i shot the banana but i didn't shoot no monkey, page-2

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When it was complete, I was shocked at the BlueScope presentation. Technical problems delayed the briefing and prevented full questioning of its chief executive Paul O’Malley but the facts that came out were grim and much worse than I outlined in my initial comment (Tighter times for BlueScope, December 10).

As I pointed out earlier, BlueScope had debt of $1.7 billion at June 30 2008 – a bit high but manageable all the same. But in the following four months BlueScope's debt exploded to $2.8 billion and about half that debt was short term.

Of the $1.1 billion debt blow out, $494 million was cash used during the four months and $562 million appears to be the savage effect of the fall in the Australian dollar on BlueScope’s US dollar borrowings.

But it gets worse. The sale of New Zealand iron sands business for some $200 million is in doubt. The buyers are clearly unhappy about the fall in the demand for iron ore and the looming price slump.

What's even more serious, is that during the first four months Australian demand for BlueScope’s Australian flat steel products were at peak levels before demand fell out of bed, declining between 15 and 20 per cent. The major contributor was the fact that mining and industrial companies had slashed their investment programs. Because steel prices are coming down dealers and customers ran down their stocks causing even more grief.

BlueScope is making no promises about its interim dividend, it's slashing its capital expenditures and tightening the whole operation. This combination of factors has required BlueScope to discount the share issue price from the previous trading level of $4 to $3.10 to get institutional support to raise the $300 million. That still leaves debt at $2.5 billion. The company has to complete the re-financing of a bridging facility and believes that it will be able to lengthen its debt profile.

But as I explained earlier if you value the shares at $3.10 then the market value of BlueScope shareholders funds before the $300 million issue is only $2.4 billion.

After the placement, the market value of BlueScope's shareholder funds rises to $2.7 billion which is a little above the debt level of $2.5 billion. If retail shareholders subscribe the position will be better.

BlueScope is a wonderful company with strong strategic positions and will fight its way out of the mess created by the insufficient attention paid to debt levels in today’s environment. BlueScope say they acted quickly. They did not act nearly quickly enough.

Robert Gottliebsen