Selling the family silver: Arrium and BlueScope mull options

This week Arrium announced the latest in a series of reviews and write-downs as it struggles to cope with low iron ore and steel prices, US$1.8bn in debt and a market value of only $450m.

Following a $1.3bn write-down in January, Arrium said it would book another charge of $320m, relating primarily to the impact of lower iron ore prices on its cash flows.

The company shed 500 jobs in January when it closed its Southern Iron mining operations in South Australia.

It expects its latest initiatives to reduce its total cash cost for its remaining Middleback Ranges hematite business to US$50/t, versus the current iron ore price of around US$62/t. However, analysts expect iron ore prices to average US$50 to US$54/t in 2015/16.

Iron ore production will fall from the 13mtpa achieved last year to only 8mtpa in financial 2016.

Arrium’s review said that debt reduction was a priority.

An obvious target for disposal is its mining consumables business, which is earning around $200m a year and, in the words of Arrium chief executive Andrew Roberts, “performing strongly.”

Mining consumables includes the Moly-Cop business, which produces grinding balls and rods, wire ropes and wheels for rail wagons.

Financial firm Credit Suisse has valued the mining consumables business at $2bn.

The firm’s analyst Michael Slifirski told The Australian newspaper that: “Mining consumables is now entering a period of stronger free cashflow generation, while growth capex abates and volume increases at a sustained margin.

“It is difficult to identify another asset in the portfolio that could be sold for which there is a buyer or from which reasonable cash could be realised.

“If sold, net debt could be extinguished, leaving a high-cost, raw material integrated domestic steel business with positive leverage to a rising iron ore price in a market that expects a lower iron ore price.”

Andrew Roberts sounded dubious about a sale of the company’s Whyalla steel business.

“I won’t rule out anything over time, but to close businesses or assets takes a considerable amount of cash.”

Shutting a steel works is a task that activist financial firm Sandon Capital has asked BlueScope Steel to consider, with the company’s Port Kembla steelworks in the firing line.

Sandon, which advises funds managers and investors on how to shake-up companies for their benefit, insisted to the Australian Financial Review that its aim is merely to start a discussion about Bluescope’s options and how they might lift its value.

BlueScope shed 1000 jobs and spent $500m in 2011 closing blast furnace number six at Port Kembla in a bid to cut losses on exporting steel.

Sandon says BlueScope is still exporting over 500,000 tonnes of loss making commodity steel products per year, in the process losing $200/t and $100m a year.

The situation will get worse in 2017 when domestic car makers close and another 80,000t of the company’s steel will have to head overseas.

Sandon says in the AFR that Bluescope could mothball the number five blast furnace “and import substrates for the manufacture of its higher-margin branded metal-coated and painted products.”

Credit Suisse’s Slifirski said that restructuring Port Kembla could drive a “significant earnings uplift.”

He was quoted as saying: “Cessation of steel making would come at a significant community cost but could materially improve earnings as a smaller-tonnage hot rolled coil importer and converter.”