Is Peter Smedley bad news for a stock?

He made a lot of people a lot of money when a nervous and over
generous David Murray and the Commonwealth Bank bailed him and his
mates out of Colonial by paying a silly price for the fund manager and
insurer in 1999.

But it didn’t take long for David Murray to
tire of Pete and the Colonials, and they soon left, richer, but
unwanted, leaving the CBA to make sense of what they had bought.

The
confused and underperforming Mayne Group loomed as the next port of
call, but some missed forecasts and other problems meant that investors
started going cold on the stock and the welcome mat was eventually
withdrawn. Shareholders rejoiced as the shares recovered some strength
after the mauling they had suffered in the last years of Smedley’s
resign.

That left him short of a gig or two, but he settled in
very nicely at OneSteel, the old Whyalla-Newcastle based part of BHP’s
steel business, which with the old Port Kembla based business (now
called Bluescope Steel) has gone from strength to strength, riding the
boom in this once despised commodity metal.

Up till October that
is when a series of glitches flowing from thereline of the Whyalla
blast furnace in July, have hit earnings prospects and the share price
hard.

And OneSteel has been good for Smedles. He’s on a basic
salary of $250,000 a year for being chairman, and a bit more for shares
and options.His total 2004 pay was put $419,000 in the annual report.
Bob Every, the former BHP steel executive, now CEO of OneSteel,
received more than $3 million in the year to June, including a cash
bonus of $1 million.

A very tasty reward for a good year. Here’s the 2004 OneSteel annual report.

But
in the last two months, nothing seems to have gone right for the
steelmaker. A fire at Whyalla caused some publicity, but according to
the annual meeting address of Smedley on November 15, nothing untoward
financially – read more here.

Famous
last words from Smedles. It was only two weeks before another more
major problem emerged that will have a direct and large impact on
OneSteel’s financial results.

Since October 11 the company has
made four separate statements culminating in Monday’s shocker, that the
blast furnace at Whyalla, newly re-lined earlier this year with copper
rather than refractory type bricks, had developed a major fault.

The
fault seems to be a propensity for the furnace to go cold, thereby
upsetting the smelting process as the temperature drops below optimum
operating levels of more than 1400C.

It has two episodes of developing a cold heart since the July rebuild, which took longer to complete than previously forecast.

It
may sound a bit like ‘oops our blast furnace has caught a cold, but in
the steel industry (or in other metal smelting industries) it’s very
bad news.

Once a blast furnace develops a cold spot, the molten
iron cools and the slag (the left over rubbish) won’t separate and
float to the top allowing it to be sort of swept off the molten iron).

This
can lead to the furnace rapidly losing heat and the molten metal
cooling quickly to set inside the furnace walls. It has happened in the
past at Port Kembla.

The cooled metal has to be cut, hammered
and cut out. It is time consuming and very expensive if it happens.
That set off a round of downgrades today for analysts following the
company – as the SMH reports here.

The
damage to the company’s credibility has been noticed by the market
which has sold off the shares from more than $3.12 in mid October to
$2.48 around lunch Tuesday, a fall of around 20% in the strongest
market we’ve seen for years.

This leads the cynic to wonder if a
bonus will be paid to management for such a terrible run of technical
problems. They would argue ‘acts of god, m’lord! But the original
decision to reline the furnace with copper instead of the safe and
boring refractory bricks should be looked at and whether there was any
additional work needed in managing the smelting process with a metal
instead of brick lining.

A technical matter involving a piece of
equipment so central to the company’s fortunes would have had to be a
board decision. That’s where the buck should stop and an accounting
happen, if one is needed.

And OneSteel’s Whyalla problems
have captured another company, contractors and engineers, the United
Group which late today revealed that it is fighting OneSteel for more
than $33 million in unpaid bills for the work at Whyalla.

United issued a statement
to the ASX detailing its problems with OneSteel the company said it
completed the work on the mechanical and structural components of a
reline of the Onesteel Whyalla blast furnance in july and August, under
a cost plus contract.

“United KG (United’s engineering
business) has been engaged with OneSteel in a dispute resolution
process to recover $33 million of reimbursable costs under the
contract, plus interest and margin currently outstanding”.

United warned it would take all steps to recover its debts from OneSteel.