OST Onesteel Fpo

OneSteel Ltd. (OST.AU) posted a 49% drop in first half profit on Tuesday but the result still came in ahead of market expectations, with the company's iron ore business cushioning the blow of lower steel prices.

The Sydney-based steelmaker posted a first half net profit of A$117 million for the period ended Dec. 31, down from A$228 million a year earlier.

The result beat analyst expectations, which ranged from A$50 million-A$100 million, and outshone rival BlueScope Steel Ltd. (BSL.AU), which posted a A$28 million first half loss on Monday, underlining the advantages of OneSteel's integrated model.

OneSteel Chief Executive Geoff Plummer said while it was disappointing the result was down so much on the prior period, it was still encouraging given the tough market conditions.

Plummer said steel prices had lagged behind higher input costs but that in the coming quarter steelmakers would have to start seeking recognition of higher prices for iron ore and coking coal.

"That will have to flow through and I would be surprised if that doesn't lead to step up in the international prices," he told reporters.

OneSteel gave guidance for its net profit in the second half to be broadly in line with the first half.

Macquarie analysts said the A$117 million profit beat its forecast for A$73.5 million and the guidance for the second half implied a full year profit of about A$235 million, also ahead of Macquarie's forecast of A$220 million and market consensus for A$209 million.

"As an integrated steelmaker, (OneSteel) remains our preferred Australian steel sector exposure," Macquarie said.

High input costs and sagging steel prices have squeezed the margins of steelmakers worldwide, prompting some to move upstream into mining of key inputs like coking coal and iron ore to secure cheaper supplies.

OneSteel has the advantage of not only feeding its Whyalla steelworks in South Australia state with its own magnetite ore but also producing direct shipping, or hematite, ore for export.

Its iron ore sales of 3 million tons during the half saw earnings before interest and tax, or EBIT, for that segment soar 70% on year for to A$126 million.

This was in contrast to the company's manufacturing segment, which saw EBIT tumble 73% to A$59 million, while its Australian distribution business saw EBIT fall 68% to A$51 million and its recycling segment posted a A$4 million EBIT loss.

Iron ore sales are forecast to be 6 million tons for the year and look set to continue to help offset the impact of weaker steel prices, with analysts forecasting increases of 30%-50% in contract iron ore prices in this year's round of negotiations.

In the past week, iron ore miners BHP Billiton Ltd. (BHP.AU) and Vale SA (VALE) have fueled expectations of an even bigger hike by pointing to soaring spot iron ore prices--currently trading at 90% above the benchmark price--as the best indicator of the state of the market.

Plummer endorsed this view, saying the spot price was the best reflection of the current strong demand, although he declined to comment on how high contract prices may go this year.

"Over the next 12 months, iron ore prices on average, be it spot or contract, are going to be materially above where they have been for the last 12 months," he said.

OneSteel said its labor cost reduction program had resulted in annualized savings of A$160 million, of which A$100 million is expected to be permanent.

Operating cashflow of A$324 million for the half helped the company pay down more of its debt, with net debt now standing at A$970 million at the end of the half compared with A$2.27 billion a year earlier, taking gearing to 18%.

Underlying profit for the period fell 45% to A$119 million from A$215 million in the previous corresponding period.

Sales revenue for the half fell 28% to A$2.97 billion from A$4.13 billion in the prior year and OneSteel declared an interim dividend of 5 cents compared with 6 cents a year earlier.

The better-than-expected result boosted OneSteel's shares, which were up 5.6% at A$3.40 at 0321 GMT in a broader Australian market up 0.9%.

-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094; alex.wilson@dowjones.com

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