hasilp89 Posted March 1, 2021 Share Posted March 1, 2021 thought i had shared this previously but had been looking for disconfirming evidence to the demand and scrap thesis here and found the opposite from NUE and Steel Dynamics earnings call. :) Nucor Demand Outlook "And so as we think about the supply-demand picture, the demand side, really again, all product routes are incredibly strong. We're at or near historic levels of backlogs in almost every product group that we have, including our downstream groups as well. Order activity and entry rates remain very robust and continue to be strong and I think a further strengthening sign of that or in support of that. As we talk to our customers, they're experiencing very similar things with their customers in incredibly strong backlogs, order entry rates, again, at the customer level." Scrap Pricing "And look, as we look out to the long term, as the mix continues to shift from integrated mills, to EAFs, and again, we're about 70% of the steelmaking capacity today in the United States, the EAF sector is,the demand on prime scrap is going to stay very tight , and that's going to now increase. Steel Dynamics Industry Capacity "As a result of the pandemic, an estimated 15 million tons of higher cost domestic blast furnace flat roll steel production was idled in early 2020. Since that time, we believe between 5 million to 6 million tons of net production capacity has resumed." Demand Outlook "But it's intriguing to me that there is this concern about the strength of the market, because it, right now it is absolutely incredible. I know the supply side tightness, but demand is very, very strong, automotive recovered and it's going to be 16 million units or so this year and probably more and that's very, very strong for us, we'll continue to gain market share both at flat roll and engineered bar." Scrap Pricing and Supply "Regarding scrap supply, I think you're seeing what has been typical in the past, scrap is incredibly elastic, certainly the obsolete grades are incredibly elastic and has scrap pricing has increased dramatically in the last month or two, it's amazing how folks get out and that flow increases dramatically. And so I don't see a long-term issue with scrap supply in any way shape or form." "I think when this -- so as we look at scrap generation, we see it continuing to increase and we see it increasing even more quickly than potentially some of the additional demand that will be derived from some of the new EAF capacity coming online domestically. But one also has to look at the additional HBI, DRI and other projects that are either coming online have been announced or being contemplated by even the blast furnace participant. So I think there should be ample raw material as Mark said." "And with the rationalization of the integrated side of the industry, it's quite possible that you're starting to see them actually produce pig iron which help the supply balance, supply demand balance as well." Link to comment Share on other sites More sharing options...
bearprowler6 Posted March 3, 2021 Share Posted March 3, 2021 The window of opportunity to get in on Stelco Holdings (STLC) is closing fast: https://www.bnnbloomberg.ca/stelco-s-optimistic-ceo-sees-new-reason-to-be-more-rosy-on-steel-1.1571286 You don't want to be buying when Prem is selling..... Link to comment Share on other sites More sharing options...
petec Posted March 3, 2021 Author Share Posted March 3, 2021 The window of opportunity to get in on Stelco Holdings (STLC) is closing fast: https://www.bnnbloomberg.ca/stelco-s-optimistic-ceo-sees-new-reason-to-be-more-rosy-on-steel-1.1571286 You don't want to be buying when Prem is selling..... Is there a video of Kestenbaum saying the things he’s quoted as saying in the article? None of the videos that pop up when I click the link seem to back the content? Link to comment Share on other sites More sharing options...
bearprowler6 Posted March 3, 2021 Share Posted March 3, 2021 The window of opportunity to get in on Stelco Holdings (STLC) is closing fast: https://www.bnnbloomberg.ca/stelco-s-optimistic-ceo-sees-new-reason-to-be-more-rosy-on-steel-1.1571286 You don't want to be buying when Prem is selling..... Is there a video of Kestenbaum saying the things he’s quoted as saying in the article? None of the videos that pop up when I click the link seem to back the content? There is no video of the comments attributed to Kestenbaum. His comments were made during a phone interview conducted with him by a Bloomberg reporter and first reported in the following article: https://www.bloomberg.com/news/articles/2021-03-02/stelco-s-optimistic-ceo-sees-new-reason-to-be-more-rosy-on-steel?utm_source=google&utm_medium=bd&cmpId=google The original link I posted was from Bloomberg's Canadian affiliate BNN Bloomberg which picked up the original article as well as videos from various analysts/fund managers on BNN Bloomberg discussing STLC during the last several months. Link to comment Share on other sites More sharing options...
