KGB: OneSteel's Geoff Plummer

OneSteel chief executive Geoff Plummer tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

• Whyalla can be competitive, even with the dollar where it is

• The biggest domestic economic issue is fear of unemployment, which is hitting spending and flowing through to areas such as residential construction and retail

• The company is working hard to convince people it has changed dramatically in the past four years

• The mining consumables section of OneSteel is growing at a strong rate, and is less volatile to resource price fluctuations

• He and the rest of management are far more positive about the outlook now than for several years past

Alan Kohler: It seems to me on my reading of the remuneration report that you and your management team might be in line for some LTI after the huge rise in OneSteel's share price over recent weeks. Would that be right?

Geoff Plummer: No, I think we're still a fair way underwater. Our interests are very closely aligned to our shareholders' interests and we've still got a significant way to go to be realising some value for them and for ourselves. I think it's a good example of where the LTIs, should they deliver, will be working as intended, so we still need to improve our share price before myself or my colleagues will get some benefit from where we're at, but it's certainly a much better trajectory than where it's been.

AK: Where do you need to get it to?

GP: Oh, it depends on the years where they were issued, but we're still probably 50 cents short of the most recent issue, so considerable work for me and the team to do yet.

AK: Do you think you'll get there?

GP: A number of people commented that if this half year results the company and myself were far more confident than we've been over the last several reporting seasons and that's certainly true. I think there are several aspects where we feel much more comfortable. A key matter was being able to forecast that the steel business would return to EBITDA positive which is addressing one of the downside risks, but the real positives were delivering on the improvement out of the mining consumables business which was in line with the company's expectations – but I think ahead of the market's expectations. Certainly [we] feel far more positive about the outlook over the next year or two.

Stephen Bartholomeusz: Geoff, you've announced that you're going to change the name of the company. Is there a sense of frustration that there are some in the market who still see you primarily as a steel company?

GP: Yes there is. It's also often other stakeholders; media, politicians and so on, see it just as a steel company and at the end of the day that's really a significant impediment to our investors and potential investors. There's a large pool of potential investors who really don't look at it and even the experience over the last week or two, people are saying, ‘gee I didn't understand that you were already so significant in mining' or ‘I didn't understand you were as such a significant mining consumables business, we thought you were only an Australian domestic long product steel company', which is what we were four years ago.

SB: You reviewed the future of that steel division and remained committed to it. Is that because of the cost of remediation or do you think there is potential for it to be acceptably profitable?

GP: Oh, yeah, that's a key question. We've indicated we're confident we can get that business back to generating cash and to exit that business would take a significant cash investment. My view is why would you pay a lot of cash to get out of a business that can generate cash? That's the nearer term objective; to be cash generating. Then, beyond that, what we have to do is actually make sure we're generating EBIT returns and generating some value for shareholders. This half we've given some very clear guidance – We expect to be EBITDA positive for the steel manufacturing business in the June half.

SB: If the dollar stays where it is, is it conceivable that Whyalla could be competitive?

GP: I think it is conceivable. Perhaps the way to look at the steel manufacturing is if we were talking two years ago or three years ago and I said we were going to have our steel manufacturing business EBITDA positive in an environment where firstly we still have very weak markets domestically – but moreso, if back in 2008-09 I said I think we can be EBITDA positive with the dollar above parity – I think people would have raised their eyebrows and said, really? So, I think it shows just how much traction we've been able to get in improving the steel manufacturing business of which Whyalla is really a key part.

Robert Gottliebsen: Does Whyalla require a lot of investment, longer term, to make it world competitive?

GP: No. We don't have a significant capex spend there. One of the key things that will improve Whyalla's performance going forward is that we repaired the blast furnace last year and we now have a blast furnace that's in good condition, operating well and we'd expect it to be in good condition out to at least the end of this decade. So, we can run our steel manufacturing business well below depreciation level and I think stay-in-business capex is probably much closer to half of depreciation. We can run that and continue to offset costs, which is what we've done for a long time. The real issue at the moment has been battling the run up in the dollar.

RG: Geoff, are there any signs of improvement in the structural steel market in Australia? And are you getting much business from the mining investment projects?

GP: We've seen some signs. We've indicated that this half we expect our steel volumes to grow by about five per cent and all of that will come through what we call engineering construction which is driven by either infrastructure or resource projects. So, we are starting to see some work flow from the resource investment, but at this stage it's only generating a small lift, but you know we can see over the next year or two there certainly is a more positive outlook in that space, but we really need to see that spill over into investment into non-residential and residential construction as well.

