Arrium takes $474m hit to steel mills
The company, formerly known as OneSteel, said on Wednesday it would book a heavy $474 million write-off against its manufacturing division, principally its Australian Tube Mills unit, since any sale of the unit will not achieve the book value of the business.
The move has slashed the value of the remaining goodwill of the group's steel making in South Australia and western Sydney, along with sundry processing units, to only about $120 million.
The write-off reflects its view that the Australian dollar will remain overvalued and that the domestic construction industry will remain under pressure, it said.
In total, $431 million has been written off against the goodwill of its manufacturing arm and the other $43 million is against its distribution arm.
The manufacturing unit had goodwill of $554.8 million before the write-off.
Arrium has said previously that it wants to sell further non-core assets, which analysts had speculated would include its Australian Tube Mills unit, which uses externally sourced steel.
The goodwill of Australian Tube Mills has been written down to zero "as it does not expect to realise this value on a sale of the business", Arrium said in a statement to the sharemarket.
"The steel division has earned no money for the past few years," Morningstar analyst Matthew Hodge said. The write-off "could have been larger", with the prospect of further write-downs, he said. "I'm not expecting any steel turnaround any time soon."
Arrium said the impairments "are non-cash in nature and have no impact on operations". The write-off is equal to 37 per cent of the company's sharemarket worth.
The Australian Tube Mills unit makes pipe and tube at plants at Acacia Ridge in Brisbane, Newcastle, and Somerton in Melbourne, along with precision tube at Sunshine in Melbourne, and Kwinana in Western Australia.
The state of negotiations for the sale of these units is not known.
Higher sales of iron ore in the second half are expected to give earnings a lift after a weaker first half, analysts said.
The write-off will slash the group's combined goodwill on the balance sheet of $2.82 billion to about $2.34 billion.
Arrium declined to give fiscal 2013 profit guidance at its recent annual meeting in November, citing uncertainty around iron ore prices, the exchange rate and global and Australian economic conditions.
The company expects profit will be skewed to the second half due to higher iron ore volumes. The first half is affected by weaker iron ore and steel prices.
Arrium expects iron ore sales volumes of 8-9 million tonnes in fiscal 2013, up from 8 million tonnes. It forecasts exports at a long-term rate of 12 million tonnes a year from July-August 2013.
Frequently Asked Questions about this Article…
Arrium announced a $474 million impairment hit mainly against its manufacturing division, principally the Australian Tube Mills unit. That total comprises $431 million written off against manufacturing goodwill and $43 million against its distribution arm. For investors, this is a large non-cash accounting adjustment that reduces reported goodwill and paper equity but, according to the company, does not affect day-to-day operations.
Arrium said the write-down reflects a dim outlook for manufacturing driven by a strong Australian dollar and weak domestic construction demand. The company believes the Australian dollar will remain overvalued and that any sale of certain units, like Australian Tube Mills, would not realise their current book value, so goodwill was reduced accordingly.
No. Arrium described the impairments as non-cash in nature and said they have no impact on operations. The write-down is an accounting adjustment to goodwill and does not directly reduce the company’s cash balances or daily operating activities.
The write-off will reduce the group’s combined goodwill from about $2.82 billion to roughly $2.34 billion. Specifically, the remaining goodwill for the steel-making operations and some processing units was cut to about $120 million after the adjustment.
Arrium wrote the goodwill of Australian Tube Mills down to zero, stating it does not expect to realise any value on a sale of that business. The article notes analysts had speculated the unit might be sold, but the current state of negotiations for selling those sites is not known.
No. Arrium declined to give fiscal 2013 profit guidance at its recent annual meeting, citing uncertainty around iron ore prices, the exchange rate and global and Australian economic conditions.
Arrium expects profit to be skewed to the second half of fiscal 2013 because it forecasts higher iron ore volumes. It expects iron ore sales volumes of 8–9 million tonnes in fiscal 2013 (up from 8 million tonnes in the first half) and sees potential earnings lift from stronger iron ore sales in the second half.
Investors should monitor a few key risks highlighted by the company and analysts: the level of the Australian dollar (which Arrium believes is overvalued), domestic construction demand, iron ore prices and volumes, the state of global and Australian economic conditions, and the possibility of further goodwill write-downs given the steel division’s weak recent performance.
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