petec Posted March 3, 2021 Author Share Posted March 3, 2021 Thanks. In discussing input costs at the end of that second article, they missed a key point: Stelco has the option to acquire 25% of Minntac, effectively locking in their iron ore price. My guess is that that option is well in the money these days. Link to comment Share on other sites More sharing options...
bearprowler6 Posted March 4, 2021 Share Posted March 4, 2021 First you pump it (yesterday's discussion)....and then you dump it.... https://ca.finance.yahoo.com/finance/news/stelco-holdings-inc-bedrock-industries-011100696.html Link to comment Share on other sites More sharing options...
bearprowler6 Posted March 11, 2021 Share Posted March 11, 2021 An interview from earlier today with Stelco's CEO: https://www.bnnbloomberg.ca/video/we-re-very-bullish-on-the-future-of-electric-vehicles-stelco-holding-s-ceo~2158339 Link to comment Share on other sites More sharing options...
petec Posted March 11, 2021 Author Share Posted March 11, 2021 Interesting looking at the HRC curve - real strength through the end of this year. It’s going to be a banner year. Link to comment Share on other sites More sharing options...
hasilp89 Posted March 12, 2021 Share Posted March 12, 2021 Interesting looking at the HRC curve - real strength through the end of this year. It’s going to be a banner year. Got the cme link on my favorite bar now 8) Petec - any thoughts on the secondary offering? Also been thinking about whether they’ll be hedging. Maybe I’m conservative but with fixed costs think they’d be happy to hedge some pricing for further out months. Link to comment Share on other sites More sharing options...
petec Posted March 17, 2021 Author Share Posted March 17, 2021 Been working on the land value. LOTS of assumptions in the workings below - please point out where I am wide of the mark. - 2017: Initially didn't want the land, which effectively became a pension asset rented by Stelco. - 2018: Did a 180 and bought 760 acres at Hamilton and 2300 at Nanticoke for $114m, paid with a 25 year 8% mortgage to the pension. Hamilton city described this as a sweetheart deal. Bad blood - city wants employment and taxes and wants to know Stelco doesn't just want lease revenue. Says Stelco hasn't responded to their requests to talk. - 2019: Bought 37 acres at Hamilton including 500ksqft industrial warehouse and 100ksqft office for $20m. - 2020: received approval to subdivide Hamilton into different categories - first step in redevelopment. Application refers to 310ha = 766 acres. Of these 242 acres are for steel, 376 for short term redevelopment, and 133 deferred. Next stages are the master plan and possibly rezoning, plus Stelco need to reach a servicing agreement with the city through the amendment of a sewer use bylaw. - Uses ○ Before Stelco bought the lands, the City had a 25-year plan to turn the land into a Brooklyn Navy style waterfront with commercial and industrial uses including creative offices, light industry, movie studios, and green space. ○ The deferred lands in the 2020 plan include waterfront property on the western edge of the parcel. This "is particularly valuable because many believe it can be made part of an intermodal transport hub for ships, trains, and trucks" by building a port and combining it with a 6ha docking facility due to go into operation on nearby Randle Reef in 2022. ○ Amazon are interested, according to Stelco. - Value creation. ○ Statista estimates warehouse construction costs in Toronto at $100k/sqft. Costmodelling suggests lower figures for the UK, but I am not sure what is included - land, services, etc. - and the City has said that underground infrastructure is deficient. ○ In 2019 Stelco signed two leases: § $10sqft/year, no other details given, but before the 37 acres were acquired. § 10y lease for 125ksqft/20% of the industrial area under roof on the 37 acres. $20m NPV, which at a 5% discount rate implies $2.47m of cash flow a year or $20/sqft/year. ○ At $10/sqft and a 7% cap rate we get 10/0.07=143 in value per sqft. ○ At $20/sqft and a 5% cap rate we get 20/0.05=400 in value per sqft. ○ Stelco have said they have space for 8m sqft under roof on the whole area. However taking the 2020 plan's call for developing 376 acres (16.4m sqft) in the short term and assuming 35% of this can be under single-storey roof, we get 5.75m sqft. ○ $100/sqft in costs and $140-400/sqft in value gives $40-300 in value creation/sqft. ○ 5.75m sqft implies value creation of $230m-$1.7bn, before considering any value in the existing leasable buildings, the deferred land, or in Nanticoke. - Risks ○ Relationship with the city. ○ Environmental remediation costs could be significant. The issue the City had with the "sweetheart" sale to Stelco was the revaluation of 375 acres from $180k/acre to $100 per acre due to "prohibitive" environmental remediation costs. The other 425 acres were still valued at around $100k/acre. The City disputed this revaluation but it might be indicative. Link to comment Share on other sites More sharing options...
