Hi Folks
In case any of your missed it - this article was in Tuesday's AFR - covers Arrium and a few other stocks.
http://www.copyright link/personal-...ning-bargains-or-best-avoided-20150324-1m6a11
In case you can't access it the article, here is the relevant bit about Arrium:
Are these eight stocks including Arrium, Coca-Cola Amatil and Newcrest Mining bargains or best avoided?
1. ARRIUM
From the outside looking in, mining and minerals company Arrium looks to be facing some insurmountable challenges. Certainly the market seems to see it that way – the stock has been sold off so heavily its market capitalisation is now less than the amount raised by the company in a rights issue last September.
As recently as 12 months ago the stock was trading at $1.20 but now it appears to be range-bound, languishing just above 20¢ on the back of write-downs and the $1.5 billion first-half loss it announced in February.
The company, named OneSteel when it was spun out of BHP in 2000 and then renamed Arrium in 2012, is a far cry from when it was trading in the heady days of 2005-07. Back then, investors couldn't buy steel producers quick enough. But there are hints of a turnaround that could bring Arrium to life, should a few things go its way, making it potentially good buying at the current share price.
At the centre of this thesis is the value of the company's assets. Arrium has three separate businesses: an iron ore mining business, a steel business and a mining consumables business. The iron ore business is possibly the most broken: the company announced it was closing its loss-making mines in South Australia and investors should ascribe no value to this business.
But the other two businesses have value: the mining consumables business is the strongest and generates about $150 million worth of earnings before interest and tax (EBIT). Management thinks it can get this figure up to about $200 million.
The steel division has been hampered by the elevated Australian dollar and a global oversupply of steel. Chief executive Andrew Roberts seized on this last point when he admonished the government for slow progress on its anti-dumping legislation. Last year the business delivered underlying EBIT of just $54 million compared with a longer-term average of closer to $250 million EBIT. Favourable government policy and a lower dollar should help.
Accounting for its debt load, the market currently values Arrium at about $1.2 billion. "That is a very conservative valuation, especially if you think Arrium's steel business can normalise its earnings," says Simon Mawhinney, a portfolio manager with turnaround specialist Allan Gray.
The funds manager is betting on an Arrium turnaround and owns 13.4 per cent of the company. "You don't need the future to be bright to justify investing in this company," Mawhinney says.
Verdict: Bargain Basement
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Basically the article reiterates the points I was making in my post of 23rd March - this company is far more than just an IRON ORE miner (although that is indeed the company's high profile stuff up that will go down in the history books!). Article is useful in that puts some objective arms-length EBIT numbers on certain divisions - gives you a pretty good idea of the potential and opportunity Allan Gray and others see in this stock - if steel division numbers can normalise earnings back towards its longer term average with the lower AUD (prior to recent period of high exchange rate), and they can steadily increase the mining consumables EBIT as predicted, the iron ore business will become little more than an annoying pimple on their backside over time...
