculations just completed.

SNOOPY

Snoopy

13-11-2014, 06:46 PM

It has been a bad week for Arrium, the entity that has emerged from the former Onesteel. The history of Onesteel you can find here.

http://www.sharetrader.co.nz/showthread.php?2578-OST&highlight=Onesteel

Some history on the purchase of Moly Cop and AltaSteel by Arrium, completed in December 2010.

From the Anglo American Plc annual report 2010 p85:

-------

Moly-Cop and AltaSteel performed well, assisted by strong demand for grinding media and increased vertical integration with the Canadian rolling mills. Production of steel products at 794,200 tonnes exceeded the prior year, notwithstanding the earthquake in Chile in February 2010 impacting production in Talcahuano.

In November (2010), Anglo American announced the sale of Moly-Cop and AltaSteel to OneSteel. The transaction was completed on 31 December 2010, resulting in a net cash inflow of $US993 million.

------

And from p45

-----

The Group completed the disposal of its 100% interest in Moly-Cop and AltaSteel (Other Mining and Industrial segment), generating a profit on disposal of $US555 million.

--------

Did Arrium pay too much for Moly Cop as some suggest? On 31st December 2010, $US1 = $A0.9840. So the transaction was almost done on a 1:1 basis.

EBIT was $139.8m for FY2014 and EBITDA was $187.1m and Revenue of $1,538.1m. However, these earnings include some residual Arrium businesses that were combined with Moly Cop after the buy out from Anglo American.

The FY2011 Onesteel (as it was then) annual report gives a comparative measure of the mining consumables business that was rolled into the Moly Cop purchase (AR2011 p76). Putting this information into a table with the above purchase information.

------

RevenueEBITEBITDA

Total Mining Consumables FY2014 (a)$1,538.1m$139.8m$187.1m

Onesteel Mining Consumables FY2011 (b)$680.1m$60.5m$81.4m

Difference (a)-(b)$858.0m$79.3m$105.7m

--------

We could argue (*) that four years down the track that $933m price gives an EBIT multiple of:

$933m/$79.3m = 11.7

and an EBITDA multiple of

$933m/$105.7m = 8.83

Now, I'm no mining guru. But what do you think people? Do those multiples look OK?

SNOOPY

(*) I am making an assumption here that all growth after acquisition has come from the acquired businesses, and none from the original Onesteel business. I am guessing this is not so far from the truth as most of the forecast growth is from the Americas, which was mostly the businesses that were bought.

percy

13-11-2014, 06:51 PM

Snoopy

16-11-2014, 11:10 AM

Looks to me as though the share price is moving to reflect the PE.
Would a PE of 7 be about right?
If so the share price has some way to go yet.

I am banking on my suffering not getting this bad Percy. On Friday I doubled my holding. Average entry point is now 34c, what Deutsche Bank said they are worth. I am taking the gamble that the board will shore up the share price on Monday, by not announcing any more 'new' bad news at the AGM. Big hundreds of millions of dollar writedowns in goodwill I expect.

I am not claiming to be smarter than Deutsche Bank. I just have a different way of looking at Arrium and a different time frame to satisfy. Everyone in the media is droning on about the iron ore price. But actually, in the medium term, Arrium don't have to mine iron ore for export at all. There are other minerals in their mining fields that could be mined and there are plans in place to prospect for them. And Arrium have a state of the art seaport ready to export them in a country where seaport capacity for raw material export is constrained.

Meanwhile, the mining consumables business is trucking along. The steel division is a problem. But the macroeconomics of more infrastructure development in Australa going forwards provide the tailwind for this to improve.

My impression is that Mr Market is in a state of complete capitulation over Arrium. He can only focus on iron or price and the possible need to raise yet more capital. Personally, I think the odds are against more capital being required from here (but only 75:25 against). Nevertheless I am prepared to put up more money for a right priced rights issue in the future if necessary. All in all I am satisfied with the way my investment in ARI is progressing, and am looking for the right time to buy a third tranche of ARI shares.

SNOOPY

h2so4

16-11-2014, 11:49 AM

All in all I am satisfied with the way my investment in ARI is progressing, and am looking for the right time to buy a third tranche of ARI shares.

SNOOPY

Wait until Mrs Market gets wind of it.:eek2:

Stranger_Danger

16-11-2014, 02:07 PM

Snoopy,

I think the last leg down will be after the AGM, as the "slowest" of the old holders get shaken out at the bottom, by news of what has already happened. I think the capital raising overhang is about a week from being cleared out.

Still haven't bought yet. Suspect I will be later this week, but if the AGM news is good, I'll probably end up wishing I followed your strategy!

Corporate

16-11-2014, 10:34 PM

I am not claiming to be smarter than Deutsche Bank. I just have a different way of looking at Arrium and a different time frame to satisfy. Everyone in the media is droning on about the iron ore price. But actually, in the medium term, Arrium don't have to mine iron ore for export at all. There are other minerals in their mining fields that could be mined and there are plans in place to prospect for them. And Arrium have a state of the art seaport ready to export them in a country where seaport capacity for raw material export is constrained.

SNOOPY

Snoopy I'm no mining expert, but I don't think you just close down mining iron ore to go after other minerals in your tenements. If there were minerals of significant value and easy enough to mine (with existing infrastructure) don't you think they would already be doing it.

Everyone needs to be very careful when considering an investment in this company. To me the numbers just don't stack up.

The current enterprise value is $1.678 billion. If the iron ore price doesn't appreciate then the mining business is close to an EBITDA loss. When you take into account capex then you have a business unit putting significant strain on the company.

Then when you look at the remaining businesses units with an fy14 ebitda of $249m and deduct capex of $155m (the mid-point of the capex guidance) you are left with FCF of less $100m.

To me this is still far to expensive.

Joshuatree

17-11-2014, 08:35 AM

Snoopy

17-11-2014, 11:29 AM

Did Arrium pay too much for Moly Cop as some suggest? On 31st December 2010, $US1 = $A0.9840. So the transaction was almost done on a 1:1 basis.

EBIT was $139.8m for FY2014 and EBITDA was $187.1m and Revenue of $1,538.1m. However, these earnings include some residual Arrium businesses that were combined with Moly Cop after the buy out from Anglo American.

The FY2011 Onesteel (as it was then) annual report gives a comparative measure of the mining consumables business that was rolled into the Moly Cop purchase (AR2011 p76). Putting this information into a table with the above purchase information.

------

RevenueEBITEBITDA

Total Mining Consumables FY2014 (a)$1,538.1m$139.8m$187.1m

Onesteel Mining Consumables FY2011 (b)$680.1m$60.5m$81.4m

Difference (a)-(b)$858.0m$79.3m$105.7m

--------

We could argue (*) that four years down the track that $933m price gives an EBIT multiple of:

$933m/$79.3m = 11.7

and an EBITDA multiple of

$933m/$105.7m = 8.83

Now, I'm no mining guru. But what do you think people? Do those multiples look OK?

(*) I am making an assumption here that all growth after acquisition has come from the acquired businesses, and none from the original Onesteel business. I am guessing this is not so far from the truth as most of the forecast growth is from the Americas, which was mostly the businesses that were bought.

Just to back pedal on why I am interested in a deal that is four years old.....

The Mining Consumables Business is arguably the only saleable part of Arrium in 2014. So it is of interest to shareholders to know what it might fetch on the market today if it were partially, or wholly sold off.

My above value calculation I have realised is not complete. It does not contain the capital investment made in Arrium Mining Consumables since that business was acquired. That capital investment was as follows:

FY2012: $37m
FY2013: $50m
FY2014: $71m

That is a total of $158m

We could argue that four years down the track that $A/$US933m acquisition price and subsequent $A158m of investment gives an EBIT multiple of:

($933m+$158m)/$79.3m = 13.8

and an EBITDA multiple of

($933m+$158m)/$105.7m = 10.3

I'm no mining guru. But what do you think people? Will Arrium get their capital back if they decide to sell down their stake in mining consumables on today's market?

SNOOPY

Snoopy

17-11-2014, 11:50 AM

Snoopy I'm no mining expert, but I don't think you just close down mining iron ore to go after other minerals in your tenements. If there were minerals of significant value and easy enough to mine (with existing infrastructure) don't you think they would already be doing it.

I am no geologist Corporate. But IMO this unseemly rush into iron ore of recent years seems to be driven by harvesting the low hanging fruit. Look at the restructuring that BHP are proposing. BHP are looking at spinning off all their other mineral mining (silver, nickel etc.) into a new baby "BHP 2" so they can focus on their business that have scale: Iron Ore, Coal , Oil. Curiously iron ore seems to be at the top of the profitability tree (for BHP) by a long way.

I am not suggesting that other minerals that might be available to Arrium will come near the glory days of iron ore in terms of profitability. Other mineral prospecting wasn't mentioned in the FY2014 Annual Report. But in previous years Arrium have indicated their intention to prospect for other stuff. Obviously even with today's depressed iron ore prices (although it is debatable if the prices of the last three months are indicative of the future) it still makes sense for Arrium to continue to mine iron ore. Transitioning to another metal will incur some cost, to be sure. But I would argue that the same extraction equipment that Arrium own now would transfer over. Certainly the port facilities would, even if they have to build another rail access line.

SNOOPY

Snoopy

17-11-2014, 12:01 PM

Snoopy

17-11-2014, 12:07 PM

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.

I have gone through previous annual reports back to 2008 and put some numbers on the NPAT losses that the now combined (manufacturing and distribution used to be managed separately) Arrium Steel Division. I am excluding recycling, because although under the umbrella of Steel Division managment it continues to be reported separately. I have allocated contemporary management and interest costs to produce these figures.

YearSteel NPAT

2008$32.4m

2009$116.4m

2010-$24.8m

2011-$262m (ouch!)

2012-$155m

2013-$114m

2014-$123m

The horror year was FY2011. Some progress has been made since. But I think it is obvious from these figures the Steel Division is where the deep trouble still is.

SNOOPY

Snoopy

17-11-2014, 12:28 PM

YearSteel NPAT

2008$32.4m

2009$116.4m

2010-$24.8m

2011-$262m (ouch!)

2012-$155m

2013-$114m

2014-$123m

The horror year was FY2011. Some progress has been made since. But I think it is obvious from these figures the Steel Division is where the deep trouble still is.

If we go back to the FY2011 Annual Report, there is commentary (p8) on what caused the dramatic dowturn in steel.

1/ Weak domestic demand compounded by unseasonal wet weather (causing building project times to be drawn out?).

2/ Underutilisation in International Steel markets (leading to market dumping of finished steel product?)

3/ High raw material prices (at least this has been alleviated in theory! In practice maybe not as teh magnetite the Whyalla plant uses probaly has very low market value, even before the hematite price slump.)

4/ Rapid and significant $A appreciation, +28% in one year! (I presume in relation to the USD, the currency in which most commodities are traded. This has come back a bit since).

5/ Domestic demand affected by credit availability (the downstream effect of the GFC. The Australian Reserve bank is trying to control that)

Action taken at the time: 400 employees and contractors lost their jobs, saving the company $40m per year.

The real question is, how are these same effects playing out today?

SNOOPY

Joshuatree

17-11-2014, 03:57 PM

PDF (http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01574685) Presentation and address out

Snoopy

17-11-2014, 07:06 PM

PDF (http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01574685) Presentation and address out

Not a great presentation. Why are all the slides what I can only suppose 'draft versions' devoid of text?

SNOOPY

Snoopy

17-11-2014, 07:17 PM

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/industries/63055924/New-Zealand-steel-standards-could-lower

The key quotes:

----

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".

------

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

17-11-2014, 07:26 PM

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

http://www.stuff.co.nz/business/industries/63055924/New-Zealand-steel-standards-could-lower

And some counter point quotes:

http://www.stuff.co.nz/business/industries/63224765/Steel-costs-more-than-it-should

Excerpts below:

------

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?"

-------

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

18-11-2014, 04:24 PM

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

18-11-2014, 06:18 PM

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

h2so4

18-11-2014, 07:18 PM

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

19-11-2014, 01:08 PM

A bit of support at 26.5 cents. Ugly.

Snoopy

19-11-2014, 06:03 PM

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 » (http://lists.tarawera.co.nz/12all/lt/t_go.php?i=17852&e=MjIxNA==&l=-http--www.theaustralian.com.au/business/dataroom/downturn-may-force-arrium-into-sale-of-grinding-media-business/story-fnjw8txa-1227123070219)

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

------

"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."

------

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

19-11-2014, 06:11 PM

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

h2so4

20-11-2014, 12:28 PM

Wait until Mrs Market gets wind of it.:eek2:
......oh dear, looks like Mrs Market has got wind of it .25 as I write. I hope her nagging stops soon.

Snoopy

20-11-2014, 03:50 PM

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

Snoopy

20-11-2014, 04:08 PM

Stranger_Danger

20-11-2014, 04:37 PM

Bought my first parcel today.

*Sits with Snoopy in the "short term losses" corner*

Clearly the P/E will be ugly high or negative, but such is the nature of cyclical plays.

Snoopy

20-11-2014, 04:54 PM

Bought my first parcel today.

*Sits with Snoopy in the "short term losses" corner*

Clearly the P/E will be ugly high or negative, but such is the nature of cyclical plays.

As I write this the share price is 24.7c.

So my estimated PE for FY2015 has been reduced to (24.7/29.5)*31.5 = 26.3

As Stranger Danger has said, this isn't about PE though. The mining consumables business is the key to Arrium surviving. Despite some shareholder criticisim at the AGM about the bank debt taken out to buy Moly Cop, the truth is Arrium would probably be in the hands of receivers now if it had not done so.

With projected earnings of just:

$27.7m / 2,937m = 0.94cps

there isn't much scope to get rich from dividends in the next twelve months.

To a very large extent what happens in the next twelve months depends on iron ore prices. But to a large extent the iron ore troubles are already built into the share price. Those waiting for the iron ore price to rise before investing will gain certainty, but lose - a lot- of potential capital gain. IMO waiting for the iron ore price to rise from here will probbaly see a potentail Arrium investor pay too much, especially as the iron ore price could easily fall back again.

Investing in Arrium at these prices is not without risk. But it is a calculated risk that I am prepared to take.

SNOOPY

Stranger_Danger

20-11-2014, 05:20 PM

Agreed, definitely not without risk. Those looking for less financial risk with their iron ore should probably go MGX with it's cash mountain. The risk there is the Chinese holders act in concert to take it out cheaply.

h2so4

20-11-2014, 06:27 PM

To a very large extent what happens in the next twelve months depends on iron ore prices. But to a large extent the iron ore troubles are already built into the share price. Those waiting for the iron ore price to rise before investing will gain certainty, but lose - a lot- of potential capital gain. IMO waiting for the iron ore price to rise from here will probbaly see a potentail Arrium investor pay too much, especially as the iron ore price could easily fall back again.

Investing in Arrium at these prices is not without risk. But it is a calculated risk that I am prepared to take.

SNOOPY
Wow!
There is GREAT! risk here. A further fall in iron ore prices, reduced demand or a strengthening $A will compound ARIs problems. If iron ore prices remained low for a number of years they will need more than a few hedging contracts to pay off their debts. They owe tons of money and more is needed for their planned Capital Expenditure.( plant and equipment) Did I mention a further contraction to world economies? Yes that to.
Potential investors may only be waiting for iron ore prices to level out, whatever their strategy they do do so at reducing RISK!
DYOR fellow STs.

Corporate

21-11-2014, 11:27 AM

Snoopy I'd be really keen to understand how you've come to $75m profit for the iron ore business?

I have decided my enthusiasm for the growth of the mining consumables business has been premature.

My new profitability assessment for Arrium for FY2015, with corporate overheads and interest allocated by revenues with tax paid at 30% is as follows.

DivisionNet Profit After Tax (FY2015 (Est))

Mining Consumables$91.7m

Iron Ore$75.1m

Recyclables-$29.1m

Steel-$117.6m

[/TR]

Total$27.4m

This increaseses the forecast PE for 2015 to 31.5

SNOOPY

Snoopy

21-11-2014, 11:32 AM

Wow!
There is GREAT! risk here. A further fall in iron ore prices, reduced demand or a strengthening $A will compound ARIs problems. If iron ore prices remained low for a number of years they will need more than a few hedging contracts to pay off their debts. They owe tons of money and more is needed for their planned Capital Expenditure (plant and equipment) Did I mention a further contraction to world economies? Yes that to.

Whoa Sulphur Sugar Daddy has a Rotorua moment! All of what you say is possible SSD (except for the bit about debts of which more later) , but I would say it is an apocalyptic viewpoint.

Iron ore is just about as important for Australia as Milk is for New Zealand. Just as a weakening milk price is (usually) enough to send the NZD down, a weakening Iron Ore price (usually) sends the Australian dollar down. Currency concerns IMO are not a big deal here.

The reason for the fall in Iron Ore price is supply lead, not demand lead. Iron ore and the downstream product steel are not luxury items. They will have ongoing use in society, whether a recession hits or not. A contraction of world economies often means goverenments ramp up spending on infrastructure projects (reinforcing steel).

As for iron or prices being low for years to come, that is similar to saying milk prices could be low for years to come, so no-one should go dairy farming. Both might happen. But I believe the underlying demand for both commodities means that it won't in both cases.

Your premise that if all things turn against the company then Arrium (as per this example) will be in real trouble is correct. But you could say the same about any company in any market sector. I don't think focussing only on the worst possible long term market is a satisfactory way to evaluate the potential of any investment.

SNOOPY

Snoopy

21-11-2014, 11:58 AM

If iron ore prices remained low for a number of years they will need more than a few hedging contracts to pay off their debts. They owe tons of money and more is needed for their planned Capital Expenditure. (plant and equipment)

SSD raises a legitimate issue more existing and potential Arrium investors. So what really is the debt position for Arrium in the eyes of the banks?