AK: Geoff, can you tell us about what growth you expect from mining consumables?

GP: We're very positive. Some people don't understand that when we bought the Moly-Cop business, which was the largest grinding media business in the world, we were actually the second largest grinding media in the world. The businesses we bought were South America, Chile and Peru in particular, but also Mexico and Canada. So, we now have generally more than 50 per cent market share in Canada, the US, Mexico, Chile, Peru, significant positions in Brazil, more than 50 per cent of the Australian and the Indonesian markets. We're very well represented in not just significant markets, but – particularly in the case of South America – a growing market and these are very mission critical products to the mining houses. We have a superior technical product, we believe, certainly a superior value proposition in terms of supply chain and logistics supporting mines in some pretty remote locations, and we now have the added benefit of scale. So, this year we'd expect that business to do not far under a million tones.

SB: Geoff, is consumables a more defensive kind of play than iron ore?

GP: I wouldn't describe it as a defensive play. It is less volatile in terms of earnings and margin. It's a more stable play in that context. But it's certainly a growth business.

RG: Do you think we're going to see a big rise in the supply of mineral products in the next two or three years and might that affect the price levels that we've been used to?

GP: I think the demand for commodities will continue to grow strongly. I think China will continue to drive that, but it's not just China; it's the other BRIC and non-third world countries which have still got pretty strong growth rates. In my mind the concerns or fears about China in particular slowing down I think are now overstated. Even if China only grows at five or six per cent per annum, in absolute terms that's the same total growth as it would have been three or four years ago when it was eight or nine per cent GDP growth, just because of the scale of the economy now.

AK: Hey Geoff, how do you think Australia is being run at the moment?

GP: I think most people think we're wasting an opportunity. I think most people understand that much of our current performance is actually good luck and that that could disappear quickly. The issue driving the economy in lots of ways at the moment in my mind is not the unemployment level, but the fear of unemployment. I think that's why we've got saving rates approaching 10 per cent and that's what's weighing very heavily on residential construction or retail or domestic tourism or things like that. I think the fear of unemployment is probably ahead of the current unemployment levels and I guess the question is: why do people have that fear? Yes, some benefit can come from it, households restoring their balance sheets, but I think it's reflecting an underlying fear and concern. People who either had earnings cut back through no overtime or things like that, or they know people who have lost their jobs, and they're fearful for themselves.

AK: Do you think the government should drop the carbon tax?

GP: I think I've been clear for a long time. I think Australia was getting ahead of the world in the carbon tax. We did a lot of work as a steel industry and ended up I think with a satisfactory approach where the government recognises specific circumstances in the steel industry and I commend them for that. But, on balance, I think we're certainly moving ahead of the rest of the world and if you have a look at what happened post-Copenhagen, we expected the US and a number of other countries to move – They've probably gone further away rather than closer to the carbon tax.

SB: Geoff, you referred to the near doubling in your iron ore output. Iron ore prices have come off a little bit. Where do you sit on the cost curve?

GP: Our pre-existing iron ore business with Middleback Ranges we've guided to about $50 loaded costs for this financial year, so I think that still puts us in a pretty reasonable position. We acquired Western Plains iron ore business up in Coober Pedy. It will be higher in the cost curve; we've said about $70 a tonne to get that loaded. But it is at 63 per cent Fe, so we're confident that it will be able to support the higher loaded costs. We have a unique ability to combine what was going to be a little over three million tonnes that Western Plains were hoping to export with 53 per cent product from our existing mines and make a very marketable 60 per cent FE product and basically we're able to sell two million tonnes more, so we go from a little over three million tonnes to five million tones.

RG: Do you think that OneSteel is a takeover target?

GP: I think the best thing I can do is to make sure that the value proposition to our investors is understood and … that's starting to show through. You asked the question earlier about the name change. Part of the point of saying we were going to change our name, but not announcing a new name, was to get people to pause and reflect: ‘this is a different company to what I thought it was.' At the moment I think that people are only just coming to grips with the inherent value in the changes we've made over the last three or four years.

RG: In about two years you'll have a big cashflow, all going well. Do you have any long term plans to spend it or are you going to give it back to shareholders?

GP: No. At the moment the focus here is to apply it back to our debt levels. We'd certainly prefer to have debt levels below where they are at the moment.

AK: Geoff. Thanks very much.

GP: A pleasure. Thanks for your time.

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