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

[Daytr]

Perhaps I was just reacting to what you posted, "you finance types should know the distinction is an important one for troubled companies."
A post you have now deleted I see... So pot / kettle.

And for the record, it doesn't change everything, but it might change some things.
It depends on the terms of the debt & its not like ARI are in a good position to dictate terms.
I would have thought the coupon could be in the region of 8-9%, although the junk bond market yield has been crunched so they may get a lower rate.
There will also no doubt be caveats a bit like STO have.
So until a package I sighted its difficult to know.
There may not be the appetite either.
Just have to wait & see.

You will probably find yourself pissing people off by sneering at them Daytr, I have never professed to be an expert at finance but I still did consider an issue of junk bonds as a possible scenario for looking at a turnaround. It's all speculation but in my view it would be a game changer if the rumours come true, would transfer ARI into the investment camp as the banks won't be forcing a sale.

[Joshuatree]

" 0.5c fall in after market match up"

[Snoopy]

Article in the AFR on Bluescope Steel dated 13-08-2015 p36 referenced Arrium.

------

<snip>
It costs about $480 a tonne to produce the hot rolled coil (HRC) that Bluescope makes in Port Kembla.
<snip>

The price of Chinese HRC has fallen nearly 30% this year, reaching lows in recent weeks as the Middle Kingdom's domestic steel demand continues to undershoot production schedules. As a result through July, Chinese Steel exports rose by up to 25% with expectations that up to 100Mt of product will leak into regional, North American and European markets.

That potential has been made almost certain by the devaluation that will leave Bluescope even more firmly poised on dilemma's horn.

<snip>

Given the struggle that Bluescope and fellow domestic producer Arrium have had in securing anti-dumping protections this would likely bring O'Malley (Bluescope CEO) no succour. Bluescope argues that even the beefed up regime of recent years is too slow and too easily beaten.

The most recent 'boron scam' is a classic example. Apparently some foreign steelmakers have danced around our anti-dumping tariffs by subtly changing the specification of their steel through the addition of a bag of boron (chemically neutral in this application) to their raw materials mix. It is reported this window of opportunity is being closed slowly.

<snip>

Looking at through the prisim of right now, Chinese hot rolled coil is selling at around $300m a tonne. (if Port Kembla's game changing cost reduction of $50m to $100m a tonne, the Australian production cost will still be at least $80/tonne above this).

<snip>

For all that Arrium was one of the few listed companies with an obvious exposure to competitive risk from the yuan's devaluation that was not spanked by investors on Wednesday. Then again when past slip-ups and continuing structural flaws have seen your share price slide six-fold over a year to a spare 12.5c a pop, there is not a whole lot of downside left.

--------

What the article didn't mention was that as an iron ore producer, Arrium will see benefits from the spike in the iron or price back over $US50 in the last few weeks.

Excerpts from an article in the AFR dated 17-09-2015

--------

Fair Work commissioner Julius Roe found on Tuesday that Arrium was within its rights to alter employee hours and abolish the rostered day off system at a WA processing and distribution centre. <snip>

Since the 1980s workers on the site have worked a 38 hour week, with two hours a week accumulating towards an 8 hour rostered day off (RDO) every four weeks. The Fair Work Commission decision gives Onesteel the ability to abolish the RDO system and reduce the overlap of workers shifts.

--------

The rest of the article tells that fellow steel producer Bluescope have not been so lucky with their labour reforms, a decision that may yet mothball the remaining blast furnace at its iconic Port Kembla steel works.

SNOOPY

[Snoopy]

So they are going to the junk bond market? What do you think the coupon will be Snoop?
Buys them some time I suppose, but I don't see it solving anything.
Also if the Aussie continues to depreciate then the debt grows, so not a smart move I would suggest.
Is their debt Aussie denominated now?

Daytr, the current debt is a mixture of Oz denominated debt, Canadian denominated and US denominated debt. From p93 of AR2014.

"The group has US denominated bank loans that that currently bear an average variable interest rate of 2.13% (2013: 2.58%). Swaps in place cover 27% (2013: 31%) of the variable USD loan principal outstanding and are timed to expire between one and four years. This is managed on a portfolio basis and assumes that debt facilities are renewed."

The junk bond rates are likely higher than that. But we could still be looking at US 'junk bond' rates lower than 5-6%. ARI can probably cover that with earnings from its US denominated assets. No one at Arrium would welcome higher interest rates. But kicking the can down the road while the underlying business recovers could still be in the best interests of shareholders.

