Arrium needs to separate the iron from the steel

Misery loves a companion, as Arrium investors discovered after the close of trading last night.

Massive write-downs last February, to the tune of around $475 million, largely were forgiven as the company attempted to position itself for a future with growth and profits.

But a second write-down within six months, this time of around $480 million and with the prospect of another loss, will not be treated so leniently.

Not that newly appointed boss Andrew Roberts has much choice. The company’s steel division continues to struggle, weighed down by a global steel glut and a strong Australian dollar.

Iron ore is the key ingredient in steel. But that’s about as far as it goes when it comes to business similarities. Iron mining is extractive. Steel production is manufacturing.  And at some stage, if Arrium is to provide any value for shareholders, the question of a demerger will need to be visited.

In addition to steel production and metal recycling, Arrium exports nine million tonnes of iron ore a year from its South Australian mines. These mines provide its earnings and are ramping up production to 11 million tonnes a year (see Tim Treadgold's Is it iron curtains for small producers? and Brendon Lau's Mining for a ROE revival).

Its biggest problem, apart from being a small steel producer at the end of the earth, is debt. Arrium is drowning in it. Its $2.2 billion in liabilities is almost double the company’s market value.

The former OneSteel – itself spun out of BHP at the turn of the century – is in a desperate bid to restructure its manufacturing base and the latest write-downs reflect the fact that the US recycling business and its merchandising operation, both of which are up for sale, will not achieve the kind of prices that are anywhere near book value.

Given the company rejected an offer from South Korean steel giant Posco and Hong Kong’s Noble Group last year at 88 cents – 10% above yesterday’s closing price – investors will grimace this morning as the company comes under pressure.

The medicine currently prescribed by Roberts may well turn out to be beneficial in the long term. But the pain is likely to persist for quite some time.