There are two banking covenants, as outlined in slide 29 of the capital raising presentation:

1/ Gearing ratio must be less than 50%.
2/ EBITDA/(Net interest Bill) > 3.0 to 3.5

I will deal with each of these separately.

SNOOPY

Snoopy

21-11-2014, 12:03 PM

1/ Gearing ratio must be less than 50%.

Slide 28 of the capital raising document shows a Pro-Forma balance Sheet.

Net Assets: $4,470m
Net Debt: $976m

So net assets would have to decrease by:

$4,470m - $976m = $3,494m for this covenant to be breached.

Now I for one am expecting one off writedowns of up to 2 billion dollars in written off assets (tangible and intangible) over the next couple of years. But even with write offs of that magnitude, the balance sheet will be secure from a banks prespective. So this first covenant is safe.

SNOOPY

Snoopy

21-11-2014, 12:07 PM

2/ EBITDA/(Net interest Bill) > 3.0 to 3.5

Please forgive me the following data deluge, regarding forecast FY2015 EBITDA cover both divisionally and as a whole.

FY2015 (forecast)Iron Ore Mining ConsumablesRecyclablesSteelTotal

EBIT$170.6m$140.0m$1.3m$-52.8m

EBIT (corporate)-$15.9m-$11.1m-$11.0m$-27.4m$189.7m

D & A$204.6m$47.3m$10.8m$103.6m$366.3m

EBITDA$359.3m$176.2m$1.1m$23.4m$560.0m

Net Interest Bill$23.6m$21.6m$12.2m$37.4m$94.8m

EBITDA/Interest15.28.20.090.635.8

Tax Payable$71.5m

Net Interest Bill$94.8m

EBDA$394m

The key figure (in the box) of 5.8 is very healthily in excess of the 3.0 to 3.5 covenant range. So I can say with confidence that this covenant is unlikely to be an issue either.

On an individual divisional basis, the EBITDA covenant is an issue, in Recycling and Steel. But Arrium is assessed by the banks in its entirety, not as divisions.

Finally EBDA is EBITDA with interest and tax removed. This is a proxy for free cashflow (before incremental capex), which to me looks healthy.

SNOOPY

Snoopy

21-11-2014, 12:41 PM

Wow!
If iron ore prices remained low for a number of years they will need more than a few hedging contracts to pay off their debts. They owe tons of money and more is needed for their planned Capital Expenditure.( plant and equipment)

There is no need for a corporate to 'pay off their debts' as such. Sensible gearing is a fact of corporate life. Rolling over of that debt is a different matter. Slide 29 shows the debt maturing profile, before the capital just raised has been put to use paying some of it off.

Total debt of the proforma balance sheet is listed as $A1.5billion. The amount of debt maturing in FY2015 and FY2016 is well under $A250m, which is more than covered, and some, by the $A750m just raised. The big tranche of debt in FY2017 of $A750m is theoretically half paid off too.

By my reading of these figures, Arrium will have no problem at all covering their debt rollover until 2018 at the earliest. Ane we know a lot can roll under a bridge in three years. In summary then Arrium has their debt as well under control as any corporate might expect.

IMO, there are no medium term debt issues with Arrium. And the next capital raising (if required, I would guess not) is more than two years away.

SNOOPY

Snoopy

21-11-2014, 04:47 PM

EBDA $394

Finally EBDA is EBITDA with interest and tax removed. This is a proxy for free cashflow (before incremental capex), which to me looks healthy.

Total capital expenditure for FY2015 is budgeted to be between $390m and $450m. This is incrementally $60m-$70m more than was spent in FY2014. The increment in cashflow expenditure needs to come out of my EBDA figure.

That leaves $324m - $334m in the money tin which can be put towards further repayment of debt should management desire.

As I said before. Arrium is generating plenty of cash and has no debt issues, even with current iron ore prices.

SNOOPY

percy

21-11-2014, 05:50 PM

This thread was started on 28-09-2014 when ARI share price was 38 cents.
Today the share price is 24 cents.
And to think someone thought I was suffering brain fade??????????????? !!!!!!!!!!!!!!!!!

h2so4

21-11-2014, 09:22 PM

This thread was started on 28-09-2014 when ARI share price was 38 cents.
Today the share price is 24 cents.
And to think someone thought I was suffering brain fade??????????????? !!!!!!!!!!!!!!!!!

Yes I and 34 or 34.5 was mentioned as the bottom. Sometimes share price follows value.

Snoopy

22-11-2014, 10:55 AM

Snoopy I'd be really keen to understand how you've come to $75m profit for the iron ore business?

FY2015 (forecast)Iron Ore ProfitSource

EBIT$140mPost 107

Corp. EBIT Costs-$11.1mAR2014 p83

Net Funding Interest-$21.6mPRS2014 Slide 6

Total EBT$107.3mCalculated

Tax @ 30%-$32.2mCalculated

NPAT$75.1mCalculated

Notes:

I have spread out the Total Interest costs and Corporate EBIT runnings costs betweem the four earning divisions (Mining Consumables, Iron Ore, Recycling and Steel) like this:

1/ Corporate EBIT costs are apportioned relatively according to revenues (excluding 'other revenues') for each division.
2/ Net interest costs are apportioned relatively according to liabilities listed for each division.

Base have been taken from the results for FY2014. assuming they won't change that much year to year, except for net interest that has been adjusted as per Arrium's own forecast.

SNOOPY

Joshuatree

24-11-2014, 10:59 AM

5 year low for iron ore sub $70. I guess it doesn't matter if you are alongterm player , except you could average down again:)

Corporate

24-11-2014, 11:19 AM

h2so4

24-11-2014, 11:50 AM

5 year low for iron ore sub $70. I guess it doesn't matter if you are alongterm player , except you could average down again:)

Would certainly affect any asset and future cash flow valuations.

Snoopy

24-11-2014, 03:03 PM

Would certainly affect any asset and future cash flow valuations.

Persistently low iron ore prices will certainly affect asset valuations.

The acquisition of the ex WPG Resources field at Peculiar Knob, a long 600km rail ride away, may have to be mothballed. That could mean writing off the $A346m acquisition cost. It would also mean a probable write off of the spending categorized under the confusingly named 'Project Magnet 2', ($A200m), associated with the iron ore field expansion. I say confusingly named because 'Project Magnet 1' referred to the conversion of the Whyalla Steel facility to operate on a raw material of magnetite ore not hematite ore. 'Project Magnet 2' from what I can see has no connection with 'Project Magnet 1'.

In FY2013 there was further capital expenditure of $218m to further expand iron ore field capacity, when the iron ore price was much higher than today.

I believe the total sum of this outlined CAPEX ($764m) in bold may well have to be written off.

I expect further write offs in the steel division too, of the order of one billion dollars. All this has already been factored into my investment decisions. In summary, my projected operating profit of $27m will result in a headline profit announcement of a record loss, close to $A2billion, because of these one off asset adjustments. Despite this I still expect to double my money on my Arrium investment in the medium term.

SNOOPY

Snoopy

24-11-2014, 03:21 PM

Snoopy, in your analysis of the iron ore business you assume that on 75% of the sales volume is not impacted by the iron ore spot price. My view is that this is hugely overstating your forecast EBITDA figures.

Let me explain: my reading of the annual report is that 25% of the volume goes directing to the spot market (for anyone to buy) whereas the 75% is sold to long term customers. This split has little impact on the ultimate pricing because in one way or another, the 75% will be linked to the prevailing spot market price. I doubt they have managed to 'fix' the sale rate at above current pricing. If they had, they'd be telling the market.

Just my opinion. DYOR.

Corporate. The normal reason for a buyer to lock in a supply contract is to create certainty of price over a period. AFAIK, Arrium has never said what the lengths of these contracts are. KW suggested they might be as short as three months. If that is true, I agree that such contracts will produce a result little different compared to all of the iron ore sales being contracted at spot market prices.

Your suggested interpretation though, though that 75% of output is sold to long term customers, and 25% is left for anyone to buy on the day, is not an interpretation I had considered before. But if you are correct, I do not understand the need to differentiate between long and short term customers. If everything effectively goes through at the same price, no matter what the long term/short term customer split, why bother to mention it at all? If a long term customer quits, cannot Arrium can just sell that surplus on market and receive an identical price?

My position is that contracts are settled at a fixed price that does not change until the end of the contract. Arrium could not be expected to inform the market what the difference between the spot price and contract market price is at the time of contract signing, due to buyer/seller confidentiality. It is even more unrealistic, IMO , to expect Arrium to come out and announce that contract prices have risen well above today's market price, as a result of iron ore prices sinking. To me it seems obvious that this has happened as a natural consequnce of current iron ore price market movement, compared with the historical contract prices.

What Arrium has said is that they cannot produce a forecast due to very high market volatility. In teh circumstances, IMO, this is the best you can expect.

SNOOPY

Snoopy

24-11-2014, 04:47 PM

Total capital expenditure for FY2015 is budgeted to be between $390m and $450m. This is incrementally $60m-$70m more than was spent in FY2014. The increment in cashflow expenditure needs to come out of my EBDA figure.

That leaves $324m - $334m in the money tin which can be put towards further repayment of debt should management desire.

As I said before. Arrium is generating plenty of cash and has no debt issues, even with current iron ore prices.

After reflecting over the weekend, I believe the detail my above analysis is not accurate.

'Capital Expenditure' is not an annual expense. An annual 'depreciation of asset expense' and 'amortization of mine licence exprense' will come out in the annual reported income statement, not the whole capital expenditure for the year. Effectively that means that all of the $390m and $450m projected Capex does need to come from my projected EBDA figure of $394m. That in turn means a small negative cashflow for the year. However, the negative cashflow of up to around $50m is not material on a balance sheet with $4.47billion of net assets and only $976m of net liabilities.

Arrium has plenty of cash. But while this kind of capex is spent annually, it is not the cash generating monster I had alluded to previously. Nevertheless, the bit about Arrium having no debt issues is still certainly true.

SNOOPY

Snoopy

24-11-2014, 05:03 PM

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.

Am I allowed to back pedal on a back pedal?

After listening to the recorded telecast of the AGM, the vote that shareholders were asked to vote on regarding giving the board free reign to issue more shares (up to 15% of existing capital) only applies in the future to shares the board wants to place with institutions, independently of who holds what in the current shareholding base. The outcome of the vote did not affect the ability of the board to declare a rights issue in the future. I note that there was considerable resistance, in particular from the Australian shareholder association, to allowing the board the option of placing 15% of the bumped up new capital with institutions in the future. Not enough resisance to defeat the motion though!

Consquently we can say that the company's bankers would have been consulted on the size of the rights issue and the recent capital raising has indeed 'right sized' the company, as I originally suggested.

SNOOPY

Stranger_Danger

24-11-2014, 08:31 PM

Increased my holding nearly tenfold today, off a low base.

Have about 1/3 what I want. Near bottom? No idea.

percy

24-11-2014, 10:02 PM

Increased my holding nearly tenfold today, off a low base.

Have about 1/3 what I want. Near bottom? No idea.

Gee Whiz.
That was some buying.
Pushed the share price up to 26.5 cents!!!! lol.

Stranger_Danger

25-11-2014, 08:11 AM

lol I didn't buy above 26.

My base case is that this will still fall a little more, yesterdays move was in case we're at the bottom now. I do think we're close but that could be famous last words.

Snoopy

25-11-2014, 04:33 PM

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.

Post AGM information is now available on 'Shortman'. Monday (day of AGM) it was 2.33%. The next two days the number of shorted shares increased to 2.41% (Tuesday) and 2.57% (Wednesday).

The share price itself bounced nearly 10% yesterday, but is now back down to 26c. I want some more shares too but I'm going to watch for while. See what happens. Unlike shares that are likely to pay dividends, there is no hurry to purchase.

SNOOPY

Joshuatree

01-12-2014, 03:03 PM

22.5c today. Horrible days for metals,Gold ,Oilers . M/S companies etc...... Also horrible if you are watching the falling knives and thinking shall i average down, for longtermers. or traders...:(.G/luck from this non holder.

percy

01-12-2014, 05:54 PM

Some buyers at 21.

Snoopy

01-12-2014, 07:49 PM

Some buyers at 21.

Nope, buyers have retreated to 20c now. This is starting to look ridiculous, but Mr Market will go his own way.

Meanwhile Arrium have been busy paying down debt:

-----

REPURCHASE OF US$148M USPP NOTES
Arrium Limited (ASX:ARI) today announced that it has closed a partial tender offer to repurchase up to US$150 million of its US Private Placement Notes (USPP Notes) at par plus accrued interest. Take up ofthe offer was pleasing, with US$148 million USPP Notes being repurchased. The repurchase was funded by proceeds from the company’s recent capital raising.
No early redemption or make-whole costs were incurred with the repurchase. The repurchase is not expected to materially change the average interest rate for the company’s total drawn and undrawn debt facilities, which is currently approximately 4%. Arrium’s Chief Financial Officer, Mr Robert Bakewell said:

“The repurchase is in line with our focus on reducing debt and we are pleased with the take up of the offer.”

------

SNOOPY

winner69

01-12-2014, 08:12 PM

Now is the time to be brave Snoopy .....it'll all come right one day

Maybe a once in a lifetime to get an outfit like Arrium at a rock bottom price

Keep the faith

Snoopy

02-12-2014, 03:29 PM

Now is the time to be brave Snoopy .....it'll all come right one day

Maybe a once in a lifetime to get an outfit like Arrium at a rock bottom price

Keep the faith

You would be proud of me Winner. Last night I unpicked my tea bag and have saved the leaves for a future reading. Then I looked up my Fibonacci numbers. I said at the start of this ARI odyssey that 38c was an absolute bargain. So I am thinking 19c might just be 'the price'. However, don't tell the Major about any of this will you? He will have me eating chicken entrails if he finds out!

SNOOPY

Snoopy

02-12-2014, 03:42 PM

Nope, buyers have retreated to 20c now. This is starting to look ridiculous, but Mr Market will go his own way.

Meanwhile Arrium have been busy paying down debt:

-----

REPURCHASE OF US$148M USPP NOTES
Arrium Limited (ASX:ARI) today announced that it has closed a partial tender offer to repurchase up to US$150 million of its US Private Placement Notes (USPP Notes) at par plus accrued interest. Take up ofthe offer was pleasing, with US$148 million USPP Notes being repurchased. The repurchase was funded by proceeds from the company’s recent capital raising.
No early redemption or make-whole costs were incurred with the repurchase. The repurchase is not expected to materially change the average interest rate for the company’s total drawn and undrawn debt facilities, which is currently approximately 4%. Arrium’s Chief Financial Officer, Mr Robert Bakewell said:

“The repurchase is in line with our focus on reducing debt and we are pleased with the take up of the offer.”

------

I have had a look at the new debt repayment profile. It is interesting to see what has not been said, about the syndicated bank debt. There is still a big spike of syndicated bank debt to be paid down or rolled over in 2017. But none of that has been paid off yet. This indicates to me that the banks are not worried. Instead some of the privately held US based debt has been retired, ahead of retiring bank debt. That would not have been allowed had the banks any doubt about the future of the company.

All the US notes that were due to be repaid in 2018 have been repaid early, smoothing the 2018 debt repayment peak in the process. Plus a big chunk of US notes that were due to be retired in 2021. The rest of the debt profile looks to be unchanged. So the rest of the rights issue, some $A500m, is currently sitting there as cash. $A500m will cover the likely cash expenditure for CAPEX this year (budgeted up to $A450m). Everything looks to be on track. There is certainly no need to even think about selling assets, as one Deutsche Bank analyst has said, before 2017 at the earliest. A lot can happen in these markets over three years!

SNOOPY

Corporate

03-12-2014, 08:53 AM

All the best guys. This is not my cup of tea and without a significant upwards movement in the iron ore price I still think the current EV is expensive.

Joshuatree

03-12-2014, 07:28 PM

I think holders are looking at a longer 2 or 3 year time frame Corp. Patience of JOBE and, Snoop Dog.

who is jobe?:ohmy:

h2so4

03-12-2014, 10:08 PM

All the best guys. This is not my cup of tea and without a significant upwards movement in the iron ore price I still think the current EV is expensive.

Good to know. Meantime it seems China needs less Iron Ore to keep growing infact they need less of everything and the price of iron ore keeps falling off the back of a truck.

ARI continue their juggling act.

Joshuatree

04-12-2014, 11:54 PM

Shorters may have left the building Snoopy. 48 mill shares thru today with"an after mkt crossing of 15.3 million in a single hit". Good luck tomorrow(in 9 mins).

Snoopy

09-12-2014, 01:45 PM

I see we have a new substantial shareholder on the register. "Allan Gray Australia". They seem to be tied up with the Orbis family of investment funds. Anyone know anything about them?

PS 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.

Share price may be down (17.5c as I write this), but Allan Gray continues to increase their holding. Latest declaration, as of December 4th has Alan Gray Investment family of funds holding 10.7% of the company, up from 7.2% on 29th October.

Meanwhile the S&P Dow Jones Indicators have released a statement (5th December 2014) which says that Arrium is out of the ASX100, after the market close on 19th December. We can expect quite a lot of selling pressure from those index funds up until then I would guess. Anyone know how the December 19th date ties in with the likely selling? Will those index funds affected be required to quit by that date? Or is there some leeway?

SNOOPY

Snoopy

09-12-2014, 01:58 PM

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

------

"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."

------

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 $US123m per dry metric tonne.

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)

EBIT(2015)= $481.3m x [($83m - ($73m x 0.9121)]/[($123m - ($73m 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.

Updating for current market conditions.

Benchmark international iron ore price fell 1.7% to $US69.70 on December 8th. Rebar average slowed but is only 3 points above new lows. That is substantially ($US13.30, 16%) down on my primary modelling figure of $US83. Still unknown is how much Arrium's contracts to sell iron ore, a huge 75% of output, are tied to that spot price.

