The near 40% rebound in the global iron ore price since early April (to just over $US65 a tonne from that early April low of around $US46 a tonne), hasn’t helped one of Australia’s major middle ranking iron ore exporters – the steel maker and miner, Arrium (ARI).
Despite that rebound, the company yesterday revealed a massive writedown in the value of its assets and possible asset sales as a result of its continuing financial woes.
Arrium shares fell 5% to 15.2 cents after the news was released early in the day. It was the latest in a series of gloomy news, detailing writedowns, cuts in iron ore production and now a strategic review in 2015.
Arrium said its debt position and weak iron ore prices have forced it to launch a strategic review of its business.
"The review includes an assessment of options for achieving an appropriate structure and level of debt. This will include the potential divestment of significant assets or businesses,” Arrium said.
"In January 2015, the company announced it was re-designing its Mining business for the low iron ore price environment prevailing at that time, and that its targeted cost and capital expenditure reductions were expected to return it to a cash generative position in FY16."
"The subsequent deterioration in actual and forecast iron ore prices led to the company announcing in April that additional work was underway to identify volume/grade/cost options to further optimise its Middleback Ranges (MBR) operation.
"This work has focused on lowering the FY16 cash breakeven iron ore price for the MBR hematite export business, as well as providing the optimal cash outcome for the company over the medium term,” Arrium said.
As a result, Arrium said it will slash capital expenditures such as exploration and stripping at its iron ore operations in South Australia to bring the cash break-even cost of its iron ore export business down to $US50 a tonne in 2015-16.
The company said yesterday it expects to book a further impairment charge of $320 million primarily related to the impact of weaker iron ore prices on its cash flows.
ARI 5Y – Iron ore rebound provides no relief for Arrium
Looking to the results for 2014-15, Arrium said, "Underlying Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) for the year ending 30 June 2015 is expected to be between $335 million and $350 million. This includes stronger underlying earnings in the second half from both Mining Consumables and Steel, as well as the impact of lower iron ore prices in Mining."
That EBITDA figure will be close to a third of the record $864 million earned in 2013-14 thanks to very high iron ore prices – a stark illustration of how badly the downturn in iron ore prices has hit Arrium’s finances.
"In February, Arrium stated that it expected Group underlying earnings for the second half of FY15 to be greater than the first halfxi assuming prevailing iron ore prices and exchange rates continued through the balance of this financial year. Notwithstanding recent modest improvements in iron ore prices, the lower Group earnings expectation for the second half simply reflects the substantial deterioration in average iron ore prices since the February announcement.
"In Mining Consumables, the business has continued to deliver strong volume growth across North and South America and maintain stable margins. In Steel, lower scrap prices and cost reductions have contributed to a significant improvement in underlying earnings for the second half,” Arrium said yesterday.
Turning to the strategic review, Arrium said in yesterday’s statement, "Arrium is undertaking a strategic review of its business in a low iron ore price environment following a detailed assessment of its balance sheet and portfolio. Debt reduction continues to be a key priority for the company however the substantial deterioration in iron ore prices has had an adverse impact on the company’s cash flows and level of debt.
"The review includes an assessment of options for achieving an appropriate structure and level of debt. This will include the potential divestment of significant assets or businesses,” the company said.
In February Arrium revealed a massive $1.5 billion first-half loss, after writing down asset values due to the plunging iron ore price.
The writedowns included $1.34 billion announced in January, plus $70 million of lost tax assets after the mining tax was repealed and $66 million in additional tax, restructuring and other adjustments.
Excluding these one-off writedowns, Arrium still posted an underlying loss of $22 million, down from a profit of $201 million in the same six-month period a year earlier.
