Liberia Mining And Calvert EAF Will Unlock Future Opportunities

Key Takeaways

• Expansion in Liberia and strategic acquisitions are enhancing production capacity, resulting in higher margins and long-term cash flow benefits.
  
• Investments in new technologies, like EAF and global projects, alongside capital return strategies, are poised for strong revenue growth and shareholder returns.
  
• Uncertain tariffs, weak steel demand, coal cost volatility, and regulatory issues in key regions could challenge ArcelorMittal's margins and growth strategy.

Catalysts

Operates as integrated steel and mining companies in the Americas, Europe, Asia, and Africa.

• The expansion of the mining segment, particularly in Liberia, is expected to significantly increase production capacity and improve earnings with higher-quality material. This could enhance future revenue streams and contribute to EBITDA growth, providing long-term cash flow benefits.
  
• Strategic acquisitions and high-grading of their asset portfolio, through divesting higher-cost assets and acquiring new ones that create value in various market environments, have structurally resulted in higher margins and earnings resilience, suggesting potential for increased net margins.
  
• The commissioning of a new state-of-the-art Electric Arc Furnace (EAF) at Calvert, and progress on development projects in India, show ongoing investments in growth that are expected to capture $1.2 billion in EBITDA over the next few years, positively impacting future revenue and earnings.
  
• Focused capital return strategies, including a new long-term share buyback program through 2030, demonstrate confidence in generating strong cash flows, improving EPS, and providing returns to shareholders, supporting stock value appreciation.
  
• Trade protections and tariffs reforms, like Section 232 in North America and newly strengthened trade safeguards in Europe and India, are expected to help normalize market conditions and potentially stabilize or enhance revenue and margins across regions.

ArcelorMittal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ArcelorMittal's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 6.1% in 3 years time.
• Analysts expect earnings to reach $3.9 billion (and earnings per share of $5.34) by about May 2028, up from $1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.9 billion in earnings, and the most bearish expecting $3.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.8x on those 2028 earnings, down from 16.9x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 6.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

ArcelorMittal Future Earnings Per Share Growth

Risks

• The impact of Section 232 tariffs on North America is uncertain, and while largely expected to be neutral, trade adjustments and tariffs could affect earnings and net margins.
  
• Concerns about weak demand in major markets like China and the potential for stimulus not translating into material steel demand could impact revenue projections and earnings resilience.
  
• Potential volatility in met coal costs and their lag effect might delay cost benefits, influencing net margins and cost efficiencies.
  
• Execution and regulatory hurdles in India for the new greenfield steel plant could lead to delays, affecting future revenue growth and strategic expansion plans.
  
• High energy costs and competitive disadvantages in Europe, alongside uncertain regulatory improvements, could impact operational margins and strategic investments for decarbonization.

Valuation

• The analysts have a consensus price target of €30.075 for ArcelorMittal based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €39.97, and the most bearish reporting a price target of just €25.56.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $64.1 billion, earnings will come to $3.9 billion, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of €25.92, the analyst price target of €30.07 is 13.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.