ArcelorMittal NEUTRAL ZACKS CONSENSUS ESTIMATES (MT-NYSE)

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1 December 17, 2014 ArcelorMittal (MT-NYSE) Current Recommendation Prior Recommendation Underperform Date of Last Change 06/25/2014 Current Price (12/16/14) $10.69 Target Price $11.00 NEUTRAL SUMMARY We are retaining our Neutral recommendation on ArcelorMittal. The company swung to a profit in the third quarter, aided by its ongoing cost management initiatives. Revenues rose year over year on higher steel and iron ore shipments. The company reaffirmed its profit margin outlook for ArcelorMittal continues to contend with soft economic conditions in Europe, volatility in steel prices and tough competition. The oversupply in the steel industry has pressured prices and might lead to further price declines. However, we are impressed by the growth opportunities arising from acquisitions and emerging markets as well as the company s efforts to cut debt and reduce costs. We are also encouraged by its expansion initiatives in the mining segment. SUMMARY DATA 52-Week High $ Week Low $10.57 One-Year Return (%) Beta 2.27 Average Daily Volume (sh) 4,786,349 Shares Outstanding (mil) 1,795 Market Capitalization ($mil) $19,189 Short Interest Ratio (days) 7.31 Institutional Ownership (%) 3 Insider Ownership (%) 0 Annual Cash Dividend $0.17 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 1.5 Earnings Per Share (%) Dividend (%) P/E using TTM EPS N/A P/E using 2014 Estimate 44.5 P/E using 2015 Estimate 14.6 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Average, Type of Stock Large-Value Industry Steel-Producers Zacks Industry Rank * 235 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,703 A 22,478 A 19,723 A 19,309 A 84,213 A ,752 A 20,197 A 19,643 A 19,848 A 79,440 A ,788 A 20,704 A 20,067 A 19,379 E 79,938 E ,333 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.09 A $0.64 A -$0.31 A -$1.47 A -$1.05 A $0.21 A -$0.32 A -$0.06 A -$0.31 A -$0.90 A $0.12 A $0.03 A $0.01 A $0.32 E $0.24 E 2015 $0.73 E Projected EPS Growth - Next 5 Years % N/A 2014 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Luxembourg-based ArcelorMittal (MT) is the world s leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both the developed and developing world. It is the leader in all the main sectors automotive, household appliances, packaging and construction. The company is also the world s fourth largest producer of iron ore, with a global portfolio of 16 operating units with mines in operation or development. The company s global share of the automotive steel market is around 18%. In all, the auto industry consumes around 15% of all the steel that ArcelorMittal produces. Long-term contracts add to the stability of the company s business. ArcelorMittal had steel shipments of 84.3 million tons in ArcelorMittal has changed its organizational structure, effective Jan 1, 2014, to reduce organizational complexity and layers, simplify processes, and take advantage of the scale effect within the regions. The new reporting segments now include NAFTA, Brazil, Europe and Asia Africa and CIS (ACIS) with the Mining segment remaining unchanged. In January 2011, ArcelorMittal completed the spin-off of its stainless steel operations to a separatelyfocused company Aperam. Therefore, Stainless Steel is reported as discontinuing operations. ArcelorMittal maintains a strategy of selective divestment of non-core assets. As part of this, the company sold its steel foundation distribution business in NAFTA (North American Free Trade Agreement), namely Skyline Steel and Astralloy to Nucor Corporation for a total consideration of roughly $605 million on a debt free and cash free basis. The agreement covered 100% of ArcelorMittal s stake in Skyline Steel s operations in the NAFTA countries and the Caribbean. ArcelorMittal will continue to own and operate the foundation distribution businesses in the rest of the world. ArcelorMittal Luxembourg has also divested its 23.48% interest in Enovos International SA to a fund managed by AXA Private Equity for a purchase price of 330 million. Moreover, ArcelorMittal has sold its 48.1% stake in engineering company, Paul Wurth Group, to SMS GmbH for around $363 million. ArcelorMittal, in January 2013, agreed to sell its 15% stake in one of its iron ore operations, ArcelorMittal Mines Canada (AMMC), for $1.1 billion. The company said that it will sell the stake to a consortium led by South Korean steelmaker Posco and Taiwan-listed China Steel Corp. Under the agreement, ArcelorMittal, Posco and China Steel Corp will jointly own ArcelorMittal s Labrador Trough iron ore mining and infrastructure assets and will enter into long-term iron ore supply agreements. The transaction closed in May The consortium acquired a 3.95% interest in the joint venture for a total consideration of $290 million in cash, which increased its stake to 15% in the joint venture. AMMC now retains 85% stake in the joint venture. The joint venture is consistent with ArcelorMittal s strategy of establishing strategic relationships with key customers and expand its mining business. ArcelorMittal, in October 2013, announced that it has signed a strategic agreement with Algerian company Sider. The deal includes an investment plan of $763 million for the steel complex at Annaba and mines in Ouenza and Boukhadra. It also includes plans of selling part of the company s stake in two steel joint ventures in Annaba and Tebessa to state-owned Sider. Per the agreement, ArcelorMittal will reduce its stake in both ArcelorMittal Annaba and ArcelorMittal Tebessa to 49%, with the state of Algeria owning the remaining 51%. ArcelorMittal s investment project plan includes more than doubling the Annaba steel plant's annual production capacity from 1 million ton to 2.2 million tons by The company stated that the plan will be funded by equity contributions from shareholders and bank financing. Equity Research MT Page 2

