Arrium Limited, Australia’s fourth-biggest iron ore exporter, is set to be the first casualty of the global supply glut brought on by Rio Tinto and BHP Billiton, with the announcement that it will close its Southern Iron asset in South Australia.
According to The Australian, the closure of Arrium’s iron ore operations in SA will likely be followed by more closures at smaller miners as mining giants such as BHP Billiton and Rio Tinto – who operate at low cost and are therefore able to withstand the market pressure – increased iron ore output in order to squeeze out competition and increase their market share.
The move represents a symbolic retreat for Arrium, which has spent the past four years trying to diversify its business into iron ore and mining consumables in response to the poor Australian manufacturing environment during the China boom.
The closure of Arrium’s higher-cost operations in SA will reduce the company’s exports from 12.5 million tonnes a year to about 9 million tonnes, and will leave 200 full-time workers, as well as 380 contractors without jobs as the company turns its attention towards the Middleback Ranges operations near Whyalla.
Arrium’s biggest shareholder, Allan Gray, with a 13.5% stake, said the move was necessary.
“It shows some capital discipline that they’ve decided to walk away from part of the more expensive end of their iron ore production. The future is very uncertain for Arrium, but they seem to have a focus on cash maximisation, which for a company with $1.4bn in debt is crucial,” said Allan Gray fund manager Simon Mahwhinney.
“The company is in a very awkward position as a result of balance-sheet mismanagement in the past and being caught on the wrong side of the cycle.”
Arrium boss Andrew Roberts told The Sydney Morning Herald that an iron ore price significantly above the market’s consensus view of future prices would be needed to reopen the assets, which were of good quality but a troublesome 600 kilometres from port.
“There is some uncertainty around the nature of the price recovery and the time that it will take, and our mining business at this point in time is absorbing cash rather than contributing cash back to the group, so today we have announced the redesign of our mining business,” he said.
Arrium acquired Southern Iron from WPG Resources for $320 million in August 2011 and spent hundreds of millions of dollars developing the assets and connecting them to the company’s existing mines and ports near Whyalla.
However, Mr Roberts admitted on Friday that the acquisition had not realised full value yet for Arrium, and the company would record asset impairments of $1.1billion on its mining business next month.
“In terms of the original investment, plus the ongoing investment required to mine the business, we haven’t realised the full value at this point,” he said.