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

[Snoopy]

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]

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]

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]

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]

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

FY2015 (forecast)	Iron Ore Profit	Source
EBIT	$140m	Post 107
Corp. EBIT Costs	-$11.1m	AR2014 p83
Net Funding Interest	-$21.6m	PRS2014 Slide 6
Total EBT	$107.3m	Calculated
Tax @ 30%	-$32.2m	Calculated
NPAT	$75.1m	Calculated

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]

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]

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.

[h2so4]

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]

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]

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