3 ArcelorMittal plans to build a rolling mill for rebar and wire rod with a production capacity of 1 million tons. Also, the investment will ensure a long term future for steel making in Annaba and mining in Tebessa. Through this investment, ArcelorMittal Annaba will be able to cater to the increased domestic demand for steel products in Algeria and support the government to become self sufficient in steel. In November 2013, ArcelorMittal entered into a joint venture with Nippon Steel & Sumitomo Metal Corporation to buy 100% of ThyssenKrupp Steel USA (TK Steel USA) from ThyssenKrupp for $1,550 million. Calvert, Alabama-based TK Steel USA is a steel processing plant that holds a total capacity of 5.3 million tons including hot rolling, cold rolling, coating and finishing lines. The plant represents the most modern finishing facility in the world. The acquisition was closed in February 2014 REASONS TO BUY ArcelorMittal is highly focused on reducing debt, lowering costs and improving efficiency. The company maintains its $15 billion medium-term net debt target. On the cost-saving front, ArcelorMittal is progressing with a new $3 billion cost optimization program that mostly focuses on variable cost reductions in its plants. The company achieved cost savings of $1.1 billion on an annualized basis in 2013 and expects $2 billion in savings by the end of Moreover, it is looking to divest its non-core assets and increase focus on important operations. These moves might lead to a better operational performance in the long run. For ArcelorMittal, its mining segment is a significant advantage. It ensures security of raw materials supply to its steel business, enables the company to sell to a growing number of third party customers, allows optimization of supply and logistics savings as well as provides it with an effective hedge against raw material price movements. The company is progressing with its mining growth projects and is on track to boost iron ore production capacity in its own mines to 84 million tons by It has ramped up annual capacity at ArcelorMittal Mines Canada to 24 million tons. ArcelorMittal has also identified an expansion potential of 6 million tons per year to 30 million tons per year in Canada. Moreover, the company s operations in Liberia recorded over 150% increase in shipments to more than 5 million tons in ArcelorMittal is currently conducting a second phase expansion (from 4 million tons per year to 15 million tons annually) in Liberia with expected completion by end The acquisition of AM/NS Calvert (formerly known as TK Steel USA) is an important strategic fit for ArcelorMittal and is expected to deliver $60 million of annual synergies for the company. ArcelorMittal holds an identified franchise business in the automotive market and the acquisition is expected to reinforce its existing auto business in the U.S. The NAFTA automotive market is expected to see a roughly 15% rise in vehicle production over the next decade. The acquisition will also uplift ArcelorMittal s position in supplying to the NAFTA energy industry, which is expected to demonstrate growing demand for energy pipe and tube products due to increases in oil and natural gas exploration and production. Equity Research MT Page 3

