ARI - Where To From Here

Bris Vegas – apologies for being bit harsh/gruff in my earlier posting (caught me at a bad moment!). Obviously we should be able to have differing opinions – indeed it is what makes these forums interesting & beneficial for all parties (i.e. different opinions challenging our own beliefs/opinions).

In short – I agree with you & VBeebles on number of fronts:

1) Company ABSOLUTELY has been poorly managed – have been some very poor decisions such as the aggressive debt-funded Iron Ore expansion, and in hind sight turning down Posco’s takeover offer of some time ago.

2) Company has excessive debt – absolutely for current business conditions. Hence why company has been marked down to such horrendous levels – it is deemed a higher risk play and equity value heavily discounted as a result. Thank god they raised equity when they did!

However, where I disagree with you gents is as follows:

3) It is an "intrinsically unprofitable business” – Any appraisal really has to look at the three core business units, each with very different drivers and performance.

(a) Iron Ore - Can put this arm down to their “Charitable” business arm. Will probably end up being run at around breakeven levels for next 2-3 years. Knowing what we all know now, would have been better buying it off the majors – but we are where we are, so best to do what they’re doing (close one mine, run the other keeping as tight a rein on costs as possible).

(b) Steel - I presume this is the one you were referring to in your comment. I disagree with a blanket assessment as unprofitable – rather it is a capital intensive and cyclical business, which means it is not everyone’s cup of tea for a stable investment (i.e. its prospects, the share price & divvies will swing with market cycles). This business has just had to survive the most horrendous several years of “dutch disease” (mining boom savaged this business two fold – high input costs (very high iron-ore price) and very elevated AUD for a prolonged multi-year period (smashing end sales prices and volumes due to flood of cheap imports). Both these very damaging factors have now been removed, and while steel prices remain somewhat subdued, domestic construction activity is strong & results from this business unit for the current half & going forwards should show a very substantial improvement and profitability.

(c) Molycorp – This is the jewel in the crown, and indeed the reason I believe you see Allan Gray on the register. It is a very profitable global business, positioned number one in most of its target markets, spitting out a strong USD revenue stream (perfect hedge/source to reduce USD debt) & profitability. Once USD debt levels reduced to more comfortable levels, Arrium will benefit significantly from strong translation effect (lower AUD ) from this business. This business is very valuable and some analysts have suggested selling a 49% stake as way to accelerate debt reduction if necessary – but hopefully they can avoid this as this business really is the future of Arrium. It’s grinding media are mining-activity- based, not purely commodity-price based, and with huge ramp up in number of mines & mining cap-ex of recent years, should remain a strong performer for many years to come.

4) "The business is facing deteriorating market conditions" – Again, as above, splitting into its three units, I would only agree with you on the Iron Ore front. The other two business units are very much heading the other way in my opinion!

5) Counter-Cyclic funds / Allan Gray – I agree they operate in more risky space than traditional fund managers, but the returns are spectacular when they get their calls right. For Allan Gray to take & continue adding to such a large position in this one, I think you will find they are quietly very confident the overall basket of businesses are undervalued, and should enjoy a significant re-rating over time. They are patient capital, and I agree with their assessment on Arrium, hence my long-interest in this stock.

Finally I am not here to pump the stock. I enjoy these forums as I feel one can workshop and share insights, which is always preferable to trading/investing in a vacuum. I believe Arrium has been quite the playground for algorithmic trading programs this past 6 months, and while unpredictable, this can throw up some fantastic opportunities...