MT Arcelor Mittal New

Steel giant ArcelorMittal (MT) reported diluted net earnings of 99 cents per share in the second quarter of 2011, above the Zacks Consensus Estimate of 94 cents, but below last year’s $1.13 per share.

Total steel shipments in the second quarter of 2011 were 22.2 million metric tonnes compared with 22.3 million metric tons in the year-ago quarter.

Revenue

Quarterly revenues increased 24.7% year over year to $25.1 billion from $20.2 billion in the year-ago quarter and 13.3% sequentially. Sales were higher over the previous quarter primarily due to average steel selling prices (+10.9%). However, the results were slightly below the Zacks Consensus Estimate of $25.3 billion.

Costs

Depreciation expense of $1.2 billion in second-quarter 2011 was flat versus the prior-year quarter.

Impairment loss was nil versus $18 million in the previous quarter and $118 million in the year-ago quarter.

Operating income in second-quarter 2011 was $2.3 billion compared with an operating income of $1.6 billion in the year-ago quarter. The operating performance in the quarter reflected a positive impact from a non-cash gain of $336 million related to the reversal of provisions for inventory write-downs, triggered by improved market conditions, and reversal of provisions for litigations.

The operating performance in the quarter also included a non-cash gain of $189 million relating to unwinding of hedges on raw material purchases.

Foreign exchange and other net financing costs were $443 million in the second quarter of 2011 compared with $465 million in the prior-year quarter.

Segment Review

As from January 1, 2011, ArcelorMittal reported the results of its mining operations as a separate operating segment. The segmental change has been undertaken in order to reflect changes in the company’s approach to manage its mining operations, as required by IFRS.

Flat Carbon Americas:Sales in the segment were $5.6 billion in the second quarter of 2011, up 12.7% sequentially, primarily due to higher average steel selling prices (15.8%).

Flat Carbon Americas crude steel production amounted to 6.3 million tons in the quarter, up 3.5% sequentially and 6.8% year over year. The company expected demand to be higher leading to increased production across all operating units.

Shipments were 5.5 million tons, down 1.8% sequentially. However, shipments improved in the company’s South American operations due to the recovery after an accident in the local coal handling port in Brazil, offset in part by lower shipments in North America due to automotive supply chain disruption.

EBITDA in the second quarter increased by 75% to $924 million from $528 million in the previous quarter and $657 million in the year-ago quarter. 

Flat Carbon Europe:Sales in the segment were $8.6 billion in the quarter, up 9.5% sequentially, primarily due to higher average steel selling prices (10.6%), offset in part by lower steel shipment volumes (-3.0%).

Flat Carbon Europe crude steel production amounted to 7.9 million tons in the quarter, up 3.1% sequentially and down 7.1% year over year. Production increased reflecting improved market sentiment toward the end of the first quarter, except at the Romanian operations, where one of the blast furnaces was under going maintenance.

Shipments were 7.2 million tons, down 3% sequentially, driven by strong demand in the first quarter of 2011 and marginal de-stocking by customers entering the seasonally weak third quarter. Shipments were also impacted by an increase in imports driven by the strong currency exchange rate combined with declining international prices.

EBITDA in the second quarter improved by 35% to $636 million from $471 million in the previous quarter and $560 million in the year-ago quarter. 

Long Carbon Americas and Europe:Sales in the segment were $6.7 billion in the quarter, up 13.2% sequentially based on higher average steel selling prices (7.9%) and improved steel shipments (5.0%).

Long Carbon Americas and Europe crude steel production reached 6.4 million tonnes during second-quarter 2011, up 5.9% sequentially and 6.7% year over year. Production was higher in both Europe and the Americas, reflecting seasonally stronger quarter and improved demand.

Shipments were 6.2 million tons, up 5.0% sequentially and 3.3% year over year.

EBITDA was $610 million, an increase of 27.1% sequentially due to improved profitability, driven by higher average selling prices and higher volumes.

Asia Africa and CIS (AACIS):Sales in this segment increased 11.5% sequentially to $2.9 billion. Sales increased primarily due to higher average steel selling prices (11.1%) and higher steel shipments (5.2%).

AACIS segment’s crude steel production was 3.8 million tons, up 3.3% sequentially, primarily due to higher production in the company’s South African operations. This was partially offset by loss of production in the CIS countries driven by operational issues in Ukraine, which are expected to be resolved during the third quarter of 2011.

Shipments were 3.3 million tons, up 5.2% sequentially.

EBITDA during the quarter was $462 million, an increase of 81.9% sequentially, primarily due to a higher average steel selling prices and steel shipments.

