Arrium Ltd (ASX: ARI), a $500 million iron ore and steel business, today announced its third quarter production results.
In the three months ended 31 March 2015, Arrium shipped 3.064 million tonnes of ore, down 7% on the prior corresponding period. However year-to-date ore shipments totalled 9.8 million tonnes, up 5% on the prior period.
Iron ore – a steel making ingredient – is priced from the Platts market index, which is based on 62% iron content and includes cost of freight.
Arrium's mining operation – like peer Fortescue Metals Group Limited (ASX: FMG) – is lower quality and priced as a percentage of the market index. The average grade of Arrium's ore during the quarter was 59.1%.
During the March quarter, the average market price for iron ore was $US62 per tonne, down $US12 per tonne on the prior quarter. Given its lower quality product, Arrium's realised price was $US46 per tonne ($58 in AUD), down $US18 on the prior quarter.
The problem for Arrium, which posted a loss of $1.49 billion during its most recent half year, is its costs. The miner's 87% share price fall over the past 12 months reflects the margin pressure and dire outlook for the iron ore industry, in the wake of China's unprecedented industrialisation.
Arrium said its "total cash cost" was $66.90 per tonne, in its quarterly report today. Note that its realised price was lower than its costs.
The last hurrah?
In addition to its iron ore and steel businesses, Arrium – formally known as OneSteel – has a mining consumables business which was its best performing business during its most recent half year. It produced an earnings before interest and tax result of $77 million. However this is equivalent to a profit margin of just 7.3%.
With losses being posted left right and centre, it is troubling to know some financial commentators are trying to justify a buy recommendation in the iron ore space by picking the lows.
Personally, I believe Arrium may be able to survive the lower-for-longer iron ore price environment by transitioning its focus towards its consumables business, but it even if it could pull off such a huge operational shift, it's unlikely to be a smooth transition.