bearprowler6 Posted March 17, 2021 Share Posted March 17, 2021 The following articles from local newspapers on the land purchases by Stelco may be of interest: https://www.thespec.com/business/2018/06/05/stelco-signals-plan-for-expanded-steelmaking-with-major-land-purchase.html https://www.thespec.com/business/2019/08/23/stelco-the-landlord-sees-big-bucks-in-leasing-out-surplus-industrial-land.html According to the articles, Stelco seems to be protected from the cost of environmental remediation related to the lands due to the unique structure afforded the land purchases. The cost of remediation seems to fall on the Province of Ontario. I do not hold out hope that great value can be extracted from the redevelopment of the lands due to its location and arguably Hamilton city council being very unfriendly to the business community. Nonetheless, I continue to hold a significant investment in Stelco in order to benefit from a very robust steel market. Any windfall from land redevelopment is not factored at all into my analysis however I am very open to being pleasantly surprised on this front. Link to comment Share on other sites More sharing options...
petec Posted March 17, 2021 Author Share Posted March 17, 2021 Yes, I’ve read those. I’m skeptical that expanding steel making is part of Stelco’s plans for the land. It’s not something they’ve mentioned in calls and it doesn’t seem to be in the partitioning plan that got approved last year. All the commentary on the calls has been about development, square feet under roof, lease values, and cap rates. It’s pretty clear where they’re going. I know Stelco is protected from the costs of environmental remediation. I think this means they can’t be forced to clean up the land. I don’t think it means they can force someone else to clean up the land if they (Stelco) want to develop it. I think that if Stelco want to develop the lands, Stelco pays. Would love to be proved wrong. The City is certainly pissed off. But various comments in the newspaper articles I’ve read suggest that they’re keen to see this go ahead so long as they like the master plan, and think it will generate employment and taxes. That ball is in Stelco’s court, and they’re not stupid. Link to comment Share on other sites More sharing options...
Viking Posted April 23, 2021 Share Posted April 23, 2021 (edited) Nucor just released results. Record earnings in Q1 and they said Q2 will be higher. Their order backlog is at an all time high. Scrap is ‘super tight’. one of the analyst questions was why is industry utilization flat? I.E. why are steel producers not increasing production more? This suggests some level of discipline; perhaps due to industry consolidation in recent years. They also discussed wind. Sounds like steel demand from solar will be strong from 2022 to at least 2028, driven by Biden’s plan. Solar was also discussed a little. It will be interesting to see what companies do with all the cash... dividend, special dividend, share buy backs... and do we see further industry consolidation? Stelco looks like it might be a nice target... ———————————— The bottom line is the steel hard market is showing no signs of slowing down. I expect Stelco Q1 results to get hit as they roll off the hedge they put on in Q4. But starting in Q2 it looks like all systems go for the rest of the year; profitability should soar. ————————————- And from a Fairfax perspective it is highly likely they will see some special dividend payments from Stelco (in addition to the regular). Nice to see the equity holdings delivering good surprises Edited April 23, 2021 by Viking Link to comment Share on other sites More sharing options...
hasilp89 Posted April 24, 2021 Share Posted April 24, 2021 Commentary on demand picture was definitely encouraging. In addition. To what you mentioned re wind/solar/infrastructure - Nonres construction strong and pretty positive on auto despite chip shortages. being lazy but remind me how much STLC is hedged? With futures above $1k/ton through next March am interested to see if they will continue to do so. For STLC believe special dividends were on the table right? Am not gonna complain if they’re taken out at a healthy multiple on 2021e Ebitda Link to comment Share on other sites More sharing options...
petec Posted April 26, 2021 Author Share Posted April 26, 2021 They said on the q4 call that they hedged 15% of their output. They also mentioned something about having booked losses on q1 swaps in q4. And they had not taken any more swaps out as of the time of the call. They mentioned hedging at $700-1000/t. Assuming costs of $400/t they've probably locked in a $400 margin on 15% of their production for one quarter - so say 4% for the year - and based on the current forward curve they are earning $900-1100/t on the rest for the balance of the year. In other words, the hedge is a rounding error. If they are able to realise anything like the current forward curve they are probably trading on c.1.5x 2021 ebitda (including the pension liability in the EV). Given that most of the EV is market cap and most of the ebitda is free cash flow...well, you can do the maths on the potential special dividend yield. Link to comment Share on other sites More sharing options...
