ArcelorMittal South Africa – results for the quarter ended 30 September

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ArcelorMittal South Africa today released its production results for the quarter ended 30 September 2015 together with an update of its various turnaround strategies.

SAFETY

The company recorded an increase in the number of Lost Time Injuries (LTIs) in Q3, the highest so far this year. The Lost Time Injury Frequency Rate (LTIFR) of 0.66 for Q3 2015 is a slight improvement on the 0.72 attained in Q3 of the previous year, but it is notably higher than the 0.38 achieved in Q2 2015. Year to date, the company has recorded an LTIFR of 0.51, which is less than the 0.60 achieved during the same period last year, but is still slightly higher than our target of 0.49 for the year.

“We recognise that these are uncertain and difficult times for all employees which often has an impact on safety in the workplace,” said CEO, Mr Paul O’Flaherty. “It is for this reason that we have re-energised our focus on safety with a number of enhancements and new initiatives.”

PRODUCTION UPDATE FOR THE QUARTER ENDED 30 SEPTEMBER 2015

Overall, liquid steel production was 161 000 tonnes (15.8%) higher than the corresponding period last year. “This increase reflects the fact that the Newcastle blast furnace is once again in operation following the R1.8 billion reline which took place last year,” explains Mr O’Flaherty. “Unfortunately, this was offset to a large extent by the cuts we have had to make to production to match the reduced demand in a subdued and import affected market.”

Local sales were 5.9% higher than the corresponding period last year, with an increase in flat products of 24 000 tonnes and in long products of 20 000 tonnes. There was a significant increase in export sales of 92 000 tonnes (31.9%) over the same period, driven largely by the availability of long products following the reline. Commercial coke sales were down by 14.4% (15 000 tonnes) as a result of lower production in Newcastle.

“In the last quarter of the year, we expect that all our units will maintain current reduced production levels and that sales will decrease in line with the traditional and seasonal impact of quarter four,” said Mr O’Flaherty. 2

REORGANISATION AT ARCELORMITTAL SOUTH AFRICA OPERATIONS

In August this year, the company announced that it would initiate a Section 189 process with regard to the potential closure of the Vaal Meltshop and the Forge at its Vereeniging Works. The consultation process has yielded an alternative solution which will allow the Forge to continue operating, albeit at a reduced capacity. However, the Board has taken the decision to place the Meltshop under care and maintenance. The Meltshop will cease production during quarter four 2015 and, subject to finalisation of the process, it is estimated that this will have an impact on 283 employees. Management continues to actively work with unions and Vereeniging employees to find ways to minimise job losses, including voluntary separation and voluntary early retirement packages.

It was also announced in August that the company would undertake a review of the Vanderbijlpark Works and its Corporate Services departments to optimise structures and minimise costs. This review, which used the services of independent experts, has now concluded.

The outcome of the footprint review conducted at Vanderbijlpark Works revealed that the assets need to run at their optimal capacity. To ensure that Vanderbijlpark Works achieves positive operating and financial results, a number of significant operational, productivity and cost efficiency improvements will be implemented over the next two years. However, the sustainability of the Vanderbijlpark Works is heavily dependent on the implementation of import tariffs and other trade remedies requested from Government, as well as the designation of primary steel for localisation.

“Our current plans assume that all the initiatives undertaken with Government will be in place in Q1 2016,” explains Mr O’Flaherty. “However, we will need a strong social pact with labour to ensure we can urgently pursue the productivity improvements necessary to ensure the sustainability of the business.”

At Corporate Services, the review identified certain business processes and transaction services that could be outsourced in order to create a lean, agile corporate office whose mandate is to orchestrate strategic direction, offer support to the business units from a centre of expertise and provide robust governance. These opportunities will be explored further over the next three months.

STAKEHOLDER ENGAGEMENT

ArcelorMittal South Africa has continued its constructive engagement with the South African Government on measures which would ensure the sustainability of the South African steel industry in the long term and is appreciative of the progress that has been made in this regard. This includes: 3

 Consideration by the South African Government of the increase of custom duties on locally produced primary steel from 0% to the bound rate of 10%;

 Additional ‘anti-dumping/safeguarding’ duties are under discussion and receiving support from Government;

 Consideration by the Government of the designation of local steel for State procurement and infrastructure spend; and

 Agreement on a mechanism for ArcelorMittal South Africa-produced steel to be priced appropriately in order to ensure the downstream steel dependent industries are more competitive, balanced with a reasonable return for the company.

Furthermore, the company has reached agreement with Kumba on amendments to the pricing mechanism terms of the current agreement from a cost-based price to an Export Parity Price (EPP), with effect from 1 October 2015. This will provide ArcelorMittal South Africa with much greater certainty regarding the costs of iron ore going forward as it is aligned to external market prices and the company has the right to an annual offtake of 6.25 million tonnes.

Had the agreement been in place since 1 January 2015 and based on the 3.3 million tonnes received to 30 September 2015 and assuming that all of the tonnes were from the Sishen mine, the benefit would have been a pre-tax amount of R470 million.

