IO steady rise, page-20

Here is the article I was previously referring to when iron ore was then under $40. Now close to $45 with oz dollar at .70c us. We must be close to break even now.

DYOR
GLTA


Arrium burning $100m of casha year, analysts say

• THE AUSTRALIAN
• DECEMBER 22, 2015 12:00AM
• Matt Chambers

Analysts have slashed their target share price for Arrium. Picture: Calum Robertson


Embattled steelmaker and miner Arrium is bleeding $100 million of cash a year from its South Australian iron ore mines, analysts say.



The company is in danger of breaching covenants on its $1.7 billion of debt and could have no equity value if it needs to close assets, after recent slides in iron ore prices to 20 per cent below its targeted break-even price.

Analysts have slashed their target share price for Arrium (the former OneSteel) in the wake of downgraded iron ore prices and raised questions about whether the company can survive the downturn if it is unable to sell its mining consumables business.

Credit Suisse yesterday cut its Arrium target price from 15c a share to just 5c after iron ore prices recently fell below $US40 a tonne, valuing the company’s equity at about $150m.

Deutsche Bank cut its target price from 9c to 5c last week.

Yesterday, Arrium shares fell 0.4c, or 7 per cent, to 5.5c, bringing losses in the past year to 74 per cent, and 96 per cent since the start of last year.

Since August, Arrium has been conducting a strategic review that includes trying to sell its $2bn mining consumables business to pay down debt. But scepticism is growing it will be able to get a price in the present depressed market that reflects the business’s earnings power.

In October, Arrium said it was targeting a 2015-16 iron ore break-even benchmark price of $U47 a tonne. At this price, and without cost cutting and restructuring elsewhere, Credit Suisse analyst Michael Slifirski said Arrium was burning $100m-$110m a year but was unable easily to close operations.

“The stressed balance sheet cannot wear the cash bleed from iron ore or from Whyalla steel making, but the exit cost is even more punitive,” Mr Slifirski said.

“Under an asset closure scenario, Arrium appears to have negative equity, despite its positive enterprise value.”

Credit Suisse said the only apparent course of action was for an urgent renegotiation of terms with contractors to cut costs.

“If the contractors do not concede cost savings, then Arrium’s survival could be threatened,” Mr Slifirski said.

In its 2014-15 annual report, released in September, Arrium said it would be in compliance with its debt covenants at $US50 iron ore and an exchange rate of US75c this financial year.

Yesterday, the benchmark iron ore price was trading at $US40 a tonne, with the damage offset slightly by an exchange rate at US72c.

Deutsche Bank analyst Emily Smith said at $US42 iron ore, Arrium would be at the upper end of debt covenants, which were for an earnings before interest, tax, depreciation and amortisation ratio to interest ratio of between 3 and 3.5.

She said without the sale of the mining consumables business the covenants risked being breached at this price.

Mr Slifirski said if the sale of the consumables business did not eliminate the company’s debt, it was not a workable deal.