4 The long-term growth potential in the emerging markets is strong. The company plans to expand its steel-making capacity and raw materials self-sufficiency through a combination of brownfield growth, new greenfield projects and acquisition opportunities, mainly in the emerging markets. ArcelorMittal has restarted an expansion project at its Monlevade and Juiz de Fora sites in Brazil. The project expansion is expected to increase the annual production capacity from 3.75 million tons to 4.9 million tons. Monlevade is expected to produce 1.05 million tons per year of coil on capital investment of $140 million. The expanded wire rod from Monlevade is expected to enhance supply of added value products mainly to the domestic construction and automotive industries. On the other hand, rebar capacity at Juiz de Fora will also be increased from 50,000 to 400,000 tons a year. ArcelorMittal expects demand to resume in Brazil and, based on this, the company restarted its wire rod mill expansion. This $108 million project is expected to be completed in two phases with the first phase mainly aimed at downstream facilities while the upstream portion of the investment remains on hold. REASONS TO SELL The steel industry is affected by global production capacity and fluctuations in steel imports/exports and tariffs. Demand and pricing for steel remains weak. The world economy is still weak and the challenging conditions persist in Europe and emerging markets. Moreover, there is a demandsupply gap in the U.S., exacerbated by the effects of sequestration. The recent slowdown in China is also affecting steel demand in that country. Soft construction activity in the U.S. and Europe remains another concern. Weakness in key end markets may hinder the company s earnings power. ArcelorMittal continues to contend with difficult economic environment, especially in its biggest markets Europe, where recovery remains constrained by high unemployment and weak credit growth. Its European business remains under pressure due to lower average steel selling prices. Steel demand fell in Europe in 2013 and is currently 29% below pre-crisis levels. The recovery in the demand environment is expected to be sluggish in the region in the near term. Moreover, lower iron ore pricing is hurting the company s mining business. Considering the challenging economic conditions, ArcelorMittal has cut its annual dividend by 73%. Moreover, the company has permanently closed its factory in Liege, Belgium, given slack demand and weakening European economy. ArcelorMittal closed six production lines at Liege that manufacture finished steel products for the auto industry. It also closed a coke plant, which produces fuel for blast furnaces. The steel industry is highly competitive. Expansion into new markets by established producers, increased production by smaller producers or exporters selling excess capacity from markets such as China may put pressure on ArcelorMittal s market share, increase expenditures or reduce pricing. These developments could further affect the company s business, financial condition, prospects and results. Equity Research MT Page 4

5 RECENT NEWS ArcelorMittal Swings to Profit in Q3, Shipments Up November 7, 2014 ArcelorMittal reported net income of $22 million or $0.01 per share in the third quarter of 2014, contrary to a loss of $193 million or $0.12 per share in the year-ago quarter. Revenues went up 2.2% year over year to $20.1 billion in the reported quarter. Sales increased year over year due to increased steel shipments and higher marketable iron ore shipments. Total shipments rose 3.9% year over year to 21.5 million metric tons in the quarter. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $1.9 billion in the third quarter, a 11.2% improvement from the year ago quarter. Operating profits rose strongly in the third quarter on the back of improved European operations and higher steel volumes, despite a decline in iron ore prices. Segment Review NAFTA: Crude steel production increased 0.5% year over year and 5.4% sequentially to 6.5 million tons in the quarter. The sequential increase was due to completion of the planned blast furnace reline at Indiana Harbor No.7 and impact of unplanned maintenance downtime at Cleveland facility during the previous quarter. Average selling prices went up 4.3% year over year to $853 per ton. Sales increased 13.5% year over year and 4.1% sequentially to $5,645 million. The sequential increase in sales was attributed to higher shipments, offset by a decline in average steel selling prices. Brazil: Crude steel production increased 15.3% year over year and 24.7% sequentially to 3 million tons in the quarter. Shipments rose 23% sequentially due to the higher slab shipments from Brazil following restart of a blast furnace at Tubarao. Sales rose 7% year over year and 11.3% sequentially to $2.7 billion in the quarter. The sequential increase in sales was due to higher average steel shipments. Average selling prices went down 3% year over year to $866 per ton and also declined 7.3% sequentially. Europe: Crude steel production increased 3% year over year but declined 0.9% sequentially to 10.8 million tons in the quarter. Sales declined 0.4% year over year and 7.9% sequentially to $9.7 billion due to lower steel shipment volumes and lower average steel selling prices. Average steel selling prices declined 3.3% year over year to $760 per ton. Asia Africa and CIS (ACIS): Sales declined 6.9% from the year-ago quarter and 13.3% from the previous quarter to $2 billion. Lower sales of non-steel products and lower steel shipment volumes led to the sequential decrease in sales. Production recorded a 2.5% year-over-year decline and a modest rise sequentially at 3.6 million tons. The sequential increase in production was due to higher production in Ukraine and Kazakhstan and Ukraine, partly offset by lower production in South Africa after the reline of the Newcastle blast furnace, which commenced during the second quarter. Average selling prices were $594 per ton compared with $607 per ton in the year-ago quarter. Mining: Iron ore production increased 6% year over year but fell 4.5% sequentially to 15.8 million tons in the reported quarter. The sequential decline was due to the rainy season in Liberia and minor operational issues in the company s Canadian operations. The year over year increase was led by higher production from Canadian mining operations. Coal production declined 10% year-over-year and was flat sequentially at 1.8 million tons. Revenues decreased 20.3% year over year and 8% sequentially to $1,272 million. Equity Research MT Page 5