In mitigation of this fall the currency (AUD/USD exchange rate) has declined from 91c to 83c (an 8.8% loss in value). Furthermore Arrium have cut extraction cost (latest Arrium Mining Quarterly Production Report for the quarter ended 30 September 2014) : Down to $A45.6 per wet metric tonne. There are further costs to be cut. Total cash cost A$68.4/dmt2, [down from ~A$73/dmt2 (decline 6.3%) average for the prior year (as per my model)].

Total USD cost reductions at 15.1% do not quite match the latest market spot price reductions (16%). But it is not far away. I believe Arrium is still making a profit on their iron ore exports as of today.

I think Arrium are to be congratulated for responding well to the pressure they are under. Not quite ready to push the button on increasing my holding yet. But it is getting close.

SNOOPY

Snoopy

09-12-2014, 04:55 PM

See my assessment of the value of the Grinding Media business in another post (93 on this thread) Joshuatree. I note that CreditSuisse still value Arrium at 40c, despite the negativity of the above commentary in the Australian.

Page 40 of the Arrium Mining Consumables Division contains information on the two next largest competitors:

-----

Sigdo Koppers

• Magotteaux, Proacer and SABO
• Magotteaux provides predominantly high chrome cast balls, limited application overlap with Moly-Cop’s forged media
• Proacer and SABO are both local competitors to Moly-Cop Chile

ME Long Teng

• Manufacturer and distributor of Chinese manufactured forged ball

-------

Perhaps something to follow up another day?

SNOOPY

percy

09-12-2014, 05:08 PM

• Magotteaux provides predominantly high chrome cast balls,

-------

Perhaps something to follow up another day?

SNOOPY

Don't delay.
Order some today !!!!
Will need them should you decide to add to you ARI holding.!!!! lol.

cammo

09-12-2014, 09:24 PM

i have some at 20c. think bottom is close, really tempting to load up. think ill watch now until first news. firmly on snoopys side of the fence on ARI.

disclaimer: i love high risk stocks

winner69

09-12-2014, 09:44 PM

Was ARI really about 150 at the beginning of the year?

Corporate

09-12-2014, 10:53 PM

I still think the Iron Ore result will be much worse than you think Snoopy. These long term contracts won't mitigate the iron ore price decline and you are still fully exposed to the iron ore spot price. Take a look at FMG & AGO, both have long term customers - no different to ARI - they are still exposed.

Snoopy

10-12-2014, 11:00 AM

i have some at 20c. think bottom is close, really tempting to load up. think ill watch now until first news. firmly on snoopys side of the fence on ARI.

disclaimer: i love high risk stocks

Nice buying there Cammo, in relation to my 34c average so far at least! Don't underestimate the stupidity of those index funds at rebalancing time though. If they are required to sell up to December 19th, then they will sell, no matter how stupid the price.

I guess whether you see ARI as a high risk share depends on your definition of risk. Some equate risk to volatility. I guess if you are a leveraged trader that might be appropriate. Traders can be forced to sell shares on unexpected price swings. If however you are a long term investor, with a strategy not dependent on first entry price and no pressure at all to sell -ever- 'risk' has quite a different. meaning. I am more worried about permanent loss of capital. Buying something at about half net asset value and with a PE of around 4 is only risky if you think that business will never recover, or will need some huge further capital injection to survive. I don't believe either of those things for reasons I have well documented on this thread.

From my perspective ARI is an extremely low risk investment. I don't expect others who have a twelve month only time frame will agree. But what I see is a share being mispriced as a pure iron ore producer (which it isn't), suffering from high input costs that they can't control (quite wrong as they are doing so) which some analysts think will need a capital injection soon (if needed at all, I think not, it will be two years away). Looking out 24 months, provided the steel division doesn't bite them more than expected, I believe the Arrium share price will be a multiple higher than it is today.

SNOOPY

Snoopy

10-12-2014, 11:13 AM

Was ARI really about 150 at the beginning of the year?

Don't believe everything you see the charts Winner. Each of those shares at $1.50 contained a hidden right to buy one more share at 48c. So what you read as $1.50 actually equates to:

($1.50 + $0.48)/2 = $0.99

Then on top of this, a share amount equivalent to 15% of the 'start of the year number of shares' was offered to institutions. This has diluted all existing rights entitled shareholders by:

15/(100+100+15)= 7.0%

So actual equivalent value for shares held now verses those quoted at the start of the year is:

$0.99 x (1-0.07)= 92c

Not $1.50 at all. Still it is nevertheless a spectacular slide down to 17.5c, the sort of which you ordinarily would have to go to a giant fun fair to see.

SNOOPY

PS I see some shares went through at 35c today, by someone exercising a 'put' option. I wonder what all that is about?

Snoopy

10-12-2014, 11:39 AM

-----

Sigdo Koppers

• Magotteaux, Proacer and SABO
• Magotteaux provides predominantly high chrome cast balls, limited application overlap with Moly-Cop’s forged media
• Proacer and SABO are both local competitors to Moly-Cop Chile

Company Overview from a conference in South America

•
Sigdo Koppers is a Chilean Industrial Conglomerate
•
50 years of successful track record
•
Strategic focus: to become a comprehensive supplier for mining and industrial operations
•
Commitment with a long term investment industrial approach
•
The company is organized in three business areas:

1/ Services Area
2/ Industrial Area
3/ Commercial and Automotive Area

Further digging down under category 2

Strategic focus on the mining industry

• SK is present at various stages of the mining industry value chain
• Magotteaux provides high value-added services and products, notably for the mining and cement industries
• Magotteaux is a key strategic choice to position SK as a leading comprehensive supplier for the mining industry

High performance wear resistant consumables provider of high chrome grinding media and castings

1/ Magotteaux, based on Belgium, is a leading global provider of high chrome grinding media and castings.
2/Principal end markets for Magotteaux’s products are the mining and cement industries.
3/The company has 14 wholly-owned manufacturing facilities across 11 countries and 38 commercial offices worldwide
4/ The main facilities are located in Belgium, Brazil, United States and Thailand
5/ Magotteaux has a Joint Venture with Scaw Metals in South Africa

Installed capacity (tons/year)

High chrome GM: 240.000

Low chrome GM: 60 000

Forged steel GM: 50.000

Castings: 64.000 (73.000 since 2Q12)

JV with Scaw Metals: 100.000 (high chrome GM)

6/ Magotteaux provides high value-added products, being recognized as an innovation and technology

SNOOPY

cammo

10-12-2014, 11:17 PM

Snoopy,

Ive been reading these forums. Its very hard to rationalise the "fall from grace" to a reclimb from 17.5 cents, but im not a pay $3 per share and get my 7% less taxes etc y o y kinda guy. Im in for the new IPOs and the news releases. So im prepared to lose occasionally.

Being a scientist and a builder among other things, I find mining and distribution of atoms/molecules quite interesting, so I do biotech, metals and novel technology bits that i think might go. I think ARI should be able to roll through this, although other countries that have cheaper labour are starting to threaten the OZ backstop of plentiful easily extracted atom sources, so I worry that the eventual chinesisation of the ore and refining will hurt mining in OZ and create ghosttowns in the outback.

cammo

11-12-2014, 03:22 PM

Ummm 15.7 ....where is the bottom.....time to sit on hands till moving averages cross?

percy

11-12-2014, 03:31 PM

Ummm 15.7 ....where is the bottom.....time to sit on hands till moving averages cross?

Not going to happen for awhile, as the sp is a country mile below both the 50 EMA [31 cents] and the 200 day EMA [63 cents].
The death cross on 1st May when the sp was .99cents has proved correct.

h2so4

11-12-2014, 03:42 PM

Ummm 15.7 ....where is the bottom.....time to sit on hands till moving averages cross?

I thought you said around .20 was close? Slightly more optimistic than s d who I suspect hasn't yet bought his 50th tranche.

Better order some chrome balls camo.:)

percy

11-12-2014, 03:46 PM

I thought you said around .20 was close? Slightly more optimistic than s d who I suspect hasn't yet bought his 50th tranche.

Better order some chrome balls camo.:)

Make those LARGE !!!

airedale

12-12-2014, 07:58 AM

Hi KW, agree with that, check out the long term monthly chart also helps and there is no sign of any lift off there.

cloggs

12-12-2014, 08:32 AM

From The Australian Financial Review

The forecast average iron ore price is to be downgraded to around $US60 in next week’s mid-year budget update, resulting in a revenue write-down of more than $9 billion in two years and pushing back any hope of the budget returning to surplus.

The revenue losses from iron ore will be in addition to the write-downs that will come from falls in the coal and gas prices, which are linked to oil.

The mid-year economic and fiscal outlook, known as MYEFO, is pencilled in for early next week. Data out on Thursday showed unemployment has inched up to a 12-year high of 6.3 per cent.

While there will be more savings announced in MYEFO, including cuts to foreign aid, Treasurer Joe Hockey has ruled out a mini-budget to chase the revenue losses from *falling commodity prices because it would hurt the economy and cost jobs.

The iron ore price is now around $US68 but sources said MYEFO would contain forecasts based on an annual average price of around $US60.

It is believed this estimate was arrived at following consultation with the industry as well as the Treasury and is in keeping with Mr Hockey’s tendency to prefer conservative estimates and forecasts.

On Wednesday night, federal frontbencher Josh Frydenberg said the revenue losses from the fall in the iron ore price since the May budget were $9 billion.

“Iron ore prices have fallen by 35 per cent since May. This is $9 billion in our revenue projections just over the next couple of years,’’ he told ABC Radio National.

If the MYEFO forecast pushes the price down to $US60, as expected, the revenue write-downs should exceed $9 billion.

Mr Frydenberg also alluded to the pending falls in gas revenues.

“Australia is set to become the *largest LNG exporter in the world by 2017, overtaking Qatar, and what’s happened? The oil and gas prices have fallen dramatically. This hurts us,’’ he said.

The federal government will use MYEFO and its ballooning deficit predictions to pressure the Senate to think again about blocked measures worth $28 billion over four years.

After dumping the $7 GP charge for a compromise package that includes an optional $5 payment for non-concessional payments, the government looks to secure $3.6 billion of the $3.5 billion in planned savings.

On Thursday, Prime Minister Tony Abbott flatly ruled out increasing the Medicare levy to help meet the spiralling costs of universal heath.

“Too many people think that tax increases and more regulation is the solution to Australia’s problems,’’ he said.

The unemployment figure is the highest since 2002 but masked strong jobs growth in November, when 42,669 jobs were created.

That was the biggest jump in employment since March 2012, when 66,200 jobs were created, according to the Australian Bureau of Statistics’ seasonally adjusted data.

The Australian Financial Review

BY PHILLIP COOREY

Snoopy

12-12-2014, 03:19 PM

Not going to happen for awhile, as the sp is a country mile below both the 50 EMA [31 cents] and the 200 day EMA [63 cents].
The death cross on 1st May when the sp was .99cents has proved correct.

ARI seems to be being pushed around by the iron ore price, although I don't see it as a single variable iron ore play. But if the market wants to do that I'll go with that. It doesn't affect my long term strategy.

As many here know, I don't use charts. However, if I did I would be using a 30 day EMA short term and a 90 day EMA long term. Why? 30 days corresponds to one cycle between board meetings. This if things were going to happen driven by management that seems a good measuring stick. 90 days corresponds to the stock pile time those big steel refineries in China like. So this is the kind of time frame you might have to wait before you see a step change in buyer behaviour.

If anyone can tell me why I would choose 50 days or 200 days as alternative indicator periods I am prepared to listen. Personally I can't see any reason at all to choose those though.

Oh and the death cross hasn't proved correct. Arrium is not dead!

SNOOPY

Snoopy

12-12-2014, 03:32 PM

Ummm 15.7 ....where is the bottom.....time to sit on hands till moving averages cross?

Just wait until the index selling is done Cammo. Remember index selling is completely brainless. When the robot says 'sell' the shares are sold. No consideration given to FA. No respect of fibonacci extrapolated support levels or long term price averages. In some circumstances you might expect bargain hunters (like me) to come out of the woodwork. But ARI is quite well capitalised with plenty of liquidity about. Very difficult for even a big player to reverse the trend of the brainless ones. No dividend imminent so no need to buy up withing any medium ternm timeline.

Wait for the brainless ones to empty their suitcases then buy on or about December 19th. That's my plan. Alternatively if you want to pay more for no good reason wait till the cross of some made up averages.

SNOOPY

Snoopy

12-12-2014, 03:35 PM

From The Australian Financial Review

The forecast average iron ore price is to be downgraded to around $US60 in next week’s mid-year budget update,
<snip>
The iron ore price is now around $US68 but sources said MYEFO would contain forecasts based on an annual average price of around $US60.

It is believed this estimate was arrived at following consultation with the industry as well as the Treasury and is in keeping with Mr Hockey’s tendency to prefer conservative estimates and forecasts.

<snip>

“Iron ore prices have fallen by 35 per cent since May. This is $9 billion in our revenue projections just over the next couple of years,’’ he told ABC Radio National.

Wow. Will update my EBITDA figures for Arrium's iron ore mining based on $US60 and current exchange rates and cash extraction costs.

------

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 0.8310.

EBIT for FY2014 was based on average iron ore earnings of $US123m per dry metric tonne.

I am proposing to use an average EBIT using average iron ore earnings of $US60m per dry metric tonne. This was the price used for Australian budget estimation purposes.

I have assumed that
1/ extraction costs reduced to between FY2014 and FY2015 to $A69.
2/ I also the AUD/USD exchange rate is 0.8301
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)

EBIT(2015)= $481.3m x [($60m - ($69m x 0.8310)]/[($123m - ($69m x 0.8310)]

= $481.3m x 0.0405 = $19m (still -just- profitable!)

I assume that depreciation and amortization will not change substantially from FY2014 ($204.6m).

EBITDA(2015) = $19m + $205m = $224m

Still nothing to worry about, even with the government 'worst case' scenario.

SNOOPY

Snoopy

12-12-2014, 07:43 PM

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

Interesting post on Hotcopper, pauljbo470, on 11-12-2014 regarding property assets of Arrirm up for sale

-----

This is whats for sale at the moment
http://www.realcommercial.com.au/property-industrialwarehouse-nsw-mayfield-501337111

it is pretty much the australian tube mill site there.

they do own the riverfront land behind it (see picture in the link) up to the cleared site closer to the ocean (old bhp steelworks site). I am sure the coalies would love to get their hands on it.

to give you an idea of what its worth the government just did a 98 year lease for the main part of the port for $1.75 B (700 hectares). But it obviously has existing port infrastructure

so definitely assets would outstrip market cap easily at this point.

--------

We are talking about Arrium land in Newcastle in the port precinct.

Land area is 39.25Ha. So scaling that government leasehold variation in proportion to area I get just under $A100m. Perhaps more to come if they could sell and lease back other land?

Obviously for comparative purposes, the government land is more developed in terms of port functionality. Not sure how selling land outright verses a 98 year lease would affect value.

SNOOPY

Snoopy

13-12-2014, 04:00 PM

ME Long Teng

• Manufacturer and distributor of Chinese manufactured forged ball

'Long Teng' is the local Chinese partner of ME Elecmetal (Chilean based).

Drilling down into the website of ME Elecmetal. The Chinese grinding media plant is a small section of the overall company. The location of all manufacturing plants are as follows:

-----

CHILE

Elecmetal foundry (Santiago)
Talleres foundry (Rancagua)
Esco-Elecmetal foundry (Colina)
Talleres machine shop (Rancagua and Antofagasta)

UNITED STATES OF AMERICA

ME Global foundry in Duluth (Minnesota)
ME Global foundry in Tempe (Arizona)

CHINA

ME-Long Teng grinding balls factory (Changshu)
ME Elecmetal foundry, Changzhou

MEXICO

Fucasa foundry (licensee in Mexico)

-----

ME Elecmetal manufactures forged steel grinding balls from 7/8" to 6 ½" diameter at this joint-venture plant in Changshu, China.

"By offering premium quality grinding media, premium quality mill liners, integrated liner/ball design, and industry leading technical services, ME Elecmetal has accomplished proven results over the competition in helping customers achieve higher mill productivity and lower total cost of mill operation." (press release)

The annual reports are only available in Spanish, reflecting a company being domiciled in Chile. From p13 of that Annual Report:

"In 2012 Elecmetal continued its program of international expansion constituting the subsidiary ME Elecmetal (China) Co. Ltd. , in the city of Changzhou, China. This subsidiary began in 2013 (second half), the construction of a plant for forged grinding balls for an amount of US$45 million (approved in FY2012), which will be operational during the second half of 2014, to principally service the markets of Asia, Africa and Oceania."

This looks like new competition for Arrium. I notice they are not planning to take on Arrium in their core North and South American markets, at least in the short term. Moving on to page 17, it looks like the above paragraph may only relate to the latest expansion in what is a 3 stage project. Capacity is 400,000 Mtons of milling balls (total once construction is finished).

From p23 AR2013

"New subsidiary "ME Elecmetal (China) Co. , Ltd. is advancing in the construction of a foundry of special steels in the city of Changzhou, Jiangsu province, China, that will have a capacity of 30,000 tons of spare parts for grinding equipment, production that will be mainly devoted to the great mining of the Asia region, Africa and Oceania."

SNOOPY

Corporate

13-12-2014, 10:22 PM

Let's take another look at the iron ore profitability

Current 62% fines price USD 68.70 wmt
Less discount for lower quality USD 12.37*
Realised price USD 56.33 wmt
Less Conversion to dmt USD 2.82**
Realised price USD 53.51 dmt
Realised price AUD 64.70 dmt***

Less total cash cost AUD 68.4* dmt

Equals negative AUD 3.7 dmt

At at 13mtpa run rate that is a cash loss of AUD 48.1m. And then the key point is this excludes any capitalised costs which according to the capital raising presentation - for mining only - are in the range of AUD $240-290m. This is hugely negative in terms of free cash flow.

