Arcelormittal South Africa Limited · JSE:ACL
Arcelormittal South Africa — Ispat Iscor — Investor Presentation (August 2004)
45 slides from Arcelormittal South Africa's investor presentation, August 2004
Slide 1: Ispat Iscor Limited investor pack
«= ISPAT ISCOR LIMITED investor pack
Slide 2: Market Information
Market Information JSE Top 40 index position: #22 Free float 41% Market cap $3.1bn Daily value traded $6.1m for past 12 months Annualised turnover 77% of total issued shares Major shareholders - LNM Group 50.01% (#2 global steel producer) - IDC 8.8% - Institutional 41% - South Africa 28%
Slide 3: Company Profile
Company Profile 1928 – Iscor established as parastatal 1989 – Iscor privatised and listed on JSE 1994 – Start of major re-engineering program 2001 – Unbundling of mining division as Kumba Resources 2001 – LNM Holdings N.V. buys initial stake in Iscor 2002 – Iscor enters into BAA with LNM
Slide 4: Successful Restructuring History
Successful Restructuring History Major re-engineering 1994-2001 - significant headcount reduction (30 000 people) - steel grades down from 302 to 50 - inefficient capacity closed (1mtpa) - moved to lowest quartile on global cost curve Value added products: - Flat 61% - Long 72% Mining division
Slide 5: Production
Production Operations - 3 integrated steel mills - 1 steel mini-mill - surplus coke batteries producing market coke - captive iron ore (toll-mined by Kumba Resources) Output Long - Steel: 6.4 mtpa 31% Flat 69% - Market Coke: 400 ktpa for ferro-chrome industry Largest regional steel producer 5
Slide 6: Geographic Location
Geographic Location Overview of operations Flat Products Vanderbijlpark 3.1 Mtpa final product Thabazimbi Saldanha 1.3 Mtpa final product Long Products Johannesburg Newcastle Vanderbijlpark Vereeniging 1.7 Mtpa final product Vereeniging Sishen Newcastle 0.3 Mtpa final product Durban
Slide 7: Geographic Sales
Geographic Sales South Africa Rest of Africa Total Africa Far East European Union North America 1H’03 Middle East 2H’03 1H’04 Other % 0 10 20 30 40 50 60 70 80 Switch to better paying markets 7
Slide 8: Domestic Market Consumption
Domestic Market Sound South African economic fundamentals Good prospects for long-term sustainable growth Underlying demand recovery throughout 2004 Other Africa market share growing strongly Domestic margins $100/t > non-African exports ’000t Imports % 1 700 Quarterly consumption 14% Stee
Slide 9: Domestic Pricing Policy
Domestic Pricing Policy Domestic prices based on International Parity Principle Downstream industry support programme ($70m pa) through: - export rebates - strategic concessions - long-term contracts (auto industry, packaging) Competition Commission (Feb 2004) ruling that Iscor pricing policy
Slide 10: Invoiced Export Prices
Invoiced Export Prices US$/t (c&f) 630Hot rolled coil Low carbon wire rod 580 530 480 Based on 430 order book & expectations 380 330 280 230 180 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Ispat Iscor Record high prices 10
Slide 11: Global Steel Demand
Global Steel Demand ‘mt 1 200China WSD forecast +4% +1% Rest of world +3% +3% 1 000 +7% +6% +6% +6% +3% +8% 0% +4% +6% 800 +10% +22% +2% +21% +22% 600 400 +4% +0% +9% +6% +3% +2% -4% +3% +2% 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: World Steel Dynamics China driving growth in steel
Slide 12: China – Supply and Demand
