MT Arcelor Mittal New

Steel giant ArcelorMittal (MT) reported diluted net earnings of 19 cents per share in the third quarter of 2011, much below the Zacks Consensus Estimate of 51 cents and last year’s 89 cents per share.

Total steel shipments in the third quarter of 2011 were 21.1 million metric tonnes compared with 20.5 million metric tons in the year-ago quarter.

Revenue

Quarterly revenues increased 22.6% year over year to $24.2 billion from $19.7 billion in the year-ago quarter and decreased 3.6% sequentially from $25.1 billion. Sales were down sequentially primarily due to lower average steel selling prices (-1.7%) and lower volume of shipments (-4.9%).

Costs

Depreciation expense of $1.2 billion in third-quarter 2011 was flat versus the prior quarter and higher than $1.1 billion in the year-ago quarter.

Impairment loss was $85 million versus nil in the previous quarter and $26 million in the year-ago quarter.

Operating income in third-quarter 2011 was $1.2 billion compared with an operating income of $1.0 billion in the year-ago quarter. The operating performance in the quarter reflected a positive impact from non-cash gain of $129 million related to the unwinding of hedges on raw material purchases

Foreign exchange and other net financing costs were $26 million in the third quarter of 2011 compared with $31 million in the prior-year quarter. Foreign exchange and other net financing gains were positively impacted by foreign exchange gains on euro denominated debt.

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 $5.5 billion in the third quarter of 2011, down 1.2% sequentially, primarily due to lower average steel selling prices (-5.3%) primarily in Mexico and Brazil due to slab shipments, partially offset by higher steel volumes.

Flat Carbon Americas crude steel production amounted to 5.9 million tons in the quarter, down 6.5% sequentially, due in part to production downtime in the North American operations.

Shipments were 5.7 million tons, up 3.4% sequentially, primarily due to improved auto demand in the NAFTA market.

EBITDA in the third quarter decreased by 54.5% to $420 million from $924 million in the previous quarter, primarily driven by margin compression on account of lower average steel selling prices and higher costs.

Flat Carbon Europe:Sales in the segment were $7.7 billion in the quarter, down 10% sequentially, primarily due to lower steel shipment volumes while average steel selling price remained relatively stable.

Flat Carbon Europe crude steel production amounted to 7.4 million tons in the quarter, down 6.1% sequentially, reflecting weaker market sentiment and seasonal slowdown.

Shipments were 6.4 million tons, down 10.9% sequentially, due to weaker market demand and seasonal slowdown.

EBITDA in the third quarter plunged by 42.3% to $367 million from $636 million in the previous quarter primarily driven by lower steel volumes and higher costs.

Long Carbon Americas and Europe: Sales in the segment were $6.7 billion in the quarter, flat sequentially.

Long Carbon Americas and Europe crude steel production reached 5.6 million tonnes during third-quarter 2011, down 12.5% sequentially. Production was lower in the Americas primarily due to drawdown of inventory mainly in Brazil and weaker market demand. Production was lower in Europe primarily due to seasonal effects.

Shipments were 6.0 million tons, down 3.0% sequentially, particularly due to seasonal slowdown in Europe.

EBITDA was $438 million, down 28.2% sequentially due to lower volumes and higher costs.

Asia Africa and CIS (AACIS): Sales in this segment decreased 8.3% sequentially to $2.6 billion. Sales decreased primarily due to lower steel shipments, while average steel selling price remained relatively stable.

AACIS segment’s crude steel production was 3.5 million tons, down 8.8% sequentially, primarily due to operational issues impacting the South African operations.

Shipments were 3.0 million tons, down 9.0% sequentially primarily due to operational issues in South Africa.

EBITDA during the quarter was $284 million, down 38.5% sequentially, primarily due to lower steel shipments and higher costs.

Distribution Solutions: Sales in the segment were $4.9 billion, down 2% sequentially, primarily due to lower average steel selling prices (-2.9%).

Shipments in the segment were 4.6 million tons, flat sequentially.

EBITDA was $48 million, down 58.3% sequentially primarily due to lower margin from European operations resulting from seasonal slowdown.

Balance Sheet

At the end of September 30, 2011, cash and cash equivalents including restricted and short-term investments were $2.8 billion versus $3.2 billion at the end of June 30, 2011.

During the quarter, net debt increased by $0.1 billion to $24.9 billion compared with $25.0 billion as of June 30, 2011.

Cash Flow

Net cash used in operating activities was $0.8 billion in the reported quarter versus $0.3 billion for the three-month period ended June 30, 2011. The cash flow used in operating activities for the third quarter of 2011 included a $1.0 billion investment in operating working capital compared with $2.8 billion investment in the second quarter of 2011.

MT and Peabody Bid for Macarthur

On October 25, 2011, ArcelorMittal provided notice to Peabody Energy that, in accordance with the Co-Operation and Contribution Agreement between the two companies, following its acceptance of PEAMCoal Ltd’s offer for Macarthur Coal Ltd, it has terminated the Co-Operation and Contribution Agreement. ArcelorMittal will remain a shareholder in PEAMCoal until the termination arrangements are completed, which is expected to be in approximately 90 days’. In taking this decision, ArcelorMittal has determined that it would no longer be appropriate to allocate substantial capital for the acquisition of a non-controlling, minority business interest. This is in accordance with the rights that ArcelorMittal originally negotiated with Peabody at the time the Co-Operation and Contribution Agreement was concluded.

Given the unanticipated level of acceptances into the offer, ArcelorMittal believes that it is more appropriate to focus its capital elsewhere in its business. ArcelorMittal considers that the capital commitment that would be required to retain its Macarthur interest and grow it materially further, exceeds what is appropriate to allocate to a business that ArcelorMittal does not fully control and consolidate. The unconditional PEAMCoal offer for Macarthur will not be affected by ArcelorMittal’s acceptance and will remain open until 7:00 p.m. (Brisbane time) on November 11, 2011 unless extended. ArcelorMittal will continue to perform its funding obligations to PEAMCoal until the termination takes effect as described in section 10.2(f) of PEAMCoal’s Bidder’s Statement for Macarthur.

Earlier 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, which is 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.

Outlook

The company’s EBITDA in the second half of 2011 is expected to exceed the level achieved in the comparable period of 2010. The company’ expects shipments in fourth quarter 2011 to be lower sequentially, reflecting economic uncertainties leading to customers adopting a “wait and see” approach. Higher iron ore and coal volumes will continue to be a positive underlying driver. The company’s iron ore and coal production is expected to increase by 10% and 20% respectively, by the end of 2011 as compared with 2010.

In light of the recent market uncertainty, the company is focusing on core growth capital expenditure. This will result in postponement of some planned steel investments. Accordingly, full-year 2011 capital expenditure is expected to be below the previously targeted level of $5.5 billion.

Net debt at year end is expected to be higher than third quarter of 2011, primarily due to the temporary investment in Macarthur Coal (which will be reversed in the first quarter of 2012).

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

We maintain our Neutral recommendation on ArcelorMittal with a Zacks #4 Rank (Sell) on the stock.

 
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