petec Posted April 26, 2021 Author Share Posted April 26, 2021 Futures prices are here, for anyone interested. U.S. Midwest Domestic Hot-Rolled Coil Steel (CRU) Index Futures Quotes - CME Group Stelco is heading towards a cost base of $400 per ton (but they're not quite there yet). These numbers are in USD so be careful comparing them to the CAD-denominated EV of the company. Interestingly, met coal prices don't seem to have risen with steel prices. I am not sure why, but if they do, expect Stelco to exercise their option to buy 25% of Minntac, which will cost them $500m. I think they will be quite able to do this and pay a large special in 2021. Link to comment Share on other sites More sharing options...
Viking Posted April 26, 2021 Share Posted April 26, 2021 (edited) 7 hours ago, petec said: Futures prices are here, for anyone interested. U.S. Midwest Domestic Hot-Rolled Coil Steel (CRU) Index Futures Quotes - CME Group Stelco is heading towards a cost base of $400 per ton (but they're not quite there yet). These numbers are in USD so be careful comparing them to the CAD-denominated EV of the company. Interestingly, met coal prices don't seem to have risen with steel prices. I am not sure why, but if they do, expect Stelco to exercise their option to buy 25% of Minntac, which will cost them $500m. I think they will be quite able to do this and pay a large special in 2021. The (good) problem that cyclicals have is what do do with all the free cash flow. The do not want to just let the cash build as they will become a buy out target. So the cash is normally used to buy back stock (as high prices) or make an aquisition (at a high price). As you point out Stelco has a GREAT use of cash at a very attractive price (buying 25% of Minntac). Combine this with a special dividend and you have a very rational use of free cash flow. The management team certainly has positioned the company well. My guess is someone will try and take them out. And management looks motivated to sell (assuming the price is right). ——————————- Fairfax’s other pure play commodity holding is in a similar position (it will be gushing free cash flow). They made a perfectly timed acquisition of three lumber mills from Conifex the end of 2019/early 2020 so they may want to delever a little in the near term. A special dividend is likely (based on past history). I think they also have a pretty hefty legacy pension deficit. Both lumber and steel look like crazy high prices will be with us into 2022. If so both companies will have obscene free cash flow. Edited April 26, 2021 by Viking Link to comment Share on other sites More sharing options...
bearprowler6 Posted May 5, 2021 Share Posted May 5, 2021 Strong Q1 2021 results reported after the market close earlier today: https://investors.stelco.com/2021-05-04-Stelco-Holdings-Inc-Reports-Triple-Digit-Improvement-in-Adjusted-EBITDA-and-Net-Income-in-First-Quarter-2021 Q1 results summarized: Revenue of $665 million for the quarter, up 57% from Q4 2020 Operating income of $167 million for the quarter, up 328% from Q4 2020 Adjusted Net Income* of $155 million and Adjusted Net Income* per share of $1.75, up 243% from Q4 2020 Shipments* of 675,000 tons for the quarter, up 38% from Q4 2020 Adjusted EBITDA* of $185 million for the quarter, up 208% from Q4 2020 Declared quarterly dividend of $0.10 per share payable on May 19, 2021 Also noteworthy are the following comments from the CFO: Paul Scherzer, Chief Financial Officer, added, "The results we achieved in the first quarter are testament to the hard work of our employees and reflect our continued commitment to controlling our costs and maximizing the financial return on our capital investments. However, this is only the beginning. We have not historically issued guidance, other than shipments, but want to impress upon the market the earnings power of Stelco. Assuming the current forward curve for hot-rolled coil on the CME, level quarterly shipments at our anticipated product mix, and our current cost structure, we could generate Adjusted EBITDA in excess of $2 billion over the whole of 2021. Additionally, the alignment of management with our shareholders remains at the core of our approach and is unique within the North American steel industry. I am pleased that we are in a strong financial position and able to once again provide a quarterly dividend of $0.10 per share. Our strategy has been proven, and we will not deviate from our commitment to maintaining a strong balance sheet and positive cash position." Link to comment Share on other sites More sharing options...
petec Posted May 5, 2021 Author Share Posted May 5, 2021 The >$2bn number is good to hear. That implies >$1.8bn in the last three quarters, concentrated in 2q and 3q, implying >>600m in each of those quarters. I think Stelco could do anything up to $20 in FCF per share in 2021. Link to comment Share on other sites More sharing options...
