ArcelorMittal plans Rs 18,697-crore capex for debt-laden Essar Steel

ArcelorMittal has said the capital expenditure plan of Rs 18,697 crore will be implemented over six years

ArcelorMittal’s resolution plan for Essar Steel, which is awaiting approval from the National Company Law Tribunal (NCLT), includes a capital expenditure plan of Rs 18,697 crore to take the finished steel goods capacity of the plant to 8.5 million tonnes by 2024.

In its annual report, ArcelorMittal has said the capital expenditure plan of Rs 18,697 crore (about $2.8 billion) will be implemented over six years. 

The first stage will involve investments to increase production of finished steel goods sustainably to 6.5 million tonnes per annum and completion of ongoing capital expenditure projects. It will also include implementation of ArcelorMittal’s best practices.

The second stage will involve investments to increase the production of finished steel goods from 6.5 million tonnes per annum to 8.5 million tonnes per annum by the end of 2024, including asset reconfiguration and the addition of coke oven, blast furnace and basic oven furnace.

The long-term aspiration, however, was to increase finished steel shipments between 12 and 15 million tonnes through the addition of new iron and steel-making assets so that ESIL (Essar Steel India Limited) can play an active role and fully benefit from the anticipated growth in the Indian industry, ArcelorMittal said. 

Arcelor has offered an upfront payment of Rs 42,000 crore ($5.7 billion) towards debt resolution of Essar with a further Rs 8,000 crore ($1.1 billion) of capital injection into the company to support operational improvement, increase production levels and deliver enhanced levels of profitability. 

In October 2018, the committee of creditors (CoC) of Essar Steel had voted to approve ArcelorMittal’s plan and a letter of intent was issued. 

In November, ArcelorMittal entered into a $7 billion term, facilities agreement with a group of lenders in connection with the acquisition of ESIL. The agreement has a term of one year (i.e. until November 20, 2019) subject to ArcelorMittal’s option to extend the term by six months. The facility may be used for certain payments by ArcelorMittal as well as by the joint venture, the annual report mentioned. 

ArcelorMittal expects to jointly own and operate ESIL in partnership with Nippon Steel & Sumitomo Metal Corporation (NSSMC), Japan's largest steel producer and the third largest steel producer in the world, as per the joint venture agreement.

Arcelor and NSSMC are expected to finance the joint venture through a combination of partnership equity (one-third) and debt (two-thirds), and ArcelorMittal anticipates that its investment in the joint venture will be equity accounted.

However, the report mentioned, that the resolution plan if implemented, it would subject the company to various risks. 

On the financial front, the uncertainties and risks related to ArcelorMittal's exposure (via equity investment in the joint venture and possible guarantee of the joint venture's debt). The exact ratio had yet been determined and the nature of long-term debt financing of the joint venture had not been defined.

Pending the implementation of long-term financing, ArcelorMittal would guarantee any amounts drawn by the joint venture under the bridge financing. 

On the operational front, the industrial project to turnaround ESIL and further improve operational profitability was large-scale and ambitious.

"While ArcelorMittal has substantial experience in turnaround situations, the scale of this one is particularly large and it is the company's inaugural large-scale acquisition in India, an emerging market. Capital expenditure in excess of budgeted amounts, delays and difficulties in achieving commercial objectives therefore cannot be ruled out," the company mentioned.