6 Balance Sheet Cash and cash equivalents (including restricted cash) amounted to $4.2 billion as of Sep 30, 2014, compared with around $4.4 billion as of Sep 30, The company s long-term debt stood at to $17.5 billion as of Sep 30, 2014 compared with $18.5 billion as of Sep 30, New Developments On Oct 8, 2014, ArcelorMittal and Gerdau (GGB) jointly completed the sale of their respective 50% interests in Gallatin Steel Company to Nucor Corporation (NUE) for $770 million in cash. On Sept 16, 2014 ArcelorMittal along with its joint venture partner Nippon Steel & Sumitomo Metals Corporation (NSSMC), announced a $40 million slab yard expansion project to boost AM/NS Calvert`s slab staging capacity and efficiency. ArcelorMittal also announced major organizational moves to improve performance in North America, where operations account for one quarter of its steel shipments and profits. The company aims at improving operational performance in North America and speeding up the successful integration of AM/NS Calvert. Guidance ArcelorMittal expects EBITDA in excess of $7 billion for Improvement in the steel business is expected to be offset by the impact of declining iron ore prices on the Mining segment profitability. The company expects global apparent steel consumption (ASC) to rise by about 2.25%-2.75% in The company raised its expectations for U.S. ASC growth to a range of % based on strong steel demand in the country. Strong demand conditions remained in Europe during the seasonally weak summer period and the company reiterated its ASC growth expectations of 3%-3.5% for In China, the company foresees signs of stabilization due to the government s targeted stimulus, and sees steel demand in the range of 1.5%-2%. After the successful ramp up of expanded capacity at ArcelorMittal Mines Canada, year-on-year increases in market-priced iron ore shipments are anticipated, which is expected to underpin a 15% expansion of marketable iron ore volumes for the company in Steel margins are expected to improve in ArcelorMittal expects net interest expense to be about $1.5 billion in 2014 compared with $1.8 billion in 2013 mainly due to lower average debt. Capital expenditure is expected to be roughly $3.8 billion in ArcelorMittal does not plan to ramp-up any major steel growth capital expenditure or increase dividends until the medium term $15 billion net debt target has been achieved and market conditions improve. Equity Research MT Page 6

7 ArcelorMittal Posts Strong Q2 Earnings, Narrows View August 1, 2014 ArcelorMittal reported net income of $52 million or $0.03 per share in the second quarter of 2014, contrary to a net loss of $0.8 billion or $0.44 a year ago. Revenues went up 2.5% year over year to $20.7 billion in the reported quarter. Sales increased year over year due to improved steel shipments and higher marketable iron ore shipments. Total shipments rose 2.9% year over year to 21.5 million metric tons in the quarter. Segment Review NAFTA: Crude steel production increased 7.6% year over year but decreased 1.7% sequentially to 6.2 million tons in the quarter. The sequential decline was due to planned blast furnace reline at Indiana Harbor No.7 and unplanned maintenance downtime at Cleveland. Average selling prices went up 1.8% year over year to $856 per ton. Sales increased 13.1% year over year and 10% sequentially to $5,423 million. The sequential increase in sales was attributed to higher shipments and higher average steel selling prices. Brazil: Crude steel production fell 7% year over year and 1.3% sequentially to 2.4 million tons in the quarter. Sales decreased 7.1% year over year but rose 3.2% sequentially to $2.4 billion in the quarter. The sequential increase in sales was due to higher average steel selling prices. Average selling prices went down 2.6% year over year to $934 per ton but rose 4.4% sequentially. Europe: Crude steel production increased 3.9% year over year and was almost flat sequentially at 10.9 million tons in the quarter. Sales declined 0.3% year over year but increased 1.9% sequentially to $10.5 billion due to higher steel shipment volumes. Average steel selling prices declined 1% year over year to $799 per ton. Asia Africa and CIS (ACIS): Sales rose 6.9% from the year-ago quarter and 14.6% from the previous quarter to $2.3 billion. Improved volumes and higher average steel selling prices led to the sequential increase in sales. Production recorded a 2.2% year-over-year decline and a 5.5% sequential increase to 3.6 million tons. The sequential increase in production was due to higher production in Ukraine and Kazakhstan, partly offset by lower production in South Africa following the reline of the Newcastle blast furnace, which commenced during the quarter. Average selling prices were $592 per ton compared with $628 per ton in the year-ago quarter. Mining: Iron ore production rose 10.7% year over year and 11.7% sequentially to 16.6 million tons in the reported quarter due to higher production from the Canadian mining operations which were hurt by harsh winter conditions in the previous quarter. Coal production declined 10% year-over-year and was flat sequentially at 1.8 million tons. Revenues rose 2.4% year over year and 10.1% sequentially to $1,383 million. Balance Sheet Cash and cash equivalents (including restricted cash) amounted to $4.4 billion as of Jun 30, 2014, compared with around $6.9 billion as of Jun 30, The company s long-term debt stood at to $18.1 billion as of Jun 30, 2014 compared with $18.9 billion as of Jun 30, Equity Research MT Page 7

