Eco Investor December 2016

Core Securities

Four Year High for Sims Metal

There is a very strong correlation between Sims Metal Management's buy and sell prices and the prices of iron ore and coking coal, and ferrous prices on the London Metals Exchange, said Sims' managing director and chief executive officer, Galdino Claro, at the company's annual general meeting.

Almost on cue, Sims' share price jumped to a four year high of $13.10 when Donald Trump won the US presidential election and iron ore and coal prices rose in response. This was said by some commentators to be in anticipation of an infrastructure and manufacturing boom in the US.

According to Market Index, since the start of 2016 the spot price for iron ore has risen from US41.25 per tonne to US$58.20 at the end of October and to US$71.81 at 25 November. The US election was on 8 November.

The price of coking coal has risen even more strongly. The Financial Times says that in January it was around US$60 per tonne and is now over US300 per tonne, including another steep rise in November.

In response to a question from Eco Investor, Mr Claro said that Sims' sell prices lagged the spot market by a month or two but as iron ore and coking coal prices rise, new steel prices also rise and the steel mills that recycle scrap can charge more for their steel. Sims aims to ride on this by charging the scrap mills more for its scrap metals.

While it is unknown whether the new highs for Sims' shares will be maintained or what direction they may take, the shares have traded above $12 since the latest uptick. Perpetual has taken the opportunity to reduce its holding from 8.1 to 7.1 per cent with the majority of the sales in the high $12 range.

During the AGM, Sims received a first stroke on its remuneration report which received a 31.7 per cent no vote. There was also a 33.7 per cent no vote on Mr Claro's participation in the long term incentive plan, and a 46.5 per cent no vote for a grant of restricted units to Mr Claro.

The Australian Shareholders Association voted against the remuneration report and incentives for Mr Claro and was articulate in explaining why. But unfortunately, the annual general meeting was marred by two other, less balanced shareholders who spoke too often and for far too long and were embarrassing in their small-minded and mean-spirited comments.

Their awful comments were enough for Eco Investor to speak in favor of the resolutions and this resulted in many expressions of thanks from other shareholders and directors.

Eco Investor's main point was that Sims has been a turnaround and the remuneration and incentives need to be seen in that light where significant capital losses are possible and the results of a turnaround can sometimes take years to become evident.

Mr Claro said Sims has suffered a 40 per cent reduction in ferrous scrap prices and a 33 per cent contraction in sales volumes. Over the past year it has reduced its controllable costs by $137 million, giving it a 17 per cent lower sales volume break-even point. The break-even volume level has been reduced to below 7.8 million tonnes, but the company has retained enough capacity to sell 12 million tonnes of recyclable material per annum when the industry and volumes recover. Also encouraging is the decline in steel exports from China.

Sims is now a waiting game for better economic times, particularly in the US. (ASX: SGM)





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