Dismal 3Q from ArcelorMittal

Steel bellwether ArcelorMittal ( MT - Analyst Report ) posted a net loss of $709 million or 46 cents per share in the third quarter of 2012 compared with a net income of $659 million or 19 cents per share a year ago. The bottom line was hurt by the challenging economic conditions including the slowdown in China as well as lower steel pricing and shipments.

The company’s adjusted loss of 31 cents a share missed the Zacks Consensus Estimate of earnings of 6 cents per share. The adjusted loss excludes one-time items including impairment and restructuring charges.

Revenues declined 18.5% year over year to $19,723 million, trailing the Zacks Consensus Estimate of $21,189 million. Sales also declined 12.3% on a sequential basis due to lower steel shipment volumes and lower average steel selling prices. Shipments declined 5.7% to 19.9 million metric tons in the quarter.

Segment Review

Flat Carbon Americas: Lower production in North America and South America due to planned maintenance led to a 2.4% year-over-year and 4.8% sequential decline in steel production to 5.7 million tons in the quarter. Average selling prices went down 6.6% year over year to $850 per ton.

Sales went down 12% annually and 9.7% sequentially to $4,840 million due to lower steel selling prices in North America, weakening slab pricing and lower dollar prices in South America resulting from the depreciation of Brazilian Real.

Flat Carbon Europe: Revenues slid 20.6% year over year and 15.4% sequentially to $6,108 million in the quarter, due to lower steel shipment volumes and lower average steel selling prices. Steel production fell 9.1% from last year and 5.9% sequentially due to weak economic conditions and seasonal demand patterns. Average selling prices of steel took a massive hit, going down almost 16.2% from last year to $856 per ton.

Long Carbon Americas and Europe: Revenues from the segment dropped 22.3% year over year and 8.9% sequentially to $5,189 million. Sales were affected by a decrease in steel shipment volumes and lower average steel selling prices. Average selling prices fell around 11% year over year to $861 per ton. Production declined 1.8% on a year-over-year basis and 2.9% sequentially, impacted by weak economic conditions and seasonal effects.

Asia Africa and CIS (AACIS): Sales slipped 6.2% from the year-ago quarter and 8.2% from the previous quarter to $2,457 million due to lower steel shipments and average steel selling prices. Average selling price was $658 per ton compared with $771 per ton in the year-ago quarter.

Distribution Solutions: Revenues declined almost 24.1% year over year and 13.4% on a sequential basis to $3,716 million as slightly lower shipments and a drop in average selling prices weighed on sales. Average steel selling prices declined 14% year over year.

Mining: Iron ore production inched down 0.7% from the previous quarter to 14.3 million tons in the reported quarter while increasing 1.4% year over year. Coal production declined 4.8% both year over year and sequentially to 2 million tons.

Balance Sheet

Cash and cash equivalents (including restricted cash and short-term investments) amounted to $3 billion as of September 30, 2012, compared with $3.9 billion as of December 31, 2011. The company’s net debt increased by $1.2 billion to $23.2 billion in the quarter due to negative operating cash flow and unfavorable foreign exchange impacts, partly offset by proceeds from asset disposal and an issuance of perpetual securities.

Outlook and Recommendation

ArcelorMittal is wary of the situation in Europe and the domino effect it might have on other markets. In such circumstances, the company is focused on improving its efficiency, productivity, optimize its assets and reduce net debt.

The company anticipates its own iron ore shipments to increase by approximately 10% in 2012, from last year while capital expenditure is projected to be approximately $4.5 billion for the year. Also, the company expects EBITDA to be approximately $7 billion in 2012.

Excluding any proceeds from future asset sales, net debt is expected to be approximately $22 billion at the end of 2012. Deleveraging is a priority as the company continues to target an investment grade credit rating.

As such, the company is planning to cut its annual dividend to 20 cents per share in 2013 from 75 cents per share in 2012. The revised dividend, which is subject to the clearance of shareholders at the next annual general meeting in May 2013, will be paid in July 2013.

We currently have a long-term Underperform recommendation on ArcelorMittal. The company, which competes with U.S. Steel Corp. ( X - Analyst Report ) and Tata Steel Limited, maintains a Zacks #5 Rank, which translates into a short-term (1 to 3 months) Strong Sell rating.