ArcelorMittal (MT): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:
We are retaining our Neutral recommendation on ArcelorMittal. The company swung to a profit in the second quarter, aided by its cost management initiatives. Revenues rose year over year on higher steel shipments. The company, however, narrowed its profit margin outlook for 2014 as a result of weak iron ore pricing. ArcelorMittal continues to contend with soft economic conditions in Europe, volatility in steel prices and tough competition. The oversupply in the steel industry has pressured prices and might lead to further price declines. However, we are impressed by the growth opportunities arising from acquisitions and emerging markets as well as the company's efforts to cut debt and reduce costs. We are also encouraged by its expansion initiatives in the mining segment.

Overview:

Luxembourg-based ArcelorMittal (MT) is the world's leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both the developed and developing world. It is the leader in all the main sectors automotive, household appliances, packaging and construction. The company is also the world's fourth largest producer of iron ore, with a global portfolio of 16 operating units with mines in operation or development.

The company's global share of the automotive steel market is around 18%. In all, the auto industry consumes around 15% of all the steel that ArcelorMittal produces. Long-term contracts add to the stability of the company's business. ArcelorMittal had steel shipments of 84.3 million tons in 2013.

ArcelorMittal has changed its organizational structure, effective Jan 1, 2014, to reduce organizational complexity and layers, simplify processes, and take advantage of the scale effect within the regions. The new reporting segments now include NAFTA, Brazil, Europe and Asia Africa and CIS (ACIS) with the Mining segment remaining unchanged.

In January 2011, ArcelorMittal completed the spin-off of its stainless steel operations to a separately-focused company Aperam. Therefore, Stainless Steel is reported as discontinuing operations.

ArcelorMittal maintains a strategy of selective divestment of non-core assets. As part of this, the company sold its steel foundation distribution business in NAFTA (North American Free Trade Agreement), namely Skyline Steel and Astralloy to Nucor Corporation for a total consideration of roughly $605 million on a debt free and cash free basis. The agreement covered 100% of ArcelorMittal's stake in Skyline Steel's operations in the NAFTA countries and the Caribbean. ArcelorMittal will continue to own and operate the foundation distribution businesses in the rest of the world. ArcelorMittal Luxembourg has also divested its 23.48% interest in Enovos International SA to a fund managed by AXA Private Equity for a purchase price of 330 million. Moreover, ArcelorMittal has sold its 48.1% stake in engineering company, Paul Wurth Group, to SMS GmbH for around $363 million.

ArcelorMittal, in January 2013, agreed to sell its 15% stake in one of its iron ore operations, ArcelorMittal Mines Canada (AMMC), for $1.1 billion. The company said that it will sell the stake to a consortium led by South Korean steelmaker Posco and Taiwan-listed China Steel Corp. Under the agreement, ArcelorMittal, Posco and China Steel Corp will jointly own ArcelorMittal's Labrador Trough iron ore mining and infrastructure assets and will enter into long-term iron ore supply agreements. The transaction closed in May 2013. The consortium acquired a 3.95% interest in the joint venture for a total consideration of $290 million in cash, which increased its stake to 15% in the joint venture. AMMC now retains 85% stake in the joint venture. The joint venture is consistent with ArcelorMittal's strategy of establishing strategic relationships with key customers and expand its mining business.

ArcelorMittal, in October 2013, announced that it has signed a strategic agreement with Algerian company Sider. The deal includes an investment plan of $763 million for the steel complex at Annaba and mines in Ouenza and Boukhadra. It also includes plans of selling part of the company's stake in two steel joint ventures in Annaba and Tebessa to state-owned Sider.

Per the agreement, ArcelorMittal will reduce its stake in both ArcelorMittal Annaba and ArcelorMittal Tebessa to 49%, with the state of Algeria owning the remaining 51%. ArcelorMittal's investment project plan includes more than doubling the Annaba steel plant's annual production capacity from 1 million ton to 2.2 million tons by 2017. The company stated that the plan will be funded by equity contributions from shareholders and bank financing.

ArcelorMittal plans to build a rolling mill for rebar and wire rod with a production capacity of 1 million tons. Also, the investment will ensure a long term future for steel making in Annaba and mining in Tebessa. Through this investment, ArcelorMittal Annaba will be able to cater to the increased domestic demand for steel products in Algeria and support the government to become self sufficient in steel.

In November 2013, ArcelorMittal entered into a 50-50 joint venture with Nippon Steel & Sumitomo Metal Corporation to buy 100% of ThyssenKrupp Steel USA (TK Steel USA) from ThyssenKrupp for $1,550 million. Calvert, Alabama-based TK Steel USA is a steel processing plant that holds a total capacity of 5.3 million tons including hot rolling, cold rolling, coating and finishing lines. The plant represents the most modern finishing facility in the world. The acquisition was closed in February 2014.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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