China – Supply and Demand ‘mt 350 WSD forecast Consumption Production China forecast to become 300 net exporter by 2008 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: World Steel Dynamics China expected to become net exporter 12
Slide 13: World Steel Consumption Trends
World Steel Consumption Trends World Steel Consumption and GDP Per Capita, 1950-2010 2010 7 000 China takes 6 500 off! Phase 3 6 000 Asian crisis 1999 $US/capita ($1995) 2004 5 500 of USSR led Collapse 2002 1997 to steel consumption 1994 5 000 1989 collapse in Eastern Phase 2 Europe 4 500 1983 1979
Slide 14: Global Input Price Trends
Global Input Price Trends Based to 100 Based to 100 170 800 Coking coal - contract (LHS) Freight rates (RHS) Iron ore fines - contract (LHS) Coke (RHS) 160 Scrap (RHS) 700 150 600 140 500 130 400 120 300 110 200 100 100 90 0 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Source: Ispat Iscor Global
Slide 15: Raw Material Integration
Raw Material Integration Internall Domestic y supply sourced agreement Imported (at cost) s Iron ore 92% 3% 5% Coke 100% - - Coal 8% 55% 37% Scrap 81% 19% - DRI 98% 2% - Actual 1H’04 data Cost benefit for raw material integration 15
Slide 16: Key Performance Indicators
Key Performance Indicators 1H’03 2H’03 1H’04 CI savings (Rm) 13 303 464 - percentage 0.2 4.3 6.1 Number of employees (’000) 13 045 12 539 12 072 HRC cash cost - R/t 1 756 1 637 1 686 - US$/t 221 231 254 Billet cash cost - R/t 1 535 1 529 1 543 - US$/t 193 217 231 Percentage value-add exports - flat
Slide 17: Headline Earnings
Headline Earnings Rm 1H’03 2H’03 1H’04 Revenue 9 312 9 175 10 544 Comparable operating profit 1 871 1 504 2 948 Financing cost - net interest expense (31) (16) (14) - long-term provision top-up (28) (53) (133) # Tax (608) (492) (914) Equity earnings* 48 67 179 Minority interest 1 (3) (4) Comparable
Slide 18: Comparable Headline Earnings Trend
Comparable Headline Earnings Trend 1 500 Rand million US$ million 240 1 393 212 1 350 210 1 200 180 1 050 150 900 120 750 655 669 99 657 97 596 600 79 90 77 450 352 48 60 300 30 150 0 0 1Q’03 2Q’03 3Q’03 4Q’03 1Q’04 2Q’04 1Q’03 2Q’03 3Q’03 4Q’03 1Q’04 2Q’04 * Average R/US$ spot rate * R8.32/$ R7.73/
Slide 19: Key Result Drivers
Key Result Drivers 1H’04 vs 1H’03 Positive Negative HRC cash cost per tonne (Rands) -4% Domestic sales volume +22% HRC US$ price +40% Exchange rate +21% Operating margin* 20% 28% * Excluding BAA remuneration (1H’04) & power contract settlement (1H’03) Strong Rand only negative factor 19
Slide 20: Sensitivity Analysis
Sensitivity Analysis Operating Headline EPS Variable Change Income* Earnings* (SAc)* International steel price ±$10/tonne 197 134 30 Exchange rate ±10c 116 79 18 Domestic sales ±10% 187 127 29 * Based on impact for full six months forecast July-December 2004 Significant gearing to major variables 20
Slide 21: Financial Ratios
Financial Ratios 1H’03 2H’03 1H’04 Operating margin (%) 18 8 21 - on comparative basis (%) 20 16 28 EBITDA margin (%) 23 13 26 - on comparative basis (%) 25 22 33 Revenue/invested capital (times) 1.3 1.3 1.4 Return on equity (%) 18 7 23 - on comparative basis (%) 20 16 30 Net cash/equity (%) 5.8 0.2
Slide 22: Distribution to Shareholders
Distribution to Shareholders In view of our strong cash flow: Current distribution policy being reviewed Capital reduction proposal to be put to shareholders before end- 2004 Programme of capital reduction to be instituted Current stated capital R14/share No interim dividend declaration Su