Distribution Solutions:Sales in the segment were $5.0 billion, up 16.3% sequentially, primarily due to higher average steel selling prices (6.9%) and steel shipments (9.3%).

Shipments in the segment were 4.6 million tons, up 9.3% compared with 4.2 million tonnes in the last quarter and flat in the year-ago quarter.

EBITDA was $115 million, down 9.4% sequentially due to non-cash gains of $22 million related to the reversal of certain provisions. Excluding the impact of the non-cash gain during the first quarter of 2011, the results for the second quarter of 2011 improved by 9.5%.

Balance Sheet

At the end of March 31, 2011, cash and cash equivalents including restricted and short-term investments were $3.2 billion versus $3.9 billion at the end of March 31, 2011.

During the quarter, net debt increased by $2.4 billion to $25.0 billion compared with $22.6 billion as of March 31, 2011, primarily due to investment in working capital and M&A related expenditures.

Cash Flow

Net cash used in operating activities was $0.6 billion in the reported quarter versus $1.3 billion for the three-month period ended March 31, 2011. The cash flow used in operating activities for the second quarter of 2011 included a $2.8 billion investment in operating working capital compared with $1.8 billion investment in the first quarter of 2011.

MT and Peabody Bid for Macarthur

On July 11, 2011, ArcelorMittal confirmed that it had along with Peabody Energy Corporation made an indicative, nonbinding and conditional proposal to make an off-market takeover bid, through a bid company 40% owned by ArcelorMittal and 60% owned by Peabody, to acquire up to 100% of the issued securities of Macarthur (“Indicative Proposal”). Under the Indicative Proposal, Macarthur shareholders would be offered a cash price of $15.5010 per share, indicating a value of approximately $4.7 billion for the equity in Macarthur. ArcelorMittal already has an ownership interest of approximately 16% of Macarthur's shares. The Indicative Proposal is conditional on the successful completion of due diligence, which would be completed in a timely manner. Any resulting offer to Macarthur shareholders would be conditional only on a minimum of 50.01% acceptance by Macarthur shareholders, approval from Australia's Foreign Investment Review Board and other customary conditions and approvals.

Mining Update

On May 20, 2011, ArcelorMittal announced the expansion of its Mont-Wright mining complex and additional construction at Port-Cartier in Canada. The investment is expected to allow ArcelorMittal Mines Canada (“AMMC”) to increase its annual production of iron ore concentrate from 16 million metric tonnes to 24 million metric tonnes by 2013. AMMC is also increasing its production of iron ore pellets from 9.2 million tons to 18.5 million tons. The project would represent a total investment of CAN$2.1 billion (including CAN$0.9 billion investment in pellet plant, if approved) and is subject to environmental and other regulatory approvals.

Spin-off of Stainless Steel Business (Discontinued operations)

Discontinued operations (i.e., the Company’s stainless steel operations were spun-off into a separate company Aperam, whose shares were distributed to ArcelorMittal shareholders in the first quarter of 2011) for the three months ended on June 30, 2011 were nil.

Discontinued operations for the three months ended on March 31, 2011 amounted to a gain of $461 million, including $42 million of the post-tax net results contributed by the stainless steel operations prior to the January 25, 2011 spin-off effective date. The balance of $419 million represented a one-time non-cash gain from the recognition through the income statement of gains/losses relating to the demerged assets previously held in equity.

Outlook

For the third quarter of 2011, management expects EBITDA to be approximately $2.4 –$2.8 billion. Working capital requirements and net debt are expected to remain stable sequentially.

For the second half of 2011, management expects raw material accounting costs to increase sequentially. Due to the continued underlying demand recovery, steel shipments in the second half of 2011 are expected to be higher than the same period in 2010. Results of mining business are expected to further improve due to increased production and shipments.

For 2011, management continues to target a growth of 10% in iron ore production and an increase of 20% in coking coal production. Overall group EBITDA per-tonne in the second half of 2011 is expected to exceed the level achieved in the same period of 2010.

The company’s full-year 2011 capital expenditure target increased by 10% from $5.0 billion to $5.5 billion (versus $3.3 billion in 2010) due to investments in the recently announced capacity expansions at the company’s Canadian mines, investments in energy saving projects (reinvesting the proceeds from the sale of carbon dioxide credits), Vega Do Sul investment in Brazil and expenses related to the study of the Liberia phase 2 expansion.

Major competitors of ArcelorMittalare are United States Steel Corp. (X) and Tata Steel Limited.

We maintain our Outperform recommendation on ArcelorMittal with a Zacks #2 Rank (Buy) on the stock.

 
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