Arrium trying to change its spots

A change of name and focus hasn’t helped Arrium Limited (ASX: ARI) – ex-OneSteel, generate a profit for the six months to December 2012. Once a pure play steel company, Arrium has recently branched out into mining iron ore.

The company posted a massive $447 million loss for the first half of the 2013 financial year, significantly worse than the $74 million loss reported the previous year. Much of that can be attributed to a write down the value of its intangible assets by $474 million, which included the ARC brand name portfolio and goodwill in the Manufacturing and Distribution segments.

Excluding the writedown, underlying profit came in at $51 million, lower than the $77 million underlying profit reported the previous year.

Iron ore no panacea

Lower iron ore prices also had a $75 million to $85 million impact on net profit in the mining division, compared to the previous year, which also had the benefit of a 9% increase in sales volumes to 3.4 million tonnes.

Total iron ore sales for this financial year are expected to be between 8 and 9 million tonnes, and production will expand to around 12 million tonnes per annum by July/August 2013. That should see Arrium become Australia’s fourth largest iron ore miner, behind Rio Tinto Limited (ASX: RIO), BHP Billiton (ASX: BHP) and Fortescue Metals Group (ASX: FMG).

With iron ore prices currently around US$150 a tonne and increased sales volumes, Arrium should generate a much better result from its mining division in the second half.

Steel still an issue

Despite the positive steel outlook from Arrium’s competitor, BlueScope Steel Limited (ASX: BSL) yesterday, Arrium sees a difficult environment ahead, with the strong Australian dollar, and weak construction and manufacturing markets continuing to challenge its Steel and Recycling businesses.

With more than $2 billion of debt and much more work to do to turn around some of its divisions, Arrium remains a work in progress, and we are happy to sit on the sidelines and watch it play out.

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