Weekly Metals And Mining Notes: ArcelorMittal, Rio Tinto And U.S. Steel

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Arcelor Mittal

Metals and mining stocks had an eventful week with ArcelorMittal announcing the sale of its interest in Gallatin Steel Company, Rio Tinto’s prospects being boosted by the settlement of a tax dispute in Mongolia and U.S. Steel shelving expansion plans in order to control costs. Here are some of the major events of the week pertaining to companies that Trefis covers in the metals and mining space.

ArcelorMittal

ArcelorMittal (NYSE:MT) and its joint venture partner in Gallatin Steel Company, Gerdau Ameristeel, have announced that the two companies are selling their respective 50% interests in Gallatin to Nucor Corporation for a total cash consideration of $770 million. The transaction is expected to close by the end of 2014. [1] The move is consistent with ArcelorMittal’s policy to selectively divest non-core assets in order to pare down its debt. ArcelorMittal has made a concerted effort to reduce its net debt burden since its credit rating was downgraded by major ratings agencies in 2012. Net debt for the company stood at $17.4 billion on June 30, down from $21.8 billion on December 31, 2012. [2] The company has set itself a medium term net debt target of $15 billion, though it has not specified an exact time frame in terms of years. [2]

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We have a $14 price estimate for ArcelorMittal, which is around 4% lower than the market price. We estimate revenues of around $83 billion and an EPS of $0.33 for ArcelorMittal in 2014, as against a consensus estimate of $0.46.

Rio Tinto

A tax dispute that could potentially have delayed the development of Rio Tinto‘s (NYSE:RIO) Oyu Tolgoi copper mine in Mongolia, has been resolved. [3] Rio Tinto indirectly holds a 33.5% interest in the mine through its subsidiary Turquoise Hill Resources Limited, which is the operator of the mine. ((Rio Tinto’s Q2 Earnings Media Release, SEC)) Mongolian authorities had recently conducted an audit, claiming unpaid taxes by Turquoise Hill.((Rio Tinto’s Oyu Tolgoi Mine in Mongolia Hits Another Snag, Wall Street Journal)) However, a settlement reached between the two sides has pegged the unpaid tax liability at $30 million, significantly lower than the $130 million in unpaid taxes claimed by the authorities in June. ((Mongolia says resolves Rio Tinto copper mine tax dispute, Reuters)) Now all disputes have been settled, and post the approval of a  new feasibility study being conducted by Turquoise Hill, construction activities should resume at the mine sometime in Q1 2015. The Oyu Tolgoi mine began operating in July 2013, with Phase I open-pit operations producing 76,700 tons of copper concentrate in 2013. ((Rio Tinto’s Oyu Tolgoi Mine in Mongolia Hits Another Snag, Wall Street Journal)) Upon reaching full production in 2021, the mine is expected to produce 450,000 tons of copper and 330,000 ounces of gold annually. [4] Rio’s share would stand at approximately a third of this level of output, around 150,000 tons of copper and 110,000 ounces of gold annually. The company’s attributable share of copper production stood at approximately 631,000 tons in 2013. [5]

We have a $54 price estimate for Rio Tinto, which is around 4% above the market price. We estimate revenues of around $49 billion and an EPS of $5.61 for Rio Tinto in 2014, as against a consensus estimate of $5.82.

U.S. Steel

U.S. Steel (NYSE:X) has dropped its plans to expand two of its facilities. The company announced that it will not proceed with the planned expansion to its Minnesota iron ore pellet operations and will not make additional investments at its carbon alloy facilities in Gary, Indiana. [6] The company produces a coke substitute product at its carbon alloy facilities at Gary. [7] Both iron ore and coke are raw materials in the steel making process. The company stated that its current iron ore and coke production facilities are sufficient for meeting its future raw material needs. ((U.S. Steel’s Canadian unit to file for creditor protection, Reuters))

In addition, the company announced that its Canadian unit, U.S. Steel Canada, will apply for bankruptcy protection after posting operating losses for five consecutive years, aggregating $2.4 billion. [8] U.S. Steel Canada is seeking a court order that would allow it to operate while exploring restructuring alternatives. U.S. Steel has announced that it would provide its Canadian unit with $168.6 million of secured debtor-in-possession financing (DIP Financing) to support operations through the end of 2015. ((U.S. Steel’s Canadian unit to file for creditor protection, Reuters))

The decision to shelve its expansion plans will save the company roughly $800 million. However, the company will report a pre-tax, non-cash charge of $250 million in the third quarter as a result of these actions. In addition, the company will report another $300-350 million pre-tax, non-cash charge related to its Canadian restructuring. [9] These measures are a part of the company’s efforts to control costs and enhance efficiency in an environment of recovering steel demand and prices. The company expects $435 million in margin improvement in 2014, as a result of projects undertaken under ‘The Carnegie Way’, a company-wide initiative aimed at controlling costs and improving efficiency. ((U.S. Steel Q2 2014 Earnings Conference Call Transcript, Seeking Alpha))

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Notes:
  1. ArcelorMittal and Gerdau Agree to sell Gallatin Steel Facility for US$770 million, ArcelorMittal Press Release []
  2. ArcelorMittal’s Q2 2014 Earnings Presentation, ArcelorMittal Website [] []
  3. Mongolia says resolves Rio Tinto copper mine tax dispute, Reuters []
  4. Rio Tinto to Cut 1,700 Jobs at Oyu Tolgoi Mine, Wall Street Journal []
  5. Rio Tinto’s 2013 Annual Results Media Release, Rio Tinto Website []
  6. U.S. Steel’s Canadian unit to file for creditor protection, Reuters []
  7. U.S. Steel’s 2013 10-K, SEC []
  8. U.S. Steel’s Canada Unit to Seek Bankruptcy Protection, Wall Street Journal []
  9. U. S. Steel Announces Strategic Actions To Strengthen Company And Updates Third Quarter Outlook, Yahoo Finance []