Arrium may have to ask shareholders for more cash and consider closing or halting some of its steel and mining operations, despite launching a $756 million equity-raising, analysts say.
Arrium, formerly known as OneSteel, on Monday announced the mammoth capital raising to ease its debt burden as iron ore spot prices plunged to fresh five-year lows of $US83 ($92) a tonne.
The steel, mining and mining consumables group said the raising – underwritten by UBS at 48¢ a share – will be used to pay down at least $732 million of debt.
But CIMB analyst Andrew Hodge warned it may not be enough and said the 48¢-a-share offer price, which Arrium markets as a 26 per cent discount to Friday's close, is not attractive.
"In our view Arrium at current spot iron ore prices is only just cash-positive in its mining business ... if it [iron ore] goes lower, even just $US10 a tonne, on a sustainable basis, we believe this raising will not be the last," he said.
CIMB has cut its long-term iron ore price forecast to $US80 a tonne from $US95 a tonne. Mr Hodge slashed his Arrium valuation by 54 per cent to 30¢ a share.
Credit Suisse analyst Michael Slifirski estimates that Arrium's higher-cost Peculiar Knob mine in South Australia has a cash cost of $US89 a tonne. Mr Slifirski said the equity-raising provides flexibility for Arrium to consider putting Peculiar Knob on care and maintenance. Arrium only discloses its "all-in" mining cash cost of $73 a tonne.
The outlook for Arrium's loss-making steel business is also challenging, and profitability has not improved despite an 11 per cent increase in steel volumes during the August quarter.
Arrium said it is targeting further cost reductions in steel from contracts, efficiency measures and job cuts.
Deutsche Bank analyst Emily Smith said she is sceptical the renewed cost-cutting efforts can significantly influence steel profitability in the near term.
"We remain of the view [that] further significant rationalisation is required for this business to return to profitability," she said.
Arrium said on Monday that no large-scale closures are planned in steel and it intends to continue running all of its iron ore operations.
