FY15 Capex budget SIB only!

In MOST important number in the upcoming FY14 results presentation is the FY15 capex budget.

The difference between FY15 capex and accounting DA over the next 3-4 years for Arrium will determine its dividends and more importantly debt reduction.

Debt reduction will reduce interest of course but more importantly allow a re-rating to a normalised P/E ratio e.g. 13x-15x accounting EPS.

If Arrium was rated as such today it would trade $1.30 to $1.50
Reuters has FY15 EPS at 10.4

The board really has no choice but to only approve Stay In Business (SIB) capex in the current Iron ore market.

Iron Ore = $8 / t = 13 * 8 = $104m
(from the FY13 presentation)
Exploration = $10m
Mining Consumables = $35m SIB + $20m Canada expansion completion = $55m
Steel & Recycling 50% of DA = $55m  

Total = $224m

FY15 Accounting DA = $362m

Difference is $138m or 10.1 cents a share.

If the company was run like this for 4 years which I think it now should be.

Dividends could be paid out at 100% of accounting EPS.

Debt could be reduced by $552m (i.e. 4 *$138) or about 30%.

A really good outcome for shareholders over the next 4 years.

* Total dividend payout = 40 cents (using FY15 eps of 10 for 4 years)
   Or a 50% return on the share price over 4 years

* Debt reduction of 30% to $1,298m from $1,850m (end FY14 estimate).

I get FY15 EPS = 10.4 by putting in the following to a model...

Iron ore average for FY15 of US$99
Currency average for FY15 of 0.90
Using a 5% discount of 'realised price' to grade.
i.e. 90% of the 62% benchmark price not 95% that was the case in 1H14.

The writer implies no investment recommendation. This report contains material speculative in nature. Investors should seek professional investment advice. The writer owns shares in Arrium.