ArcelorMittal (NYSE:MT) is continuing with efforts to reduce its massive debt through stake sales in assets. It’s selling a 15% stake in Canada’s Labrador Trough iron ore mine for $1.1 billion, to a consortium comprising of South Korean steelmaker Posco and Taiwan-listed steelmaker China Steel. Earlier, ArcelorMittal had sold a 20% stake in the Mary River iron ore project, located on Baffin Island in Canada to its partner Nunavut. You can read about that deal here.
The consortium has already paid $810 million in cash for a 11.05% stake in the mine. It remains unclear as to how this amount was split between Posco and China Steel. The second installment, which will increase the consortium’s stake to 15%, remains subject to various conditions and is expected to be paid in the second quarter of 2013. ArcelorMittal’s wholly owned subsidiary ArcelorMittal Mines Canada, now owns 88.95% of the mine [ArcelorMittal set to sell 15 % stake in Quebec iron ore mines, Domain-b.com].
ArcelorMittal’s partial sale of iron ore assets seems to be influenced by a slowdown in the global economy as well as overcapacity in the European steel industry where a lot of the company’s own manufacturing is also concentrated. The steel manufacturing capacity in Europe stands at around 210 million tonnes of which only 155 million tonnes is being utilized. Idle plants imply less requirement for iron ore [ArcelorMittal writes down value of European businesses, Montreal Gazette].
The mines in question in the context of the latest deal produce about 40% of Canada’s total iron ore output. 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. The company is currently completing a $1.4 billion expansion of the mine to 24 million metric tonnes of iron ore output a year [ArcelorMittal Completes 1st Part Of $1.1B ArcelorMittal Mines Canada Stake Sale, WSJ].
What Is Forcing ArcelorMittal to Sell Stakes In Strategic Assets?
1) Debt Burden
ArcelorMittal has been struggling with a heavy debt burden and weak steel prices for quite some time now. Its long term debt stood at $219.3 billion at the end of 2012. 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 is likely selling non-core assets to reduce its debt burden [ArcelorMittal Annual Report 2012, ArcelorMittal Website].
2) Failure To Get Rid Of Production Overcapacity In Europe
ArcelorMittal reported a net loss of $6.5 billion in 2012, and admitted that conditions in Europe were unlikely to improve anytime soon. According to the company, demand for steel in Europe has slumped by 29% since 2007 [ArcelorMittal’s Debt Plans Lead To Moody’s Downgrade, Trefis].
The situation in Europe is so bad that ArcelorMittal had to write down the value of its European assets by $4.3 billion in the fourth quarter of 2012.
ArcelorMittal has been attempting to get rid of overcapacity wherever possible and shed non-productive assets. However, it has run into significant political opposition from irate politicians furious at job cuts resulting from sale the of assets. The ire in France and Belgium over announced closure of facilities are well known examples. This may be forcing the company to compensate elsewhere in order to meet debt reduction targets which are absolutely imperative given the investment rating downgrades. Future growth may be compromised if ArcelorMittal is unable to access funds from the market at reasonable rates of interest.
What’s The Long Term Plan?
Despite the partial stake sales, ArcelorMittal seems to be convinced of the long-term potential of the iron ore mining business. Its projected growth of iron ore output to 84 million tonnes in 2015 from 56 million tonnes in 2012 remains unchanged from last year. It is possible that selling a non-controlling stake is for the purpose of bringing in capital for development of mines and locking in customers for the iron ore produced. Steel companies like Posco and China Steel need copious quantities of iron ore for their operations [Creating Value From Our Mining Franchise, ArcelorMittal Investor Day Presentation].
We have a price estimate for ArcelorMittal of $15.
Disclosure: No positions