Arrium trying to change its spots

Writedowns, challenging conditions for its steel business and low iron ore prices take toll on Arrium

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published February 19, 2013 11:11 am AEDT

A change of name and focus hasn't helped Arrium Limited (ASX: ARI) – ex-OneSteel, generate a profit for the six months to December 2012. Once a pure play steel company, Arrium has recently branched out into mining iron ore.

The company posted a massive $447 million loss for the first half of the 2013 financial year, significantly worse than the $74 million loss reported the previous year. Much of that can be attributed to a write down the value of its intangible assets by $474 million, which included the ARC brand name portfolio and goodwill in the Manufacturing and Distribution segments.

Excluding the writedown, underlying profit came in at $51 million, lower than the $77 million underlying profit reported the previous year.

Iron ore no panacea

Lower iron ore prices also had a $75 million to $85 million impact on net profit in the mining division, compared to the previous year, which also had the benefit of a 9% increase in sales volumes to 3.4 million tonnes.

Total iron ore sales for this financial year are expected to be between 8 and 9 million tonnes, and production will expand to around 12 million tonnes per annum by July/August 2013. That should see Arrium become Australia's fourth largest iron ore miner, behind Rio Tinto Limited (ASX: RIO), BHP Billiton (ASX: BHP) and Fortescue Metals Group (ASX: FMG).

With iron ore prices currently around US$150 a tonne and increased sales volumes, Arrium should generate a much better result from its mining division in the second half.

Steel still an issue

Despite the positive steel outlook from Arrium's competitor, BlueScope Steel Limited (ASX: BSL) yesterday, Arrium sees a difficult environment ahead, with the strong Australian dollar, and weak construction and manufacturing markets continuing to challenge its Steel and Recycling businesses.

With more than $2 billion of debt and much more work to do to turn around some of its divisions, Arrium remains a work in progress, and we are happy to sit on the sidelines and watch it play out.

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