Arrium helps reverse steel gloom
While close to $1 billion worth of impairments and restructuring costs dragged Arrium's net result down to a $695 million loss for the 2013 financial year, the underlying profit of $168 million was better than most analysts expected.
Investors were also cheered by a more optimistic outlook on the Chinese economy, with Arrium chief executive Andrew Roberts forecasting continued strength, albeit with volatility.
"Economic growth in China is expected to continue at high levels despite recent downward revisions in the rate of growth," he said.
On Monday, BlueScope CEO Paul O'Malley expressed strong concerns over the direction of the Australian and Chinese economies, helping to spark a 14 per cent fall in BlueScope shares and a 6 per cent fall in Arrium shares.
But Arrium was more upbeat, forcing the stock almost 13 per cent higher on Tuesday.
Mr Roberts said conditions remained tough for the steel division but it still produced $76 million worth of earnings before interest, tax, depreciation and amortisation; a much better result than last year's $19 million underlying loss and the division's $180 million underlying loss in 2011.
Mr Roberts said there was often a pause in the market before a federal election and he expected steel conditions to improve further in the 2014 financial year.
But steel is no longer the main game for the company that used to be known as OneSteel, which now relies on its iron ore exports for 60 per cent of its earnings before interest, tax, depreciation and amortisation.
Expansion work to allow exports of up to 12 million tonnes per year - which would make Arrium the nation's fourth-biggest iron ore exporter - are now complete, meaning free cash flow from the division should improve.
"We expect iron ore prices to remain at solid levels," Mr Roberts said. "The feedback we have got so far is that people understand this has been a transformation of the business, particularly this year, into a true mining and materials company."
There was also 15 per cent growth in earnings from Arrium's lowest-profile division: the mining consumables business that sells grinding balls to gold and copper miners.
The division produced $197 million worth of earnings before interest and tax and was forecast to continue growing at an annual rate of 8 per cent until at least 2017.
Frequently Asked Questions about this Article…
Arrium reported a net loss of $695 million for the 2013 financial year after close to $1 billion of impairments and restructuring costs, but delivered an underlying profit of $168 million — a result that beat most analysts' expectations and helped reverse recent negative sentiment in the steel sector.
Arrium's underlying profit of $168 million was stronger than many analysts had expected, which helped lift investor confidence and pushed the stock sharply higher after initial falls tied to sector worries.
BlueScope CEO Paul O'Malley's public concerns about the Australian and Chinese economies triggered a 14% fall in BlueScope shares and an initial 6% fall in Arrium shares. When Arrium then released stronger-than-expected results and a more optimistic outlook, Arrium's stock climbed almost 13% the following day.
Very important. Arrium CEO Andrew Roberts said economic growth in China is expected to continue at high levels despite recent downward revisions, and he forecast continued strength (with volatility). Strong Chinese demand is key to steel and iron ore markets that affect Arrium's performance.
Iron ore exports are now central to Arrium’s strategy, accounting for about 60% of the company's earnings before interest, tax, depreciation and amortisation (EBITDA). Expansion work to allow exports of up to 12 million tonnes a year is complete, which management says should improve free cash flow and could make Arrium Australia’s fourth-biggest iron ore exporter.
Although conditions remained tough, Arrium's steel division produced $76 million of EBITDA in 2013 — a sizable improvement from a $19 million underlying loss the previous year and a $180 million underlying loss in 2011. Management expects steel conditions to improve further in the 2014 financial year.
Arrium's mining consumables business, which sells grinding balls to gold and copper miners, recorded 15% earnings growth and produced $197 million of earnings before interest and tax. The division was forecast to continue growing at about 8% annually until at least 2017.
Close to $1 billion in impairments and restructuring costs were the main one-off charges that dragged Arrium's net result into a $695 million loss. The company has also shifted focus: once known as OneSteel, Arrium has transformed into more of a mining and materials company where iron ore and mining consumables now play a much larger role than steel alone.
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