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AMSA adds R4.5bn rights issue to survival plan, as it warns of earnings ‘bloodbath’

ArcelorMittal South Africa CEO Paul O’Flaherty outlines steps being taken to increase protection for the domestic steel industry. Camera Work & Editing: Nicholas Boyd. 6.11.2015

6th November 2015

By: Terence Creamer

Creamer Media Editor

  

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JSE-listed steel producer ArcelorMittal South Africa (AMSA) announced a whopping R4.5-billion rights issue on Friday as part of a multipronged survival package, which hinges materially on greater protection for the embattled domestic steel industry. The offer will be fully underwritten by the larger ArcelorMittal group, which holds 47% of the South African company.

The rights issue would be larger than AMSA’s current market capitalisation of around R3.6-billion and could, thus, only proceed with the support of a special shareholder resolution granting approval for the issuance of shares with voting power exceeding 30% of the shares currently in issue.

CEO Paul O’Flaherty said the group had already received irrevocable undertakings of support from shareholders holding 78.1% of the shares currently in issue, but stressed that this did not imply that all these shareholders would participate in the rights issues. A general meeting had been set down for 9:00 on December 11, 2015, for a vote on the special resolution.

AMSA also warned of an earnings “bloodbath” for 2015, revealing that the results would be negatively affected by weak trading conditions and a R1.53-billion write-down.

The write-down arose following a decision by iron-ore miner Kumba to close of the Thabazimbi mine, which exclusively supplies AMSA – the steel group was also responsible for closure costs. The company had made provision for R350-million in retrenchment costs and a R233-million impairment of its iron-ore inventory. There would also be impairment of R378-million relating to the group’s decision to close the Vereeniging Works Melt Shop.

In addition, there was the R568-million write off of the company’s previously deferred contributions to stripping costs at the Kumba mine as a result of a new pricing deal with the Anglo American miner.

Under the new agreement, Kumba could migrate its pricing for up to 6.25-million tons yearly from a cost-based price, to one based on an export parity price (EPP), with scope for discounts. If the index price is between $60/t and $70/t, AMSA will receive a 5% discount to the EPP, rising to 6.25% should the iron-ore EPP rise to between $70/t and $80/t. A 7.5% discount would apply should the price climb above $80/t.

O’Flaherty acknowledged that the EPP model would be less beneficial to AMSA as the iron-ore price rose, but said that once the good times returned it would still be receiving iron-ore at prices “cheaper than in China”.

“Sure, on a cost-plus 20% arrangement I could have made even more money, but that’s the sacrifice that you make [to survive],” he said, noting that, had the agreement been in place since January 1 the benefit would have been a pre-tax amount of R470-million.

Overall, 2015 earnings would be 11 times worse than was the case in 2014, when it reported a loss of R158-million.

But O’Flaherty nevertheless, argued that the various elements of the survival package were beginning to come together, offering a “glimmer of hope” for the company.

MORE PROTECTION

The group had already secured 10% duty protection on some steel products and expected the International Trade Administration Commission of South Africa to have approved protection across all domestically produced steel grades by the end of November.

But he stressed that in the context of rising “unfair” imports from China, work was under way on various antidumping and safeguard applications, in a bid to raise protection on certain products by upwards of 40%.

Due process would be followed, but AMSA was confident that the additional protection could be implemented, possibly by way of provisional safeguard duties, by the end of March. However, O’Flaherty admitted that this remained an area of risk to the package.

Progress had also been made in negotiations with government on the so-called “fair pricing model”, whereby AMSA would agree to cap its margins at a ‘reasonable return’ level for a period of five year in return for protection.

Government was also seriously considering removing the clause in its localisation stipulations for certain ‘designated’ products, such as locomotives, power lines and buses, specifically excluding local-content credit for domestically procured steel.

Progress was also being made on a proposed 23% black economic-empowerment transaction, with five potential partners having been shortlisted. AMSA was aiming to conclude the transaction, which had been modelled in the Northam Platinum deal, by February, which could inject a further R1.5-billion to R2-billion into the company.

O’Flaherty would be hosting “town hall” meetings with staff in the coming days to outline the implications of the decision to shut the Vereeniging Works Melt Shop and to offer assurances that there were not plans to retrench workers at its Vanderbijlpark, Newcastle and Saldanha sites.

“There is just no ways, personally and as a company, and living in the Vaal Triangle that you are going to retrench people – there is just no way I’m doing that,” he said, adding that it would also not have received the support it was from government had it pursued retrenchments as part of its survival programme.

RIGHTS ISSUE RATIONALE

In fact, he said the rights issues plan had followed a thorough footprint review of its Vanderbijlpark Works, after which it was concluded that it would be counterproductive to scale back operations as initially considered.

“We have always spoken about cost reduction and we are absolutely doing that. We looked at potentially right-sizing Vanderbijlpark, [but] you can’t – you run it full with all its assets, or you shut it. There is no 70% solution, there is no 60% solution and we believe that we can do it.”

But having moved from a net cash position of R8-billion in 2009, to net debt of R5-billion, the rights issue option had found favour over an international bond issuance following a cost/benefit analysis.

“We have literally got a shelf application ready to go. But in current market conditions with a balance sheet so weak . . . you are going to land up paying 13% interest and that’s just ridiculous – doing the rights offer is the only way.”

AMSA aimed to complete the rights issue in January and use the process to pay debt, fund capital investments and create the basis for the raising of additional debt.

Edited by Creamer Media Reporter

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