The world’s largest steel maker is proving its mettle. ArcelorMittal halved its dividend and is aggressively cutting costs.
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The company slashed its dividend to $0.75 (Rs36.60) per share as it delivered its fourth-quarter and full-year results on 11 February. ArcelorMittal said Ebitda (short for earnings before interest, tax, depreciation and amortization) fell to $2.8 billion in the fourth quarter, 42% below the same period last year but within its guidance range of $2.5-3 billion. ArcelorMittal reported a $2.6 billion net income loss.
But excluding one-off charges, the firm is still making money and is on track to meet its debt reduction targets. In extremely difficult conditions, that’s a fairly impressive performance.
In response to weak global demand, the steel maker cut production by a huge 45%—some 10 percentage points higher than it had previously guided investors.
The steel maker’s effort to run down its inventory and reduce its workforce resulted in a one-off charge of $4.4 billion in the quarter. But strip that out and ArcelorMittal still generated an operating income close to $1 billion, that’s a comfortable 1.5 times the steel maker’s net interest expense.
The steel maker has taken significant steps to strengthen the balance sheet. It got 60% of the way to its goal of reducing debt by $10 billion by the end of 2009 in just one quarter. (Debt fell to $27 billion from $33 billion at the end of the third quarter.)
At least half of that came from one-offs—including $1 billion from the sale of its stake in a German steel plant and a further $2.5 billion from unwinding currency hedges—but the company still looks likely to meet its goal ahead of time.
ArcelorMittal has also delayed its most onerous debt maturities. Investors had been primarily concerned about $8 billion the company was due to repay in 2010. By agreeing “forward start” loan agreements, locking in loans ahead of time, ArcelorMittal ensures that it has no more than $4 billion of debt maturing in any one year until 2012. That should be met by the steel maker’s cash flows, which get a $1 billion boost from a decision to halve the dividend.
Write-offs and dividend cuts are never welcome, but ArcelorMittal deserves credit for acting so decisively. It may help that the controlling Mittal family has seen so many dismal years in the industry. Sharp action helped ArcelorMittal’s fourth quarter numbers come in better than many analysts feared.
Whether or not the steel maker is right in thinking the worst part of the cycle has already passed, ArcelorMittal looks well placed for whatever comes next.