Snoopy, looking back at earlier post there was some discussion on the leverage ratio. Have you reassessed the headroom based on these kind of numbers?

Sources:
* calc from the latest quarterly report
** 5% used, could be slightly higher
*** using 0.8270

Corporate

13-12-2014, 10:26 PM

Snoopy

14-12-2014, 02:04 PM

Equals negative AUD 3.7 dmt

At at 13mtpa run rate that is a cash loss of AUD 48.1m. And then the key point is this excludes any capitalised costs which according to the capital raising presentation - for mining only - are in the range of AUD $240-290m. This is hugely negative in terms of free cash flow.

Corporate, you say that capitalised costs - for mining only - are in the range AUD $240-290m. This is from slide 27 of the capital raising prospectus, sub note 1? This is the projected capital expenditure (not the capitalised cost) for FY2015. This budget was set as the iron ore price was plummeting down to $US83 (capital raising presentation slide 7). That was a fall of 12% in a month and no-one was saying it would stop there (it didn't).

The expansion of Arrium's iron ore mining capability was largely completed in FY2014. My interpretation of what this still large expenditure is for is to open up another part of the Middleback Ranges that will allow access to a higher grade ore that can be mined at lower cost. Presently 'export blend' is obtained by trainsporting higher grade iron from Peculiar Knob and blending with very low grade ore from Middleback. However that is expensive , as Peculiar Knob is hundreds of kilometres from the export port. The purpose of (most) this projected mining capital expenditure for FY2015 was made under the shadow of a falling iron ore price and IMO it will be largely a one off. For FY2016, I expect mining expenditure in total to be under $A50m, a huge reduction.

Because most of the capital expenditure in mine development is already finished I have obtained my annual estimate of 'capital cost' for FY2015 from p21 of AR2014;

EDITDA - EBIT = $685.9m - $481.3m = $205m

OK, given the amount of capital expenditure in FY2015, the real figure will probably be a bit higher for FY2015. But this $205m is a sunk cost. It has no effect on cashflow going forwards. $205m will be written off on the books each year for several years. And yes I agree with you that with all capital costs taken into account iron ore mining is not profitable in NPAT terms. But even the banks say this doesn't matter. The banking covenants are based on EBITDA, because EBITDA reflects cashflow, and cashflow is what Arrium needs to pay bank their bank loan.

Ah, but you counter cashflow is really negative because you have failed to take into account mining capex for 2015! Strictly, that is true. But it only matters if that FY2015 projected mining Capex will be ongoing. I am telling you that it won't be. Think of the 2015 Capex not as a cost, but as an investment in lowering the cost of extraction for ten years into the future. Imagine capex for mining virtually drying up in FY2016. Then you will see that iron ore mining will become enormously cashflow positive for Arrium, even if it is not profitable in NPAT terms. It is cashflow that Arrium needs to get them through the period of low iron ore prices, not profit (even if profit would be nice).

SNOOPY

PS I am wondering if Deutsche Bank have assumed that mining capex for FY2015 will be ongoing into FY2016? If they did, and if they didn't appreciate why the capex has been lumpy over the current period, it would be an easy mistake to make. That would explain why they think Arrium might need to sell assets. I am calling the Deutsche bank analyst over this one - IMO they've screwed up, and now I know why.

Snoopy

14-12-2014, 02:48 PM

Snoopy, looking back at earlier post there was some discussion on the leverage ratio. Have you reassessed the headroom based on these kind of numbers?

At corporate's request, I have repeated my forecast FY2015 EBITDA cover calculation, assuming a much lower iron ore EBIT. Updating my post in the format of post 120.

FY2015 (forecast)Iron OreMining Consumables RecyclablesSteelTotal

EBIT$19m$140.0m$1.3m$-52.8m

EBIT (corporate)-$15.9m-$11.1m-$11.0m$-27.4m$42.1m

D & A$204.6m$47.3m$10.8m$103.6m$366.3m

EBITDA$207.7m$176.2m$1.1m$23.4m$408.4m

Net Interest Bill$23.6m$21.6m$12.2m$37.4m$94.8m

EBITDA/Interest8.88.20.090.634.3

Tax Payable$33.4m

Net Interest Bill$94.8m

EBDA$280.2m

The key figure (in the box) of 4.3 is still in excess of the 3.0 to 3.5 covenant range. So I can say with confidence that this covenant is unlikely to be an issue, even with steel at USD60, and the prevailing exchange rate at AUD1 = USD0.8310.

SNOOPY

Snoopy

14-12-2014, 02:54 PM

Edit, I have just noticed that I may have double counted the moister cost. it seems that ARI include this in the quoted total cost of production. So the margin may be closer to breakeven at a EBITDA level. But the point is this is nowhere near covering the capital costs of mining.

Corporate, the only way I can get 'breakeven' at EBITDA level even at $US60 for iron ore is to regard all the projected mining expenditure for FY2015 as an expense. IMO these are costs that will be capitalised. EBITDA for Iron Ore is close to +$200m, even with the Australian government's budgeted worse case scenario.

SNOOPY

PS Yes I am aware that the capital costs of mining are not being covered. But as I said in another post, this isn't an issue for now.

h2so4

14-12-2014, 07:07 PM

Still nothing to worry about, even with the government 'worst case' scenario.
Not sure how well that statement would go down in the annual report.

Code for Record drop in EBITDA to $200 million, down 70% from $686 million pcp.

Standing by for coded announcements from ARI management.

cammo

14-12-2014, 09:37 PM

One of the coolest things to do with H2SO4 is dehydration of sucrose (table sugar). Turns nice white sugar into a mass of black carbon.

percy

14-12-2014, 09:47 PM

One of the coolest things to do with H2SO4 is dehydration of sucrose (table sugar). Turns nice white sugar into a mass of black carbon.

Can that mass of black carbon be formed into balls?
If so do you think they will make "chrome balls" obsolete?

cammo

14-12-2014, 09:51 PM

No but we could use the H2SO4 to digest the iron ore, providing a superior product which we could sell for more USD.

percy

14-12-2014, 10:01 PM

No but we could use the H2SO4 to digest the iron ore, providing a superior product which we could sell for more USD.

Yeah right??
Good to know that??

Snoopy

15-12-2014, 03:21 PM

Code for Record drop in EBITDA to $200 million, down 70% from $686 million pcp.

Standing by for coded announcements from ARI management.

My post 173 is showing EBITDA of $A390m with iron ore price at $US60/dmt, and the exchange rate at $A1 = $US0.8310. Exchange rate is now $A1 = $US0.8256.

http://www.vale.com/EN/business/mining/iron-ore-pellets/Pages/Iron-Ore-Indices.aspx

Current Iron Ore price is $US69.40.

Granted I haven't taken into account that Arrium will receive less money because they exporting a lower grade than 62% iron ore. But they have also increased volume from 12.5MT to 13MT. So I don't think my figures are too far out.

If EBITDA drops to $A200m then Arrium has problems for sure. But all my calculations (post 173) show it to be earning nearly twice that with an iron or spot price 15% below where the market is now. I can't get my EBITDA figures anywhere near $A200m. $A200m EBITDA looks like a manic depressive fantasy to me.

SNOOPY

PS Another thing to factor in to mining is the drop in fuel price. Some say fuel represents 50% of the cost of extraction. So if fuel prices drop 20%, and the iron ore price is $US60/dmt that takes something like $US6/dmt off the extraction cost. That is a huge potential boost to profitability for iron ore. Falling commodity prices aren't all bad for Arrium!

Snoopy

15-12-2014, 04:20 PM

Company Overview from a conference in South America

•
Sigdo Koppers is a Chilean Industrial Conglomerate
•
50 years of successful track record
•
Strategic focus: to become a comprehensive supplier for mining and industrial operations
•
Commitment with a long term investment industrial approach
•
The company is organized in three business areas:

1/ Services Area
2/ Industrial Area
3/ Commercial and Automotive Area

Further digging down under category 2

Strategic focus on the mining industry

• SK is present at various stages of the mining industry value chain
• Magotteaux provides high value-added services and products, notably for the mining and cement industries
• Magotteaux is a key strategic choice to position SK as a leading comprehensive supplier for the mining industry

High performance wear resistant consumables provider of high chrome grinding media and castings

1/ Magotteaux, based on Belgium, is a leading global provider of high chrome grinding media and castings.
2/Principal end markets for Magotteaux’s products are the mining and cement industries.
3/The company has 14 wholly-owned manufacturing facilities across 11 countries and 38 commercial offices worldwide
4/ The main facilities are located in Belgium, Brazil, United States and Thailand
5/ Magotteaux has a Joint Venture with Scaw Metals in South Africa

Installed capacity (tons/year)

High chrome GM: 240.000

Low chrome GM: 60 000

Forged steel GM: 50.000

Castings: 64.000 (73.000 since 2Q12)

JV with Scaw Metals: 100.000 (high chrome GM)

6/ Magotteaux provides high value-added products, being recognized as an innovation and technology

More information from the end of 2012 capital raising prospectus, from p18 onwards.

------

LEADER IN ITS MARKET SEGMENT

With a long experience and consolidated prestige, Magotteaux is today a leader in the areas where participates, with a market share of 79% in balls of grinding of high chromium. The main strategy of Magotteaux for the next few years is to build on its leadership position, further increasing its penetration in high-growth markets, and developing new applications by and developing new applications by means of three strategic directions.

1/ Creating New Product.
2/ Continue expansion in Asia and Latin America.
3/ Continue to innovate processes.

Magotteaux has:

1/ Been a pioneer in the use of materials with high chromium
2/ Patented more than 20 technologies and processes in 60 countries
3/ Several centers for R&D (Belgium, South Africa and Australia) with teams of engineers
and highly qualified scientific

Customers:

Significant synergies and cross-sectional Magotteaux with SK complement supply and allow access to new customers, enhancing the growth of SK

Geography

The extensive network of global marketing and distribution of Magotteaux will allow Sigdo Koppers expand its distribution network and expand its sales to a significant amount of countries. In a similar way, the local and regional recognition of Sigdo Koppers Magotteaux will allow to develop your business in markets where it is not present or has a low participation.

Magotteaux has 38 plants on four continents.

Magotteaux has 2 commericail offices in Indonesia, 2 in Australia, 3 in South America and 4 in North America amongst a total of 38.

The Magotteaux Acquisition in October of 2011 for US$640 million, sees the consolidated SK as global leader and provider of comprehensive services for mining and industry.

-------

Arrium would not agree that Magotteaux is the 'market leader'. But Magotteaux have sub defined their own market as 'grinding balls of high chromium' only to achieve market leadership by their own definition.

Sigdo Koppers, as a relatively recent acquirer of Magotteaux, will have their own reason for making the acquisition and no doubt growth going forwards is part of the plan, including integration with SKs existing subsidiaries in Chile.

SNOOPY

Joshuatree

15-12-2014, 04:38 PM

Iron Ore Miners’ Breakeven Prices Falling, but High Cost Plays Remain Risky – UBS (http://businessnow.theaustralian.com.au/2014/12/15/iron-ore-miners-breakeven-prices-falling-but-high-cost-plays-remain-risky-ubs/?ncabn-iframe-embed=1)about 5 hours ago | 9:31am | DAVID ROGERS
Iron ore miners’ breakeven prices have fallen significantly in the past two weeks, according to UBS, with some miners boasting record months for production and cost control.
Capesize freight rates have fallen from $US9 to $US5.50/tonne and AUD/USD has fallen from 0.8600 to 0.8250, while the lump iron ore premium has increased from $US6 to $US19/ton, while the spot iron ore has remained stable at about $US70/tonne.
Breakeven prices for BHP (BHP) and Rio Tinto (RIO) are now sub-US$40/dry metric tonne cfr vs $US43-45/tonne previously, and Fortescue (FMG) is now $US60 vs $70/tonne (excluding growth capex).
Atlas Iron (AGO) and Mount Gibson (MGX) require $US70 and $US67 respectively vs $US79 and $US91, BC Iron (BCI) needs $US$65 vs $US76 while Grange Resources (GRR) requires $US65 vs $US79, with pellet premiums at about $US28. Arrium (ARI) falls to $US56/tonne.
“It’s amazing what a difference a change in A$ and freight rate can do to the breakeven
price for the Australian iron ore producers with all breaking even or making cash pre
growth capex spend,” UBS strategist Glyn Lawcock says.
“However, we note that the margins are small and are very sensitive to changes in FX and freight rates, as well as the discount for impurities. We believe an investment in the high cost iron ore players remains risky, especially those with net debt such as Atlas Iron.”

TAGS: AGO (http://businessnow.theaustralian.com.au/tag/ago/?ncabn-iframe-embed=1), ARI (http://businessnow.theaustralian.com.au/tag/ari/?ncabn-iframe-embed=1), BCI (http://businessnow.theaustralian.com.au/tag/bci/?ncabn-iframe-embed=1), BHP (http://businessnow.theaustralian.com.au/tag/bhp/?ncabn-iframe-embed=1), FMG (http://businessnow.theaustralian.com.au/tag/fmg/?ncabn-iframe-embed=1), GRR (http://businessnow.theaustralian.com.au/tag/grr/?ncabn-iframe-embed=1), MGX (http://businessnow.theaustralian.com.au/tag/mgx/?ncabn-iframe-embed=1), RIO (http://businessnow.theaustralian.com.au/tag/rio/?ncabn-iframe-embed=1)

Corporate

16-12-2014, 08:58 AM

Snoopy, thanks for your detailed reply.

What is really confusing me is how you've come up with a ebitda for the mining business of $189m. This is more than $10 per tonne and ARI are certainly not making that kind of margin.

At corporate's request, I have repeated my forecast FY2015 EBITDA cover calculation, assuming a much lower iron ore EBIT.

FY2015 (forecast)Iron OreMining Consumables RecyclablesSteelTotal

EBIT$1m$140.0m$1.3m$-52.8m

EBIT (corporate)-$15.9m-$11.1m-$11.0m$-27.4m$193.7m

D & A$204.6m$47.3m$10.8m$103.6m$366.3m

EBITDA$189.7m$176.2m$1.1m$23.4m$390.4m

Net Interest Bill$23.6m$21.6m$12.2m$37.4m$94.8m

EBITDA/Interest8.08.20.090.634.1

Tax Payable$71.5m

Net Interest Bill$94.8

EBDA$224

The key figure (in the box) of 4.1 is still in excess of the 3.0 to 3.5 covenant range. So I can say with confidence that this covenant is unlikely to be an issue, even with steel at USD60, and the prevailing exchange rate at AUD1 = USD0.8310.

SNOOPY

Snoopy

16-12-2014, 03:51 PM

Snoopy, thanks for your detailed reply.

What is really confusing me is how you've come up with a ebitda for the mining business of $189m. This is more than $10 per tonne and ARI are certainly not making that kind of margin.

EBITDA(mining)= EBIT(mining) + EBIT (apportioned head office costs) + Depreciation and Amortisation.

The EBITDA ends up so high because the capital investment has been high in the past as the mines and infrastructure were developed. Not quite sure what you mean by 'margin' in this context.

Margin in accounting terms normally means "Net Profit After Tax" / "Revenue"

If I use the revenue figure for FY2014, that is $1,568.6m (p21 AR2014). That is based on 12.5m tonnes shipped. The average Platts 62% CFR index price was US$123/wmt (p12 AR2014).

Now if we adjust that figure to a price of $US60/dmt x 1.05 $US63/wmt to reflect your doom laden FY2015 forecast and assume volume goes up to 13Mt, then we can estimate FY2015 revenue as follows.

Iron Ore Revenue FY2015 = $1,568.6 x (13/12.5) x (63/123) = $835.6m

Iron ore Net Profit After Tax FY2015 = EBIT - Interest - Tax
=$19.0m - ($20.8m-$0.5)m -$0m
= -$1.3m

So divisional NPAT Margin (Iron Ore) is: -$20.8m/$835.6m = -2.49% (pretty nasty, negative means making a loss, once allocated head office expenses are taken into account)

However if you look at what the banks are interested in that tends to be EBITDA margin.

"EBITDA Margin (Iron Ore)" = EBITDA / Revenue
= $207.7m /$835.6m = +24.9%

To get a true cashflow picture you might want to calculate the EBDA margin, (after the interest bill and tax bill are paid.)

EBDA Margin (Iron Ore) = EBDA / Revenue
= ($207.7m-$23.6m-$0m) /$835.6m = +22.0% (approx 20%)

What that means is for every $100 worth of Iron Ore mined, Arrium gets $20 in cash but at the same time loses $2.49 in net profit terms.

Long term it can't work at the $US60/dmt price point. But in the short term Arrium is still generating enough cash to pay their interest bill while they wait for the iron ore price to recover (or alternatively shut down the mining operation to stop bleeding!)

SNOOPY

Corporate

16-12-2014, 11:58 PM

Hi Snoopy you are putting a lot of effort into this but I still don't see how you get to $189m EBITDA for the mining business?

The profitability workings below are my approximation for the EBITDA based on the current iron ore price.

Current 62% fines price USD 68.70 wmt
Less discount for lower quality USD 12.37*
Realised price USD 56.33 wmt
Less Conversion to dmt USD 2.82**
Realised price USD 53.51 dmt
Realised price AUD 64.70 dmt***

Less total cash cost AUD 68.4* dmt

Equals negative AUD 3.7 dmt

I.e. AUD -3.7 * 13mpta

Equals AUD -48m EBITDA approximation

Joshuatree

17-12-2014, 09:35 PM

Very int to see Allan Gray, (Orbis)keep buying; up to 12.15% holding now.

Disclose; Not a holder

percy

17-12-2014, 09:49 PM

Very int to see Allan Gray, (Orbis)keep buying; up to 12.15% holding now.

Disclose; Not a holder

He needs to make a bigger effort as the sp is still 15.5 to 16 cents.
Maybe he will come back from the Christmas break with renewed vigour!

