Posted on 16 Apr 2009
WHAT does a manufacturer exposed to the ailing automotive and construction sectors (as well as flagging iron-ore and scrap steel prices) do? It issues a stern profit warning, of course.
Sticking to script, the long-steel products maker and distributor this morning cautioned full year net operating profit would come in around $200 million, which implies a second-half loss of $28 million. The company in February said it expected $325 million to $375 million for the full year.
OneSteel also intends to raise between $559 million and $878 million in an institutional placement and rights raising, thus becoming the 31st of the top 50 companies to turn to equity markets to get the banks off their backs.
There's a bittersweet flavour to the greater than expected raising: it shows there's still oodles of money out there to support such issues, but the $1.80 a share price is struck at a hefty 30 per cent discount (or 23 per cent ex-dilution).
As with Qantas's shock downgrade on Tuesday - OneSteel's profit warning results from a “rapid and significant deterioration'' in conditions.
“Both domestic and international conditions have become a lot tougher than anticipated at the time of providing our February guidance,” says OneSteel chief Geoff Plummer.
But the main driver has not been the inevitable lull in demand for OneSteel's rods, bars and slabs, but the company's role as an exporter of iron ore from its Whyalla mine. Plummer says spot pricing had been recovering from its October nadir, but then slumped dramatically in February.
Management ascribes even blame for the downgrade between falling iron ore (and scrap) prices, lower demand and reduced margins. The latter is a natural consequence of reduced production and higher than expected inventories.
Plummer hopes for a 2009-10 recovery as inventories clear and the benefits of lower raw material costs (especially coking coal) and efficiencies -- the factors the company can control -- start to flow through.
The government's stimulus measures are helping residential activity, but overall OneSteel is not budgeting for a pick-up in demand.
On the distribution side, OneSteel is yet to reap the full advantage of taking out competitor Smorgon Steel.
An advantage of OneSteel is that its two electric arc furnaces -- currently operating at 30 per cent capacity -- can be more quickly ramped up than blast furnaces (a la Bluescope Steel).
Criterion had OneSteel as a long-term buy at $2.21 in early December. “Investors need to brace themselves for more bad news before the supply-demand balance to return to glorious equilibrium,'' we said at the time.
We trust that's about it for grim tidings, not that there's any iron (ore) clad guarantee.
Investors should take up their rights at $1.80 -- and clench.