8 New Developments In Jun 2014, ArcelorMittal completed the divestment of its 78% stake in European port handling and logistics company ATIC Services S.A. (ATIC) to HES Beheer for million (roughly $212 million). With this transaction, HES Beheer now owns 100% stake in ATIC where it previously held 22% stake. The transaction reflects ArcelorMittal`s strategy of selective deposal of non-core assets. On Jul 29, 2014, ArcelorMittal and Billiton Guinea B.V. inked a sale and purchase deal for the acquisition by ArcelorMittal of a 43.5% stake in Euronimba Limited (Euronimba), which holds a 95% indirect stake in the Mount Nimba iron ore project in Guinea. The Project comprises a 935 million ton direct shipped ore resource with an average grade of 63.1% Fe. ArcelorMittal also entered into a sale and purchase pact with Compagnie Française de Mines et Metaux (a member of the Areva group) for the purchase of its 13% interest in Euronimba. The closing of these two deals would give ArcelorMittal a 56.5% stake of Euronimba. Guidance ArcelorMittal now expects EBITDA in excess of $7 billion for 2014 (down from $8 billion expected earlier) as a result of weaker than expected iron ore price. The company still expects ASC to increase roughly 3% 3.5% in Steel demand growth in Europe remains strong and the company has increased its forecast for ASC growth in 2014 to 3% 4% and, in the U.S, it has raised the projection to a range of 5% 6%. In China, the company foresees signs of stabilization due to the government s targeted stimulus, and sees steel demand in the range of 3% 3.5%. ArcelorMittal expects net interest expense to be about $1.6 billion in 2014 compared with $1.8 billion in 2013 mainly due to lower average debt. Capital expenditure is expected to be roughly $3.8 $4 billion, a modest rise over 2013, with some of the expected expenditure from 2013 rolling into 2014 as well as the continuation of the phase II Liberia project. ArcelorMittal does not plan to ramp-up any major steel growth capital expenditure or increase dividends until the medium term $15 billion net debt target has been achieved and market conditions improve. Equity Research MT Page 8

9 VALUATION ArcelorMittal is currently trading at a premium to the peer group based on the estimated earnings for 2014 and Over the last five years, the company s shares have traded in the range of 9.3x to 50.5x trailing 12-month earnings. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the broader market. Our price target of $11 is based on 45.8X our 2014 earnings estimate. Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF P/E P/E 5-Yr High P/E 5-Yr Low ArcelorMittal (MT) N/A 5.6 N/A Industry Average S&P Mechel OAO (MTL) Evraz Highveld Steel & Vanadium Ltd. (HGVLY) Nippon Steel & Sumitomo Metal Corporation (NSSMY) Posco (PKX) TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA ArcelorMittal (MT) Industry Average S&P Equity Research MT Page 9

10 Earnings Surprise and Estimate Revision History Equity Research MT Page 10

11 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1139 companies covered: Outperform %, Neutral %, Underperform 6.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research MT Page 11