During 3Q99, Ahmsa’s total sales and operating income fell 26% and 48% respectively, due to lower steel prices as a result of the global crisis, a decrease in steel and steam coal volumes, and the inflation/revaluation effect

			1999 Third Quarter Results AHMSA
	Sumant Vasal (52-5) 325-2898				November 15, 1999

During 3Q99, Ahmsa’s total sales and operating income fell 26% and 48% respectively, due to lower steel prices as a result of the global crisis, a decrease in steel and steam coal volumes, and the inflation/revaluation effect. The lower prices and volumes resulted in a contraction in gross margin (3.6 pp). Even though operating expenses fell 16% as a result of the company’s cost control programs, this was not sufficient to offset the poor performance at the gross level. As a result, operating income and EBITDA dropped 48% and 33% respectively. However, it is important to note that operating results in 3Q99 improved considerably compared to 2Q99 due to a better pricing environment and cost savings- EBITDA almost doubled. The company reported a net financing gain of Ps 103 million due mainly to lower non-cash FX losses. Due to the difficult financial situation, in late May the company declared itself in suspension of payments, a form of legal protection under Mexican law. Consequently, trading of the company’s stock was halted in Mexico and the US. In mid October, IMSA and GAN (the majority stakeholder of Ahmsa) agreed to form a strategic alliance between their subsidiaries IMSA Acero and Ahmsa. This association is conditional upon the restructuring of Ahmsa’s debt, as well as putting an end to the suspension of payments. IMSA and Ahmsa have submitted their proposal to Ahmsa’s creditors, and now the ball is in their court- they will have to decide on how much debt they are willing to capitalize, and how much they would restructure to long term. We believe this situation should be resolved before the year is over.

Operating Results

Our quarterly report is not as detailed as in the past as the company does not take our calls, and the press release was very short. Net sales fell 26% compared to 3Q98 due to a reduction in real steel prices which resulted from the global crisis and the inflation/revaluation effect. In addition, the lower steel and steam coal volumes also contributed to the drop in sales. Steel volumes amounted to 668 tons during the quarter, a 12% reduction compared to last year. Even though the Mexican steel industry is recovering, we believe the decrease seen in Ahmsa’s steel volumes is due to the new strategy of focusing its sales effort to higher margin products, and not to increased volumes. In the past, the company had been selling low margin products for the sake of higher volumes which allowed for a better absorption of expenses (although for obvious reasons this was not successful). Steam coal volumes amounted to 1.88 million tons, a slight decrease of 2% in the quarter.

Gross and operating income fell 38% and 48% respectively, due mainly to lower steel prices and volumes in the quarter. This was partially offset by cost savings (originating from the new business plan for the period 1999-2003)), and lower energy costs. As a result, gross and operating margins fell 3.6 pp and 4.6 pp respectively. Overall, EBITDA dropped 33%. However, compared to 2Q99, the company’s operating results improved considerably, with EBITDA almost doubling and margin increasing to more normal levels of 21.7% compared to 10.9%.

Financing Activities

Ahmsa reported a net financial gain of Ps 103 million during the quarter, compared to a loss last year. This was due mainly to much lower non-cash FX losses and net interest expense. This was partially offset by a reduction in monetary gains. Net interest expense was lower compared to last year as the company declared itself in suspension of payments in late May.

As we mentioned in earlier reports, Ahmsa’s balance sheet is the worse in our steel sector sample. Leverage (total liabilities/equity) amounted to 213% at the end of the quarter, and on an adjusted basis (net debt/equity), it reached 160%. In addition, interest coverage amounted to only 1.1x, although we believe this is fictitious as not all interests are being considered due to the suspension of payments.

Outlook

During the past year, the company implemented several unsuccessful strategies to overcome its difficult financial position. This, coupled with a competitive steel market, led the company to default on certain debt and interest payments during April, and consequently declare itself in suspension of payments. In mid October, IMSA and GAN (the majority stakeholder of Ahmsa) agreed to form a strategic alliance between their subsidiaries IMSA Acero and Ahmsa. This association is conditional upon the restructuring of Ahmsa’s debt, as well as putting an end to the suspension of payments. Both companies submitted their proposal to Ahmsa’s creditors who will have to decide on how much debt they are willing to capitalize, and how much they would restructure to long term- the ball is in their court. We believe this situation should be resolved before the year is over. If the strategic alliance is approved, IMSA would hold a controlling stake in the alliance, and thus, would manage both companies.

Sumant Vasal: [e-mail]

The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither CASA DE BOLSA BANORTE, S.A. DE C.V. nor AFIN SECURITIES INTERNATIONAL accepts any liability for any losses arising from any use of this report or its contents.