ArcelorMittal Worth $22 Despite Earnings Dip in Europe

ArcelorMittal (NYSE:MT) recently released its third quarter earnings, highlighting a drop in sales in the European region and the need to develop a raw material resource base in order to sustain profits going forward. ArcelorMittal, the world’s largest steel manufacturing company, was formed in 2006 by the merger of two steel giants Arcelor and Mittal. The company competes with other international steel manufacturing companies like BaoSteel, POSCO (NYSE:PKX), Nippon Steel, Tata Steel and U.S. Steel (NYSE:X).

Our price estimate for Arcelor Mittal is at $22, which is approximately 10 percent ahead of the current market price.

See our full analysis for ArcelMittal

Steel sales continue to take a hit in Europe

With the uncertain economic outlook, companies are looking to reduce their overhead and inventory levels. Moreover, sales in the second half of the year are lower traditionally as the companies look to use up their steel inventory they have bought in the first half. The European debt crisis poses a significant risk to ArcelorMittal as it derives close to 35 percent of its revenues from Europe.

One main benefit that ArcelorMittal has over other smaller steel producers is the high number of steel manufacturing units the company owns in various locations in Europe. Since the units are most profitable when they produce an optimum amount of steel to balance the fixed and variable costs, the company has suspended production at some of its units while increasing the production level at other units to reduce overall expenses and improve margins.

Focus on developing raw material resource base

ArcelorMittal is moving aggressively to develop iron ore and coal mining operations, the two primary raw materials for the production of steel. The company aims to offset the rising cost of these raw materials by mining them in-house.

ArcelorMittal recently completed the development of the first phase iron ore production set up in Liberia, which is expected to produce 1 million tons in 2011 and 4 million tons in 2012. Phase 2 of the Liberia iron ore project will raise the annual capacity to 15 million tons. Moreover, company’s Canadian iron ore production facility is undergoing an expansion to raise its capacity from 16 million tons to 24 million tons in 2013. We will be updating our models soon to incorporate the newly created mining business division.

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