Shares of Arrium Ltd are down 72%: Is it time to sell?

Credit: Alrosa

After a disastrous run in 2015, shareholders of Arrium Ltd (ASX: ARI) would have hoped for a return to form from the iron ore miner in 2016, but it certainly hasn’t played out that way.

Unlike others in the industry, including BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), shares of Arrium have not benefited from the rebound in iron ore prices in recent times, with the commodity currently fetching just under US$50 a tonne.

Instead, the junior miner and steel maker’s share price has crashed 72% since the beginning of the year to just 1.6 cents. That’s a drop of 93% since the shares traded at 23 cents 12 months ago, and a drop of 99.4% over the last five years.

Indeed, Arrium is one of the country’s smaller iron ore miners. It produces a lower quality product than its larger rivals, while it also produces far less ore which means it cannot spread the costs of mining as efficiently. That means that Arrium, together with the nation’s other high-cost producers, is particularly vulnerable to a falling iron ore price.

Although iron ore has rebounded nearly 30% over the last two months or so, it’s still sitting well below its high levels from previous years, including US$185 per tonne in 2011 and US$135 per tonne in 2014.

This has had a dramatic effect on Arrium’s earnings results, with the company recently noting (emphasis added):

There is a risk that the Group will not achieve forecast operating cash flows, realise sufficient cash proceeds from asset sales or not receive the ongoing support of financiers. These factors give rise to uncertainty which may be material, as to whether the Group will continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report.”

That is not what shareholders want to read, and is likely behind the most recent selloff. Indeed, the company is riddled with debt which will be difficult to repay in this low price environment. Of course, a rising iron ore price could help its situation, but at this point, buying Arrium’s shares seems like far too great a risk for Foolish investors to take.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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