Declaration Of Force Majeure Disrupts ArcelorMittal’s Mining Expansion In Liberia

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The outbreak of Ebola hemorrhagic fever in Liberia has taken its toll on ArcelorMittal’s (NYSE:MT) iron ore mining expansion project in the country. Contracting companies working on the project have declared force majeure and are evacuating their employees from the country. [1] A force majeure declaration protects a company from legal action if it violates contractual obligations due to circumstances beyond its control. This has disrupted ArcelorMittal’s plans to rapidly scale up output at its Liberia iron ore mining operations. The Liberia expansion project is a part of the world’s largest steel producer’s plans to rapidly scale up its high-margin mining operations in the near term.

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The Liberia Expansion Project

The currently operational Phase 1 operations at ArcelorMittal’s iron ore mines in Liberia have a production capacity of 4 million tons per annum (Mtpa). It accounted for 5.2 million tons in shipments in 2013. [2] ArcelorMittal’s total iron ore production and shipments in 2013 stood at 58.4 million tons and 59.6 million tons respectively. Proven and probable reserves at the Liberia mines stood at 505 million tons, out of a total of 4.6 billion tons of proven and probable iron ore reserves for ArcelorMittal’s Mining division as a whole. [3] Before the disruption due to the force majeure declaration, Phase 2 expansion to increase production capacity to 15 Mtpa was ongoing and scheduled for completion by the end of 2015. ((ArcelorMittal’s 2013 20-F, SEC)) This project is a part of the company’s broader plans to boost iron ore production capacity.

ArcelorMittal’s Mining Expansion

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ArcelorMittal is rapidly increasing its iron ore production capacity. The company intends to boost iron ore production capacity to 84 Mtpa in 2015, significantly higher as compared to the 2013 production figure of 58.4 million tons. ((Mining-exploiting our potential, ArcelorMittal Investor Day 2014 Presentation)) This capacity expansion will be primarily driven by the Phase 2 expansion at Liberia, the Baffinland project, which will add 3.5 Mtpa capacity in 2015 and the expansion from 16 Mtpa to 24 Mtpa production capacity at the company’s Canadian iron ore mining operations, which was completed in late 2013. [2]

ArcelorMittal’s iron ore shipments are either transferred to its steel producing divisions on a cost-plus basis or sold at market prices, either to third parties or to the company’s steel producing divisions. Through its own iron ore production and strategic long term supply contracts at some of its operating units, ArcelorMittal was able to fulfill 62% of its iron ore requirements in 2013. [3] As iron ore is a major input in steelmaking, by producing a major proportion of its requirements the company is able to lower its exposure to volatility in iron ore prices, as compared to other steel producers that purchase the bulk of their iron ore requirements from third parties. In addition, the Mining division is a highly profitable segment for the company, compared to its steel producing divisions. In the first half of 2014, the Mining division accounted for roughly 23% of the combined earnings before interest, taxes, depreciation and amortization (EBITDA) of ArcelorMittal’s operating segments, despite accounting for only about 6% of  the combined revenues of the company’s operating segments. [4] With a recovering but still fairly weak steel pricing environment prevailing currently, the high margin Mining division is very important to the company. Simultaneous to its expansion in mining production capacity, the company is also increasing its proportion of market-priced iron ore shipments. Market-priced iron ore shipments grew nearly 40% between 2010 and 2013 and are expected to grow another 15% in 2014. [2] Market-priced shipments accounted for 52.9% of the company’s iron ore shipments in 2012. [3] This figure rose to 58.9% in 2013 and to 65.6% in the first half of 2014. ((ArcelorMittal’s Q2 2014 Earnings Release, ArcelorMittal Website)) Thus, the company is looking to capitalize on its high-margin mining business.

In the context of ArcelorMittal’s plans to boost its iron ore production capacity, the disruption at its operations in Liberia is rather ill-timed. Though the company has not given a definite timeline for resumption of normal operations, a swift resumption of normal operations is essential for ArcelorMittal’s prospects in the near term.

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Notes:
  1. ArcelorMittal Blames Ebola for Delay in Liberia Mine Expansion, Wall Street Journal []
  2. Mining-exploiting our potential, ArcelorMittal Investor Day 2014 Presentation [] [] []
  3. ArcelorMittal’s 2013 20-F, SEC [] [] []
  4. ArcelorMittal’s Q2 2014 Earnings Release, ArcelorMittal Website []