Magnesita losses increase 48-fold due to write-offs

By Liz Gyekye
Published: Monday, 30 November 2015

Project cancellations hit company earnings while weak steel production cuts refractories income. The company predicts that 2016 will be another challenging year.

Brazil-based Magnesita Refratarios saw its losses increase 48-fold to Brazilian real (R$) 902.5m ($236.29m*) for the third quarter of 2015, compared to R$18.3m ($4.79m) the previous year, due to write offs in its struggling Chinese and Brazilian businesses.

The company said that the total amount of impairments and provisions that affected its Q3 results amounted to R$774m ($203m), of which only R$16.8m ($4.40m) has cash effect.

Magnesita shut down its Chizhou plant in China, which produced dolomite-based refractories for the local market, in October. As a consequence of this, Magnesita partially wrote-off fixed assets. 

Speaking about the Chizhou facility, Magnesita’s CEO, Octavio Pereira Lopes, said: "This plant, acquired along with the LWB assets [a German refractories company] in 2008, has never posted adequate profitability and, with the slowdown of the Chinese economy, the outlook had deteriorated."

"With this backdrop, we had already lowered our exposure to the Chinese market, where sales declined by 43% this year. The shutdown in Chizhou should have positive impacts on our EBITDA** and cash flow in 2016," he added.

Lopes explained that the group continued to maintain normal operations for its other Chinese plant in Dalian, which produces mag-carbon bricks for external markets.

Magnesita said that it also wrote off its failing Almenara graphite project in Minas Gerais state in Brazil, because of what it described as "the drop in graphite prices in the international markets and the limited perspective on monetisation."

Group revenues for the quarter increased by 24% year-on-year (y-o-y) to R$886m ($232m), owing to improvements in operational productivity, a focus on more profitable markets, higher sales of deadburned magnesia (DBM) and a reduction in freight costs.

Adjusted EBITDA increased by 33.9% y-o-y to R$141 ($37m), due to the benefit of the real devaluation against the US dollar and euro. Earnings also benefited from improved DBM sales.

Segment sales

The company reported that revenues for its refractory solutions segment increased by 22.5% y-o-y to R$778m ($204m), which was helped currency exchange.

Steel production in Magnesita’s established markets fell by 2.7% in the first nine months of the year, especially in the US. This meant that sales volumes in Q3 2015 to the steel industry totalled 208,000 tonnes, down by 5.6% compared to Q3 2014.

Mineral sales amounted to R$59m ($15m) for the quarter, up 52% from the corresponding period in 2014. The expansion was driven by a 100% increase in sales of DBM to third parties, reflecting productivity gains in Brumado, as well as lower refractory sales, leading to higher production volumes and surplus.

Speaking about the company’s overall outlook, Lopes said: "We believe 2016 should be another challenging year, surrounded by many uncertainties."

*Conversion made November 2015

**Earnings before interest, taxes, depreciation and amortisation