Amsa needs to prove its met­tle ArcelorMit­tal SA may be turn­ing a cor­ner, but the com­pany still needs to do a lot of work in or­der to en­sure fu­ture sus­tain­abil­ity.

Finweek English Edition - - THE WEEK -

the steel mar­ket may have taken a turn for the bet­ter in the first three months of this year, but the ex­tent to which ArcelorMit­tal South Africa (Amsa) is ben­e­fit­ting from this is un­known. That’s the up­shot of some eva­sive re­sponses pro­vided by act­ing Amsa CEO Dean Subra­ma­nian last week, when asked by an­a­lysts whether the com­pany gen­er­ated free cash in the first quar­ter.

The com­pany had ear­lier is­sued a first-quar­ter pro­duc­tion up­date say­ing that steel prices had im­proved – by about $86 per ton for hot rolled coil (HRC) – which was enough to keep the group’s Sal­danha Works in busi­ness.

“The bulk of our prod­ucts are cash gen­er­a­tive,” Subra­ma­nian said. Asked if this was also true af­ter cap­i­tal ex­pen­di­ture, he replied: “The bulk of our prod­ucts are EBITDA [earn­ings be­fore in­ter­est, tax­a­tion, de­pre­ci­a­tion and amor­ti­sa­tion] pos­i­tive.” He de­clined to ex­pand and also cen­sured another an­a­lyst who asked if the com­pany was pro­duc­ing a net profit. “This is an op­er­a­tional re­view,” Subra­ma­nian stated.

The ques­tion was worth ask­ing (and re­spond­ing to) be­cause Amsa had said in its first quar­ter com­men­tary that the com­pany’s sur­vival could not be guar­an­teed by an im­proved mar­ket alone.

“Share­hold­ers are re­minded that the fu­ture sus­tain­abil­ity of the com­pany is highly de­pen­dent on re­solv­ing all out­stand­ing mat­ters,” it said.

This in­cluded “...lo­cal­i­sa­tion of steel for gov­ern­ment in­fra­struc­ture projects, tar­iff pro­tec­tion...as well as the im­ple­men­ta­tion of safe­guards and a fair pric­ing mech­a­nism”.

Subra­ma­nian said, how­ever, that the com­pany wouldn’t be “sit­ting around” wait­ing for gov­ern­ment bailouts. It is work­ing on re­lin­ing its Sal­danha Works, at a cost of up to R100m, which would see the op­er­a­tion through for the next four years at ca­pac­ity of about 80 000 tons per month.

It had also ear­marked im­prov­ing ef­fi­cien­cies at the plant by sourc­ing cheaper en­ergy. Elec­tric­ity costs at Sal­danha in­crease to 30% of to­tal costs from 8% in sum­mer as the win­ter tar­iff kicked in. This makes it cru­cial that Amsa se­cures al­ter­na­tive en­ergy sup­ply. It’s look­ing to tie up a gas-to­elec­tric­ity project us­ing liq­ue­fied nat­u­ral gas if sup­port for the ven­ture can be found.

Its Van­der­bi­jl­park Works, how­ever, looks the most vul­ner­a­ble as it’s not pos­si­ble to switch off sec­tions that are los­ing money. Ow­ing to the scale of economies, the en­tire works has to op­er­ate.

This leaves Subra­ma­nian lit­tle op­tion but to pull in costs fur­ther. “We are pro­gress­ing very well at Van­der­bi­jl­park,” he said. “We have to run it at full throt­tle. It is still vi­able at prices to­day and we have not re­trenched any­one.”

Ini­tia­tives are in place to re­duce the base cost of Van­der­bi­jl­park’s HRC by be­tween $30/ton and $50/ton. This would be achieved partly through the sourc­ing of cheaper ma­te­rial, and low­er­ing en­ergy costs. “We are also look­ing at re­duc­ing bil­let cost at New­cas­tle,” said Subra­ma­nian.

The ev­i­dence from the share mar­ket sug­gests Amsa might be turn­ing a cor­ner. Amsa shares have gained 125% in the first three months of 2016, al­though they have been un­der pres­sure dur­ing May.

One in­ter­est­ing side ques­tion is whether AMSA should stay listed at all as a re­sult of last year’s shares-for-cash of­fer­ing. The rights is­sue was so heav­ily un­der­pinned by par­ent com­pany ArcelorMit­tal that the group’s free-float is now only 17.5%. ArcelorMit­tal owns 69% while the In­dus­trial De­vel­op­ment Cor­po­ra­tion and the Public In­vest­ment Cor­po­ra­tion own 7.9% and 5.5% re­spec­tively.

Subra­ma­nian – who will be re­placed in the sec­ond half of the year by in­cum­bent

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