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Australian miner Arrium closes iron ore mine as prices plunge

24 January 2015

Australia's mining and materials major Arrium Ltd will close down one of its two iron ore mining operations in South Australia, aiming to improve its cash flow amid slumping prices for the main steel-making ingredient.

In a statement to the Australian Securities Exchange yesterday, Arrium's chief executive officer and MD, Andrew Roberts said: ''The business is able to move to a lower cash cost operation through its flexibility to alter volumes, grade and costs.''

''We are able to 'mothball' our Southern Iron operation and optimise our lower cost Middleback Ranges operation, including increasing the utilisation of its supply chain to deliver approximately 9 million tonnes per annum (Mtpa) of high quality, lower cost export iron ore for sale,'' Roberts said.

The closure is expected to result in 200 permanent job losses and a further 380 contracting jobs.

Sydney-based Arrium, Australia's fourth-largest iron ore exporter has been in a growth phase in the past few years targeting 13 Mtpa of iron ore exports.

''The re-design results from the substantial fall in iron ore prices over the last half, as well as increased uncertainty around the timing and extent of any price recovery,'' the company said.

Iron ore prices have fallen near their 5 1/2-year lows amid fears of weaker demand from China, its biggest consumer. On Friday, the commodity was traded at $66.79 a tonne, the lowest level since mid-2009, registering a third consecutive weekly decline.

Prices nose-dived 47 per cent last year as the world's biggest iron ore producers Vale SA, BHP Billiton and Rio Tinto increased output causing a glut in the market. The big miners believe that added low-cost output will squeeze higher-cost competitors and help to offset plunging prices.

Steel output from China, the world's biggest producer, has recorded its slowest growth in 24 years at 0.9 per cent in 2014, compared with 7.5 per cent last year due to declining construction activity. The world's second-largest economy has expanded about 7.4 per cent last year, the slowest pace since 1990.

Arrium expects to complete the restructuring in June 2015.

By the closure, Arrium expects to significantly reduce costs and capital expenditure to generate positive operating cash flow.

According to company's estimates, total cost of production will come down by 20 per cent to around A$57 a tonne in fiscal 2016, compared to 2014.

Also, Arrium expects a 30-per cent reduction or A$200 million in its capital expenditure plan during fiscal 2016-2019

Other mid-sized Australian miners have also cut costs to sustain in the low price environment. Atlas Iron said that its production cost has dropped by 17 per cent to A$65 a tonne, while Fortescue Minerals is estimated to have a break-even price of A$59 a tonne.

Arrium expects to incur a restructuring cost of A$70 million in fiscal year 2015.

Weakening Australian dollar against the US dollar has increased the company's net debt as at the end of December to A$1.43 billion.

Arrium said it will record impairment charges to the tune of A$1.34 billion in the half year ended 31 December primarily on account of low iron ore prices and mothballing of Southern Iron.

According to some analysts, about 30 per cent of the world's iron ore producers are making losses at current price levels and junior and mid-sized miners have to resort to significant cost cuts to stay afloat.

Roberts said a significant improvement over the current price estimates would be needed to reopen the mine which is located about 600 km from the port.

Credit rating agency S&P, which cut Vale's rating yesterday, estimates iron ore prices to average $65 a tonne this year and 2016 and $70 a tonne in 2017.

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