■ We have downgraded forward earnings forecasts on the back of...

■ We have downgraded forward earnings forecasts on the back of revised house commodity prices. FY11 -8% to 36cps and FY12 -8% to 37cps. The magnitude of the iron ore earnings downgrade has been masked by our upgrade to manufacturing and distribution earnings and an incrementally higher contribution assumed for domestic scrap operations.
■ OneSteel’s earnings remain dominated by iron ore. The company has historically provided strong earnings leverage to rising raw material costs, but also substantially weaker earnings in a declining raw materials cost environment. While this thesis generally holds, this dynamic has been broken by falling steel prices due to over-production in a weak demand market, but rising raw materials prices due to the unprecedented recovery in global steel make. This situation is now unwinding, with potential for higher steel prices while raw material costs decline, restoring margin to manufacturing and distribution operations. Decimated domestic scrap margins are progressively being restored.
■ Investment Case: We continue to forecast recovery in non-iron ore segment margins and volumes, supporting several years of earnings growth.
■ Catalysts: FY10 earnings release (August 17) will reveal margin recovery progress and management FY11 outlook projections. This is key to restoration of market confidence in the earnings capability of the company’s operations. Greater clarity around application of the MRRT to manufacturing is critical to demonstrate that steel making will not be taxed out of business.
■ Valuation: No change to target price of $4.00/share but MRRT clarity required for this to be achieved.