Struggling steelmaker, Arrium (ARI) has sent a tremor through business and politics in South Australia and elsewhere with a warning yesterday it might have to close its huge plant at Whyalla because of rising costs.
The news saw the shares plunge almost 24% to just 4.8 cents.
The company, which has cut hundreds of jobs at the plant in the past two years, slashed costs and is trying to sell-off other businesses to try and generate enough funds to keep it going, revealed in its interim profit report that it had started work on studies about shutting the Whyalla plant and putting it on a ‘care and maintenance’ basis.
The studies will be finished mid-year in time for Arrium’s June 30 end of financial year and board discussions ahead of the release of its financial results in August.
Arrium cut 300 jobs in the first half and another 400 are to go in the June half. The group disclosed a $60 million shortfall at the steelworks from a slump in steel prices late in 2015. Whyalla has 1,100 workers and an estimated contractor workforce of another 450.
Additionally up to 1,000 jobs in total of both staff and contract labour are on the line if the company shuts its struggling South Australian export iron ore operation, which has already been restructured and written down in value.
It continues to lose heavily at current world iron ore prices of less than $US50 a tonne.
ARI 1Y – Can Arrium stay afloat?
The studies over the future of Whyalla are focused on closing the primary steelmaking part of the operation and continuing with processing or a complete closure. The electric arc furnace based operations in Sydney and Melbourne are still profitable, according to the company.
It says it is talking to the South Australian government about what can be done to close than $60 million hole at Whyalla.
News of the threat of the closure of Whyalla came as the group failed to find a buyer for its Molycop mining consumables business for which it paid around $900 million in 2010.
Arrium blamed the failed sale on the downturn in gold, copper and iron ore price, along with difficulties prospective bidders had in funding their offers in the very volatile markets since the start of 2016 Molycorp is still on the market, but no one is holding their breath for a quick sale at a price Arrium can accept.
The closure threat capped a miserable day for Arrium (another in a growing list of such days). It actually reported stronger earnings from steel and mining consumables (Molycorp) but these could not offset the woes its iron ore mining division.
That left the company with a December-half net loss of $235.8 million, an improvement from the $1.5 billion loss a year earlier when the company was forced to make massive write-downs of its iron ore business.
Revenue fell to $2.8 billion from $3.2 billion.
The underlying loss of $24.1 million was little changed from the $22.1 million underlying loss a year earlier, but worse than market forecasts.
For the half, the underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were $115 million, which fell to $40 million following more restructuring costs.
The mining consumables business generated an EBITDA of $115 million, up 15%, with steel posting an EBITDA of $44 million, up more than twofold. The mining unit posted an EBITDA loss of $20 million.
The company says that while its electric arc furnace units in Melbourne and Sydney remain profitable, the big drag on steel division earnings is its Whyalla steelworks in South Australia.
The downturn in the steel price in the last quarter of 2015 has led to a $60 million shortfall in the cash break ‘even at Whyalla’, Arrium’s chief executive Andrew Roberts said.
The Whyalla plant can produce up to 1.3 million tonnes a year, while its Melbourne plant can produce around 710,000 tonnes and the Sydney plant 660,000 tonnes.
