Arrium revives steel hopes
Arrium Ltd has proved itself to be the sunny side of the Australian steel sector, after a better than expected set of results reversed much of gloom that was dumped on the sector by rival BlueScope on Monday.
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 new Arrium boss 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 boss 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's time in the spotlight 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.
"I suspect we will see some recovery post the election," he said.
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 ... also we are looking at other opportunities to improve ourselves," said Mr Roberts.
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.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free