Snoopy

18-12-2014, 03:56 PM

Wait for the brainless ones to empty their suitcases then buy on or about December 19th. That's my plan. Alternatively if you want to pay more for no good reason wait till the cross of some made up averages.

Slight change in strategy. Paid 15.5c to double my holding yesterday. Average price paid now 25c. Double or nothing is probably a step I won't take again (starts to get expensive if you keep doubling up), but we will see.

Was getting caught up in the Christmas busyness, wondering how I was going to remember to log in in the middle of the Christmas season and complete my third tranche purchase. Then thought, those index fund managers aren't going to be working that close to deadline either. They will be dumping their holdings well before the December 19th cut off date. So I think most of the dumping is already done. If I buy now I can enjoy the holiday season.

SNOOPY

percy

18-12-2014, 04:40 PM

I think all of us watching this thread hope you are right.!!!!!

winner69

18-12-2014, 04:54 PM

I think all of us watching this thread hope you are right.!!!!!

Snoopy well done - but Mr P would not be impressed

He'd do another case study on you like he did on that Turners thread .....and we all know what happened there eh.

Many successful investors buy on the way down and before the bottom is reached (they usually sell before the next top of the cycle as well)

h2so4

18-12-2014, 05:02 PM

I think all of us watching this thread hope you are right.!!!!!

Yes I agree completely .

Joshuatree

19-12-2014, 02:03 PM

This comment may be of int.

"Also note that shorts and lends are exploding. There are more shorts now on Arium at 15.5c than there have been for two months."

"The last time shorts were this high the price was over 32c, so they are getting increasingly confident that the company has no prospect of a future as the market cap falls and they successfully starve the company of future capital."

"Distrust of management due to the way the capital raising was handled plays into their hands and is not helped by managements inability to deliver any positive news/guidance or take any decisive action"

h2so4

20-12-2014, 12:23 PM

Hi Snoopy you are putting a lot of effort into this but I still don't see how you get to $189m EBITDA for the mining business?

The profitability workings below are my approximation for the EBITDA based on the current iron ore price.

I.e. AUD -3.7 * 13mpta

Equals AUD -48m EBITDA approximation
Corporate I think you have done a cash calculation but if you back test it on the 2014year it becomes very easy to see that ARI will be burning cash going forward.
2014 mining revenue $1569m
total cash costs A$73 dmt = $912.5m @12.5m tons.

Arrium mining contributed over $650m cash to the ARI 2014 result of net profit $287.8m

So I see cash burning and losses going forward however their juggling act may save them. Iron ore prices might increase and the AUS $ may continue its decline. One thing is certain Iron ore prices wont flat line at US $60 dmt for the next 18 months.

Corporate

20-12-2014, 08:49 PM

Correct, my cash flow calc should be a good indicator of ebitda on a per tonne basis. Ignoring any working capital gains or losses. No idea about how the $189m has been come to though

Corporate I think you have done a cash calculation but if you back test it on the 2014year it becomes very easy to see that ARI will be burning cash going forward.
2014 mining revenue $1569m
total cash costs A$73 dmt = $912.5m @12.5m tons.

Arrium mining contributed over $650m cash to the ARI 2014 result of net profit $206.6m

So I see cash burning and losses going forward however their juggling act may save them. Iron ore prices might increase and the AUS $ may continue its decline. One thing is certain Iron ore prices wont flat line at US $60 dmt for the next 18 months.

h2so4

21-12-2014, 09:14 AM

Correct, my cash flow calc should be a good indicator of ebitda on a per tonne basis. Ignoring any working capital gains or losses. No idea about how the $189m has been come to though

Yes I agree. We may or may not get an explanation from SD.

I don't understand why my 2014 cash calculation did not reconcile with ARIs stated mining EBITDA of $686m. ......such is accounting??.

h2so4

21-12-2014, 09:55 AM

There probably needs to be an adjustment for the iron ore feed to the Whyalla Steelworks. So that would account for the difference I would think.

h2so4

21-12-2014, 10:38 AM

There probably needs to be an adjustment for the iron ore feed to the Whyalla Steelworks. So that would account for the difference I would think.

.....but more than likely it would be financial costs. These would not be part of the total cash cost per dmt figure.

Snoopy

23-12-2014, 07:41 PM

Let's take another look at the iron ore profitability

Current 62% fines price USD 68.70 wmt

The above is based on current spot market prices. (O.K.)

Less discount for lower quality USD 12.37*

Couldn't see the above figure in the report referenced. However, the Quarterly Production Mining Report for September 2014 did say.

Average Platts market index price (62% Fe CFR) US$90/dmt,
Average realised price ~US$73/t CFR (dmt)

Realised Price ratio = US$73/US$90= 0.8111

Or looking at it from a 'discount for lesser quality' perspective:

1 - 0.8111 = 0.1888

0.1888 x (Prevailing Price) = 0.1888 x $US68.70m = $US12.98m. Pretty close to your $US12.37m Corporate.

Realised price USD 56.33/wmt

The natural consequence of a subtraction.

Less Conversion to dmt USD 2.82**

Your reference asterisks says you are removing 5% of the total when converting from wet to dry.

However the report you reference actually specifies a figure:

"Ore shipped reported on a dry metric tonne basis after adjusting for ~4% moisture."

So I would use that 4%, not 5%.

Corporate wrote later
"Edit, I have just noticed that I may have double counted the moisture cost. it seems that ARI include this in the quoted total cost of production."

Yes, this is confirmed under the note 2 reference of the quarterly production report. So we can eliminate this water adjustment from the market price side of the equation.

Realised price USD 53.51 dmt

A natural consequence of subtraction.

But redoing the figures with the adjustments above:

----

Current 62% fines price USD68.70/dmt

Less discount for lower quality USD12.98/dmt

Projected current market price
USD55.72/dmt

Realised price AUD 64.70 dmt***

Using $US0.8270 = $A1, (O.K.)

Now using that same exchange rate on my new total

Realised price AUD 67.4/dmt

Less total cash cost AUD 68.4* dmt

Equals negative AUD 3.7 dmt

Now revised down to -$A1.0/dmt

At at 13Mtpa run rate that is a cash loss of AUD 48.1m.

Revised loss for 13Mtpa:

$13.0 x -$A1.0 = -$A13.0 (cash loss)

And then the key point is this excludes any capitalised costs which according to the capital raising presentation - for mining only - are in the range of AUD $240-290m. This is hugely negative in terms of free cash flow.

Firstly capitalised costs are not cashflow negative. They affect net profit after tax but not cashflow

As noted in a previous post, the specific $240-290m above is one off capital expenditure, not a repeating annual cost.

Sources:
* calc from the latest quarterly report
** 5% used, could be slightly higher
*** using 0.8270

The list of Corporate's references (very much appreciated)

So the margin may be closer to breakeven at a EBITDA level. But the point is this is nowhere near covering the capital costs of mining.

I think we agree that Arrium is not covering the capital costs of their mining. But I can't see how that fact relates to this post where you are looking at the cash costs of mining.

SNOOPY

Snoopy

23-12-2014, 11:12 PM

My cash flow calc should be a good indicator of ebitda on a per tonne basis. Ignoring any working capital gains or losses. No idea about how the $189m has been come to though

Sorry, thought I answered this before. Perhaps I didn't do it clearly enough.

------

Because most of the capital expenditure in mine development is already finished I have obtained my annual estimate of 'capital cost' for FY2015 from p21 of AR2014;

EDITDA - EBIT = $685.9m - $481.3m = $205m

-------

That $205m is depreciation and amortisation as relating to the iron ore mining operation over FY2014. It will be different in FY2015, but not 'enormously so different'.

So whether the cash costs are -$A37m or -$A13m, neither of those figures carry any corporate interest costs or income tax burdens.

However, what is missing from the -$A37m or -$A13m is any mention of depreciation and amortisation charges on capital expenditure made in previous years. The -$A37m or -$A13m are like EBITDA figures. Assuming an EBITDA of $13m, taking off $205m in depreciation and amortisation gives an EBIT for iron ore of:

-$A13m - $A205m = -$A218m

Have I got that right now?

SNOOPY

Snoopy

25-12-2014, 01:17 AM

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

------

"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."

------

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 $US123m per dry metric tonne.

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)

EBIT(2015)= $481.3m x [($83m - ($73m x 0.9121)]/[($123m - ($73m 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.

I am not sure my above analysis from post 107 is appropriate.

I am adjusting my 'earnings' , EBIT in this case, between two different time periods by a ratio dependent on cashflows. However, EBIT is not solely proportional to cashflows. EBIT has depreciation and amortization already removed from it. Depreciation and Amortization are not cashflow items!

EBITDA would be a better figure to adjust. I think I will run the adjustment ratio figures on that and see what happens.

SNOOPY

PS I don't want to get too tied down on this earnings stuff. ARI is for me primarily an asset play, with useful assets that are not solely tied to iron ore production. If you take market prices for iron ore while they are at multi-year lows, and assume little reduction in input costs, then of course the earnings from iron ore are going to look ugly. The costs of extracting iron ore at ARI may be more than BHP or Rio, or their equivalent in Brazil. But I think there are other international iron ore miners (outside of Australia) with a cost base higher than Arrium. These I believe will go down first, before there is any hint of Arrium folding up their iron ore operation.

Snoopy

04-01-2015, 10:13 AM

http://www.vale.com/EN/business/mining/iron-ore-pellets/Pages/Iron-Ore-Indices.aspx

Current Iron Ore price is $US69.40.

Granted I haven't taken into account that Arrium will receive less money because they exporting a lower grade than 62% iron ore. But they have also increased volume from 12.5MT to 13MT. So I don't think my figures are too far out.

PS Another thing to factor in to mining is the drop in fuel price. Some say fuel represents 50% of the cost of extraction. So if fuel prices drop 20%, and the iron ore price is $US60/dmt that takes something like $US6/dmt off the extraction cost. That is a huge potential boost to profitability for iron ore. Falling commodity prices aren't all bad for Arrium!

Arrium has been very volatile over the Christmas period. On one day I saw the share price rose over 28%.

http://www.vale.com/EN/business/mining/iron-ore-pellets/Pages/Iron-Ore-Indices.aspx

The latest quoted fines price (url above) on December 29th was $US67.90/dmt, up from the previous five day average of $US66.60/dmt. Of course it could easily start to go down again as a five day trend over the Christmas period is clear evidence of nothing much!

The last trading day of the year had the share price rising 7%, closing at A23c. That is up nearly 50% from the all time closing lows. I am still underwater (paid an average of A25c). But happy to watch and wait from this point.

SNOOPY

h2so4

04-01-2015, 12:51 PM

I am pleased the nail biting is over SD........for now.

I'm not terribly concerned about either price.

If the quoted share price goes lower I will be happy to increase my stake.

Snoopy

05-01-2015, 12:08 AM

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 $US123m per dry metric tonne.

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)

EBIT(2015)= $481.3m x [($83m - ($73m x 0.9121)]/[($123m - ($73m 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.

Time to try my slightly different way of estimating EBITDA

I shall assume that EBITDA 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.

EBITDA for FY2014 was based on average iron ore earnings of $US123m per dry metric tonne.

I am proposing to use an average EBITDA 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)

EBITDA(2015)= $685.9m x [($83m - ($73m x 0.9121)]/[($123m - ($73m x 0.9121)]

= $685.9m x 0.291 = $199.6m

I assume that depreciation and amortization will not change substantially from FY2014 ($204.6m).

EBIT(2015) = $199.6m - $204.6m = -$5.0m

For those interested I have rerun the same calculation based on a market steel price of $65/dmt

EBITDA(2015)= $685.9m x [($65m - ($73m x 0.9121)]/[($123m - ($73m x 0.9121)]

= $685.9m x -0.0281 = -$19.3m

In this case EBIT(2015) for the iron ore division is

EBIT(2015) = -$19.3m - $205m = -$224m

SNOOPY

Snoopy

05-01-2015, 12:28 AM

Please forgive me the following data deluge, regarding forecast FY2015 EBITDA cover both divisionally and as a whole.

FY2015 (forecast)Iron Ore Mining ConsumablesRecyclablesSteelTotal

EBIT$170.6m$140.0m$1.3m$-52.8m

EBIT (corporate)-$15.9m-$11.1m-$11.0m$-27.4m$193.7m

D & A$204.6m$47.3m$10.8m$103.6m$366.3m

EBITDA$359.3m$176.2m$1.1m$23.4m$560.0m

Net Interest Bill$23.6m$21.6m$12.2m$37.4m$94.8m

EBITDA/Interest15.28.20.090.635.8

Tax Payable$71.5m

Net Interest Bill$94.8m

EBDA$394m

The key figure (in the box) of 5.8 is very healthily in excess of the 3.0 to 3.5 covenant range. So I can say with confidence that this covenant is unlikely to be an issue either.

On an individual divisional basis, the EBITDA covenant is an issue, in Recycling and Steel. But Arrium is assessed by the banks in its entirety, not as divisions.

Finally EBDA is EBITDA with interest and tax removed. This is a proxy for free cashflow (before incremental capex), which to me looks healthy.

Time to rerun this table using my alternative method EBITDA estimate for iron ore.

FY2015 (forecast)Iron Ore Mining ConsumablesRecyclablesSteelTotal

EBIT-$5.0m$140.0m$1.3m$-52.8m

EBIT (corporate)-$15.9m-$11.1m-$11.0m$-27.4m$18.1m

D & A$204.6m$47.3m$10.8m$103.6m$366.3m

EBITDA$183.7m$176.2m$1.1m$23.4m$384.4m

Net Interest Bill$23.6m$21.6m$12.2m$37.4m$94.8m

EBITDA/Interest7.88.20.090.634.1

Tax Payable$39.3m

Net Interest Bill$94.8m

EBDA$250.3m

The key figure (in the box) of 4.1 is in excess of the 3.0 to 3.5 covenant range. On these figures, the EBITDA to interest bill ratio covenant is (still) unlikely to be an issue. However, this is based on an iron ore price averaged over the year of $83/tonne (maybe too high?) with no further reduction in input costs (not true as some further cost savings have been already found) and no depreciation of the exchange rate from $US1= $A0.9121 (not a reflection of what has happened since). All of those assumptions are fair game to challenge.

SNOOPY

Snoopy

06-01-2015, 02:27 PM

I am pleased the nail biting is over SD........for now.

I'm not terribly concerned about either price.

If the quoted share price goes lower I will be happy to increase my stake.

Share price down 5.7% today as I write this, but was down over 7% earlier. I guess that was the call for SSD to increase his stake? As an investor I am not used to this kind of volatility. But if I was a trader I might even be in a worse state, not sure how they cope, possibly by staying out?

I think I might put my ARI shares in the bottom drawer until the February half year announcement. Not sure if anything sensible can be gleaned by reading about Arrium until then!

SNOOPY

h2so4

06-01-2015, 08:37 PM

Snoopy

07-01-2015, 11:30 PM

Share price down 5.7% today as I write this, but was down over 7% earlier. I guess that was the call for SSD to increase his stake? As an investor I am not used to this kind of volatility. But if I was a trader I might even be in a worse state, not sure how they cope, possibly by staying out?

I think I might put my ARI shares in the bottom drawer until the February half year announcement. Not sure if anything sensible can be gleaned by reading about Arrium until then!

I couldn't let the day close without noting that Arrium rose 15.9% in a single day today. The share closed at 25.5c, which means I am in the black... :-). However, I expect to be underwater again by the end of the week, such is the volatility of this share :-(.

SNOOPY

cammo

08-01-2015, 06:45 PM

i closed end of day at 40% up. cant help wanting to drop out and buy in again with the profits :) . do i sit on my hands?

Daytr

09-01-2015, 11:43 AM

I've never been impressed with these guys.
They used to be a client & thought they were a Sydney based corporate trying to play miner.
Cyclical play I suppose, but think there are much better operators .
I didn't realize how much debt they have! Even after massive CRs.
I suppose they are at least facing the music & reducing it, but boy do they need to.
How on earth were they allowed to get so much debt in the first place, quite incredible.

After interest costs I wonder what their break even on mining is?

Snoopy

10-01-2015, 05:44 PM

i closed end of day at 40% up. cant help wanting to drop out and buy in again with the profits :) . do i sit on my hands?

Cammo, congratulations on your purchase timing. I would suggest that what you do from here depends on whether you believe a significant new capital raising is imminent. If you think it is, this could be a good time to take some profits.

If like me you consider a capital raising will not be needed, at least within the next two years, I see no reason not to 'hang about' until the Deutsche Bank ARI valuation of 40c is breached. The six month result is only a month away. So I will have my ear to the associated press release for further guidance from that.

SNOOPY

Snoopy

12-01-2015, 09:52 AM

I've never been impressed with these guys.
They used to be a client & thought they were a Sydney based corporate trying to play miner.

Hi Daytr. I see you have been posting on oil and gold related threads over 2015. So I guess you follow mineral markets a bit.

The share price drop of ARI over the last year certainly wouldn't inspire confidence in ARI management. They were 'born' as Onesteel out of BHP over a decade ago as a vertically integrated steel producer/retailer. If they had remained like that, such has been the state of the Oz steel market since, one might argue such a 'Onesteel' would be broke already.

Talk in the market today is that Arrium paid too much for their grinding media diversification into Moly-Cop, paid for largely by debt funding. I have become annoyed by management comments on how much Moly-Cop would be worth on the market today, when the Moly Cop of which they speak includes a significant pre-existing Onesteel business that combined with what they bought, the whole lot being rolled into the Moly Cop of today. IOW the price for 'Moly Cop' is not reflective of the resources put into the businesses that makes up 'Moly Cop' today. This is an example of the asset shifting that Corporates can do to make the business development since acquisition look better than it really is.

Cyclical play I suppose, but think there are much better operators .