SNOOPY

[Daytr]

Now you are just embarrassing yourself.
I suggest sticking to the topic hand.
However I will repeat for the uninformed. Bonds are debt.
Quite simple really.
And again quite simply, it's not a game changer until you know the terms.
The fact they have low interest bearing debt right now (thanks Snoop) & looking to go to the junk bond market isn't a good sign at all.
Its a sign the banks what completely out & quickly so they are forcing management to replace their debt with much higher cost debt.
With a higher interest rate it will mean they need to reduce debt significantly with asset sales as their costs will go up quite significantly.
China is making noises in regards accelerating infrastructure spending so this may help boost the FE price, but with supply still growing I'm not that optimistic on that front.

Yes it is true the pot is calling the kettle black - you are the one who didn't know the difference between bonds and bank debt where I was only confused by the common parlance of calling bank debt just debt. Which is shocking ignorance for someone with a finance background or a minor slip for an electrical engineer.
Then you tell me I am wrong but agree with me and repeat what I said re the bond terms and sizing - nice.
Of course it doesn't change everything, you are right I exaggerate but it is a game changer. It could buy time for the company to see if Molycop can carry the bad iron ore and not so great steel businesses.
I would suppose if you knew the answer to that and knew that the terms of bonds gave shareholders some relief from forced sales then ARI would be a good investment.
Still watching and waiting, 9c now I see.

[Joshuatree]

In the Australian today a snippet;"Arrium’s Moly Cop has attracted more than 10 bids from a mix of global private equity firms and trade buyers in the UBS and Lazard-run process after indicative *offers were due on Friday.
The global grinding media business is thought to be highly sought after and it is understood that offers were closer to the $2 billion market than the $1.5bn some had previously suggested.
Private equity suitors have *included Blackstone, TPG Capital, Kohlberg Kravis Roberts and Warburg Pincus while Koch Industries and the Weir Group are among the trade buyers that have been circling."

[PSE]

Obviously I am not going to read or respond to baiting from Daytr as I don't really have any time for him, I am quite comfortable to rely on my opinions and don't think I get anything from his input.
Are you still comfortable with this company Snoopy?
We are not wanting to stick you in the eye but the outcome is uncertain, Mr Market is certainly not irrational about iron ore it is in a bad place and continues to drag Arrium down with it.
I can't see the situation around ARI is clear enough to make it suitable as an investment, it is not certain that it will go down the gurgler either though.

[Snoopy]

Are you still comfortable with this company Snoopy?
We are not wanting to stick you in the eye but the outcome is uncertain, Mr Market is certainly not irrational about iron ore it is in a bad place and continues to drag Arrium down with it.
I can't see the situation around ARI is clear enough to make it suitable as an investment, it is not certain that it will go down the gurgler either though.

As I have said before PSE, when you have

1/ a very valuable asset (Molycop) coupled with
2/ a very large debt and
3/ the fair share value is a result of the difference between the two

then things become difficult to value, because a small change in the value of 1/ or 2/, can have a very large effect on 3/.

One thing to bear in mind. ARI still has time on its side - no substantial debt refinancing until FY2017 is reqiured. Of course going down to the wire my not lead to the best outcome for shareholders. If Andrew Roberts wants to negotiate from a position of strength, then he will have to act before the ultimate deadline. But the current situation does not need to be resolved before Christmas. The original solution being bandied about was to sell half of Molycop. This is my preferred solution. This still might happen. But I think as an investor from here you should really look at a cashed up steel business and try to value that. If the sums add up, then any further contribution from the sale of part of all of Molycop you should regard as a bonus.

This is how I am looking at things. One thing to be aware of though. That much vaunted recovery in Steel EBIT in the last quarter of FY2015 included the Newcastle port land asset sale proceeds. Very disappointed that AR did not empahsise that, but I think after reading the steel division announcement several times it is true. So the long term viability of steel, while improving, is proving a not so easy proposition to calculate.

SNOOPY

[PSE]

If Joshuatree's media report is correct then a steel and iron ore business with no debt and around $200m cash as a worst case but certainly possible scenario.
It seems to me that if they could have shut down the iron ore business they would have done so already?
The way the market will balance out the overproduction caused by speculative spending in capacity is low prices causing highest cost producers to lose cash and shut down.
Steel hard to calculate, is Iron Ore worth nothing or a negative number?
I know this is a simplistic analysis which I keep annoying you with but I am not Mr Market freaking out about a good company. You do seem comfortable with the high risk potential high return scenario here so I guess that is OK.

[Daytr]

Latest news out of China on FE demand is not good.
For the first time since I think the 1980s they consumed less FE over the 12M period.
Obviously supply is still increasing so I don't see too much upside to the FE price for the medium term at least. The weakening Aussie dollar may help them going forward if they can get rid of their debt through the sale of the sale of the assets.