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

[Snoopy]

Titanic bruising battle on the 1 day chart today. ARI started @14c then merged like zip from 13 to 13.5c all day taking hit after rebounding hit and ; then finishing @14c. Reporting next week; what do you reckon it will be like Snoopy?

In the 15th June announcement, Andrew Roberts said:

"Further results information will be provided with the company’s full year results announcement, scheduled for 19 August 2015."

Not sure what results are out next week. Maybe a mining statistics update?

In that 15th June announcement Andrew Roberts also said:

“We have made significant progress across the company to reduce costs, including work in Mining to reduce our targeted FY16 cash breakeven iron ore price to ~US$50/t for the export business, with ongoing flexibility."

With market prices already at this level, I guess any announcement that Arrium has been selling iron ore at more than US$50/t will be seen as positive. This is likely because most of Arrium's Iron ore sales are not on the spot market. However all this will be historical. If Arrium announce that they have further reduced the cash break even price to say $US45 in the future, that would be very positive. Otherwise I think we can expect any share price reaction to be ho hum.

For me the 19th August update will be the important one. That's when we find out about Steel and Mining Consumables.

SNOOPY

[Joshuatree]

According to a poster the quarterly is out on mon ;we will see. cheers JT

[Joshuatree]

And here it is released aftermkt. Looks good to me but I'm easily bamboozled .Very proactive in reducing costs.

PDF

[Joshuatree]

Looks like 2.74 mt Iron Ore sold @A$67 t minus all cash costs including freight ,admin etc ofA62.2 t =$13.152 mill npbt ? for quarter for IRON ORE part of the business.

Apparently there is an AFR report(haven't sighted it) re Pacific Equity partners among several partners int in buying the mining consumable business!!. I can't see ARI being that distressed to sell the Golden Egg!!

[Joshuatree]

http://www.afr.com/street-talk/pacif...0150719-gifjgx

Int they also have a sum of the parts valn of 15c!

[Snoopy]

http://www.afr.com/street-talk/pacif...0150719-gifjgx

Int they also have a sum of the parts valn of 15c!

I think it is worth examining the detail of that PEP Arrium valuation table:

	Enterprise Value $m	EV/EBITDA FY2016e	Per Share $A
Mining	118	2.9x	0.04
Mining Consumables	2135	9.8x	0.73
Steel	284	4.3x	0.10
Corporate Overheads	(320)	10.0x	(0.11)
Enterprise Value	2217	7.2x	0.75
Less Restructring Costs	(105)		(0.04)
Less Future SI cash closure costs	(65)		(0.02)
Less Debt (ex SI restructuring)	(65)		(0.55)
Equity Value	436		0.15

This is based on 2937m shares outstanding. So in dollar terms the projected value of Arrium debt at balance date is:

2,937 x $0.55 = $1.615b

The value of the consumables business is listed at:

2,937m x $0.73 = $2.144b

So all debt would be wiped out if the consumables business could be 'got away' at that price.

The implied value for Mining Consumables EBITDA is: $2.135m/9.8 = $218m


Now let's compare that figure with the amount of capital that Arrium has invested in the Consumables business (from my post 93 on this thread).

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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

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Note my bold highlight with the interchangable AUD/USD indicating that the 'Mining Consumables' purchase deal was done when the USD and AUD were at parity. Based on the AUD purchase price, Arrium has $A1.091b tied up in mining consumables today. But of course some (most) of those assets are still denominated in USD. Further IMO the quality of the underlying business has improved as 'big grinding balls' are rolled out to customers worldwide.

IMO the implied $A asset premium on offer for Mining Consumables from PEP ($2.144b - $A1.091b = $1.053b) may look attractive. But this only reflects the projected increase in earnings from the division, nothing more. Furthermore it doesn't even reflect that properly because the EBITDA multiple has shrunk (10.3 down to 9.8). I think PEP has served up a low ball opening bid here. I wouldn't expect Arrium management to sell Mining Consumables for the price PEP claims it is worth here.

SNOOPY

[Daytr]

Snoop, enterprise value means very little especially in the current market of massive swings in commodity prices.
On the XRO thread you said Arrium would generate substantial positive cashflow.
This is in my view would be a far better way to vale, i.e. PE.
What free cashflow do you expect the various business units to produce?

[Snoopy]

Snoop, enterprise value means very little especially in the current market of massive swings in commodity prices.

Daytr, 'enterprise value' is equal to (company's market capitalization - cash and cash equivalents + preferred stock + debt). When the market value of a share can vary by 50% in a single day, as you say EV is not a very stable figure.

I am not using 'enterprise value' figures in the table, except to eliminate them from the EV/EBITDA ratio, and hence extract EBITDA values.

SNOOPY

[Snoopy]

On the XRO thread you said Arrium would generate substantial positive cashflow.
This is in my view would be a far better way to value, i.e. PE.
What free cashflow do you expect the various business units to produce?

See my post 204 on 5th Jan 2015 on this thread for the full answer. The short answer is around $250m as an underlying figure for the whole company.

SNOOPY

[Snoopy]

Atlas resumes trading after its capital raising, and promptly loses 72% of its value. And a 40% loss for those who participated in the capital raising. Good example as to why averaging down is a losers game.

I guess the above is the short version. The (slightly) longer version is that Atlas failed to raise the amount of capital they sought. It is not clear where the rest of the capital they will need will come from. There have been several weeks of shareholders not being able to sell their shares, so notwithstanding the result of the capital raising, one might expect a pent up demand for selling. That the market punished Atlas for a lack of liquidity and an uncertainty over a future capital raising is no surprise.

OTOH Arrium raised all the capital they sought from their own capital raising, thanks to it being 100% underwritten. Arrium have good assets to sell should they need more capital (right now they don't). So there is a very big difference between Atlas and Arrium. But of course if you only look for a trend, you don't see anything else.

SNOOPY