I would agree that Arrium are not the lowest cost iron ore producing operators. But even today iron ore production is more 'profitable' than the Australian steel making business. Is it fair to criticize management for trying to make more profit out of their iron or reserves, by moving to export? They have had three years of quite good iron ore mining profitability, before the current iron ore price slump.

I didn't realize how much debt they have! Even after massive CRs.
I suppose they are at least facing the music & reducing it, but boy do they need to.
How on earth were they allowed to get so much debt in the first place, quite incredible.

A large chunk of that debt was buying Moly Cop. One could argue that Arrium would already be broke if they hadn't done that.

After interest costs I wonder what their break even on mining is?

One article I read this year suggested break even could be reduced to $US60/dmt. Not competitive with BHP or Rio, but possibly the best of the medium cap iron ore mining minnows? Not sure if I read the article correctly (they may have been talking about cash costs, which nevertheless would include interest). Whether they can cover their depreciation expenses and mining licence amortisations is another matter. But those are not cashflow issues

SNOOPY

Daytr

12-01-2015, 10:31 AM

Hey Snoopy, I was in metals, energy & bulks commodity trading & sales for 15 years in OZ, so yeah you could say I follow these markets. ;-)

Snoopy

13-01-2015, 01:25 AM

Hey Snoopy, I was in metals, energy & bulks commodity trading & sales for 15 years in OZ, so yeah you could say I follow these markets. ;-)

Thanks Daytr. With reference to your previous comment:

"I've never been impressed with these guys. They used to be a client & thought they were a Sydney based corporate trying to play miner."

Were you not impressed (IYO) because:

1/ Any newbie company trying to take on BHP and Rio at their best game is almost by definition foolish. OR
2/ The Arrium iron ore trading strategy itself was a crock. (Perhaps they should have looked to lock in more longer term contracts and done less spot sales as an example) OR
3/ Some other reason entirely.

Asking because I want to understand my investment in Arrium better. Hope you don't mind me asking!

SNOOPY

Daytr

13-01-2015, 12:33 PM

I wasn't impressed by the management I dealt with. Admittedly it was only the treasury team, CFO etc, however they really seemed to lack understanding of the market they were getting into. I can see it made sense as a strategy & at high prices it would have worked well, but I saw them as a corporate more than a miner.
As they were a consumer as well as a producer they did seem a little confused imo what was best, however they produce quite a bit more than they consume. Anyway in a nutshell I just wasn't impressed with the people I dealt with.

Snoopy

14-01-2015, 03:19 PM

Arrium has been very volatile over the Christmas period. On one day I saw the share price rose over 28%.

http://www.vale.com/EN/business/mining/iron-ore-pellets/Pages/Iron-Ore-Indices.aspx

The latest quoted fines price (url above) on December 29th was $US67.90/dmt, up from the previous five day average of $US66.60/dmt. Of course it could easily start to go down again as a five day trend over the Christmas period is clear evidence of nothing much!

The last trading day of the year had the share price rising 7%, closing at A23c. That is up nearly 50% from the all time closing lows. I am still underwater (paid an average of A25c). But happy to watch and wait from this point.

Arrium continues to be volatile. Down 4.8% today to 25.7c as I write this. However it has traded above 30c in intraday trading last week.

http://www.vale.com/EN/business/mining/iron-ore-pellets/Pages/Iron-Ore-Indices.aspx

The latest 6th January steel index price is $US71.10, just above the 5 day average $US71.08 and nicely above the 30 day average of $US68.88. So maybe we are nearing the top of this short term iron ore price spike? Will be hanging on, neither buying nor selling until the Febraury half year announcement now. Still in the black with my Arrium investment (paid 25c average) but only just (market price 25.7c).

SNOOPY

Daytr

14-01-2015, 06:20 PM

Snoopy

15-01-2015, 12:19 PM

A couple of quotes by CEO Andrew Roberts from the AFR article on Arrium (p11) printed on 5th January 2015.

"Every annualised 1c decline in the Aussie dollar against the US dollar is worth between $11m and $14m in EBIT to Arrium. There are also more than $10m in indirect EBIT benefits because a lower exchange rate makes Arrium more competitive against steel imports. In September the dollar was worth US93c. It is now trading below US81c."

By my maths that represents a potential EBIT gain of more than:

($10n+$11m)x 12= $252m in EBIT gains from the exchange rate fall (if sustained) alone.

"Bluescope Steel Chief executive Paul O'Malley believes that China's steel demand has already peaked. But Mr Roberts said he expected iron ore demand to stay strong: 'We are still positive about the medium to long term picture for growth in China'. While the supply of seabourne iron ore was growing robustly, Mr Roberts said it was possible that some higher cost Chinese iron ore will leave the market. 'A lot of Chinese mines will close for the winter and the question is whether they actually close down and stay down.' he said"

"On new years day , the Chinese government said it would remove the export tax rebate on boron added steel products, which covers about 40% of China's exports. The move should result in margin improvements in Asia."

- but perhaps less relief for the Oz steel retailing than Mr Roberts is predicting?

SNOOPY

Snoopy

16-01-2015, 04:06 PM

If like me you consider a capital raising will not be needed, at least within the next two years, I see no reason not to 'hang about' until the Deutsche Bank ARI valuation of 40c is breached. The six month result is only a month away. So I will have my ear to the associated press release for further guidance from that.

Looking into my crystal ball, I am expecting an operational loss for HY2015 of around $A50m. The way deprecitaion and amortization works, this will still equate to operational positive cashflow of some $A100m by my reckoning. That should be enough to keep the bankers at bay.

Ordinarily I would look at the six month cashflow statemnt in Arrium's (difficult) sitiuation. But that will be hugely positive due to the cash issue and placement. Subsequent pricing of those new shares means it is unlikely ARI would get a further cash issue away. (Nor will they need to IMO, at least for the next two years). Taking out the effects of the cash issue there my be other one off effects. I am referring here to the stepped up expenditure aimed at lowering the cash extraction cost of iron ore. Those expenses will likely drop in FY2016. So it will be difficult to get a handle on just what cashflow is 'normal'.

I do (eventually) expect large profit write downs in connection with the acquisition and development of Peculiar Knob. But these will all be non cash adjustments. When a company does a billion dollar plus writedown, I would expect them to get all the bad news out in one hit. Reading between the lines of CEO Robert's comments, I think he may wait until full year result time when it should be clearer at what price level iron ore will stabalize. But all this is why I am focussing on 'operational profit' not 'headline profit'.

Operational profit for the full year I predict will be a loss of $85m. The first half (a $A50m loss) will be worse on a proportional basis. That is because much of the cost reduction expenditure will have been committed without the results showing through. If the first half result is a loss of around $A50m (implying positive cashflow of $A100m) I will be happy with the way my investment in Arrium is progressing.

SNOOPY

Snoopy

21-01-2015, 05:55 PM

Actually the latest price is $69.25 as of yesterday.
The forward curve has also deteriorated suggesting FE may head toward $65
The Aussie cyclone season is not far away & this may interrupt shipments from the Oz that may se some support for FE in the short term.
Overall though I think FE prices are heading to $60/ton.

http://www.cmegroup.com/trading/metals/ferrous/iron-ore-62pct-fe-cfr-china-tsi-swap-futures.html

I think Arrium could live with $60 per tonne, provided that oil price stays down. Quote from an article posted today on Motley Fool Australia.

------

Oil collapse produces savings

Mining doesn’t consume crude oil for production, but uses a great amount of diesel fuel. Recent decreases in diesel have lessened production costs some. Shipping costs to China have decreased as well due to lower fuel costs. Atlas Iron managing director Ken Brinsden said on a conference call that his company saw a $4 a tonne decrease in sea freight. He emphasised, “Now that would take our headline break even position down into the low $60s.” (Atlas’s just released half-year production costs were $67 a tonne.)

------

Ok the above is about Atlas, but the same issues are faced by Arrium. Has the oil price collapse removed $5 from the cost side of the equation? I would guess yes.

SNOOPY

Snoopy

22-01-2015, 03:55 PM

I couldn't let the day close without noting that Arrium rose 15.9% in a single day today. The share closed at 25.5c, which means I am in the black... :-). However, I expect to be underwater again by the end of the week, such is the volatility of this share :-(.

My prediction came true, back under water. But ARI looks like it might post an even greater one day gain today of some 20% if it finishes at 22.7c or above. Still under water of course. But Allan Gray posted another ASX notice today to say that they are still accumulating, now holding 13.45% of shares (up from 12.15% on December 15th 2004).

Production figures for the half year are due to be posted tomorrow. Actual half year result still a month away. The only thing I can say for certain is that I expect more extreme SP volatility. Looking way into the future myself, awaiting the resumption of dividends. With the amount of shares I have now even 0.5cps will be juicy!

SNOOPY

Snoopy

23-01-2015, 12:10 PM

Production figures for the half year are due to be posted tomorrow. Actual half year result still a month away.

RE-DESIGN OF ARRIUM MINING AND RESULTS UPDATE

Arrium Limited (ASX:ARI) today announced that it is re-designing its South Australian based Mining operation to provide a sustainable, cash flow positive business in a low iron ore price environment.

1 The re-design is aimed at maximising cash generation by ‘mothballing’ the company’s higher cost Southern Iron mining operation and optimising its lower cost Middleback Ranges operation to deliver approximately 9Mtpa of iron ore for sale.

Arrium Mining has been in a growth phase in recent years with export iron ore sales currently tracking at its targeted rate of ~13Mtpa. It has a history of being a significant contributor to the company’s earnings and cash generation. The re-design results from the substantial fall in iron ore prices over the last half, as well as increased uncertainty around the timing and extent of any price recovery.

Iron ore prices are currently at five year lows, and down ~45% on prices for the prior financial year. The extent of this fall has moved Arrium Mining to a position where it is absorbing cash, despite significant work and achievements in reducing costs and capital expenditure. The re-design announced today will provide a step change in the Mining business’ cash costs and capital requirements. Cash costs loaded onto ship (2) are targeted to average A$37/wmt in FY16 down 23% or ~A$11/wmt from FY14. Total cash costs (CFR China) (3) are targeted to reduce by 20%, from A$71/dmt(4) in FY14 to an average of A$57/dmt in FY16. The business has also targeted ~A$200 million (5) or a ~30% reduction in its FY16 to FY19 capital expenditure plan. This will position the business to deliver positive operating cash flows in a low price environment.

Arrium’s Chief Executive Officer and MD, Mr Andrew Roberts said: “The business is able to move to a lower cash cost operation through its flexibility to alter volumes, grade and costs. We are able to ‘mothball’ our Southern Iron operation and optimise our lower cost Middleback Ranges operation, including increasing the utilisation of its supply chain to deliver approximately 9Mtpa of high quality, lower cost export iron
ore for sale.

“The re-design is scheduled for completion by the end of June 2015, leaving Arrium Mining well positioned for maximising cash generati on and returning cash to the Arrium group in FY16.”

Results update

Earnings

Underlying EBITDA for HY2015 (to 30-12-2014): A$180 million to A$190 million.
Underlying NPAT for FY2015 (to 30-06-2015) year ending weighted to the second half, and less than the prior financial year. Second half earnings are expected to benefit from a lift in Steel and Mining Consumables earnings as well from cost reductions.

Restructuring costs

The company is currently in discussions with its Southern Iron contractor base to mitigate the extent of break fees and costs related to the ‘mothballing’ of its Southern Iron operation. Total costs are yet to be finalised and are expected to be spread over ~2.5 years being the remaining term of the Southern Iron agreements. A payback of less than one year is targeted. It is expected restructuring cash costs of ~A$70 million will be incurred in FY15.

Asset Impairments

The company will be recording an asset impairment charge of A$1,335 million in its financial statements for the half year ended 31 December 2014. This includes an impairment of A$1,166 million in Arrium Mining primarily related to the impact of low iron ore prices and the mothballing of Southern Iron, and A$130 million in Steel and Recycling. The Steel and Recycling impairment is mainly due to the impact of a delayed recovery in SE Asian steel margins on forecast future cash flows and follows completion of the company’s regular impairment testing process. The asset impairments have no impact on cash flow. Following the impairment charge the company’s gearing ratio will be approximately 32%.

(2) Includes mining, crushing, beneficiation, road haulage and trans-shipping costs. Excludes capitalised
costs (infrastructure, pre-stripping & mining licences) & depreciation, amortisation charges in respect of those costs, royalties, sales & marketing and corporate costs. Also includes $2/t related to addition of ~600kt of magnetite concentrate.

(3) Includes loaded cash cost, royalties, sales and marketing and corporate costs, adjustment for moisture content and freight based on current market levels. Excludes capitalised costs (infrastructure, pre-stripping and mining licenses) and depreciation and amortisation charges in respect of those costs.

(4) FY14 reported total cash cost (CFR China) included $2/t related to magnetite overheads

(5) Includes PPE, mine development (including capitalized stripping) and exploration

Snoopy

23-01-2015, 04:29 PM

Time to rerun this table using my alternative method EBITDA estimate for iron ore.

FY2015 (forecast)Iron Ore Mining ConsumablesRecyclablesSteelTotal

EBIT-$5.0m$140.0m$1.3m$-52.8m

EBIT (corporate)-$15.9m-$11.1m-$11.0m$-27.4m$18.1m

D & A$204.6m$47.3m$10.8m$103.6m$366.3m

EBITDA$183.7m$176.2m$1.1m$23.4m$384.4m

Net Interest Bill$23.6m$21.6m$12.2m$37.4m$94.8m

EBITDA/Interest7.88.20.090.634.1

Tax Payable$39.3m

Net Interest Bill$94.8m

EBDA$250.3m

The key figure (in the box) of 4.1 is in excess of the 3.0 to 3.5 covenant range. On these figures, the EBITDA to interest bill ratio covenant is (still) unlikely to be an issue. However, this is based on an iron ore price averaged over the year of $83/tonne (maybe too high?) with no further reduction in input costs (not true as some further cost savings have been already found) and no depreciation of the exchange rate from $US1= $A0.9121 (not a reflection of what has happened since). All of those assumptions are fair game to challenge.

RE-DESIGN OF ARRIUM MINING AND RESULTS UPDATE

<snip>

Results update

Earnings

Underlying EBITDA for HY2015 (to 30-12-2014): A$180 million to A$190 million.
Underlying NPAT for FY2015 (to 30-06-2015) year ending weighted to the second half, and less than the prior financial year. Second half earnings are expected to benefit from a lift in Steel and Mining Consumables earnings as well from cost reductions.

Trying not to be too smug about this, because my interest cover prediction from my most recent spreadsheet above was not entirely my work (thanks fellow sharechatters for arguing against my previous over optimistic version). But it does look like I am bang on the money. An improvement in 2HY2015 should see an EBITDA for FY2015 just more than twice the first half ($360m-$380m).

My EBITDA margin looks right even though I both overestimated the price for iron ore obtained and also overestimated the cash extraction cost for Arrium (a falling exchange rate and cost cutting have worked to Arrium's benefit). These two 'mistakes' have cancelled each other out.

With plans to be cashflow positive in FY2016 from iron ore, it looks more and more likely that no more capital raising will be needed. That is a huge positive for shareholders going forwards.

No doubt some are shocked by write downs of $1b plus. That could be affecting sentiment today. Come Monday, once those analysts have had the weekend to reflect, I think you might see a different story. I predicted that quantum of writedown too (albeit in the full year not the half year result). Well done Andrew Roberts. Given the circumstances you couldn't have done much better. Not sure the market has yet woken up to how good an underlying half year result has been flagged here, behind the awful headline figures.

SNOOPY

Snoopy

23-01-2015, 04:52 PM

30th June 2014 results show net assets of $3,730.9m.
Within that figure are $1,964.1m of intangibles. So Net Tangible Assets are down to $1,766.8m

1,366.2m new shares are being issued in the 1:1 underwritten issue at $0.48, together with a placement of 204.9m at $0.48.

That should bring in net proceeds of $754.1m

Divide recapitalised net assets by the number of shares on issue after recapitalization and I get:

($1,766.8m+$754.1m)/(1,366.2*2+204.9) = $0.858

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.

Time to update the net tangible asset backing, in view of the $1,335m dollar write down:

tangibleintangible

Iron Ore$956.5m$209.5m

[/TR]

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.

SNOOPY

Daytr

23-01-2015, 07:55 PM

Well when the SP drops by 85% in a year you would hope its a value play!
Sorry being lazy here Snoop, but what's the MC & level of debt at the SP?
I might take a gander at them next week.

Joshuatree

24-01-2015, 11:37 AM

"30 % of worlds iron ore production is loss making"

The muck is starting to hit the fan in Australia's iron ore industry, where companies reported more than $3 billion in asset writedowns this week, along with the probable loss of more than 500 Australian jobs.
Eight months after the price dipped to less than $US100 a tonne, Australian miners are giving up hope of a significant price recovery, and are instead cutting their businesses down to size.
Australia's fourth-biggest iron ore exporter, Arrium Limited, took a clear step in that direction on Friday when it announced the "mothballing" of one of its two operations in South Australia.
The closure of the Southern Iron assets is a symbolic retreat for Arrium, which has spent the past four years trying to change its brand from that of a pure-play steelmaker to a diversified group with a large iron ore export business.

