Arrium: That’s not a turnaround


Arrium Limited (ASX: ARI) (formerly OneSteel) has declared its intent to pay a 3 cent dividend, despite reporting a 75% fall in full year net profit to $57.7m, on $7.5 billion of revenue.

The company also managed to reduce its net debt, from $2,242 million to $2,143 million. Debts maturing in 2013 have been extended to the second half of 2014, giving the company some breathing space as it morphs from a steel producer to an iron ore miner, with a smaller steel division.

During the 2012 year, the mining division sold 6.3 million tonnes of iron ore, and the company says it remains on track to almost double production to 11 million tonnes per year by mid-2013. That would make it one of Australia’s largest iron ore producers behind Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and put Arrium alongside Atlas Iron Limited (ASX: AGO).

The Mining Consumables division is the world’s largest supplier of grinding balls and grinding rods, and it increased sales revenues by 43% over the previous corresponding year, mainly thanks to the acquisition of the Moly-Cop businesses.

Arrium’s OneSteel steel and recycling division continues to face many headwinds, including the high Australian dollar, wet weather and generally weak markets. 815 staff lost their jobs during the year, resulting in annualised labour savings of $85 million.

The company expects strong demand for iron ore (mainly from China) to underpin high prices, as the company ramps up production. Management have also stated that they expect Mining Consumables to remain strong, underpinned by increasing levels of copper and gold production in North and South America.

The Foolish bottom line

Underlying return on equity came in at 4.4%, still lower than the average interest rate on its debt – which is around 5%. Until the company can increase this important metric above its cost of capital, this result is not a turnaround. Foolish investors should be very wary about investing in a company that can’t generate higher returns on its equity, than it has to pay on its capital.

If you’re in the market for some high yielding ASX shares, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

OUR #1 DIVIDEND PICK FOR 2016...

Forget BHP and Woolworths. This "dirt cheap" company is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for hungry investors, including SMSFs, this ASX company could be the "holy grail" of dividend plays for 2016.

Enter your email below to discover the name, code and a full investment analysis in our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2016.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.