Can Arrium last?

Arrium makes a big move in an attempt to cut its debt

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In just two hours this week, miner and steel producer Arrium Limited (ASX: ARI) sold a 50.3% holding in New Zealand-based steel distributer Steel and Tube Holdings Limited (NZX: STU), adding a cool $73.4 million to its balance sheet and continuing its push to become a more streamlined, mining-focused company. The shares were sold to a number of institutional and retail investors at a discount of 37% to the price of the shares listed on the New Zealand exchange at the start of the week, suggesting Arrium was looking to make a quick sale.

The money is earmarked entirely to go towards reducing the company’s debt, but it’s not enough to have a significant impact. By the time the financial year had reached an end on June 30 this year, Arrium’s debt had leapt 24% to $2.143 billion, while gross profit dropped 19%. For an investor, when a company’s debt is twice the size of its market capitalisation, it is rational to ask yourself “can it last?”.

The sale of Steel and Tube was another step towards Arrium’s strategy of shifting away from the underperforming steel production side of the business, which has been hit by low demand and the high Aussie dollar, as well as shifting focus towards joining the big players in the resource export business like BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO). Arrium expects to almost double the level of iron ore sales over the coming year. However, with the World Steel Association revising its forecasts for steel demand down by 2% in 2013 according to Reuters, it would seem dangerous to pin all hopes on China’s continued demand.

Foolish takeaway

Staying afloat in the mining game is a lot about efficiency of production and having the cashflows to get through potential dips in ore prices and demand. If Arrium wants to outlast its big crucible of debt and look towards growth and stability, this is something it will have to quickly master.

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Motley Fool writer Regan Pearson does not own shares in any of the companies mentioned in this article. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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