Arrium: Burning the cash

Arrium: Burning the cash

During Sky Business’ Your Money Your Call – on which the Montgomery team regularly appear – there is a segment entitled ‘Buy, Hold, Sell’. One of my preferred ‘Sells’ over recent years has been Arrium Ltd (ASX: ARI), formerly known as OneSteel.

The rationale is based on the company being highly financially and operationally leveraged – a corporate no-no in the wake of falling commodity prices.

So it was no great surprise when earlier this week, on the back of five-year low iron-ore prices, the company announced a deeply discounted $756 million equity raising. The steel, mining and mining consumables group said the raising, underwritten by UBS at $0.48 per share, would be used to pay down at least $732 million of debt. This compares with the company’s net debt at their 30 June 2014 balance date of $1.708 billion and its EBIT, from continuing operations, in FY14 of $530 million.

Arrium only discloses its ‘all-in’ iron-ore mining cash cost of US$73/tonne. However, readers must be aware that number excludes any quality discount (expected FY15 production of 13 million tonnes with an average grade of around 60 per cent iron) as well as capital expenditure, exploration and corporate cost requirements. The outlook for Arrium’s loss-making steel business is also challenged.

Arrium is burning cash, and management in fact stated that if current conditions continue; with the lower earnings cycle, cyclical working capital movements, capital expenditure and other payments, net debt at 31 December 2014 could be $100 million to $300 million greater than the 30 June 2014 pro-forma net debt figure of $976 million.

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Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.