Downgrades And Other News

Sydney, Nov 27, 2008 (ABN Newswire) - In another sign that the slump in China is hurting Australian companies, especially in resources, iron ore miner Fortescue Metals has suspended the construction of its Cloudbreak to Christmas Creek rail line in the Pilbara region of Western Australia, according to contractor, NRW.

It's a sign that the commodities slump is having a bigger impact on WA, notwithstanding BHP Billion's decision Tuesday to spend another $US4.8 billion expanding output there by a further 50 million tonnes a year over the next couple of years.

BHP also called off the Rio Tinto bid, so the iron ore spending should be seen as a cheaper way of expanding deeper in iron ore (which was what the Rio bid was all about).

China's cuts in iron ore purchases is hurting, even though Fortescue tried to claim that it had struck a deal to sell more ore to China

NRW said in a statement to the ASX yesterday that

"NRW Holdings Limited advises that FMG has suspended the contract for construction of the Cloudbreak to Christmas Creek Rail Line with instructions to demobilise from site, pending determination of the project status.

"NRW had completed approximately 47% of the contract to date and is continuing operations for FMG at the Cloudbreak Mine site.

"NRW further advises that notwithstanding this contract suspension, the Company sees no reason to alter profit guidance previously issued, but will monitor developments in the lead up to the second half."

NRW shares slumped 37%, or 1.5c to 28c, Fortescue shares fell 16.1%, or 33c to $1.72. So much for the Fortescue spin.

At its AGM last week in Perth, Fortescue said:

"Fortescue has concluded a Variation Agreement to enhance an existing long term contract with one of China's Top 5 steel mills. Commercial confidence prevents Fortescue from naming the mill.

"This variation provides for a 3.5 million tonne increase in purchases by this mill of Fortescue iron ore over the next calendar year. Beyond 2009 the customer has committed to taking 10% of Fortescue's total production. During 2008, the customer has met its purchase obligations under the Fortescue contract.

"The contract has now been amended by the parties with the customer committing to take deliveries of up to 5.5 million tonnes per annum ('mta') over calendar year 2009 as Fortescue ramps up to the production rate of 55mta during that year."

That still doesn't explain the decision to cut the railway construction. A spokesman for Fortescue was quoted in the media as saying the decision was in terms of the company's announcement last week as well that all projects and parts of the business would be reviewed.

Media reports today suggest the Fortescue will ship less this year, possibly as low as 15 to 18 million tonnes. It will truck ore from Christmas creek to Cloudbreak in a cost saving move, hence the decision to stop building the railway. 

For NRW, it was a very painful review outcome, coming ahead of yesterday's AGM in Perth.

Shares in electrical contractor Norfolk Group slumped 25% yesterday after the company reported its earnings had been bitten by the slumping economy, especially in the building and construction sectors here and in New Zealand.

Norfolk reported a 45% in first half earnings and slashed full year guidance. The market responded by selling down the shares 10.5c, or more than 26% to a new all time low of 28.5c.

Norfolk reported net profit for the half year to September 30 of $4.287 million, down from $7.777 million in the prior corresponding half.

That was struck on an 85% rise in first half revenue to $382.806 million. The company's earnings before interest and tax (EBIT) fell 16% to $10.299 million.

The guidance for the full year, which was updated around a month ago with a downgrade, worsened with the company now expecting to earn less in 2009 than it did in 2008.

On October 7 Norfolk said:

"The general uncertainty of global financial markets continues to impact the markets in which Norfolk operates, as discussed at the Norfolk Annual General Meeting in July this year.

"Since that time, instability in global financial markets has intensified and the New Zealand construction and building sectors have weakened further.

"As a result, Norfolk believes it will not achieve the target of a 10 per cent increase in earnings before interest and taxation (EBIT) on the 2008 financial year as previously stated.

"With no further delays in significant projects or further worsening of current market conditions, Norfolk believes it will achieve an EBIT result for the 2009 financial year similar to that of the 2008 financial year."

Yesterday that guidance became:

"Notwithstanding Norfolk's backlog and major contract wins, the continued extreme economic unpredictability has led to the company revising its FY2009 EBIT forecast to be within a range of $27.0 million to $30.0 million," the company said.

Seeing the company had an EBIT of $34.3 million in the 2007-08 year in its first year as a listed company, the current year will see quite a slump: it could be upwards of 20%.

Despite the earnings slump, Norfolk declared a maiden interim dividend of two cents, fully franked.