Advertisement

The closure will reduce Arrium's exports from 12.5 million tonnes a year to about nine million tonnes, and will force the company to shed 200 full-time workers. A further 380 contracting jobs on the project have also been thrown into doubt.
Arrium boss Andrew Roberts said an iron ore price significantly above the market's consensus view of future iron ore prices would be needed to reopen the assets, which were of very good quality but were located a troublesome 600 kilometres from port.
"There is some uncertainty around the nature of the price recovery and the time that it will take, and our mining business at this point in time is absorbing cash rather than contributing cash back to the group, so today we have announced the redesign of our mining business," he said.
Arrium bought Southern Iron from WPG Resources for $320 million near the top of the iron ore market in August 2011. It then spent hundreds of millions of dollars developing the assets and connecting them to the company's existing mines and ports near Whyalla.
Just months after the 2011 transaction, WPG chairman Bob Duffin lauded the "full" price paid for the assets on the grounds that "we felt that iron ore prices were unsustainably high and were likely to fall as new production comes into the market".
Mr Roberts conceded on Friday the acquisition had not realised full value yet for Arrium, and the company would record asset impairments of $1.1 billion on its mining business next month.
But he said the acquisition would continue to have benefits in the future.
"In terms of the original investment, plus the ongoing investment required to mine the business, we haven't realised the full value at this point," he said.
"Going forward the redesigned business will extract value because of the investments we made at that time. We wouldn't be able to do what we are proposing to do in the redesign without the investments in Southern Iron two or three years ago, so there is still ongoing value that we will extract from the investment."
The changes would strengthen Arrium's iron ore position by lowering its cost of production by 20 per cent to $57 a tonne, he said.
"We have a business that is going to be sustainable and it is a business that will be generating positive cash (in FY16)," he said.
The changes will push Arrium below the likes of Atlas Iron and Mt Gibson on what is an increasingly fluid cost curve.
Atlas Iron said this week that its all-in cost of production had fallen by 17 per cent in recent months to about $65 a tonne, while Fortescue is estimated by UBS to have a break-even price of $US59 a tonne.
The declining Australian dollar and slumping oil price has provided some relief to miners, who have been cutting spending on jobs and projects.
But with the price 65 per cent below its 2011 peaks at just $US66.79 a tonne on Friday, further asset impairments and job losses appear inevitable.
Last month Atlas said it would record up to $900 million in writedowns on assets it acquired between 2009 and 2011, while Hong Kong giant Citic Limited said on Tuesday it would impair the book value of its Sino Iron project in Western Australia by up to $US1.8 billion.
UBS analyst Glyn Lawcock believes about 30 per cent of the world's iron ore production is loss-making at current prices, and high-cost juniors will have to "cut costs materially to survive".
"We believe it will take time for high-cost supply to exhaust cost-cutting and financing options before they exit the trade," he said in a note to c

Read more: http://www.smh.com.au/business/mining-and-resources/mining-jobs-lost-as-australian-iron-ore-mines-close-20150124-12wn1h.html#ixzz3PgBbmHnd

Snoopy

24-01-2015, 03:32 PM

Well when the SP drops by 85% in a year you would hope its a value play!

The problem is when the market price of what was previously your largest cash earner drops to near the extraction price, small variations in IO market prices can equate to wild swings in ARIs share price valuation. Mind you, dropping from 13Mt to 9Mt in terms of export volumes for FY2016.....

The contract sale percentage (as opposed to spot market sales that make up the balance) for FY2014 was 75%. 75% of 13Mt is 9.75Mt. So maybe Arrium, by reducing the amount of IO mined to 9Mt, are looking to pull out of the spot market altogether?

Sorry being lazy here Snoop, but what's the MC & level of debt at the SP?

Since the cash issue and placement, the number of shares on issue:

(1,366.2*2+204.9)= 2,937.3m

With the price at 20.5c, total market capitalisation is:

2,937.3m x 0.205 = $602m

or rather less than even the new capital of $754.1m, injected into the coffers in the recent recapitalisation! Anyone know how big the market capitalisation has to get before ARI is welcomed back into the ASX100?

Any share price change of ARI has no effect on the level of debt held within Arrium itself. The big change is the write down of assets. The debt in $A does fluctuate because some debt is denominated in USD. However, this is offset by theoretical gains in asset values valued in USD. So IMO, looking at debt on a constant AUD/USD exchange rate basis is easier and legitimate.

We are told net debt as at 31-12-2014 is $1,234m (exchange rate constant).

Total assets on the books are $8,009m (pro forma balance sheet capital raising slide 29). $1,335m in assets will be lost in the write down. Another $50m (my estimate ) from NPAT losses in 2HY2015. So at the end of FY2015 there will be:

$8,009m - ($1,335m+$50m) = $6,624m of assets left.

Line the exchange rate constant debt up with that (assuming no more write downs in 2HY2015) and I get debt as a percentage of assets to be.

$1,234m/$6,624m = 18.6%

Or debt as a percentage of equity

$1,234m/($6,624m-$1,234m) = 22.8%

All looks very manageable, with the new slimmed down ARI able to put earnings into reducing those ratios from FY2016 forwards. So no more capital raising. And a dividend return in FY2017 just might be on the cards.

SNOOPY

h2so4

27-01-2015, 06:12 PM

No doubt some are shocked by write downs of $1b plus. That could be affecting sentiment today. Come Monday, once those analysts have had the weekend to reflect, I think you might see a different story. I predicted that quantum of writedown too (albeit in the full year not the half year result). Well done Andrew Roberts. Given the circumstances you couldn't have done much better. Not sure the market has yet woken up to how good an underlying half year result has been flagged here, behind the awful headline figures.

Those analysts must still be asleep SD or it's in their too hard basket.

percy

27-01-2015, 06:25 PM

I think they have been under water for so long they have drowned!!

Snoopy

30-01-2015, 12:13 PM

I've never been impressed with these guys.
They used to be a client & thought they were a Sydney based corporate trying to play miner.
Cyclical play I suppose, but think there are much better operators .

Someone else of substance agreeing with you Daytr.

The boss of WPG resources has some pretty damning things to say about Arrium management in the AFR dated 24th-26th January

From p35
"WPG Resources Executive Chairman Bob Duffin said it was clear iron ore prices were going to fall when the tranaction (Arrium acquisition of Southern Iron) took place in 2011. <snip> Most of the executives involved in the acquisition have since left the company and Mr Duffin said it was clear he had sold the assets to people from the steel industry rather than miners.
'When I was dealing with them I never saw people with a mining industry mindset... the steel business is is very tough and it is full of tough menm without a lot of imagination' Duffin said"

The only sweetener in that is that 'most' involved in the deal for Arrium have gone!

SNOOPY

Snoopy

30-01-2015, 12:32 PM

Snoopy wrote
"No doubt some are shocked by write downs of $1b plus. That could be affecting sentiment today. Come Monday, once those analysts have had the weekend to reflect, I think you might see a different story. I predicted that quantum of writedown too (albeit in the full year not the half year result). Well done Andrew Roberts. Given the circumstances you couldn't have done much better. Not sure the market has yet woken up to how good an underlying half year result has been flagged here, behind the awful headline figures."

Those analysts must still be asleep SD or it's in their too hard basket.

Of course now that Arrium is out of the ASX 100, the coverage from analysts has probably reduced. However costs for iron ore delivered to China are now projected to be $57 per tonne (I think USD?) which is below the declared costs of minnow miners Atlas and Mt Gibson.

Here is what Matthew Stevens of the AFR (24th-26 Jan 2015, p41) said about Arriums projected debt position:

"Arrium is sitting right back where it was before it agitated its retail and professional owners with a call for new equity in the in the face of iron ore's new downside volatility.

While its gearing sits below the 50 percent required by its lending covenants , it is clear the company sees 32% as way too high. And it is just as clear that it is carrying too much debt with $976m of borrowings in USD."

Two important points from that.
1/ Arrium will not be forced by their banks to raise more equity in a hurry.
2/ The criticisim of having too much debt denominated in USD is unfair IMO, because those US liabilities are offset by US based assets. The increase in value of US assets in AUD terms, becuase of AUD currency devaluation, would be apparent should Arrium choose to sell them, even if it is not apparent in the balance sheet now. Any US debt not offset against US assets is hedged.

In addition Stevens hasn't mentioned the ability to pay more US interest increases markedly as the AUD currency weakens against the USD. IMO Stevens, and other commentators are worrying about Arriums debt unecessarily.

SNOOPY

PS Arrium clawing its way back now up to 20.7c as I write this

Snoopy

04-02-2015, 03:22 PM

Actually the latest price is $69.25 as of yesterday.
The forward curve has also deteriorated suggesting FE may head toward $65
The Aussie cyclone season is not far away & this may interrupt shipments from the Oz that may se some support for FE in the short term.
Overall though I think FE prices are heading to $60/ton.

http://www.cmegroup.com/trading/metals/ferrous/iron-ore-62pct-fe-cfr-china-tsi-swap-futures.html

February 2015 iron ore price now $US62.87

http://www.cmegroup.com/trading/metals/ferrous/iron-ore-62pct-fe-cfr-china-tsi-swap-futures.html

Nevertheless, the Oz interest rate cut means in $A terms the fall is cushioned. The same website futures contracts show iron ore to be at $US66.25 in January 2017, up from a slow deterioration to just under $US60 over the next two years.

Meanwhile Arrium itself is again 'on the tear' having risen 10% today to 22c as I write this. There is talk on other forums of a 'shorters trap' having been set.

SNOOPY

h2so4

04-02-2015, 05:08 PM

I hope you've been getting a few trades away SD. Lol!

Joshuatree

08-02-2015, 12:35 PM

Snoopy

09-02-2015, 03:09 PM

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.

Arrium has taken the write down (mainly) with Southern Iron.

"As a result of the shutdown Arrium will take a one-off $1.335 billion hit to its half year result, including a $1.17 billion impairment charge related to Southern Iron and $130 million charge linked to its Steel and Recycling business."

Now Arrium is busy raising capital., without going back to shareholders. This is the February 6th announcement (misdated 6th January!):

----

SALE OF WIRE ROPES BUSINESS

Arrium Limited (ASX:ARI) today announced that it has entered into an agreement for the sale of its Wire Ropes business to Bekaert, a Belgium based company for A$90 million.

The Wire Ropes business, based in Newcastle, NSW, is a leading manufacturer of high performance ropes in Australia with a history spanning more than 90 years. Arrium’s Managing Director and CEO, Mr Andrew Roberts said: “Wire Ropes is a quality business, however it lies outside our strategic focus for future growth in Mining Consumables.

“Our growth in Mining Consumables is centred on the global mineral processing industry, including capturing at least our share of the expected strong growth in grinding media demand. Our Moly-Cop grinding media business is well positioned to achieve this with leading market positions in key growth regions of the world including North America, South America and Australasia”.

The Wire Ropes business has strong leverage to the mineral extraction industry, particularly through its market leading drag line and shovel ropes. This acquisition builds on Bekaert’s existing global position in wire ropes.

“Today’s announced sale is consistent with our focus on reducing debt, and builds on our good progress with asset divestments. Arrium’s asset divestment proceeds for FY15 will increase to at least ~A$150 million following completion of this sale,” Mr Roberts said.

Arrium’s Wire Ropes business employs ~100 people and Bekaert will offer all employees ongoing employment. The sale is expected to complete by end of the March 2015 quarter.

----

SNOOPY

Snoopy

09-02-2015, 03:26 PM

This posted by asteroider on another forum

http://www.steelguru.com/internatio...remains_elusive_Still_USD_20_away/357042.html (http://www.steelguru.com/international_news/Iron_ore_price_bottom_remains_elusive_Still_USD_20 _away/357042.html)

The above article quotes Mr Andy Xie, a Shanghai based independent economist.

"Prices need to decline to a level that’s so painful higher cost Chinese mines will be forced to give up. Iron ore will slump into the USD 30s a tonne this year as low cost supplies rise and steel demand in China shrinks. It can still go down through USD 40 before we bounce back. It will probably average USD 50 this year."

That is one mans view, very pessimistic. But I think Arrium can survive for one year at just a USD50 average if that did come to pass. Other commentators are not as pessimistic at this.

SNOOPY

Joshuatree

10-02-2015, 10:28 PM

Snoopy

13-02-2015, 04:29 PM

Australian coal miners tipped to gain market share

Read more: http://www.smh.com.au/business/mining-and-resources/australian-coal-miners-tipped-to-gain-market-share-20150210-13a9vm.html#ixzz3RKhA9Jbm

I don't follow the relevance of this to Arrium. Arrium doesn't mine coal. The only comment I can see which is - at a stretch- relevant is:'

"The scalability of Australian mines <snip> has enabled the displacement of major competitors in US, Canada and Indonesia. This trend is likely to continue thanks to a continued strong operating performance plus currency depreciation. On the other hand, US suppliers, many of which exhibit high costs, will not see the cost relief that currency devaluation brings to Australia."

Meanwhile Arrium having quite a good day. Now up to 23c (+4.5% on the day) as I write this. The official release date of the half year result is still five days away. However, the broad content has been well signalled. So I am not expectinng too much share price reaction.

SNOOPY

Joshuatree

13-02-2015, 06:18 PM

Sorry Snoop; got my wires crossed. Out of int have you checked out other Iron Ore co's, like MGX. I know theres many differences and its hardly comparing apples with apples , more like apple with a pear maybe.

Snoopy

14-02-2015, 01:31 PM

Out of int have you checked out other Iron Ore co's, like MGX. I know theres many differences and its hardly comparing apples with apples , more like apple with a pear maybe.

The most important comparative figure is the iron or production cost going forwards. Here is what CEO Andrew Roberts said about that in the press release of 23rd January 2015.

-----

"The re-design announced today will provide a step change in the Mining business’ cash costs and capital requirements. Cash costs loaded onto ship (2) are targeted to average A$37/wmt in FY16 down 23% or ~A$11/wmt from FY14. Total cash costs (CFR China) (3) are targeted to reduce by 20%, from A$71/dmt (4) in FY14 to an average of A$57/dmt in FY16. The business has also targeted ~A$200 million (5) or a ~30% reduction in its FY16 to FY19 capital expenditure plan. This will position the business to deliver positive operating cash flows in a low price environment."

(2) Includes mining, crushing, beneficiation, road haulage and trans-shipping costs. Excludes capitalised costs (infrastructure, pre-stripping & mining licences) & depreciation, amortisation charges in respect of those costs, royalties, sales & marketing and corporate costs. Also includes $2/t related to addition of ~600kt of magnetite concentrate.
(3) Includes loaded cash cost, royalties, sales and marketing and corporate costs, adjustment for moisture content and freight based on current market levels. Excludes capitalised costs (infrastructure, pre-stripping and mining licenses) and depreciation and amortisation charges in respect of those costs.
(4) FY14 reported total cash cost (CFR China) included $2/t related to magnetite overheads.
(5) Includes PPE, mine development (including capitalized stripping) and exploration.

------

My memory is that these costs are below all the other 'small' providers in Oz (as quoted in one of those rather dire sounding AFR articles on iron ore in Australia), albeit rather more than BHP and Rio incur to dig and deliver their own iron ore resources.

To be frank, I don't regard Arrium as an iron ore investment any more. As long as they cover their costs I am much more interested in how the recovery of the steel division goes (exit strategy 1?), and what kind of jewel their expanding mining consumables business really is (exit strategy 2?). If iron ore recovers for Arrium, that is a bonus (exit strategy 3?). I like to own shares in a company where there are several potential ways out of their pickle. Hinging everything on a recovery in iron ore has very little appeal to me as an investment strategy.

SNOOPY

percy

14-02-2015, 03:10 PM

Best not to get into a pickler in the first place!!! lol.

Snoopy

14-02-2015, 03:29 PM

Best not to get into a pickler in the first place!!! lol.

I only bought into Arrium in a serious way because of the hammering the market gave Arrium as a result of their situation. I judge the market has overhammered Arrium. I don't have to wait for Arrium to regain their previous heights (not that I think they ever will) to benefit from the situation. Far from something to be avoided, it was the 'pickle' that created the investment opportunity.

SNOOPY

percy

14-02-2015, 04:32 PM

Snoopy

16-02-2015, 02:16 PM

Investment opportunity??????????????
Since 20th September 2014 ARI has lost 42%,so $1,000 "pickled invested " then, is valued by the market at $580 today,
while in the same time my $1,000 "soundly invested" in HNZ, is valued by the market at 137% more than ARI,ie $1,380.
Best not to do 'pickles"..!!!! lol.

You and I both have substantial investments (for us) in banks Percy. We have both done well out of them. That doesn't mean we should put more money into banks at todays prices, nor should we necessarily sell. My investment in Arrium is part of my diversification strategy. It comes with certain risks for sure, and as we know the market tends to exaggerate these on the downside. Personally I feel very comfortable with my holding bought - on average - for less than deep value gurus Alan Gray paid. I expect to maintain my Arrium holding for many years and am looking forwards to the resumption of a modest dividend in a few years time. To judge the success or otherwise of my strategy in just a few months is far too soon.

SNOOPY

percy

16-02-2015, 04:59 PM

You and I both have substantial investments (for us) in banks Percy. We have both done well out of them. That doesn't mean we should put more money into banks at todays prices, nor should we necessarily sell. My investment in Arrium is part of my diversification strategy. It comes with certain risks for sure, and as we know the market tends to exaggerate these on the downside. Personally I feel very comfortable with my holding bought - on average - for less than deep value gurus Alan Gray paid. I expect to maintain my Arrium holding for many years and am looking forwards to the resumption of a modest dividend in a few years time. To judge the success or otherwise of my strategy in just a few months is far too soon.

SNOOPY

I wish to apologise for my post.
It was what I thought,but I should have kept my thoughts to myself.
I hope you can turn around in a year or two's time, and point out that ARI is the biggest profit you have ever made.!!!

Snoopy

04-03-2015, 03:38 PM

To be frank, I don't regard Arrium as an iron ore investment any more. As long as they cover their costs I am much more interested in how the recovery of the steel division goes

And how is the steel division doing? They are picking a fight with a local importer "Best bars Steel" (http://www.bestbar.com.au/).

http://www.ferret.com.au/articles/news/duties-on-imported-steel-could-hurt-australian-businesses-says-best-bar-boss-n2521059

"Interim duties on steel products requested by Arrium against allegedly dumped goods could be disastrous, the local steel company Best Bar Reinforcements has said."

"The Australian Financial Review reports that Best Bar’s chief Grant Johnston feared for the future of his company if such measures were taken."

"Johnston’s firm (340 employees), which has an annual turnover of $220 million and bends and fabricates imported steel, uses Singapore’s NatSteel (owned by India’s Tata Group) as a supplier."

