ArcelorMittal looks to sell stake in Canadian mine

Faced with sluggish demand for steel and a failed effort to shed European assets, the mining company is determined to reduce debt.

By Trefis Jan 3, 2013 1:23PM
Recycled copper copyright Erik Isakson, Tetra images, Getty ImagesArcelorMittal (MT) is continuing with efforts to reduce its massive debt through stake sales in assets. It is now reportedly engaged in talks with a consortium made up of South Korean steelmaker Posco and Taiwan-listed steelmaker China Steel to sell a 15% stake in Canada's Labrador Trough iron ore mine. The deal is expected to be worth $1.1 billion.

It remains unclear as to how this amount would be split up between the two parties or the quantity of stake each would individually acquire. A South Korean wire service claims that $540 million will be contributed by China Steel and Posco while the remainder will be paid by financial investors including the National Pension Service of Korea.

This comes close on the heels of a 20% stake sale by ArcelorMittal in the Mary River iron ore project located on Baffin Island in Canada to its partner Nunavut. You can read about that deal on Trefis here.

Recognizing the growth potential -- and also to hedge against rising prices of major raw materials like iron ore and coal -- ArcelorMittal had in the past realigned its strategy to increase its focus on mining. The iron ore prices have slumped phenomenally since then. 

Regardless, ArcelorMittal is still expanding its iron-ore business, which is an important earnings driver for the company. Its iron mines are also strategic assets that are expected to give it a cost advantage vis-a-vis competitors. The same logic seems to be driving China Steel and Posco's decision, according to Bloomberg, to purchase the stake ArcelorMittal is selling. The company is projecting a growth in iron ore output to 84 million tonnes in 2015 from the 2011 figure of 54 million tonnes.

ArcelorMittal Mining RevenueThe mines in question in the context of the latest deal produce about 40% of Canada's total iron ore output. ArcelorMittal currently produces about 15 million tonnes of iron ore concentrate and more than 9 million tonnes of iron oxide pellets annually out of Canada.

What is forcing ArcelorMittal to sell stakes in strategic assets?

1) Debt burden

ArcelorMittal has been struggling with a heavy debt burden and weak steel prices for quite some time now. Its debt stood at $23.2 billion at the end of Q3. The company has seen its debt rating downgraded by all three major rating agencies -- S&P, Fitch and Moody's. The agencies are not satisfied with ArcelorMittal's debt reduction targets and also believe that the weak market conditions will make steady cash flows unlikely.

2) Weak steel prices

Steel prices on the London Metal Exchange (LME) have been trending lower for a long time now. The unfavorable market conditions have contributed to the decline in steel prices on LME.

ArcelorMittal Avg Flat Carbon Steel Price in Europe3) Failure to get rid of production overcapacity in Europe

ArcelorMittal reported a loss in the third quarter and admitted that conditions in Europe were unlikely to improve anytime soon. According to the company, demand for steel in Europe has slumped by 29% since 2007.

The situation in Europe is so bad that ArcelorMittal announced last month that it will write down the value of its European assets by $4.3 billion in the fourth quarter. You can read about it in our previous article on Trefis here.

With such a phenomenal slump in demand, a significant production overcapacity was only to be expected. The steel manufacturing capacity in Europe stands at around 210 million tonnes, of which only 155 million tonnes is being utilized at the moment.

Indeed, ArcelorMittal has been attempting to get rid of overcapacity wherever possible and shed non-productive assets. However, it has run into significant political opposition from irate politicians furious at job cuts resulting from sale of assets. This may be forcing the company to compensate elsewhere in order to meet debt reduction targets that are absolutely imperative given the investment rating downgrades. Future growth may be compromised if ArcelorMittal is unable to access funds from the market at reasonable rates of interest.

A few days back, ArcelorMittal faced a political backlash in France over its attempt to shut down two blast furnaces at Florange, in case nobody was willing to purchase them. The resulting public fury forced ArcelorMittal not only to keep the plants idle, but also commit to additional investments over time. Although the investments have been suspended for the time being, the company is still incurring heavy costs on keeping the furnaces idle. The sale of these blast furnaces was an important part of the company's asset sale plan designed to reduce debt. The events that unfolded may have upset these plans and provided an additional impetus to look at alternatives in order to meet the debt reduction target. 

In summary, the imperative to reduce debt in the face of sluggish demand for steel and the company's failure to shed assets at Florange as planned may have prompted this move.

We have updated our Trefis price estimate for ArcelorMittal to $15 after the third quarter earnings results.

Tags: MT


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