The value of assets like Mining Consumables for me is what could they sell it for based on free cash flow in a worst case senario.
I was just wondering what if ARI sold the Mining Consumables business, what would they get for it?
FY15 EBITDA around $200m
Stay in Business Capex (SIB) is 50% of DA = $50m
Cash flow after SIB capex = $175m
Say a 10x multiple on cashflow = $1,750m
Anyone who can borrow less than 10% makes a cash profit on the difference. Excluding a control and future earnings premium. So a worst case scenario for the price is $1,750m.
As Arrium is borrowing at 5.3% it has to be sold at a 18x multiple (i.e. 100/5.3%) to have a flat impact on cashflow.
BUT ARI would debt free!
Say Steel isn't worth anything, although this years $227m in steel assets sales suggests otherwise. And also that Steel generates no free cash going forward. Not today's situation or the huge jump in EBITDA associated with a lower currency in the 80c range. But let's just say...
ARI should be then be valued as a 'debt free' Iron Ore miner at 13Mt which a all in cost base mid to high $70's (ie including stripping 8/t).
*** Cash flow generation ***
Assume Iron Ore = $US94 for the next 4 years audusd 0.93
That is the only way I get the current share price...
Of course in 4 years time ARI will still be producing Iron Ore at 6-7 Mt (all in cost $65/t ish for 58% grade) if you assume Peculiar Knob only lasts 5 years (very unlikely).
And I haven't even included a value for the port.
I don't understand the share price. It could be double and be still undervalued even with am assumption of today spot iron ore and currency for the next 4 years.
ARI Price at posting:
87.5¢ Sentiment: Buy Disclosure: Held
