With the sale of Liberty OneSteel, formerly Arrium, now complete, former Administrator Mark Mentha looks back on the long journey to this point.
Arrium’s Whyalla operation had been under significant pressure for a sustained period before the Voluntary Administration in April 2016.
The falling iron ore price had crippled the mining business after significant spending on expansion.There were board-room challenges with issues relating to financiers and external predators; the steelworks was losing money and suffering from under-investment; and the future of the operation was uncertain.
The OneWhyalla story of the Arrium administration demonstrates the importance of the being socially-conscious, getting the right balance between the well-being of the individuals and the collective greater good, and persuading all stakeholders to stay the course for the right outcome in trying circumstances.
Saving Whyalla Strategy
From the outset the KordaMentha partners identified very quickly that the Arrium administration would not be a success unless it included preserving the steelworks and the mining as ongoing operations.
A KordaMentha team of 16 were dedicated to Whyalla. It kept in constant communication with the Arrium Head Office in St Leonards, Sydney – something the Whyalla business had not done for a long time. Every night we cooked or dined as a team and talked about the business and what needed to be done.
It was our life and a camaraderie developed on a single purpose – saving Whyalla.
For a business with a global turnover of $6.5 billion, and headquarters in Sydney, it was easy for the stakeholders in Whyalla to be marginalised.
Adding further complexity and ignoring the big four Australian banks who were highly supportive, the balance of the 60 banks, 30 bondholders and noteholders were largely foreign with no regional context. Most had no idea where Whyalla was. Their sole focus was a return on their debt.
To be elected on the Committee of Creditors in the Arrium administration, a creditor would need a substantial exposure and of course, the local Whyalla creditors exposures were unlikely to get them elected. So we created the OneWhyalla committee for local creditors to obtain regular updates on the administration process.
OneWhyalla became our war cry, emphasising the importance of demonstrating a united and a collaborative approach.
The cost-cut programme
For the mining business to be a long-term sustainable proposition, it needed to be a low-cost producer. In the 12 months before the appointment, the business reduced its C1 costs to $35.40/tonne (cost of getting ore on the cape to export) and its CFR China cost to $56.70/tonne (cost of getting ore to the client).
We needed to protect the mining business from the volatile commodity prices by aggressively driving costs down. Working collaboratively with the mining operations team and the contractors, we reduced costs by $154 million in FY17.
The Pay cut
With OneWhyalla forecast to be cash flow negative in FY17, even after the implementation of the cost-reduction initiatives, we needed to review the labour costs within the business.
We needed to consider the changes to overtime and shifts that had occurred before our appointment. Many OneWhyalla employees had already made sacrifices.
After engaging with the union officials and senior management, we decided that a flat and immediate base rate reduction of 10 per cent for all 1400 salary and wages employees was in the best interests of OneWhyalla.
These savings were critical to OneWhyalla and the way they were structured also provided a stable IR platform for the interested parties. The interested parties were not required to negotiate new EA agreements for four years.
The Sale: Final Bidders
Newlake & Posco: We were heavily engaged with Posco from the early days of the administration and they had been engaged with Arrium in the years leading up to administration. We allowed their technical team to visit the steelworks and mines to ensure that they could be up to speed as much as possible when the business was up for sale.
Liberty House GFG (Gupta Family Group): An engaging and ever-present bidder with Michael Morley and strong local advisors from the start. They played a strong media campaign, which went to new heights when they got their bidding strategy wrong and missed being preferred bidder.
Whyalla has been given a second chance.
It needs to make the most of it at every level – Steelworks and Mining operations, contractors, employees, council and community.
The new owners and government, along with unions and the suppliers, need to ensure proper investment is made. It needs to learn from the lessons of the many crisis that engulfed the steelworks and mines over the last 18 months. Whyalla is a wonderful city with much to offer. I wish Mr Gupta well and trust he becomes a great Australian citizen.