Lonmin issue casts shadow over Mittal

The timing and terms of Lonmin's rights issue are depressing ArcelorMittal South Africa's share price as investors are anxious that its cash-raising exercise will be offered at a similar steep discount.

ArcelorMittal South Africa CEO Paul O'Flaherty said: "This deep discount given by Lonmin has really affected our share price. Shareholders are not sure where ArcelorMittal South Africa will place itself in terms of its rights issue; people are getting nervous."

Mining and metals companies are strapped for cash as commodity prices are at levels last seen in 1999, with most commodity shares at lower levels than they were during the bottom of the global economic crisis in 2009.

This has forced two of South Africa's biggest companies to go to the market for money, in an effort to survive the commodities slump that appears to have no end.

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In a desperate attempt to entice shareholders, Lonmin will offer its shares at a 94% discount on December 10.

Lonmin said on Thursday that 88% of its shareholders approved the rights issue at a meeting in London after it had warned that if it couldn't raise the cash, shares could be suspended.

ArcelorMittal South Africa shareholders will vote on its rights issue, in which it wants to raise up to R4.5-billion, next month. Its share price is below R5 a share, from a high of almost R250 in 2008.

Since November 9, when Lonmin announced more detail on its rights issue, ArcelorMittal South Africa's share price has fallen another 27% to R4.90.

O'Flaherty said the share price was "heavily undervalued" and "ridiculously low", considering the company's strategy and the progress it has made since June this year in terms of government relations, tariff protection and efficiencies.

"We are looking so much better than we did in June this year; if anything, our share price should be looking better, not worse," said O'Flaherty.

Since the start of June, ArcelorMittal South Africa's share price has fallen by 80%.

O'Flaherty said he did not need to give as big a discount as Lonmin's Ben Magara was advised to do, because ArcelorMittal South Africa's rights issue was fully underwritten by the group owned by steel magnate Lakshmi Mittal.

Both companies rely on a small group of big shareholders, with, for example, 70% of ArcelorMittal South Africa's shares held by 10 shareholders. The group's top four shareholders are ArcelorMittal South Africa with a 46.8% stake, the Industrial Development Corporation with 7.9%, the Government Employees Pension Fund with 5% and Investec with 2.5%.

O'Flaherty said that including the rights issue and the BEE deal the company wants to sign in February next year, he would have about R3-billion in cash to work with going into the next financial year.

ArcelorMittal South Africa expects operating losses of almost R700-million for its 2015 financial year. "And I don't expect that 2016 will be any easier; in fact, steel demand for 2016 is expected to be at a seven-year low," said O'Flaherty.

Local steel demand during the next year is pinned at around 4.8million tons from 5.2million tons the year before. This is compared with the seven million tons used when infrastructure was being built for the 2010 Soccer World Cup.

Nevertheless, with the additional cash, better efficiencies and better relations with the government, O'Flaherty said the company could break even as soon as next year, and shareholders should expect an upturn, albeit a slow one, come 2017-18. He predicted 2% annual growth in steel demand after 2016 up to 2020, but that is without government speeding up its spend on infrastructure.

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ArcelorMittal South Africa has received 10% import tariff protection on certain of its products, and expects more to be put in place soon.

Additional anti-dumping protection is also expected to be implemented in coming weeks.

In exchange, the company has been working with the government to get the right pricing model for steel, and concluding a black partnership deal.

Steel would also be included in the country's localisation drive.

"The goal is that local steel is present and represented with the government in future trade missions," said O'Flaherty.

He said the 87-year-old company - the largest steelmaker in Africa - was looking at expanding business on the continent . "We are considering things like setting up a strong steel distribution business in SADC [ the Southern African Development Community] .

"We are fixing our balance sheet and trying to save as many jobs as possible. We are hanging in there and we are hanging tough."

prinslool@sundaytimes.co.za