Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Billionaires are used to controlling their own destiny. But Lakshmi Mittal can only do so much about plunging steel prices. 

Shares Hit
Source: Bloomberg

ArcelorMittal, the world's largest steelmaker, said on Friday it will raise $3 billion in in a stock offering, equivalent to about 40 percent of its market value, as well as sell a $1 billion stake in Gestamp, a Spanish auto-parts maker.

Impairments, chiefly related to dwindling cash flow expectations for the company's mining assets, caused the company to report a $7.9 billion net loss, far worse than analysts' estimates. The shares, which had fallen almost 60 percent over the past year, tumbled a further 7 percent on Friday.

ArcelorMittal's Losses
The steelmaker posted a $7.9 billion net loss for 2015
Source: Bloomberg data

The steelmaker had ruled out a capital increase as recently as November. Yet the relatively modest share price decline on Friday, combining with a sharp decline in the cost of insuring ArcelorMittal's debt against default, suggests investors are relieved the company is taking action to avoid losing access to capital markets and credit lines.

Mittal insisted on Friday his company "has the right assets, the right strategy and the right balance sheet". The need for large impairments and a capital increase suggest that's not quite the case -- and the ingredients for a long-term turnaround lie largely outside the billionaire's control.

Due to its sprawling global operations, the company is even more exposed than some European rivals to price declines caused by China's steelmakers dumping a supply surplus on global markets.

Unlike some rivals, ArcelorMittal also owns large iron ore mining assets. A source of cheap raw materials when prices are high, these mines are a drain on cash when prices are depressed.

There are tentative signs of a stabilisation of steel prices and of manufacturing demand -- but even if prices flatten out, ArcelorMittal won't feel an immediate benefit because the company's steel contracts operate with a lag.

With $6 billion of its credit lines requiring ArcelorMittal to keep net debt to less than 4.25 times Ebitda (the figure stood at 3.3 times at the end of 2015), ArcelorMittal was sensible not to run the risk that things will get worse before they get better.

Breathing Space
Capital increase reduces leverage, protecting access to a $6 billion credit facility
Bloomberg and company data

Bruised investors now need to dust themselves off and focus clearly on two things: cash generation and debt repayments.

Since the $38 billion merger of Arcelor and Mittal in 2006 the steelmaker has cut net debt by about 40 percent. Friday's fundraising and disposal will cut this further to less than $12 billion, or 2.2 times trailing Ebitda. That level is still high, and will require the company to do more to generate cash.

Cutting Debt
Net debt has declined since the 2006 merger that created ArcelorMittal
Bloomberg and company data
2016 includes impact of fundraising and asset sale

ArcelorMittal said on Friday its wants to boost free cash flow generation to more than $2 billion by 2020. Last year, it generated $2.2 billion in cash from operating activities -- but spent $2.7 billion on capital expenditure.

In the near-term, ArcelorMittal is cutting capital expenditure and the dividend to lower the business's cash requirements by around $1 billion in 2016.

But even then, cash generation will be weak at best. Ebitda is set to drop to at least $4.5 billion in 2016 -- exactly the level at which the company only starts to generate free cash flow, leaving little room for error.

With $10.1 billion of cash and credit lines, ArcelorMittal has sufficient resources to cover debt repayments until the end of 2019. The steelmaker has breathing space for now. A long-term recovery relies on steelmakers cutting capacity and a rebound in prices.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net