Mr O’Flaherty said: “In addition to the recent significant depreciation of the South African Rand against the United States Dollar, which is expected to have a positive effect on the company, we are reasonably certain that the various initiatives now in place within the company, as well as the positive interventions by Government, will ensure that ArcelorMittal South Africa returns to profitability in the medium term.”

TRADING UPDATE

Shareholders are advised that the loss per share and headline loss per share for the year ended 31 December 2015 are expected to be higher by more than 600 cents or 11 times (1100%) when compared to the year ended 31 December 2014.

This is mainly due to the depressed trading conditions in the local steel industry which have been adversely impacted by record low steel prices and a surge of cheap imports. This has been further compounded by pre-tax adjustments of R1.529 billion relating to:

 The final decision to proceed with the closure of the Thabazimbi Mine by Kumba and the resultant provision for retrenchment costs of an estimated R350 million and a write-down of iron ore inventory of R233 million at Thabazimbi, which will not be processed due to the closure;

 A write-off of R568 million relating to the company’s previously deferred contributions to stripping costs at the Kumba mine, for inventory to be received in the future, which will now be written off due to the new agreement with Kumba; and

 An impairment of R378 million relating to the Meltshop at Vereeniging Works, which is to be placed on care and maintenance for the foreseeable future.

PROPOSED RIGHTS OFFER

ArcelorMittal South Africa has announced that the Board intend proposing a rights offer to shareholders at a general meeting to be held on 11 December 2015, in order to raise additional equity capital of amounting to between R4 billion and R4.5 billion.

Mr O’Flaherty commented: “It is now well documented that we have been experiencing a challenging commercial environment. This has resulted in four consecutive years of net losses driven primarily by above inflationary increases in key costs, declining local steel consumption – specifically over the last two years – and cheap imports that have surged recently as a result of subdued global demand and continued capacity expansions. Notwithstanding the above, and due to the reasonable prospect that the interventions being undertaken with Government and the renegotiation of the Kumba contract should return ArcelorMittal to profitability in the medium term, it has become critical to restructure the financial position of the company. The proposed rights offer is the first step in this regard.”

The successful rights offer will enable ArcelorMittal South Africa to restructure its financial position in the short-term, including reducing current debt levels, funding near term investment in capital expenditure and enabling the company to raise future debt funding.

The offer will be fully underwritten by ArcelorMittal Holdings AG (“AM Group”), the major shareholder of ArcelorMittal South Africa. It is intended that the quantum of funds raised from the AM Group under the rights offer and any funds raised from the ArcelorMittal Group taking up remaining shares not taken up by other shareholders up to a maximum of between R4.0 billion and R4.5 billion will first be used to settle the AM Group loan of R3.2 billion.

A circular incorporating the notice of a general meeting to consider the rights offer will be distributed to all shareholders on Monday, 9 November 2015. The resolutions requiring shareholder approval include 75% approval from ArcelorMittal South Africa shareholders present and voting at the general meeting. 5

PROPOSED B-BBEE TRANSACTION

In September 2015, the Board of ArcelorMittal South Africa announced that it had retained the services of KPMG to pursue a possible B-BBEE transaction that would ensure the company complies with the Codes of Good Practice.

The Company is currently engaging with a number of shortlisted potential B-BBEE investors. These potential investors have begun their due diligence processes, with a final offer expected in December 2015.

ArcelorMittal South Africa’s preference is for prospective investors to provide their own unencumbered equity funds for the investment, which will be made through a proposed BEE Special Purpose Vehicle (B-BBEE SPV). However, the Board is also considering the opportunity to further increase the participation of the recently-announced lkageng Broad-Based Employee Share Trust through an investment in the B-BBEE SPV.

To the extent that there is a shortfall between the capital committed by black investors, and the funding required to execute the B-BBEE Transaction, it is anticipated that the market will be approached for potential funding support (“B-BBEE Funding”) which may include the use of B-BBEE SPV cumulative preference shares or other appropriate funding mechanisms.

To the extent that the B-BBEE SPV entity is ‘under water’ (i.e. the value of the liability of the B-BBEE Funding exceeds the value of the underlying investment in ArcelorMittal at the end of the period), ArcelorMittal will provide a guarantee in favour of the B-BBEE Funding providers to issue such amount of Shares as will be required to settle the B-BBEE SPV’s obligation relating to the B-BBEE Funding.

The final amount of B-BBEE Funding to be raised will be influenced by the prevailing Share price at that time, and the extent to which the Company is able to solicit fully funded offers from prospective black investors.

Mr O’Flaherty concluded: “The B-BBEE ownership transaction is an integral part of our significant efforts to achieve Level 3 compliance under the new B-BBEE Codes of Good Practice by the end of Q1 2016. The advantage of this proposed transaction structure is that ArcelorMittal South Africa is able to procure a shareholder funded B-BBEE transaction resulting in the possible injection of additional equity capital into the company.”

The full terms and salient dates and times of the proposed B-BBEE transaction will be announced in due course