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

[Snoopy]

There is one more arm of the avenue to administration to explore. We need to know the book value of Whyalla. We need to know this because if Roberts and his proposed GSO rescue plan cohorts were really intent on shutting all activity at Whyalla, then these 'assets' would have no value. Consequently whatever 'Whyalla' value is recorded needs to be removed from the books. To my knowledge the book value of Whyalla on its own has never been explicitly disclosed.

At the genesis of what was then Onesteel (now Arrium) in 2000, manufacturing assets were listed as being worth $1,704.9m.

<snip>

Adding up the Whyalla Assets, they make up 37.5% + 20% = 57.5% of all book manufacturing assets.

So $1,704.9m x 0.575 = $980m

From 2000 up until today there were substantial improvements to the Whyalla assets as follows:

1/ $110m was spent relining the Whyalla Blast Furnance in FY2004
2/ $395m was spent under 'Project Magnet Stage 1' to ready the Whyalla Steel Plant to a different raw iron ore: magnetite instead of hematite.

So the total book value of an 'undepreciated' Whyalla site, I calculate as follows

Value of Whyalla Assets (at FY2000)	$980m
Relining of Whyalla Blast Furnace (FY2004)	$110m
Blast Furnace Magnetite Ore Conversrion	$395m
Total Whyalla Undepreciated Capital	$1,485m

Onesteel/Arrium has a policy of depreciating their manufacturing assets 3 to 30 years (p94 AR2015).

Arrium changed substantially when Molycop became part of the business. But if we look back at the five years before this (2006 to 2010 inclusive) property plant and equipment depreciation averaged $211m per year.

The Whyalla allocation of this I estimate as:

0.575 x $211m = $121m per year

Asset values were reaffirmed when Arrium/Onesteel moved to IFRS reporting at EOFY 2006. So nine years worth of depreciation sum to:

9 x $121m = $1,089m

So we can estimated the depreciated book value of Whyalla on the Arrium accounts as follows

Total Whyalla Undepreciated Capital (EOFY2015)	$1,485m
Depreciation Charges (over 9 years)l	$1,089m
Whyalla Book Value (EOFY2015)l	$396m

OK, I have used much supposition to get to this figure. Is there any cross check? As it happens Arrium did their own asset revaluation exercise for FY2015, and you need to go to the small print notes in AR2015 to find it.

"Long products supply chain $831.2m"

Now that figure includes all the non Whyalla factory sites as well as the capital equipment tied up in the steel disribution business. So I think my estimate that the capital intensive Whyalla makes up $400m (round figures) of the "Long products supply chain' is reasonable.

SNOOPY

[Snoopy]

I have used much supposition to get to this figure ($396m). Is there any cross check? As it happens Arrium did their own asset revaluation exercise for FY2015, and you need to go to the small print notes in AR2015 to find it.

"Long products supply chain $831.2m"

Now that figure includes all the non Whyalla factory sites as well as the capital equipment tied up in the steel disribution business. So I think my estimate that the capital intensive Whyalla makes up $400m (round figures) of the "Long products supply chain' is reasonable.

We have identified overall company debt as the big issue. We have also seen that the potential closure of Whyalla triggers site remediation provisions which amount to hidden off balance sheet debt. Now let's combine this off balance sheet debt with the declared debt position as at EOHY2016 and see what happens to the gearing.

Not doing this calculation before was my mistake. Being a 'glass half full' kind of mutt, I did not consider any remediation costs should Whyalla and Middleback Ridge be completely shut down. I should have checked out this 'worst case' scenario :-(

'Gearing' = (Net Debt) / (Net Debt + Equity)

If I use that definition with the data that I used in the previous post:

Interest bearing liabilities = $20.2m + $2,359.3m +$145.0m = $2524.5m
Cash is $303.6m
Total Equity = $2,328.6m
Total Assets = $6,196.9m

then I get the following:

'Gearing' = ($2,524.5-$303.6) / ( ($2,524.5-$303.6) + $2,328.6) = 48.8%

That is creeping towards that critical 50%, yet still just within banking covenants. But have negative earnings over the second quarter for FY2016 pushed things over the edge? Our next point for investigation!

Following on from the extensive exercise of checking the book value of Whyalla Plant and Equipment, it is time to look at a balance sheet and consider the situation where all of this Whyalla machinery has to be written off. IOW Whyalla is closed down as Roberts and his GSO co-conspirators had apparently planned:

'Gearing' = (Net Debt) / (Net Debt + Equity)

If I use that definition with the data that I used in the previous post:

Interest bearing liabilities = $20.2m + $2,359.3m +$145.0m = $2524.5m
Cash is $303.6m
Total Equity = $2,328.6m -$400.0m = $1,928.6m
Total Assets = $6,196.9m -$400.0m = $5,796.9m

then I get the following:

'Gearing' = ($2,524.5-$303.6) / ( ($2,524.5-$303.6) + $1,928.6) = 53.5%

53.5% = 'BUST'

Maximum allowed under the banking covenants was 50%, so no wonder Roberts and the board assumed their desperate negotiating position. It looks like sufficient information was in the public domain to forsee the voluntary administration after all :-(. If I had done this calculation before the administration I might have saved some shareholding capital and got out :-(. Unfortunately the 'virtual shutdown of Whyalla' was a long and difficult calculation as readers of this thread over the last month have seen.

