Daniel Malan in the latest RE:CM commentary makes the bull case for ArcelorMittal SA.
The investment case relies primarily on a cyclical argument and that ACLJ.J looks good compared to historical multiples. Most interesting for the Bull case is this paragraph:
Two recent corporate actions in the domestic
steel industry put much-needed perspective on
the valuations afforded by the market at present:
A BEE company called Nemascore is buying
Russian parent company Evraz's 85% stake in
JSE-listed Evraz Highveld Steel for R3bn, valuing
it at R30 per share - a substantial premium to the
market price of R13 at the time; A consortium
including the IDC and Shanduka bought Scaw
Metals from Anglo American in April 2012
for R4.6bn. Sell-side analyst Brian Morgan of
brokerage firm BNP Paribas Cadiz estimates that
on a value per installed ton of capacity basis
these transactions value Mittal SA in a range
from R60 to R74 per share.
That is all very good. However, it should be noted that both Evraz and Scaw are smaller operations, and are therefore more likely to hit full plant capacity, arguably the most important factor in profitability. ArcelorMittal SA's facilities are just too big for the South African market, and it is extremely unlikely that it will ever consistently operate at full capacity. So replacement cost and book-value valuations are relatively meaningless in this instance. Evraz and Scaw have also been making profits in the most recent quarters, the same difficult trading environment as ArcelorMittal SA has produced losses. At R32 a share, ACLJ.J could go to R50, but in the absence of getting back to the preferential iron ore agreement at Sishen, it's unlikely that it will ever be more than that.
The investment case relies primarily on a cyclical argument and that ACLJ.J looks good compared to historical multiples. Most interesting for the Bull case is this paragraph:
Two recent corporate actions in the domestic
steel industry put much-needed perspective on
the valuations afforded by the market at present:
A BEE company called Nemascore is buying
Russian parent company Evraz's 85% stake in
JSE-listed Evraz Highveld Steel for R3bn, valuing
it at R30 per share - a substantial premium to the
market price of R13 at the time; A consortium
including the IDC and Shanduka bought Scaw
Metals from Anglo American in April 2012
for R4.6bn. Sell-side analyst Brian Morgan of
brokerage firm BNP Paribas Cadiz estimates that
on a value per installed ton of capacity basis
these transactions value Mittal SA in a range
from R60 to R74 per share.
That is all very good. However, it should be noted that both Evraz and Scaw are smaller operations, and are therefore more likely to hit full plant capacity, arguably the most important factor in profitability. ArcelorMittal SA's facilities are just too big for the South African market, and it is extremely unlikely that it will ever consistently operate at full capacity. So replacement cost and book-value valuations are relatively meaningless in this instance. Evraz and Scaw have also been making profits in the most recent quarters, the same difficult trading environment as ArcelorMittal SA has produced losses. At R32 a share, ACLJ.J could go to R50, but in the absence of getting back to the preferential iron ore agreement at Sishen, it's unlikely that it will ever be more than that.
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