Citi Cuts Iron Ore Outlook as Firms Circle Bankrupt Producer Arrium

Some companies are taking advantage of the depressed iron ore price environment by snapping up distressed assets.

Arrium

Iron ore prices are expected to fall below $50 per tonne over the next two years, according to Citi Research. The investment bank predicts that spot prices will fall to $48 in Q4 2017 and $46 in Q1 2018. As of June 19, spot prices were at $54.70.

According to Citi, the fall in iron ore prices will come on the back of increasing stockpiles at Chinese ports. While inventories stood at 70 million tonnes in 2016, they have grown to over 140 million tonnes this year — as of June 16, 138.95 tonnes of iron ore were at Chinese ports.

Citi is maintaining a “buy” rating for both BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) and Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO), but has downgraded Fortescue Metals Group (ASX:FMG) to “sell.”

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BHP Billiton received the positive rating from Citi despite a minor setback earlier this month. On June 1, a fire broke out at the company’s Mount Whaleback iron ore mine in Australia. The company announced the next day that mining operations had resumed in areas not impacted by the fire, and traders have said that the well-supplied global iron ore market will absorb lost production.

Consortiums bid on Arrium

Low iron ore prices have meant hard times for some iron ore producers, but have presented opportunities for those looking to snatch up failing companies in the hope of successfully restructuring their operations.

For example, last April, South Africa-based steelmaker and iron ore miner Arrium was placed into voluntary administration because it was over $4 billion in debt to its creditors. At the time, Morningstar analyst Matthew Hodge said the company’s management made a fatal mistake by expanding Arrium’s iron ore output at the same time as other firms were increasing production.

“They kept on ploughing it [cashflow] back into the ground, just reinvesting in other things, they should have really been repaying debt rather than reinvesting,” he was quoted as saying by ABC

Restructuring support advisory firm KordaMentha has been operating Arrium since it collapsed, and earlier this month it was revealed that two overseas consortiums have made bids for the company’s remaining assets.

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One group is led by New­lake Alliance Management and JB Asset Management. It plans to spend over $1 billion on upgrades at Arrium’s Whyalla steelworks, mini-mills, steel distribution and mining operations, says Reuters. Among other things, it will “build a gas-fired power station to feed the steelworks, which would help combat South Australia’s energy shortage.” Finex steelmaking technology under license from Korea’s POSCO (NYSE:PKX) will be used for the Whyalla revamp.

The other consortium includes Britain’s Liberty House, which operates with commodities and energy conglomerate SIMEC under the Gupta Family Group Alliance. The companies submitted a new bid on Monday (June 19) after learning last week that the Newlake group was the preferred bidder. Despite the revised bid, KordaMentha was quick to mention that it is dealing with the Korean consortium on an “exclusive” basis.

KordaMentha and investment bank Morgan Stanley (NYSE:MS), which are managing the sale process, are planning to work with the successful bidder to close the deal as soon as possible.

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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.

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