Arrium chief executive Andrew Roberts says a partial mothballing of his iron ore operations remains a possibility as he urged investors to look past the under-fire mining business at the growth potential in grinding media.
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Amid concerns about its debt levels, the steel, iron ore and mining consumables group hosted an investor day on Monday to talk up the quality and stability of its consumables division.
Despite a $754 million equity raising, Arrium's balance sheet remains stretched and its steel and mining earnings are under pressure due to the collapse in iron ore prices and depressed steel margins.
"We have to look to continue to pay down debt," Mr Roberts said.
"[But] this business [grinding media] is a very good business. We have strong market positions with very good customer relationships. Investors need to look at the value of the three different [business] segments."
Arrium's mining consumables business also supplies rail wheels and mining ropes, but the core of its earnings comes from grinding media. Mining companies use grinding media to crush ore and extract minerals. When grinding balls wear out they are replaced.
In the wake of the capital raising Arrium shares crashed to record lows. The stock rebounded 10 per cent on Monday to 26.5¢ amid a market-wide recovery in iron ore stocks, possibly linked to Chinese stimulus measures.
But based on Monday's close price, Arrium has a market value of $778 million, compared with the near $1 billion paid for the Moly Corp grinding media business alone in 2010.
"The valuation of the company reflects the challenges in mining and steel," Mr Roberts said.
"We need mining consumables to continue to improve its earnings and cash, and we need steel to improve its earnings and cash."
Arrium expects that the volume of copper and gold ore milled in the grinding business's core North and South American markets to grow at 9 per cent a year to 2018-19.
The company also points to declining head grades in gold and copper as indicators of strong demand for grinding media. Lower grade ores have lesser amounts of minerals and more unwanted rock and thus require more grinding.
Arrium said it had scale and customer advantages because Moly Corp is four times larger than its next biggest competitor and has strategic locations in key mining regions.
Critically, Arrium points to its stable margins as a sign of earnings reliability.
Contrarian fund manager Allan Gray has stepped into the recent Arrium sell-off to build an 8.3 per cent stake. Allan Gray portfolio manager Simon Mawhinney said one big risk to his investment case is if the grinding media business is not as "bullet-proof"as Arrium claims it is.
"They've gone to great lengths to make sure this business is appreciated," he said.
"The company still has a lot of debt considering where it is in the cycle. We think it offers long-term value [but] the concerns about debt are well founded."
Iron prices remain near five-year lows at around $US70 a tonne.
Mr Roberts said the sustained weakness in iron ore proves the timing of the capital raising was "prudent".
He also said the option to wind back or mothball Arrium's higher-cost Southern Iron mining operation remains on the table.
He refused to comment on Credit Suisse analyst Michael Slifirski's belief that Arrium may need to sell a stake in the grinding media business.
"We don't comment on speculation. We will continue to work on a number of strategic options. We are not closed on any particular action or opportunity," he said.
