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Arrium to meet lenders in effort to stay afloat as debt tops $2 billion

Bluescope Steel won government assistance, which Arrium is now seeking. Photo: Louie DouvisArrium will meet its financiers in the next few days to discuss if the South Australian steelmaker has a hope of survival.

The company, which has warned it may be forced to close its Whyalla steelworks and iron ore mines, will meet with its financiers over the next few days as net debt has topped $2 billion. It is reviewing refinancing proposals which may result in a rescheduling of some loans.

Arrium has also warned in its latest accounts of “uncertainty which may be material” in determining whether it “will continue as a going concern”.

At risk is an estimated 2500 jobs across the group’s steelworks and mines along with 1.3 million tonnes of annual steel capacity, about a quarter of the nation’s potential steel output. The threat to jobs and the South Australian economy has prompted it to form a taskforce with the state and federal governments to look at measures which could help the plant survive.

Arrium warned Wednesday that unless it can cut another $60 million in costs out of Whyalla, on top of the $100 million signalled last October, and cut iron ore mining costs by a third, then both operations will be shuttered. Plans for closing the Whyalla works, which would affect more than 1500 jobs, including contractors, are well advanced, with a decision due by midyear, it said.

Ahead of the final decision here, Arrium said it is in talks with contractors and suppliers in a bid to cut costs, as well as seeking government concessions. Last year Bluescope, which operates the Port Kembla steelworks in NSW, won payroll concessions from the state government. Arrium refused to be drawn on what government assistance may be on the table, but the federal election due later in the year could give Arrium some additional negotiating strength.

Arrium said it could offset part of any reduction to output from shutting Whyalla by ramping up output at smaller steel plants it operates in Sydney and Melbourne. These two plants are operating at around 70 per cent of capacity at present and are benefiting from both the low price of scrap metal along with the lower Australian dollar.

At the end of December Arrium had net debt of $2.07 billion and while it was compliant with debt covenants it may need relief from its lenders if cashflows remain under pressure, it warned, with speculation lenders to the company would need to “take a haircut”.

“Any recapitalisation proposal would be expensive, and take time,” one source close to the company said, indicating that some form of debt forgiveness may be on the table. “Doing a deal sooner may make sense. If you wait too long, there may be nothing left to squabble over,” the source said.

Fifteen months ago, Arrium raised $754 million from shareholders at 48¢ a share. The shares closed trading Wednesday at 5¢.

The slump in the iron ore price had hurt its iron ore mining division, forcing it to slash costs further, while any closure would result in the loss of more than 1000 jobs, which would be spread across in-house and contractor positions.

“This is currently a very challenging year,” Arrium chief executive Andrew Roberts said, describing the December half net loss of $24 million as “disappointing and unsatisfactory”, which he blamed on the fall in iron ore and steel prices.

To restore its finances, Arrium had put its Moly-Cop unit up for sale, but bids fell short of expectations, Mr Roberts said, citing the decline in prices of gold, copper and iron ore – the end markets for the output of this unit – and also the difficulty bidders had in financing their offers.

As a result, the focus has now shifted to the sale of other assets, although it conceded it has no assets of similar value to the Moly-Cop unit which could be sold, and more particularly a recapitalisation.

“We will consult our lenders,” Mr Roberts said.

“The company remains in charge of the strategic review,” the chief financial officer Robert Bakewell told analysts, denying the company’s financiers are in charge of this process.

South Australian Premier Jay Weatherill​ has already held talks with Prime Minister Malcolm Turnbull about a possible bailout for the Whyalla steelworks, saying the negotiations are at an advanced stage.

“We want to make sure that any support that we give to Arrium is support which provides a long-term sustainable future for the business,” he told reporters.

Arrium’s business model needed to change to ensure the steelworks had a long-term future, he said.

“That’s the basis on which we’re having these discussions,” Mr Weatherill said.

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