Arrium (ARI), Australia’s 4th biggest iron ore exporter and steelmaker is battening down by looking to raise $754 million via a placement and a highly discounted one for one cash issue.
The company will use the money to cut debt (after chopping $407 million from its total debt in the year to June) to make sure it can survive the coming shake out in the sector.
Arrium’s move is an enormous message to other small producers such as BC Iron (BCI) (merging with Iron Ore Holdings), Atlas (AGO) and a host of wannabees that the falling world price and rising over supply is going to hit the sector very, very hard.
Giants like BHP and Rio Tinto (RIO) will survive (and Vale in Brazil), while many investors reckon Fortescue (FMG) will be OK (but quite a few bears think it will struggle), but small miners and exporters will need to not only cut operating costs to survive, but also the size and cost of their debts.
Arrium’s renounceable issue, which will raise $656 million, has been priced at 48c, a steep 26% discount to its last traded price of 65 cents last Friday.
That will see the share price slide to around 48 cents or less once the placement is completed.
It has been coupled with a $98 million placement at the same price.
ARI YTD – Arrium to raise capital as iron ore plunges
“This positions the company for current markets,” the chairman Peter Smedley said yesterday. “Debt reduction is a key priority." (He is due to retire at the AGM next month).
Mr Smedley said that with iron ore prices at five year lows, “there is increased uncertainty over the extent and timing of recovery".
Arrium’s iron ore business has been the company’s major profit centre in the last three years, but with production now hitting the planned 12 to 13 million tonnes of shipments, revenues and earnings will fall sharply this financial year because of the low world price.
Cashflow will also come under pressure. The company’s steelmaking and processing businesses chew up cash even when they are operating strongly, unlike now when they are battling sluggish markets and demand.
He said the capital raising will give the company a strong balance sheet to leverage any future recovery in iron ore prices and also steel product demand stemming from any rise in infrastructure investment, he said.
The iron ore arm reported an 86% leap in earnings before interest, tax, depreciation and amortisation to $686 million, in the year to June.
That won’t be repeated this year.
The figures for 2013-14 for the iron ore business help explain why.
Arrium said it produced 12.5 million tonnes of iron ore at an average loaded cash cost of $A48 a tonne.
The realised average price for 2013-14 was $US111 dry metric tonne for its type of ore (91% the average global price for the year). The price was that high because it was around $US120 – $US130 a tonne for much of the December half year. But the price then fell for the June half year and is currently just under $US80 a tonne.
That has significantly narrowed the company’s gross profit margins in the iron or business this year, from around $US70 a tonne to around $US40 a tonne.
That will crimp cash flow which totalled $A679 million in 2013-14.
Arrium’s underlying after tax profit jumped 83% to $A296 million, for the year to June because of that $US70 a tonne and more gross average profit per tonne from its iron ore exports.
After tax profit and dividend will come under pressure as well.
If this raising goes well, other smaller companies are likely to try and follow suit.
