Does anyone has a view on ArcelorMittal stock as a long-term investment? I’m starting to see deep value funds investing aggresively based on the following thesis:

  1. One of the largest steel and iron ore producers, and also one of the most efficient ones

  2. Acceptable debt levels (I think D/E is 30% and Net Debt/EBITDA 2.5x)

  3. 70% of their revenues are coming from Europe and North America (yes, China of course has indirect effect through prices)

  4. Management has cut dividend to reduce debt and implement more cost-efficiency

  5. Most of competitors are losing money and this situation will make them close (also due to higher leverage), reducing supply, hence driving up prices.

  6. It currently trades at impressively low multiples (0.15 P/BV amongst others), it has fallen 87% since 2011 and 65% only last year, an excessive punishment according to these funds.

I’ve also seen positions increased in Rio Tinto and Antofagasta based on a similar thesis.

I think it could be an interesting call for the medium-long term.



I like quality names in the industrial space these days even if this isn’t the bottom yet. There may be some volatility ahead, but if I was going to invest in a basket of equity it would be something like:

ArcelorMittal, NUE, STLD, AA, BHP, RIO, NSC, UNP, CAT, DE.

Basically, there’s some value there in high quality names and with the rails in particular, you’re getting a great value and 3.5% dividend.

What about RIO’s dividend yield of 8.5%? Any sustainability there? With that yield and quite a healthy balance sheet, it seems difficult to lose money in the long run.

There’s a good chance Rio will cut the dividend, partly under ratings pressure and partly to build cash for acquisitions.

Thoughts on miners? I hold a small position in FCX ive been buying a bit on the weakness. The debt levels are high but they seem to be able to service them.

I’m still avoiding some miners, such as FCX.

I’m worried with FCX that things may deepen before they improve. Their oil and gas operations are dragging them down because they need to be develped to produce (the mining operations would churn $2B in free cash flow at current spots in 2016) and the issues with Indonesia keep dragging on. They idled their rigs so they’re burning like $600M a year just to rent drill rigs they aren’t even using to save on operating expenses. If they can get the deepwater assets develped, they produce at $15 bbl. They will likely have to stakes in significant assets to delever through this year and that will likely hurt the equity. I’m waiting until 3rd quarter to revisit FCX for investment.

That being said, I think they are nearing the light at the end of the tunnel and have a very strong asset base to remain solvent. The Grasberg mine in Indonesia is valued at up to $17B (total debt is $20B) and would still leave them with significant copper and oil assets. They are plenty of buyers including Rio and BHP in the market for high quality copper assets which are scarce to find and continue to sell at strong valuations. BHP could easily absorb all of FCX without losing it’s IG standing. Glencore may also be hunting for copper assets at this juncture.

So I’m not sure you need to sell your position as I don’t think they’re a solvency risk at this point, but from a pricing perspective if I were going to buy in from scratch I’d wait a bit ot try to bottom fish for pricing.

Awesome thanks for your take. I have been feeling kind of similarly lately. I grabbed it up a few months ago around 9. Shot up to 13 and was debating selling but didnt. Continued to buy on the way down and my average cost is around 6.

I have been getting a little uneasy about things as prices continue to dip, but many of their projects are still cash flow positive and they seem to be able to service their debt as of now. I am not itching to sell as I do see long term value in the name but if prices dip enough in the near-mid term it could cause some issues. My position is small enough that I can handle a big loss, and the 5 year upside on this is pretty large so I am going to keep in my holding pattern.

Good thing I held onto that FCX lol

Yep. I still think things will get worse through 2016 for another quarter or two. Some of the copper strength is from the fact that fcx itself is banned from exporting from Indonesia while they haggle over the grasberg mine right now. Eventually they will win approval and the copper mined over the export ban will hit the market. The other half comes from this self defeating cycle where weak markets pause fed expectations which rallies markets, which raises hike probabilities (which strengthens the dollar and hurts copper). The underlying macro fundamentals are still very weak


Very much agree, Im going to trim my position a bit and buy on the inevitable pullback.

The unknowns hanging out there are 1) amount and nature of asset sales given a target to delever through asset sales by 5-10B and how equity will respond and 2) what if anything they will have to pay to renew the export permit.

I think the $17B valuation they put out there is pretty questionable on Grasberg. That mine was a cash flow machine years ago, but to justify that price that mine needs to be turning out at least $2.5B of EBITDA per year and they’ve been nowhere near that the last 4 years, and that was in a higher copper and gold price environment. I know they are transitioning to the underground and eventually will hit better pay, but I’ve been hearing that for years now. That also requires capex that’ll lower the value.

That mine needs a lower multiple or higher discount rate to account for the geopolotical risk, too. There is a long history at that mine that includes a mini war if you go back far enough. Hundreds of people were killed, and only a few years ago were workers being killed by snipers b/c they showed up to work during a labor dispute/strike. Freeport is a mess

There’s some real good value there in the assets, particularly the South American copper mines. Yeah they’d be attractive to someone as an acquisition, but if BHP were to buy them they’d probably need to negotiate something with the sr. unsecured bond holders. Those are trading at distressed levels and there’s probably change of control provisions in those bonds requiring 101 to be paid. Paying par value for all of that debt makes FCX an expensive acquisition – par value of debt is 3.5x-4.0x more than the value of the equity.

I know its draconian and I dont expect it to happen, but if you own equity in FCX there’s a possibility of a lot of dilution if there is some sort of debt-for-equity or convertibles swap if copper/gold/oil prices continue downward. I don’t expect it, but when you get the debt trading at such low levels these things are on the table. Buying the sr. unsecured debt could be a better proposition than the equity b/c there’s more downside on the equity I believe. FCX is a stay-away for me.

While Tommy lays out the bear case pretty well, I think the fundamentals of the copper market as well as the general scarcity and demand of assets has to be taken into account over the long term. I would not be surprised to see copper approaching $3.00 over the long term.

FCX is a great security to buy if one is calling for $3/lb copper prices. I don’t mean to hate on the company or anything. I used to cover them and think they have good assets, but they have just been a mess ever since the Plains acquisition.

Tommy has some great points. FCX still has some obvious volatility ahead of it.

I was looking through the mining names today and got to thinking that I really like JOY to add to a basket of beaten down industrial names. Revenues have been hammered by all the industry CAPEX cuts (they provide heavy mining equipment) but revenues are now down to like 75% aftermarket and 25% OEM where you can probably assume the aftermarket forms some sort of floor. They have very low CAPEX and remain FCF positive and you can assume because most CAPEX has been cut to the bone that they are nearing the bottom of their cycle.

For sure and it’s not like that equipment is going to get any newer, those aftermarket sales are just delayed as their clients preserve cash. They’ll still have to make those expenditures eventually

FCX seems to hve gotten a pretty good deal on their sale looking at it quickly. SMM gets a good deal as well seems solid all the way around.

So you’re up 43% since 2/2, you must be pretty stoked. Haha.

Yea, I cry slightly less at night for sure. Probably going to take a look at it later and possibly trim the position size a bit. Cost basis on the trade is at 6.99 but the overall position has gotten a bit bigger than I am comfortable with.