Fundie’s not-so-favourite – lessons to learn from Arrium

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The history of Arrium

The demerger of OneSteel Limited, the manufacturer and distributor of steel products throughout Australia and New Zealand, from BHP occurred in 2000. Five years later the Whyalla Steelworks were converted to magnetite iron ore feed, thereby creating a new revenue stream for the company by freeing up the hematite iron ore reserves for export sales. OneSteel was soon exporting 6 million tonnes per annum and with the appreciating iron ore price, the strategy appeared well founded. The acquisition of WPG Resources in 2011 lead to a doubling of iron ore exports to 12 million tonnes per annum and the Whyalla port capacity was also doubled to 13 million tonnes per annum.

In 2007, OneSteel acquired the Smorgon Steel Group, and activities were broadened to include some domestic mining consumables. In 2010, this division was expanded by the acquisition of the Moly-Cop Group mining consumables business from Anglo American, making the re-named Arrium the global leader in grinding media.

On the surface, Arrium’s diversification from steelmaking into mining and consumables appeared logical, particularly given the threat of low-cost Asian steel imports into Australia and the strongly rising commodity prices. The financials, however, tell a different story, and this is why it is important for investors to fundamentally assess a company’s progress, or lack thereof, over time.

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