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When In A Hole, Stop Digging

08 February 2019 by jbchevrel

ArcelorMittal (MTNA) was under pressure today, with its 5y CDS wider by c15bp and its stock down -5%. That happened despite ever higher metal prices YTD. The move was caused by the evacuation of c700 people living near its dormant Serra Azul tailing dam, as precautionary measure. The dam has not broken yet, but analysts are divided on how big the financial impact can be. On the other side of the Atlantic, the outlook is not much brighter. MTNA’s South African subsidiary AMSA has registered its 1st profit in ~10y thanks to higher margins (metal prices up), higher volumes, lower costs. But demand from South Africa is still sluggish (less growth in infrastructure projects) and imports from China have established a fierce competition. Despite bad news, it is not a credit story yet. Leverage is still around 1x and MTNA has a solid liquidity. It has $2.4B cash on its balance sheet and another $5.5B disponible from credit facilities. Net debt is higher $10.2B, but the short-term maturities ‘only’ amount to $3.2B ($1.3B CP $1.0B loans $0.9B bonds). Management’s commitment on leverage and ‘small’ dividend & buyback programme are also reassuring in the medium term.