A Restructuring Could Mean Gains for Traders
ArcelorMittal (NYSE: MT) is evaluating a potential sale of some of its iron ore operations, as the world’s biggest steelmaker seeks to cut debt by divesting non-core businesses, people familiar with the matter recently told Bloomberg. The news service reported,
“The company is reviewing its iron ore assets in Canada, Brazil and Liberia, the people said, asking not to be identified as the matter is private. ArcelorMittal is speaking with financial advisers about options including selling partial or full stakes in at least some of the assets, according to the people.”
Traders seemed to cheer the news.
One Trade, Once a Week, One Hundred Percent Profit Targets
Simplify your trading with Jeff’s highest-conviction trade ideas. Bullseye Trading is all about 1 trade, 1 time a week, sent directly to your inbox every Monday morning before market open.
It’s that easy.
Learn how you can get one high conviction trade (weekly) from millionaire options trading guru Jeff Bishop.
Bloomberg continued, “The Canadian business is the largest and more profitable of the three and could be valued at about $2 billion in any transaction, the people said.
ArcelorMittal hasn’t kicked off a formal sale process, and it could decide to keep the operations, the people said. A representative for ArcelorMittal declined to comment.
European producers have been hit by a slump in demand from the auto industry and competition from cheap imports. That’s also making it hard for them to pass on to customers higher prices for iron ore, a key steelmaking ingredient, that are being stoked by mine closures in Brazil.
ArcelorMittal said in August that it has the potential to “unlock” $2 billion from its portfolio in the next two years, signaling plans to sell non-core units. It is exploring a sale of a downstream construction business as it divests peripheral operations, people familiar with the matter said this month.
The company is one of the world’s largest iron ore producers, with operations in countries including the U.S., Mexico, Bosnia, Ukraine, and Kazakhstan, according to its website.
In 2013, the company sold a 15% stake in its Canadian mining business to a consortium led by Posco for $1.1 billion, data compiled by Bloomberg show.
ArcelorMittal’s mines and strategic contracts produced 58.5 million metric of iron ore last year. Its iron ore and metallurgical coal mining operations accounted for about 35% of earnings before interest, taxes, depreciation and amortization in the quarter ended June 30, data compiled by Bloomberg show.
The company’s Canadian business produces more than 26 million tons of iron ore concentrate a year, according to its website. It has annual iron ore production capacity of 7.1 million tons in Brazil.
ArcelorMittal has struggled for years with its Nimba iron ore operation in Liberia, halting an expansion plan after Ebola devastated the West African country in 2014.
It also owns rail and port infrastructure around the mine, which could also be useful for iron ore projects across the border in Guinea being developed by groups backed by billionaire investor Robert Friedland and serial mining dealmaker Mick Davis.”
The long term chart shows the impacts of those struggles.
A Trade for Short Term Bulls
As with the ownership of any stock, buying MT could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for MT
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For MT, the November 15 options allow a trader to gain exposure to the stock.
A November 15 $14 call option can be bought for about $1.39 and the November 15 $16 call could be sold for about $0.45. This trade would cost $0.94 to open, or $94 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $94.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in MT the maximum gain is $1.06 ($16- $14= $2; $2 – $0.94 = $1.06). This represents $106 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $94 to open this trade.
That is a potential gain of about 112% in MT, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.