BlueScope ventures out into the light

That near-50 per cent spike in the BlueScope Steel share price probably has as much to do with relief as it was to the specifics of the announcement that the group will joint venture its ASEAN and North American coated products businesses with Nippon Steel.

BlueScope imploded as the global financial crisis developed, with over-capacity in its industry, low prices, higher raw material costs, the soaring Australian dollar, a weak domestic economy and dangerously high debt levels undermining it and leaving it drowning in a sea of red ink.

Even after last year's desperate $600 million equity raising there were continuing doubts about its survival as it tried to effect an urgent and radical restructuring of its business that included the shutting down of its export businesses.

Those doubts would, had the joint venture not been announced, been amplified by the announcement of more write-downs today which will lead to the group reporting a $1 billion loss for the 2011-12 financial year, even though there are some clear signs of improvement at an operating level.

The $310 million of new write-downs within the Australian business relate, BlueScope's directors said, to a slower than expected recovery in domestic demand and the use of higher discount rates against future expected cash flows because of the increased volatility in markets.

The joint venture announcement caused BlueScope's shares to soar by nearly 50 per cent, adding $450 million or so the group's market capitalisation ahead of the announcement of $871 million.

BlueScope and Nippon Steel, which is merging with Sumitomo Metals to create the world's second-largest steelmaker, will create a new entity, equally owned, with an enterprise value of $1.36 billion. Critically, in return for Nippon Steel's acquisition of its share of the joint venture, BlueScope will receive net proceeds of $US540 million.

BlueScope has done a remarkable job of reducing its debt, which looked likely to hit $1.6 billion last year had it not been for the capital raising. Net debt is now down to $384 million thanks to an intense focus on reducing working capital, although the company said that adjusted for the favourable timing of year-end cash flows, a net debt balance of about $580 million would be a more appropriate figure.

In any event, the cash from the creation of the joint venture will effectively wipe out BlueScope's remaining net debt and with the group saying it expected it expects its domestic coated and industrial products business to deliver positive earnings before interest, tax, depreciation and amortisation in 2012-13 it may finally be close to real financial stability.

While the broader implications of the proceeds from the joint venture for BlueScope's future are perhaps the most significant aspect of the announcement, it also says several positive things about the business BlueScope has built in the region and in the US and its future.

The price tag obviously validates the worth of the business but introducing Nippon Steel as a partner should transform it. Nippon Steel has customer relationships within the region that BlueScope couldn't replicate on its own. It also has its own technologies and products.

It is instructive that the joint venture believes it can add incremental EBITDA of as much as $US75 million by 2017 to the growth profile of the existing business, which generates about $A115 million of EBITDA.

BlueScope's Paul O'Malley and his team have been through four years of continuous and difficult and delicate reorganisation as they undertook one of the bigger industrial restructurings ever contemplated in this market, one complicated by the group's fragile financial foundations.

Once the deal with Nippon Steel has been completed, after four years of teetering on a tightrope, BlueScope ought finally to have been stabilised.