Slide 23: 3-Year Focus
3-Year Focus Further quantum reduction in costs Increase production from current assets by 1mtpa Focus on value-add projects Lowest quartile producer (delivered EU cost basis) Defer South African steel industry consolidation Join select group of steel companies earning in excess of WACC 23
Slide 24: Outlook for 2004
Outlook for 2004 Positive steel business environment - ongoing global consumption growth - prices increasing from current levels - continued strength in domestic demand Operations - ongoing cost reduction - increased throughput Earnings - Q3 up on Q2 Positive outlook 24
Slide 25: Investment Case
Investment Case Competitive producer - vertically integrated - lowest cost quartile focus - part of major global steel group - naturally protected domestic market Growth potential - growing, more profitable regional market - sweat current assets for extra 1mtpa - expansion of market coke operati
Slide 26: Market Data
Market Data
Slide 27: Steel Equity Performance
Steel Equity Performance Base to 100, all prices in US$ 600 Ispat Iscor Gerdau 500 CSN POSCO China Steel 400 Severstal Bluescope 300 Arcelor Nucor US Steel 200 100 0 2 2 3 3 3 3 4 4 ‘0 2 ‘0 02 ’0 ‘0 03 ‘0 ‘0 03 ‘0 ‘0 4 04 ‘0 ‘0 n g t‘ c b r‘ n g c t‘ c b r‘ n g Au JuSource: Bloomberg Oc De Fe Ap Ju
Slide 28: Steel Equity P/Es (Forward)
0 2 4 6 8 10 12 14 PO SC O C ST SE VE R ST IS AL PA T IS Source: Bloomberg, 24 August 2004 C O AR R C EL O R U S ST ST EE EE L L D YN AM IC S SA IN IL T’ L ST EE C L H IN A ST Steel Equity P/E’s (Forward) EE G L ER D AU N U C O R Ispat Iscor still attractively valued C SN BL U TI ES C SC O O PE ST E
Slide 29: Steel Equity Price/Book
0 1.0 2.0 3.0 0.5 1.5 2.5 3.5 C VO ST ES TA LP IN E AR C TH EL O YS R SE N Source: Bloomberg, 24 August 2004 KR U PP PO SC O O N ES LI TE M E IS I L PA TED T IS C O R C Steel Equity Price/Book SN U SI M IN AS C SA H IN A ST EE SE L VE ST R EE ST L AL D YN AM Ispat Iscor still attractively valued IC
Slide 30: Steel Equity Market Capitalisation
US$m O 0 2 000 4 000 6 000 8 000 10 000 12 000 14 000 NE LI ST M E IT EL DY SED N TE AM E VO IC L ES S TA LP IN E Source: Bloomberg, 24 August 2004 C ST IN TI TE SC R O N AT IO N IS STE AL PA EL T IS U C O SI M R IN AS SE SA VE BL R U ST AL ES C O PE ST EE U L S ST EE Mid-sized market cap L C SN Ste
Slide 31: Extra slides
«= ISPAT ISCOR LIMITED extra slides
Slide 32: Relationship with LNM
Relationship with LNM Iscor’s long-term desire to link-up with a major steel group Business assistance agreement signed with LNM (Jan ‘02) - remuneration linked to performance - target cost savings (excl. labour + first 1%) R350m to R700m pa - LNM reward: 5-10% Iscor issued shares or cash equiva
Slide 33: Business Assistance Agreement
Business Assistance Agreement Savings achieved Remuneration due % of Cum % Number of Rm pa* max target of shares shares (m) Rm Settled Dec ‘02 644 82% Jun ‘03 388 58% 5.8% 25.7 613 Dec ‘03 (cash) Dec ‘03 687 115% Jun ‘04 1 326 232% 10.0% 18.9 731 Aug ‘04 (cash) Dec ‘04 Further savings expected 44.6
Slide 34: BAA Savings Analysis
BAA Savings Analysis By Savings Annualised Savings (Rm) % Efficiencies 858 65% Procurement 468 35% Total BAA Savings 1 326 100% By Plant Annualised Savings (Rm) % Vanderbijlpark 506 38% Saldanha 251 19% Newcastle 378 29% Vereeniging 190 14% Total BAA Savings 1 326 100% BAA savings spread over group