The company said its first half performance had been affected by a rapid decline in economic activity in New Zealand, and one-off costs including relocation, recruitment and the establishment of new branches in India.

As at the end of October, however, Norfolk was looking forward to $730 million in revenue in fiscal 2009 underpinned by contracts, work orders and on-going service commitments, up from $680 million at the end of August.

Norfolk said it continued to win new business in sectors that "remain relatively robust".

Norfolk continued to expand revenue from service maintenance, recurring and alliance style contracts, and a restructuring in New Zealand after a rapid decline in that market would deliver savings.

Norfolk says its had net debt at September 30 of $58 million and it continues to operate "within its banking covenants and debt facility limits. Its main senior debt facility is not due for renewal until July 2010." 

The crunch meanwhile has cost Adelaide-based Hills Industries a valuable $105 million at a time when cash is handy, or king, as some say.

Hills shares reacted adversely, falling 38c, or more than 9% to $3.08 on the news.

Hills yesterday revealed that an agreement to sell 60% of Fielders Australia Pty Ltd to Fletcher Building of New Zealand, would not go ahead.

Hills said in a statement yesterday that :"The Group Managing Director of diversified Australian company Hills Industries Limited, Mr Graham Twartz, today announced the conditional agreement to sell its 60% shareholding in Fielders Australia Pty Ltd ("Fielders") to Fletcher Building Limited has been terminated".

He got the bad news: in early October Hills chairman, Jennifer Hill-Ling got the good news when she said the company expected the sale of the Fielders' stake "would return approximately $105M in cash to the Hills Group, comprising repayment of inter company loans, consideration for shares and a fully franked dividend".

Hills CEO, Mr Twartz said in yesterday's statement that "despite Fielders' pleasing results and performance ahead of plan, the volatility in global markets and uncertainty surrounding the Australia economy were the major factors in the parties concluding to terminate the conditional sale agreement".

In its statement Fletcher's Chief Executive Officer of Fletcher Building Limited, Jonathan Ling, said: "The decision not to proceed with the acquisition at this time is not a reflection of the Fielders business but is indicative of the current market volatility and uncertainty in the Australian economy. 

"Although the business is still seen as a good fit for Fletcher Building, these external factors cannot be disregarded at the moment."

Based in Adelaide, Fielders provides roll formed steel building components to the Australian commercial, industrial and residential construction industries. The business has annual sales of approximately $275 million and employs 890 people across Australia.

And Woolworths has dismissed suggestions it's again taking aim at JB Hi-Fi, the electricals and consumer products retailer.

Woolworths said yesterday it was concerned about continued speculation regarding supposed offer discussions with JB Hi-Fi.

"Woolworths can confirm that it is not currently in discussions of any nature with JB Hi-Fi's board, management team, staff or advisers," Woolworths said in a statement to the ASX.

"Furthermore, the company has no current intention of entering or entertaining any such discussions and there is no offer to acquire JB Hi-Fi."

The suggestion had been bandied about after JB Hi-Fi shares rose after Harvey Norman produced bad news on Tuesday about earnings and sales.

JB Hi Fi says its sales are strong, but we haven't had an update for around a month and retailing in that times seems to have worsened.

Woolworths shares were up 10c at $25.10 and JB Hi-Fi was down $1.22, or 13.9% at $7.55.

Woolies holds its AGM today.

Fairfax Media told the ASX yesterday that it has no plans or current need to raise equity.

The company was replying to yet another query from the ASX about trading in its shares that saw the price reach $1.18 when the query was made on Tuesday.

Yesterday the shares plunged lower, touching $1.115 before rebounding to $1.30 in the wake of the reply as short sellers rushed to cover their positions. They hit a day's high of $1.335.

That was in a market down more than 2%, despite the surge by BHP after it pulled the plug on the Rio bid.

Fairfax said in reply to the ASX query about the price fall "The company is not aware of any information concerning it that has not been announced which, if known, could be an explanation for recent trading in the securities of the company.

"We believe the price changes and increases in volume in the securities of the company are at least, in part, related to unfounded rumours that the company will need to raise equity, and to continuing waves of short-selling of the stock," Fairfax Media said in a statement.

"The company has no plans or current need to raise equity."

Fairfax said it provided an update to the market on trading and earnings at its annual general meeting on November 13 and has no new developments to report on this area.

Fairfax said at the time that it was planning for tough trading conditions to last "for some time" with slowing advertising markets starting to affect earnings.

 


 

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