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    OST Likes Iron Ore As Merger Hits Earnings
    AIR DAILY - 20/02/2008


    The costs of integrating the Smorgon Steel businesses bit OneSteel in the first half of the 2007-08 year, but the company is confident full year guidance will be met, despite underlying earnings falling short of market expectations.

    After including costs related to the merger with Smorgon, OneSteel (OST) said net profit fell 24% to $74.6 million for the six months to December 31.

    Excluding the restructuring and impairment costs from Smorgon, the company's net profit rose 6.3% to $104.4 million.

    The result was below analysts' forecasts, which ranged from $117.8 million to $138 million.

    OST shares fell more than 6% in a now familiar reception to an 'average' result. They bottomed at $6.66 before bouncing to finish down 18c at $7.00.

    The fall broke a sharp recovery in the company's share price on expectations of better than expected earnings, rising steel prices and speculation it might benefit from rising world iron ore prices, as we have just seen with a probably 65% rise for producers like CVRD of Brazil (Vale).

    The sharp rise in iron ore prices reported in deals between Japanese, South Korean and the Brazilian giant certainly got the attention of OneSteel and its CEO, Geoff Plummer

    OneSteel said it's on track to produce four million tonnes of iron ore this year, after the transition of ore feed at its Whyalla steel plant in South Australia.

    That's the so-called Project Magnet, which has again risen in cost to hit $400 million, according to yesterday's profit statement.

    The company has converted the steelworks to produce steel from low grade magnetite, rather than hematite iron ore, freeing about 40 million tonnes of hematite lump and fine ore for sale over 10 years.

    The company has sold a substantial portion of that figure to Chinese steel mills.

    Mr Plummer told a briefing that the company was looking to an increase of ore reserves and resources on its mining leases and an increase in production.

    "We're working pretty aggressively on both of those at this point," Mr Plummer said. "It really is the next big thing that we're looking at."

    Mr Plummer said he was encouraged by the 65% increase in the contract price of iron ore settled between Vale and three big Asians mills.

    "I think the stronger for longer outlook on iron ore is still pretty valid," Mr Plummer said.

    The company said that "Project Magnet, the commercialisation of OneSteel’s magnetite iron ore deposits continues to achieve major milestones. The transition of the pellet plant to magnetite ore feed occurred in early December and was followed by the planned pellet inventory build.

    "The transition of the blast furnace to the new magnetite pellets commenced before Christmas and is now effectively complete with the new pellets performing well in the blast furnace.

    "We are on track to ramp up to 4 million tonnes of external iron ore sales in this financial year after sales of almost 1.9 million tonnes in the period under review. The most recent estimate of the cost of the project will be approximately $400 million, compared with the previous forecast of $395 million," OST said in its statement.

    Mr Plummer said the company had made "significant progress" on the integration of the Smorgon business, with synergies achieved to date above target.

    "Progress to date with the acceleration of net synergy benefits is encouraging," he said in a statement.

    “The integration of the businesses is going well. In terms of progress against the synergy targets, the current estimate for synergy benefits in year 1 is $41 million, above the targeted first full year benefit of $25 million. The estimated cost of attaining the benefits is now $82 million which includes the $35 million cost of the bar mill restructuring that was announced on 15 February.

    "The bar mill restructuring will deliver negligible benefits this financial year as the closures and operational changes do not come into effect until the second half of the 2008/09 financial year. Costs associated with attaining the synergy benefits are by their nature often expensed prior to the benefits accruing."

    OneSteel said international prices for steel are expected to remain high this year, although the outlook for the Australian market was mixed.

    "International prices for steel and steelmaking inputs have increased dramatically to historic highs in recent months, It is anticipated that prices will continue at high levels but with continued volatility."

    Mr Plummer forecast strength in the mining, resources, non-residential and engineering construction segments, contrasting, and softness in manufacturing and residential construction.

    OneSteel reaffirmed its forecast for earnings before interest, tax, depreciation and amortisation for the 2007/08 year of between $710 million to $780 million, before restructuring costs and synergy benefits.

    The company declared an unchanged interim dividend of 8c a share. The Dividend reinvestment program will apply. There is no DRP discount.

 
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