A surge in sales of hematite has seen mining and steel maker Arrium return to profit and almost double its underlying profits despite ongoing weaknesses in its steel manufacturing business.
In its latest announcement, the company says it reversed losses $448 million in the six months to December 2012 amid massive write-downs and delivered a net profit after tax of $220 million in the half year just passed.
Better yet, stripping out once-off and abnormal items, underlying earnings before interest, tax, depreciation and amortisation (underlying EBITDA) almost doubled from $255 million to $503 million.
Driving the result was the company’s mining operations (mainly iron ore), whereby EBITDA jumped from $132 million to a record $423 million as export hematite iron ore sales volumes surged 79 percent and higher than average prices were realised.
Earnings in the steel business, however (EBITDA $30 million), remained flat as a generally weak construction market (notwithstanding recent improvements in housing) and lower margins in South East Asia offset benefits associated with synergies and cost savings arising out of the establishment of a single steel business and improved domestic margins arising out of a weaker Australian dollar.
Indeed, compared with the previous corresponding half, revenue from the steel business dropped by seven percent to come in at $1.438 billion – Arrium saying commercial building activity remained well below pre-GFC levels and the residential construction sector had until recently remained weak, albeit with continued solid levels of public sector infrastructure and mining activity.
Going forward, the company does not give specific earnings projections but says whilst weakness in domestic and international steel markets will continue, earnings from its steel business would benefit from the outlook from a lower Australian dollar, the full impact of synergy benefits associated with the business’ restructure and some lift in the domestic market.
Meanwhile, it expects continued demand from China to underpin strength in its iron ore business and healthy levels of demand to continue in its mining consumables business.
Arrium Managing Director and CEO Andrew Roberts welcomed the latest result, which he noted was accompanied by a reduction in the group’s gearing ratio from 36 percent to 33.8 percent over the past twelve months.
“The ongoing successful execution of our strategy is delivering value for shareholders, with this half including a marked increase in earnings and cash, and a lower and improved leverage ratio,” Roberts said.
Arrium’s result comes as rival BlueScope earlier signed a $NZ110 million ($101 million) deal to buy Fletcher Building’s Auckland-based Pacific Steel Group.
That arrangement will see an existing Auckland based steel mill which makes long products used in construction shut down and its capacity filled from BlueScope’s nearby Glenbrook mill once a billet caster there is installed.