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Operator Series: Brazil's Magnesita

Brazilian company Magnesita, Latin America's largest refractory brick producer, has been busy this year trying to avoid a repetition of its performance in 2015, when it posted a 1.06bn-real (US$288mn) net loss.

The company's bottom line was impacted by unfavorable economic environments at home and in export markets.

According to a statement in its 3Q16 results report, headwinds are still blowing.

"Steel production declined in all of our established markets. Even in North America, where production initially rebounded after countervailing duties and antidumping measures were implemented, steel production has declined by 15% on a quarterly basis. In South America and Western Europe, production dropped by 11% and 4% respectively, on a year-to-date basis," Magnesita CEO Octavio Pereira Lopes said.

"Moreover, the cement industry in Brazil, an important segment for Magnesita, remains at depressed levels due to subdued activity in the real estate and infrastructure sectors," he added.

To deal with the issues, Magnesita has announced this year several lines of action, including a search for a firmer international foothold, a sale of a non-core asset and even a merger with an international peer.

Its efforts appear to be paying off: Magnesita reported a US$40.1mn profit for the January to September period, compared with a US$263mn loss in the same period last year.

SEGMENTS

Magnesita produces refractory materials for the steel and cement sectors in South America, North America, Europe and Asia. The company operates through three segments: refractory solutions, minerals and services. 

Its mineral resource division sells talc, caustic magnesia and some other lower added-value products and magnesite sinter, a product which is dependent on domestic demand.

Founded in 1939, Magnesita operates 28 mining and industrial units with a refractory brick production capacity of over 1.4Mt/y. In 2013 the company acquired Chinese refractory brick producer Dalian Mayerton (DMR) with the aim of increasing Magnesita's production capacity of mag-carbon refractory bricks in order to better serve areas where the Brazilian company had a marginal presence.

HOLDING COMPANY

Magnesita announced in May that it was seeking a firmer foothold in Europe via the establishment of a holding company in London.

The refractory steel producer is one of the few truly multinational companies from Brazil, as about 70% of total revenue corresponds to sales in overseas markets. The company has industrial operations in Brazil, Argentina, the US, Germany, France, Belgium, China and Taiwan.

Magnesita's new holding company will trade on London's stock exchange, but the company plans to launch a depositary receipt program on São Paulo's Bovespa.

Local analysts see the change as positive for Magnesita, as the company is expected to gain more visibility in international markets. Another aspect is a lower debt cost when compared to that in Brazil.

ASSET SALE

Magnesita affirmed on Thursday it had concluded the sale of its talc business to Italy-based IMI Fabi Talc Company in a deal worth US$55mn.

The talc business, which is located in the city of Brumado, Bahia state, Brazil, has a 40,000t/y capacity, roughly 130 employees and posted sales of US$14mn in 2015, Magnesita said in July, when the deal was announced.

MERGER

In October 14, Magnesita and Austrian rival RHI announced they had agreed to combine their operations.

The combined company, to be named RHI Magnesita, will be established in the Netherlands and listed in London, with RHI ceasing its listing in Vienna.

Under the deal, RHI will acquire a controlling stake of at least 46%, but no more than 50% plus one share, in Magnesita, the firms said in separate statements on October 6.

RHI and Magnesita, which will remain separate until the deal's conclusion, reported revenues of 1.75bn euros (US$1.92bn) and US$1.013bn in 2015, respectively.

The transaction is expected to be completed in 2017.

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