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Why the Sims Metal Management Ltd (ASX:SGM) share price has been smashed today

One of the worst performers on the market on Monday has been the Sims Metal Management Ltd (ASX: SGM) share price.

In early trade the global metals and electronics recycling company’s shares are down over 11% to $11.89.

Why are Sims Metal Management’s shares being smashed?

This morning the company released a first quarter trading update to the market. As you might have guessed from the share price reaction, it was a disappointing one.

According to the release, based on current market conditions, management expects the company to achieve underlying earnings before interest and tax (EBIT) between $58 million and $63 million for the first quarter of FY 2019.

While this result would be a meaningful improvement over the prior corresponding period, it will be a decline on the preceding quarter.

Management has advised that although its wholly-owned operations are performing to expectation during the quarter and trading in line with the previous quarter, equity accounted income in the company’s 50% joint venture, SA Recycling, is expected to be between $10 million and $15 million lower than the previous quarter.

There are two issues that have been behind the recycling business’ weak performance. The first is lower intake volumes during the quarter and the second relates to challenging Zorba sales.

In respect to the first issue, a number of initiatives are being pursued to increase volumes in SA Recycling’s catchment areas over the balance of FY 2019.

And for Zorba, management has commenced installing upgraded equipment, enabling it to produce a higher quality Zorba, which it believes will assist in facilitating sales in the current market. The equipment is expected to be operational by the end of the year.

A further update on trading conditions and its outlook will be provided at the Sims Metal Management annual general meeting on November 8.

Should you buy the dip?

While it shares may have fallen to an attractive level now, I wouldn’t be buying its shares until there are improvements in its performance. Because of this, I think investors ought to wait for its next update at its AGM before deciding whether to pick up shares.

In the meantime, fellow materials shares BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) could be worth considering as alternatives.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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 Scott Phillips.

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