The part of the annual report that I should have noted very carefully was on p79 of AR2015.

"GOING CONCERN"

"The financial statements of Arrium Limited have been prepared on a going concern basis which contemplates the realisation of assets and discharge of liabilities in the ordinary course of business."

If the business is not a going concern, then the accounts are not as presented. And that means the picture I needed to consder is not that painted in the annual accounts! Ironically it appears there is much goodwill towards Whyalla held by the banks and the State and Federal Governments. Whyalla may even be trading profitably right down if you believe some on the ground workers reports. Nevertheless the expectation that Whyalla was a dead duck by the board ended up being sufficient to tip the whole company (Molycop excepted) into voluntary administration. I honestly thought that the board was intending to save Whyalla. Reading this wrongly was a very costly mistake on my part :-(.

The lesson to learn: Don't always assume that a business in difficulty will be a going concern when analysing the accounts!

SNOOPY

[Snoopy]

By then, administration was exactly where the lenders wanted Arrium to be.

I think I will have to stop reading the other channel until real new announcements are made. A lot of ranting and calls to take out lawsuits against the directors. I can understand the shareholder anger. But I am not sure it is productive. Three points I do want to make though.

1/ Banks Objective: Primarily the banks just want their loan money repaid. There is talk on the other channel about banks taking a partial debt haircut and coming to some arrangement with shareholders. Be sure that if there is any haircut taken by the banks, then existing shareholders are wiped out. Banks have no duty of care to shareholders (unless they are the banks own shareholders). Shareholders in Arrium are at the bottom of the repayment queue.

2/ If there is a debt to equity conversion by banks or a government stumping up new equity (the only solution I can see that would keep existing shareholders alive), then the terms of that conversion will be very unfavourable to existing shareholders.

3/ AND -On the subject of service supply contracts-

'Take or pay' rail supply agreements would be standard, especially if the rail line in question is custom built to service a particular mine. It is absurd to castigate Arrium management for signing such contracts. No rail company would purchase purpose built wagons and build a rail line to service one customer without that contract being take or pay.

SNOOPY

[Snoopy]

Lenders mulling an IPO on the ASX for Molycop

http://www.manmonthly.com.au/news/ip...ness-considere

SNOOPY

[Joshuatree]

Im hearing the USA has just imposed a 522% import tariff on chinese steel imports of cold rolled steel. If only it happened here ehh!

[Snoopy]

Im hearing the USA has just imposed a 522% import tariff on chinese steel imports of cold rolled steel. If only it happened here ehh!

I would settle for fair trade in the first place. Did you know that Molycop links the price of their steel grinding balls to the price of steel? That way it keeps things affordable for customers who are themselves coping with low metal prices.

I think the Americas in general are Molycops strongest market But I woinder what tariff will be going on Chinese steel grinding balls sold to the USA?

Meanwhile Deutsche Bank is to sell Molycop (maybe through an IPO).

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SYDNEY, June 3 (Reuters) - Administrators to Arrium (ARI) will appoint Deutsche Bank to run a sale process for the troubled steelmaker's Moly-Cop grinding balls and wire rope business, a spokesman for the administrators said on Friday.

Moly-Cop, which makes steel balls to grind ore, among other items, operates mostly in the United States and Latin America.

The decision to sell Moly-Cop is part of planned recapitalisation and sale of Arrium's assets, which also include steel works and distribution businesses in Australia.

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SNOOPY

[Snoopy]

so theyre asking for a government bailout now so that whyalla doesnt do the big bounce. will the gov be happy to hold them up?

The answer Cammo, is yes! The following was issued on 9th June.

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KordaMentha Restructuring today welcomed the SA Government’s $50 million contribution to help secure the future of Arrium’s OneWhyalla business.
Administrator Mark Mentha said the decision will go a long way towards assisting the town’s steelworks and mining operations. “It’s a great response to what has been an unbelievably strong display of unity by all stakeholders in the Arrium businesses that include government, business, local people, suppliers and employees” he said.
Mr Mentha said he looks forward to working with South Australia to gain a further $100 million for future investment.
He said that this investment will provide a much needed boost to the Whyalla community and citizens. “This is the shot in the arm the community needs right now.”
Mr Mentha said investments of this size would make a big difference to the sale/recapitalisation process for the Arrium companies. This process is expected to begin next month.
“This will make Arrium a much more attractive and sustainable proposition for potential investors

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SNOOPY

[cammo]

Yes I saw that. Quite possibly the most interesting situation I've come across. How this plays out will be interesting

[cammo]

Although jumped into nkp just to see what happens there too

[cammo]

Federal Labor would provide struggling Whyalla steelmaker Arrium with a $100 million lifeline if elected, with the money to go towards projects aimed at securing the long-term sustainability of the plant and local workforce.

Election promises. But obviously they aren't going to let this one die !