Slide 35: Currency Strength
Currency Strength Rand has strengthened 37% against US$ over past 24 months Rand relatively stronger than currencies of competitor countries Costs 65% Rand-based Focus to maintain position on cost curve 3-yr programme - restructuring - improvement projects - efficiency programmes Pro-activ
Slide 36: Capital Projects
Capital Projects Planned Completion Newcastle - pulverised coal injection 1H’05 Vanderbijlpark - Blast Furnace C – throat armour repair Completed - Blast Furnace D – interim repair 2H’04 - Roofer galvanising line* 1H’06 Coke & chemicals - market coke expansion* 2H’06 Thabazimbi - iron ore mi
Slide 37: Environmental
Environmental Environmental master plans approved All steel operations ISO 14001 certified Major environmental projects in progress - Vanderbijlpark - main water treatment plant - coke oven gas & water cleaning - Newcastle - reverse osmosis water treatment plant Focus on environmental complian
Slide 38: Cash Flow
Cash Flow Rm 1H’03 2H’03 1H’04 Cash generated by operations 2 302 2 022 3 452 Working capital (48) (292) (1 069) Asset sales 41 46 13 BAA remuneration (613) Capex (780) (499) (405) Finance cost (96) (9) (22) Tax (55) (1 032) (273) Dividends (446) (446) (334) Net cash flow 918 (823) 1 362 Strong cash
Slide 39: Capital Expenditure
Capital Expenditure Fcast Rm 1H’03 2H’03 1H’04 2H’04 Value adding 219 124 82 378 Replacement 452 300 267 352 Environmental 109 75 56 130 Total 780 499 405 860 Depreciation 451 469 478 519 Increased value-add and environmental spend 39
Slide 40: Sales Volumes
Sales Volumes ’000t 3 500 Export 3 225 Domestic DSP* 3 034 3 101 3 000 Domestic other 2 500 1 483 1 603 1 210 2 000 1 664 1 509 1 569 290 1 500 232 264 588 722 470 960 939 984 1 000 176 134 150 565 622 548 500 443 390 500 395 438 350 787 792 923 1 319 1 358 1 601 98 114 114 460 496 594 72 70 84 0 1H
Slide 41: Liquid Steel Production
Liquid Steel Production ’000t 4 000 3 595 3 490 3 477 3 500 3 000 2 500 2 000 1 811 1 870 1 829 1 500 1 073 1 080 1 085 1 000 606 645 563 500 0 1H’03 2H’03 1H’04 1H’03 2H’03 1H’04 1H’03 2H’03 1H’04 1H’03 2H’03 1H’04 Vanderbijlpark Saldanha Long products Total Production affected by Saldanha breakout
Slide 42: Flat Product Prices – Hot Rolled Coil
Flat Product Prices – Hot Rolled Coil US$/t c&f 850 US Midwest Germany 750Far East 650 550 450 350 250 150 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: CRU Geographical divergence 42
Slide 43: Long Product Prices - Wire Rod
Long Product Prices - Wire Rod US$/t c&f 750 US Midwest Germany 650 Far East 550 450 350 250 150 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: CRU Geographical divergence 43
Slide 44: Ispat Iscor Cash Cost Base
Ispat Iscor Cash Cost Base General Iron ore 6% 7% Coal : Local Labour 7% 15% Coal : Import 7% Services Scrap/DRI/Pellets 3% 6% Consumables Other raw material 4% 4% Electricity, gas & petroleum 10% Alloys & coating 9% Spares & repairs Refractories 8% Transport 4% 10% Total production cost base H1 200
Slide 45: Raw Material and Energy Impact
Raw Material and Energy Impact US Integrated plant – with coke US Integrated plant – without coke 350 350 300 +$81/ton 300 +$135/ton 250 250 200 200 150 150 $/ton $/ton 100 100 50 50 0 0 Q1 02 Q2 04 Q1 02 Q2 04 400 US Minimill –flat products 350 Ispat Iscor 350 300 300 +$199/ton 250 +$40/ton 250 200