Rain Hits OST

By Glenn Dyer | More Articles by Glenn Dyer

The big rains of last week across much of Central Australia may have delivered relief to towns and farmers but they also gave steel group, OneSteel Ltd an expensive headache: about $30 million worth.

The rains fell across parts of WA, the Northern Territory, through much of South Australia, far western NSW and western and central Victoria.

While not drought breaking they certainly were heavy enough to close roads and cause low level flooding in places.

And Whyalla, where OneSteel is located, seems to have been very wet.

Australia’s Number 2 steelmaker told the ASX yesterday that flooding caused by the rain at its Whyalla plant in South Australia, may cut its earnings by as much as $30 million this financial year.

The company said in the statement that steel manufacturing at Whyalla was disrupted for two to three days and was due to restart yesterday. The flooding, which damaged rail lines has delayed some shipments of iron ore from the 2007 financial year to the 2007-2008 year.

OneSteel said initial estimates of the pre-tax impact of the flooding ranges between $15 million to $30 million. The company could earn around $200 million after tax this financial year, so the flooding will have a material impact.

The company’s statement said:

“OneSteel Limited today announced that there has been a small loss of production after abnormal rains caused flooding to parts of the Whyalla Steelworks operation.

“Heavy rains and associated flooding caused damage to rail lines, internal and external to the site, and created potential operational security risks to certain equipment within the steelworks operation.

“In terms of iron and steelmaking operations, there was minimal disruption to the blast furnace and it is operating normally. As a result of internal logistics disruptions and to facilitate a return to normal safe operating conditions, steel manufacturing has been disrupted for two to three days and is due to recommence later today.

“Whilst mining activities have recommenced with minimal impact, the transport of iron ore from the mine site by rail is currently disrupted and will be restricted by repair work. Supplementary material will be trucked to minimise disruption to steelworks operations. However, there will be deferment of iron ore sales as rail repairs are completed.

“In terms of Project Magnet (the expansion of the iron ore mining operations) no damage was caused to plant and equipment; however it is expected that there will be a slight delay of approximately one week to construction activity.

“Preliminary assessment of the financial impact to the company’s EBITDA for the 2006/07 financial year is in the vicinity of $15 to $30 million and includes the cost of clean up, production disruptions, restoring rail operations, the rescheduling of deliveries of steel products and the deferral of iron ore shipments from this financial year.”

……………….

Shareholders in the meantime should hear by the end of the month about progress on the proposed merger with rival Smorgon Steel.

The terms of the deal were reworked in December.

The deal will now see OneSteel buying all of Smorgon’s assets except its distribution businesses, and the share-based deal will also see OneSteel assume all of Smorgon Steel’s debt.

OneSteel shares would be immediately distributed to existing Smorgon Steel shareholders by way of an equal capital reduction.

The two companies said in a statement released on December 18 that the Smorgon Steel Metals Distribution, Smorgon Steel Sheet Metal Supplies, Smorgon Steel Pipeline Supplies and Metalcorp Steel business will continue as an independent listed entity as Smorgon Steel, in the hands of its existing shareholders.

Like the earlier $1.6 billion full merger announced in June, this deal will need ACCC approval.

If that happens, OneSteel and Smorgon expect the new transaction to be put to shareholders in late April 2007.

The pair’s original $1.6 billion merger plan faced competition concerns and the move by rival BlueScope Steel to buy a 19.98 per cent blocking stake in Smorgon.

If there had been a rival bid before January 3 at more than $1.90 a share for Smorgon, then both companies could have called it quits.

BlueScope didn’t front up, so the next date is January 31 because in their December statement, OneSteel and Smorgon said they would “advance the transaction” under the new structure if by that date it became clear that completion via the scheme of arrangement (as envisaged in the original deal) was unlikely to occur within an acceptable time frame.

Such a deal would allow the original merger deal structure to be reactivated.

But they should keep a close eye on the ACCC. It was already toey and unhappy at the original proposal and the presence of BlueScope.

It’s cynical about Smorgon and OneSteel being newly in favor of competition, especially from imports as both are skilled complainers and users of the Anti- Dumping rules on imports to try and protect themselves.

The ACCC has yet to rule on the latest proposal.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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