Shares of Arrium Ltd (ASX: ARI) have crashed another 37.5% today, taking the stock's price to just 3 cents. They've fallen 46% since Monday and 86% over the last 12 months.
So What: Arrium is an iron ore miner and steel producer which is clearly struggling under the weight of the low price environment in the iron ore market. Iron ore was worth around US$185 a tonne back in 2011 and US$135 a tonne in 2014, but has since crashed to around US$46 a tonne (although it did trade even lower than that recently).
At its half-year earnings results announcement yesterday, the group said sales revenue had fallen 14% compared to the prior corresponding period, while underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were down an even sharper 39% (statutory EBITDA was just $40 million). You can read more about the results, here.
Although the results were poor, the real worry stems from the notes which accompanied the financial statements, which read (emphasis my own):
"There is a risk that the Group will not achieve forecast operating cash flows, realise sufficient cash proceeds from asset sales or not receive the ongoing support of financiers. These factors give rise to uncertainty which may be material, as to whether the Group will continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report."
The company has a heavy debt burden, and is currently losing cash (net operating cash outflows were $155.9 million during the half, compared to cash inflows of $92.5 million during the prior corresponding period). Indeed, it could also be forced to close its Whyalla mine in the near future if it proves unable to cut another $60 million in costs from the business, whilst also reducing iron ore mining costs even further.
The events will be devastating for all shareholders, but particularly those who also participated in the company's $750 million capital raising just over a year ago. The shares were sold to investors at 48 cents each at the time, with those shares losing roughly 94% of their value since then.
Now What: Arrium's situation should come as a warning to investors in the iron ore sector — particularly in the miners with higher cost operations. With the world's biggest producers, including Australia's own BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), ramping up their supplies at a time where demand is waning, there is enormous pressure on the iron ore price which could fall even further in the future.
Despite the low share prices across the sector right now, there are still strong headwinds facing the miners which investors would be wise to avoid.