Further info from the 2nd March AFR article.

-----

The NatSteel mill in Singapore is one of the mills being investigated by the ASX as a result of the Arrium dumping claim. Arrium claim the cost of delays in dumping investiagtions and action since October 2013 has been greater than the entire steel divisions $51m EBITDA made in 2013-2014. They cliam one unresolved ADC investigation has taken more than 300 days. Johnston of Best Bars claims that NatSteel, their partner of fifteen years, are playing by the rules.

Johnston said that Arrium have around 60% market share of the rebar fabrication market and only 20% of Australian fabriactors, like 'Best bars', don't use Arrium for distribution.

-----

Ther are always two sides to a story. But the Anti-Dumping Commission taking over 300 days to complete an investigation does seem a little on the long side. If you believe the claims neither the local manufacturers or the importers are making any money. No wonder building in Australia is so much cheaper than on this side of the Tasman!

SNOOPY

Joshuatree

04-03-2015, 03:50 PM

Snoopy

04-03-2015, 04:04 PM

A friend sent this to me re China hard landing. The woman is the one with the facts.

http://www.macrobusiness.com.au/2015/02/china-already-hard-landing/ (http://www.macrobusiness.com.au/2015/02/china-already-hard-landing/)

A near 90 minute panel discussion with pointy heads! The woman is Anne Stevenson Wang co-founder and director of J-Capital Research. Is there anything relevent to Arrium in here? Or is this a general economist anti-China rant?

SNOOPY

Joshuatree

04-03-2015, 04:10 PM

Snoopy

04-03-2015, 04:27 PM

Id just listen to the lady. If correct, metals prices will be affected and steel. A bottom nowhere near yet. ARI would be affected no? Nothing like the straight metal producers tho. Have just posted it on its own thread as well.

So nothing specific to Arrium then, or even the steel industry? Falling metal prices means that Arrium is affected? If you accept that steel is already being sold below cost of production already then all steel mills globally (including in China) will just shut down because globally there is no demand for steel?

SNOOPY

Joshuatree

06-03-2015, 09:20 PM

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.

Snoopy

13-03-2015, 01:04 AM

Allan Gray posted another ASX notice today to say that they are still accumulating, now holding 13.45% of shares (up from 12.15% on December 15th 2004).

Another substantial shareholder on the move (11th March). The Singaporean government controlled GIC Private Limited held 7.08% of the voting power on 1st November 2012. That stake has now increased to 8.21%. The shares were acquired between November 2012 and November 2014 at prices between 24c and $1.64.

In addition Director Brian Davis has been increasing his holding.

SNOOPY

Snoopy

20-03-2015, 02:33 PM

Another substantial shareholder on the move (11th March). The Singaporean government controlled GIC Private Limited held 7.08% of the voting power on 1st November 2012. That stake has now increased to 8.21%. The shares were acquired between November 2012 and November 2014 at prices between 24c and $1.64.

In addition Director Brian Davis has been increasing his holding.

More buying from the big boys. Allan Gray now sitting at just under 15% of the company, as announced yesterday.

SNOOPY

Snoopy

24-03-2015, 01:53 PM

Been great to watch you ignore the noise generated and stick to your reasoning Snoopy, I hope it pays off for you.
I am sure you would be looking to buy something deeply unloved that the brokers have unanimous sells on good to see the deep value investors like Allan Gray backing up your judgement on this one.

I think with hindsight, my first purchase of ARI shares on the ASX at 37c was premature. At that stage I was simply working on the huge discount to net asset backing, and my underlying liking for mining businesses that 'sell shovels to miners' rather than do the digging themselves. In making this comment I am referring to the mining consumables side of the business. I am aware that with iron ore, Arrium itself is doing the digging! I hadn't done more detailed homework at that time. However ,my 'margin of safety' has come into play here. Even after the subsequent billion dollar asset write downs, even that first purchase is still below asset backing! Feeling reasonably comfortable with my average entry price of 25c. But if I had differently timed that first purchase, then I could have done better overall.

It is a little too complex for me but as you only need things to go from dire to terrible to make lots of money I reckon your odds are good over the long term.

Yes with the four divisions (iron ore, mining consumables, steel and recycling) Arrium is complex. But that in itself has created the opportunity. Some think it is only an iron ore play,and don't bother to look further.

I would like to get BHP if it gets to the point where the market hates it as they have the lowest cost iron ore reserves and they split out their steel operations for a good reason it seems.
It seems likely that that won't happen and I will miss the opportunity with ARI.
My only exposure to resources is CDD as I get a dividend while I wait for the recovery, WOR and STO as no-one seems to think we will need oil (or steel).

I do own BHP. Average buy price around $12 I think, which gives you some idea of how long it has been floating around in my bottom drawer! But BHP and ARI are my only two in the mining sector.

Maybe these forums are only useful for speculators who think they can make money doing what everyone else is doing, day trading going short then long and making brokers rich. Seems like you get a lot of noise rather than useful information on this thread.

Personally I find the views of traders very useful in a contrarian way. The smell of trading fear can turn up gems!

SNOOPY

Snoopy

24-03-2015, 04:46 PM

Snoopy

25-03-2015, 03:56 PM

Let's take another look at the iron ore profitability

Let's take another look at the iron ore profitability

Current 62% fines price USD 68.70 wmt
Less discount for lower quality USD 12.37*
Realised price USD 56.33 wmt
Less Conversion to dmt USD 2.82**
Realised price USD 53.51 dmt
Realised price AUD 64.70 dmt***

Less total cash cost AUD 68.4* dmt

Equals negative AUD 3.7 dmt

At at 13mtpa run rate that is a cash loss of AUD 48.1m.

Sources:
* calc from the latest quarterly report (October 2014)
** 5% used, could be slightly higher
*** using 0.8270

Time to try my slightly different way of estimating EBITDA

I shall assume that EBITDA 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.

EBITDA for FY2014 was based on average iron ore earnings of $US123m per dry metric tonne.

I am proposing to use an average EBITDA 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)

EBITDA(2015)= $685.9m x [($83m - ($73m x 0.9121)]/[($123m - ($73m x 0.9121)]

= $685.9m x 0.291 = $199.6m

I assume that depreciation and amortization will not change substantially from FY2014 ($204.6m).

EBIT(2015) = $199.6m - $204.6m = -$5.0m

For those interested I have rerun the same calculation based on a market steel price of $65/dmt

EBITDA(2015)= $685.9m x [($65m - ($73m x 0.9121)]/[($123m - ($73m x 0.9121)]

= $685.9m x -0.0281 = -$19.3m

In this case EBIT(2015) for the iron ore division is

EBIT(2015) = -$19.3m - $205m = -$224m

Because there is more than one view of the future, I have decided to put "Corporate's" assumptions through my model to see what numbers come out.

Corporate has assumed that:
1/ extraction costs are $A68.40 for FY2015.
2/ The AUD/USD exchange rate changes from $A1 = $US0.9121 for FY2014 to $A1 = $US0.8270 for FY2015.
3/ The realised steel price, accounting for the lower quality ore being mined is USD 56.33 /wmt. Note that no allowance is required to convert to dry metric tonnes, because the comparative figures are also in wet metric tonnes.
4/ The tonnage of ore is shipped out in FY2014 (12.5Mt) rises to (13.0Mt) as FY2015

EBITDA(2015)= $A685.9m x [($US56.33m - ($A68.40m x 0.8270)]/[($US123m - ($A73m x 0.9121)] x [13/12.5]

= $A685.9m x -0.00437 = -$A3m

I assume that depreciation and amortization will not change substantially from FY2014 ($204.6m).

EBIT(2015) = -$3m + $204.6m = -$201.6m

SNOOPY

Snoopy

26-03-2015, 02:32 PM

Because there is more than one view of the future, I have decided to put "Corporate's" assumptions through my model to see what numbers come out.

Corporate has assumed that:
1/ extraction costs are $A68.40 for FY2015.
2/ The AUD/USD exchange rate changes from $A1 = $US0.9121 for FY2014 to $A1 = $US0.8270 for FY2015.
3/ The realised steel price, accounting for the lower quality ore being mined is USD 56.33 /wmt. Note that no allowance is required to convert to dry metric tonnes, because the comparative figures are also in wet metric tonnes.
4/ The tonnage of ore is shipped out in FY2014 (12.5Mt) rises to (13.0Mt) as FY2015

EBITDA(2015)= $A685.9m x [($US56.33m - ($A68.40m x 0.8270)]/[($US123m - ($A73m x 0.9121)] x [13/12.5]

= $A685.9m x -0.00437 = -$A3m

I assume that depreciation and amortization will not change substantially from FY2014 ($204.6m).

EBIT(2015) = -$3m + $204.6m = -$201.6m

The following 'alternative' forecast relates to the financial year 2015, whihc will end on 30th June 2015.
Time to insert the 'Corporate' Iron Ore EBIT figure of -$201.6m into the spreadsheet and see what comes out.

FY2015 (forecast)Iron Ore Mining ConsumablesRecyclablesSteelTotal

EBIT-$201.6m$140.5m$7.7m$-66.6m

EBIT (corporate)-$3.8m-$6.5m-$5.1m$-12.6m-$148.0m

D & A$191.2m$47.0m$10.0m$102.0m$350.2m

EBITDA-$14.2m$101.0m$12.6m$22.8m$122.2m

Net Interest Bill-$21.0m-$22.4m-$10.4m-$35.3m-$89.1m

EBITDA/Interest0.684.511.211.491.4

Tax Payable-$33.5m

Net Interest Bill-$89.1m

EBDA-$0.4m

The key figure highlighted in this table is the EBITDA to interest rate ratio. At 1.4, this is seriously below banking covenant agreements that say this ratio should be 3 to 3.5 at least. However, CEO Andrew Roberts is already on record as saying that banking covenants will be hurdled over in FY2015, even though he hasn't released any definitive full years earnings guidance. This means we can be fairly sure that this scenario, as painted by Corporate, will not happen. Nevertheless, despite all this scenario gloom net cashflow is within rounding error zero. This means that ARI would not have to increase its borrowings, even with a result as dire as Corporate suggested. That is good news for shareholders, should unexpectedly bad news come to pass.

Further working on these figures (not shown in table) leads me to a NPAT projected figure of -$270m (based on normalised earnings excluding one off adjustments) for this scenario.

SNOOPY

Snoopy

26-03-2015, 03:06 PM

More buying from the big boys. Allan Gray now sitting at just under 15% of the company, as announced yesterday.

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.

SNOOPY

Snoopy

26-03-2015, 03:34 PM

We can be fairly sure that this scenario, as painted by Corporate, will not happen. Nevertheless, despite all this scenario gloom net cashflow is within rounding error zero. This means that ARI would not have to increase its borrowings, even with a result as dire as Corporate suggested. That is good news for shareholders, should unexpectedly bad news come to pass.

Further working on these figures (not shown in table) leads me to a NPAT projected figure of -$270m (based on normalised earnings excluding one off adjustments) for this scenario.

Digging through the half-year result, there are more one off bitter pills to take before FY2015 is done with. Slide 52 in the HY2015 presentation suggests break fees due to Southern Iron contactors will result in a one off payment of $70m, based on contractors reducing their work force by 380 people.

'Statuatory Gearing' at 31st December 2014 (HY2015 balance date) is reputedly 32.6% (slide 68).

According to 'investorwords' gearing is the ratio of a company's long-term funds with fixed interest to its total capital.

(Read more: http://www.investorwords.com/2156/gearing.html#ixzz3VSKRrwm7)

From the same page:

Interest bearing liabilities = $1,611.3m
Cash is $181.7m
Total Equity = $2,962.2m
Total Assets = $6,406.0m

More information is in the Consolidated balance Sheet:

Current Interest Bearing liabilities = $161.2m
Non-Current Interest Bearing liabilities = $1450.1m

Now,

(Net Interest Bearing Liabilities)/(Total Equity)
($1,611.3m - $181.7m) / $2,962.2m = 48.26%

(Long Term Interest Bearing Liabilities)/(Total Equity)
$1450.1m / $2,962.2m = 49.0%

Nowhere near the quoted figure. Can anyone help out here?

SNOOPY

Snoopy

27-03-2015, 09:48 AM

'Statuatory Gearing' at 31st December 2014 (HY2015 balance date) is reputedly 32.6% (slide 68).

According to 'investorwords' gearing is the ratio of a company's long-term funds with fixed interest to its total capital.

(Read more: http://www.investorwords.com/2156/gearing.html#ixzz3VSKRrwm7)

From the same page:

Interest bearing liabilities = $1,611.3m
Cash is $181.7m
Total Equity = $2,962.2m
Total Assets = $6,406.0m

More information is in the Consolidated balance Sheet:

Current Interest Bearing liabilities = $161.2m
Non-Current Interest Bearing liabilities = $1450.1m

Now,

(Net Interest Bearing Liabilities)/(Total Equity)
($1,611.3m - $181.7m) / $2,962.2m = 48.26%

(Long Term Interest Bearing Liabilities)/(Total Equity)
$1450.1m / $2,962.2m = 49.0%

Nowhere near the quoted figure. Can anyone help out here?

I must say, I do find it annoying that there are seemingly several legitimate ways to calculate 'gearing'. And due to rather lax nomenclature there is no real way to know what measure is being used in any particular case.

To answer my own question.

Slide 8 of the Capital Raising presentation says that:

'Gearing' = (Net Debt) / (Net Debt + Equity)

If I use that definition with the data that I used in the previous post:

Interest bearing liabilities = $1,611.3m
Cash is $181.7m
Total Equity = $2,962.2m
Total Assets = $6,406.0m

then I get the following:

'Gearing' = ($1,611.3-$181.7) / ( ($1,611.3-$181.7) + $2,962.2) = 32.6%

This same percentage is later referred to as 'Statuatory Gearing', although the statute it is apparently linked to is not defined. Annoyingly this methodology does not agree with the investorwords (admittedly an American site) definition of gearing.

Now this is sorted out, I can start working on some forecast comparative figures.

SNOOPY

Snoopy

27-03-2015, 10:07 AM

I would be more worried about the debt refinancing. How long before ARI has to sell off its profitable businesses in order to bail out its loss making ones?

A lot of these debt loaded miners are going to go to the wall as a result of bankers forcing asset sales in order to get their money back. The market will not wear multi-billion dollar capital raisings in such a perilous commodity climate, so the companies are F***d. Place your bets as to who will be the first to fold.

PS. ARI next significant debt maturity is 2H 2016 so they have only a year to find the money.

KW you are one step ahead of me. I am presently working through just how Arrium can address its debt repayment schedule. Unlike other 'miners' (although I think it is not accurate to put Arrium in the miners basket, because most of their divisions are not mining divisions in that sense).

I draw your attention to slide 29 of the capital raising presentation. Debt repayment profile post equity raising shows less than $200m of debt maturing in FY2016. Now refer to my post 255 on this thread, and look at the EBDA figure right at the bottom. This is also the base for calculating potential free cashflow for FY2016. This figure, $275.6m, will more than cover the maturing debt.

I do agree though that FY2017 may be a challenge for repaying debt. This is what I am concerned about and am currently investigating.

SNOOPY

Snoopy

27-03-2015, 04:47 PM

Time to update my projected full year EBITDA results, based on the information released in the HY2015 results for the period ending 31st December 2014.

FY2015 (forecast)Iron Ore Mining ConsumablesRecyclablesSteelTotal

EBIT-$5.0m$140.5m$7.7m$-66.6m

EBIT (corporate)-$5.1m-$6.1m-$4.8m$-11.9m$48.7m

D & A$191.2m$47.0m$10.0m$102.0m$350.2m

EBITDA$181.1m$181.4m$12.9m$23.5m$398.9m

Net Interest Bill-$21.8m-$23.3m-$9.9m-$34.3m-$89.2m

EBITDA/Interest8.37.81.30.694.5

Tax Payable-$33.8m

Net Interest Bill-$89.2m

EBDA$275.9m

Further working on these figures (not shown in table) leads me to a NPAT projected figure of -$74.4m (based on normalised earnings excluding one off adjustments) for this scenario.

Time now to put on my hat of gloom. We all know that if the iron ore and steel markets recover, then owning shares in Arrium is 'money for jam'. What is of more interest to me is what happens if the iron ore market just bobs along at current market prices, and the steel market doesn't recover? Will shareholders be required to put in more share capital under that 'double doom' scenario?

The table below I have titled 'FY2016 forecast'. But it is simply a repeat of my FY2015 forecast, with an adjustment made to the iron ore division to reflect the decrease in sale volumes to 9Mt per year at much lower (current) market prices.

FY2016 (forecast)Iron Ore Mining ConsumablesRecyclablesSteelTotal

EBIT$26.4m$140.5m$7.7m$-66.6m

EBIT (corporate)-$2.9m-$6.7m-$5.3m$-13.1m$80.0m

D & A$100.0m$47.0m$10.0m$102.0m$350.2m

EBITDA$123.5m$188.8m$12.4m$22.3m$347.0m

Net Interest Bill-$19.5m-$22.8m-$10.7m-$36.2m-$89.2m

EBITDA/Interest6.38.31.20.613.8

Tax Payable-$34.5m

Net Interest Bill-$89.2m

EBDA$223.3m

Despite being cashflow positive (see the EBDA figure), we are still looking at a negative NPAT with this double gloom scenario: A loss of -$45m.

Nevertheless, the key figure here is the overall EBITDA/Interest Rate ratio of 3.8 (highlighted). The banks have asked for this figure to be above 3.5. So all still looks OK. No reason for the banks to not grant renewal of any loans with this kind of cashflow coming through. CEO Andrew Roberts would be horrified to see my FY2016 forecast as above. But he would be pleased to see that even if the recovery in the steel industry doesn't pan out in the timely manner he expects, then shareholders should not need to tip in more funds.

SNOOPY