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  1. #1
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    Default ARI (Arrium) : At Rock bottom, ore not?

    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/showthr...light=Onesteel

    SNOOPY
    Last edited by Snoopy; 28-09-2014 at 02:51 PM.
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  2. #2
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    Quote Originally Posted by Snoopy View Post
    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).

    -------

    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”.

    ------

    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
    Last edited by Snoopy; 28-09-2014 at 02:59 PM.
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  3. #3
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    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.

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  4. #4
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    Quote Originally Posted by Stranger_Danger View Post
    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
    Last edited by Snoopy; 10-11-2014 at 02:25 PM.
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  5. #5
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    Quote Originally Posted by Snoopy View Post
    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
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  6. #6
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    Quote Originally Posted by Snoopy View Post
    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)

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    Quote Originally Posted by Dej View Post
    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
    Last edited by Snoopy; 10-11-2014 at 02:26 PM.
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  8. #8
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    Google Shortman ASX then type in ARI.

  9. #9
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    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.

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    Quote Originally Posted by BFG View Post
    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
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