Updated... Arrium's break even price for Iron Ore production is...

Updated...

Arrium's break even price for Iron Ore production is effectively $US69 a tonne.

SUMMARY
Arrium (ARI) break even price for Iron Ore production is effectively $US69 a tonne (audusd = 0.94).

Looking at Arrium's Steel and Mining Consumables businesses in terms of cash generation and then deducting this from iron ore production's cost per tonne.

Iron Ore Price averages...

	Column 1	Column 2	Column 3
0	Jul 13 to Dec 13	$USD 133	$AUD 145
1	Calender 2014	$USD 113	$AUD 123
2	Past 4 weeks	$USD 95	$AUD 102
3	Spot @13th June	$USD 91	$AUD 97

ANALYSIS

FY15 EBITDA (operating cash flow)

Mining Consumables = $214m
Use as a base 2h13 EBITDA $85m + $15 cost saving * 1.07%
(i.e. FY15 capacity increase 7% i.e. 90 / 1290)

Steel = $60m

Use FY14 EBITDA = $50m as a base and add $10m for carbon tax saving. Assume the $40m in cost saving offset by slightly higher currency and lower international scrap prices.

Recycling = $10m

Total EBITDA = $284

Capex Stay-in-business (SIB)

Mining Consumables = $35m (upper end of guidance $30-$35m)

Steel = $50m (50% of DA)

Recycling = $5m (50% of DA)

Total SIB Capex $90m

From Steel and Mining Consumables after capex spend...
Cash generated ($274m - $90m) = $194m

FY15 Interest = ($89m), assumes Stat Net Debt end FY14 = $1,801m

So after interest, $105m of cash generated from Steel and Mining Consumables

So we divide $105m / 13 Mt (Iron Ore production rate) = $8 per tonne

Deduct $8/t from Arrium's Cost per Tonne.

FY15 estimate of cost per tonne = $AUD 70 - $8 = $62 per tonne

Stripping guided at $8 per tonne

Cost per Tonne after Stripping ($62 + $8) = $AUD 70 or $US 66 (audusd=0.94)

ADD grade discount from 62% to 59% or (5%) off the benchmark 62% Fe (at the low end as grade in closer to 60%)

Cost per Tonne $US 66 * 1.05 (grade discount) = $US 69 (includes grade discount)

How much cash will ARI generate at an Iron Ore price = $US 91?

Cash profit per tonne = $USD 91 - $USD 69 = $USD 22 / t *13 Mt = $USD 286 or $AUD 304

Cash Earning Per Share, ($AUD 304m / 1,366 issued shares) = 0.22

Need to deduct $AUD 40m or 0.03 a share of tax payments for Mining Consumables overseas profits

Cash Earning Per Share generated per share (0.22 - 0.03) = 0.19

CONCLUSION

If Iron Ore averages $USD 91 in FY15, Arrium generates a cash profit of 0.19 per share!

ARI's share price sits around 80 cents, or only 4X cash profit when modelling a Iron Ore of $USD 91 and a currency of 0.94 as being the AVERAGE for all of FY15.

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.