Arrium Limited (ARI) has joined the growing list of write downs in the Australian iron ore industry, revealing cuts totalling a net $1.3 billion in a statement to the ASX on Friday morning and cuts to spending for 2015 and beyond.
It won’t be the last and investor attention with now focus on Fortescue Metals Group (FMG), which is seen as the most vulnerable of the major iron ore miners to asset impairment decisions.
Arrium said in its statement to the ASX that it will close one of its two iron ore mining areas in South Australia and cut its capital expenditure this year by 30%.
Arrium confirmed it would shut the Southern Iron operations it bought from WPG Resources for $320 million in 2011.
It also said it would take asset write downs of $1.33 billion, most of which will apply to its iron ore business. Full details will be released with next month’s results.
A total of 600 jobs will go, both full time employees from Arrium and the rest from contractors and other suppliers.
Arrium joins the smaller Atlas Mining (AGO) which revealed cuts of $900 million in early December and the sacking of 120% of its work force. Earlier this week, Citic, the Chinese resources company, revealed impairment charges of around $US1.8 billion (over $A2 billion) on its iron ore project in Western Australia where it is in the courts with Clive Palmer.
ARI 1Y – Iron ore woes weigh on Arrium
The Southern Iron operation was pivotal in the company’s recent strategy to boost iron ore exports to help offset its stolid steel operations based at Whyalla in South Australia. The company will now concentrate on the northern mining areas near Whyalla.
"The re-design is aimed at maximising cash generation by ‘mothballing’ the company’s higher cost Southern Iron mining operation and optimising its lower cost Middleback Ranges operation to deliver approximately 9Mtpa of iron ore for sale,” Arrium told the market on Friday.
"Arrium Mining has been in a growth phase in recent years with export iron ore sales currently tracking at its targeted rate of ~13Mtpa. It has a history of being a significant contributor to the company’s earnings and cash generation.
But the company says the recent sharp fall in iron ore prices had left it “absorbing cash”, and needing to “mothball” the higher cost Southern Iron assets.
The company’s Middleback Ranges iron ore mines will continue to operate, but Arrium’s annual iron ore production fall from about 12.5 million tonnes to about 9 million tonnes per annum. That will cut revenue by around half a billion dollars a year. based on current prices of around $US66 a tonne.
In fact the global spot price fell to a new five year low overnight Thursday of $US66.79 a tonne.
“The redesign of the mining business announced today will provide a step-change in the mining business’ cash costs and capital requirements,” the company said in the statement to the ASX
Arrium expects its cost of production for product delivered into China to fall by 20% to $57a tonne.
The company said expects its underlying earnings before interest, depreciation and amortisation to be between $180 million and $190 million.
"Underlying Net Profit After Tax for the year ending 30 June 2015 is expected to be weighted to the second half, and less than the prior financial year. Second half earnings are expected to benefit from a lift in Steel and Mining Consumables earnings as well from cost reductions,” the company said.
Arrium, said it was discussing the costs of the changes with its contractors, including logistics group QUBE Holdings (QUB).
"The company is currently in discussions with its Southern Iron contractor base to mitigate the extent of break fees and costs related to the ‘mothballing’ of its Southern Iron operation. Total costs are yet to be finalised and are expected to be spread over ~2.5 years being the remaining term of the Southern Iron agreements. A payback of less than one year is targeted. It is expected restructuring cash costs of ~A$70 million will be incurred in FY15.”
In its own statement to the ASX Friday morning, QUBE was adamant the decisions by Arrium would not “materially impact” it.
"Qube Holdings Limited notes the announcement by Arrium Limited that it is re-designing its South Australian based mining operation which will involve ‘mothballing’ its Southern Iron mining operation. Qube understands that this process will take place in 3-4 months’ time. This development will not materially impact Qube’s FY 15 earnings,” Qube told the ASX in its statement.
"Qube’s contract with Arrium provides for demobilisation and redundancy costs to be paid by Arrium on early termination of the contract. In addition, there are compensation arrangements in relation to assets deployed by Qube for the contract. As such, this development will not have a material adverse impact on Qube’s financial position.
"Whilst this development is disappointing, Qube’s diversification strategy and its contractual arrangements will continue to mitigate the impact of such events,” Qube said.
Arrium shares were up 3.1% in early trading to 23.2 cents on Friday morning following the annoucement but fell away in the afternoon session to end down 8.8% at just over 20 cents. Qube shares eased 2.4% to $2.39 as investors await the full details the clear financial extent of Arrium’s decisions with the interim results announcement next month.
