Why Has ArcelorMittal Cut Its Stake In Canadian Iron Ore Project?
ArcelorMittal (NYSE:MT) has sold a 20% stake in the Mary River iron ore project located on Baffin Island in Canada to its partner Nunavut. This now makes the two companies equal partners in Baffinland Iron Ore Mines Corporation which owns the project. ArcelorMittal earlier owned 70% of the company. No financial details have been disclosed for the deal. [1]
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.
The company is projecting a growth in iron ore output to 84 million tonnes in 2015 from the 2011 figure of 54 million tonnes. [2]
The mine is expected to have 18 million tonnes in annual production once operational around 2017. To put this figure in perspective, 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. Over the long term, having a significant in-house supply base of raw materials can help ArcelorMittal keep costs in check as production expands once market conditions improve. [3]
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Why Did ArcelorMittal Sell Additional Stake?
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. ArcelorMittal reported a loss in the third quarter and admitted that conditions in Europe were unlikely to improve anytime soon. [4]
The Baffinland mine was acquired a few years ago at a time when iron ore prices were at a record high. However, with demand weak across geographies, the commodities supercycle seems to have run its course. The expected $4 billion cost of developing the mine in such challenging times may have been seen as too high by ArcelorMittal management. Indeed, a statement from ArcelorMittal conveyed that Nunavut Iron Ore will increase its share of funding for development of the Mary River project.
We think that another factor is at play here. 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. [5]
In summary, the high cost of development, the imperative to reduce debt, and a catalyst in the form of the company’s failure to shed assets at Florange may have prompted this move.
We have updated our price estimate for ArcelorMittal to $15 after the third quarter earnings results.
Understand on Trefis how a company’s products impact its stock price
Notes:- ArcelorMittal makes Nunavut equal partner in Baffinland, Reuters [↩]
- ArcelorMittal Results Will Suffer From Difficult Market Conditions, Trefis [↩]
- ArcelorMittal cuts stake in Arctic iron ore project, The Globe And Mail [↩]
- ArcelorMittal’s Debt Plans Lead To Moody’s Downgrade, Trefis [↩]
- ArcelorMittal Faces No Good Options As It Scraps Recent French Deal, Trefis [↩]