Pardon the pun, but Arrium Ltd (ASX: ARI) is caught between a rock and a hard place.
Today, shares of the iron ore miner and dirt-crushing consumables maker are once again heading south following yet another concerning market update.
This morning Arrium released a statement to the ASX titled, "Mining Restructure, Results Update and Strategic Review". Unsurprisingly, its shares have been crunched, falling 3.1% in afternoon trade.
Restructure and strategy
In response to crumbling iron ore prices Arrium said it is taking strides to lower its breakeven price to approximately $US50 per tonne in the 2016 financial year (FY16). For comparison, giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are believed to have breakeven prices of $US35 and $US34 per tonne, respectively.
Arrium said it'll cut capital expenditure in FY16 and every year until FY19. This will reduce production by between six and eight million tonnes per annum (6 – 8mtpa). However, Arrium said it would have the capability to increase capital expenditure and production if conditions were conducive.
Earnings update
Shatteringly, shareholders are also facing another write-off to reflect the dire conditions in the iron ore market.
Following the $1.34 billion in write-downs announced earlier this year, Arrium said it will take an additional write-down on assets totalling approximately $320 million. Of that, $245 million will come from Mining.
As a result, in the full 2015 financial year Arrium said it is expected to post underlying earnings before interest, tax, depreciation and amortisation of between $335 million and $350 million.
Despite the lower 'profit' expectation, Arrium — formerly known as OneSteel — says the result implies a stronger performance from the Mining Consumables and Steel businesses.
Arrium also forecast net debt to come in between $1.75 billion and $1.85 billion at June 30, 2015. Arrium's debt is denominated in U.S. dollars. That means a falling Australian dollar raises its debt burden.
Unfortunately, many financial commentators expect a lower Australian dollar in coming years.
However, Arrium also receives a boost from a lower dollar because iron ore is priced in U.S. dollars.
Based on my calculations, Arrium currently has a market capitalisation (i.e. the total value of its shares) of around $455 million, or approximately 25% of its net debt.
Should you buy Arrium shares?
Arrium is undoubtedly facing some tough times — and potentially decisions — ahead. Iron ore prices are expected to continue trending lower and there is nothing any of the miners can do about it.
Therefore, I won't buy Arrium shares anytime soon. I suggest you also take a cautious approach.
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