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Confidence on OneSteel, OZ Minerals Hints Profits

Unlike BlueScope Steel, which has cut the value of its assets by around $900 million and warned of a major restructuring to be announced next week, rival steelmaker, OneSteel has been quietly hacking away at costs without the too much publicity.

The cuts have been substantial with hundreds of jobs already lost in the last three years, and more to come in the coming year.

That's after the company, which is the country's second-biggest steelmaker, yesterday revealed a 2.5% drop in profit for the year to June, with the strong Australian dollar and weak local demand the culprits.

At the same time the company joined the rush to review local operations.

OneSteel said net profit before one-off items; fell to $235 million from $241 million a year ago, short of market estimates of around $248 million.

The steelmaker said it has started a review of its product portfolio, with CEO Geoff Plummer revealing that further job cuts were likely.

"Given our concern about the Australian market for steel and the weak outlook for domestic construction we will have to be looking at further reductions, unfortunately," he told a conference call to discuss the earnings report.

Mr Plummer said 400 jobs have already been cut recently in manufacturing and distribution, taking the total since the global financial crisis to around 1500 jobs.

Mr Plummer told the conference call that the company's internal review was focused on stemming cash losses from the business, and closing down the blast furnace at Whyalla was not likely.

"The costs to close Whyalla would be very significant. You would only close Whyalla if you were permanently exiting a lot of the business."

The market liked the news with the shares up 1% or 1.5c $1.45 and better than the sluggish wider market which ended down 0.8%.

OneSteel said its sales volumes remain at weak levels around 15% to 20% below pre global crisis levels, and the steelmaker expects production and operating levels in the first half of the 2012 fiscal year to be flat.

Mr Plummer played also down media speculation about a business tie-up with larger rival BlueScope, saying their businesses were quite different.

"I think there is only a pretty specific set of circumstances where those things would make sense," he said yesterday.

Looking at the report, the company actually did OK, thanks to its iron ore export business.

"Underlying earnings before interest and tax (EBIT) was $428 million, up 3% on EBIT for the prior year of $414 million," directors said.

And the iron ore export business provided the bulk of that with "EBIT for the Iron Ore segment for the year was up 57% to $524 million, due mainly to higher US dollar prices and lower freight rates, partly offset by higher operating costs and the impact of the stronger Australian dollar," the company said.

That was on a 21% rise in revenue to $948 million for the year, which came despite the stronger dollar and flat demand that saw a total of 6 million tonnes of ore exported.

The company made losses in its steel manufacturing business ($185 million) and small EBITs in its distribution, recycling operations and a $65 million positive contribution from its mining consumables business.

And finally, there's another much better comparison with BlueScope: Unlike its bigger and noisier competitor, OneSteel has maintained dividend payments, even if it has had to cut payouts to fit its finances.

Total for 2011 is 10c a share, including a 4c a share unfranked final. That's down a cent from the 11c total payout in 2010.

And, importantly, the company said yesterday "we currently anticipate franking will recommence in the 2012 financial year."

In other words, OneSteel's board reckons it could be earning enough profits to pay tax and generate franking credits in 2012, which is a rather roundabout way of showing confidence in the outlook.

Meanwhile, OZ Minerals Ltd's first-half profit fell 72% as the copper and gold miner settled a class action.

Despite the fall, the company said yesterday in its half year profit report that the outlook for copper and gold remained strong for the rest of the 2011 financial year.

Net profit was $113.9 million for the six months to June 30 compared with $405.7 million a year earlier.

But before the cost of the class action, the company said underlying for the first half profit fell to $189.1 million, from $230.5 million in the first six months of 2010.

The company declared a steady interim unfranked dividend of 30 cents a share.

The shares eased fell 3.6% or 45c to $11.90, far more than the 0.8% drop in the wider market.

Investors didn't like the talk of higher costs that were scattered throughout the result and commentary, such as higher spending on exploration and development work in some of the newer areas at the big prominent Hill mine in South Australia.

Directors said in yesterday's statement that the company "remains in a strong financial position.

"The Company's operations continue to perform well, significant funds are being returned to shareholders through a range of capital management initiatives and the Company retains a healthy balance sheet for M&A growth opportunities."

The company said the previously announced $200 million share buyback would start today.

The company had $905 million in cash at June 30, some of which will be spent on the buyback.

Cashflow in the half year was more than $380 million.

Assuming no blowouts in costs or price falls this half, OZ could fund the buyback out of cashflow, preserving its near billion dollar cash stash by the end of 2011.

Copyright Australasian Investment Review.

AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com.au

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


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

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