hasilp89 Posted May 5, 2021 Share Posted May 5, 2021 (edited) 5 hours ago, petec said: The >$2bn number is good to hear. That implies >$1.8bn in the last three quarters, concentrated in 2q and 3q, implying >>600m in each of those quarters. I think Stelco could do anything up to $20 in FCF per share in 2021. Thoughts on cash conversion? On $185m of EBITDA we’re not seeing any cash build up. $27m of capex but from there it appears WC capital related including the MIA which I’m not recalling the rational/terms of. Excited to hear confirmation of the $2b number but more interested in how much of that turns to cash for shareholders. Edited May 5, 2021 by hasilp89 Link to comment Share on other sites More sharing options...
petec Posted May 5, 2021 Author Share Posted May 5, 2021 1 hour ago, hasilp89 said: Thoughts on cash conversion? On $185m of EBITDA we’re not seeing any cash build up. $27m of capex but from there it appears WC capital related including the MIA which I’m not recalling the rational/terms of. Excited to hear confirmation of the $2b number but more interested in how much of that turns to cash for shareholders. I'm not at all surprised to see working capital build as they ramp production and prices rise into a hard market. Relative to $2bn in ebitda, they pay very little to service their liabilities and even less in tax. There is some capex this year and on current plans that drops to maintenance levels next year. Overall, I would assume $2bn in ebitda turns into $1.5bn in FCF, and I think that's conservative, but I could be wrong. Let's see what they say on the call. Link to comment Share on other sites More sharing options...
petec Posted May 5, 2021 Author Share Posted May 5, 2021 (edited) Notes from the call - very bullish and I think we see a big buyback or special divi. Starting to see all the investments pay off. Higher production, lower costs, more flexibility. C$185m ebitda. 28% margin, highest in NA, and one of only 2 over 20%. NI/EBITDA 84%. Moving parts: Record production at 675kt, sustainable in q2. 1q average pricing (agreed in 4q) was C$959. Q2 realised pricing will be much higher but not as much as $450-500 higher. Pricing being agreed now for realisation in 3q is 2x higher. All drops to the bottom line. Reported costs are up on mix (e.g. nickel on galvanised product) and scrap inputs. Underlying costs are lower than last year, at around/below $400 on HRC. At the current forward curve they can make in excess (their emphasis) of C$2bn of ebitda in 2021. That implies over C$1.8bn in the last 9 months, or C$600m/quarter. Sounds like there *is* still a free cash flow sweep on the pension. Surprises me - I thought they had changed this. Have to pay C$400m total but not all this year - was assumed to happen by 2034 but think it will happen by 2024. No working capital investment ("we're just running our business"). Maintenance capex $80m/year. Coke battery $120m so total $200m this year and "a lot of that has already been spent". $1.1bn of tax attributes between NOL and capex. Can and will fully utilise NOLs this year. Capex attributes can be used over several years. BMO suggest that $2bn of ebitda leads to $1.4bn of FCF = $16/share. Think the stock should be "at least double where it's at today" and want to meaningfully move it. Want to do something "big, meaningful, and impactful rather than dribbling it into a [symbolic] share buyback programme". Sounds like all of dividends, investments, and buybacks are on the cards but not acquisitions - too expensive and "when you're the best, acquisitions are hard". "What would be wrong with buying half our stock back? Nothing." Have 7 years to exercise Minntac and won't speculate on when they will pull the trigger. Timed it well and very happy with it but have better options right now, like buybacks. Expect continued price increases: demand is strong, inventories are low, imports are not coming because people don't want to take 6-month risk. Edited May 5, 2021 by petec Link to comment Share on other sites More sharing options...
bearprowler6 Posted May 5, 2021 Share Posted May 5, 2021 Stelco's CEO discussing the Q1 results: https://www.bnnbloomberg.ca/video/stelco-says-it-could-generate-adjusted-ebitda-of-2-billion-amid-steel-boom~2195513 The CEO reiterated the comments made earlier today on the Q1 earnings call which were summarized by petec. This is a home run for Prem and the team at Fairfax and also for investors holding Stelco directly and most importantly given the current/expected state of the steel market it appears that things are only getting started. Its worth noting that the CEO did not provide an update on the status of the land banks acquired by Stelco a few years ago so this asset remains a hidden undervalued gem on the company's balance sheet. Link to comment Share on other sites More sharing options...
Xerxes Posted May 6, 2021 Share Posted May 6, 2021 Congrats to all the longs here. You deserved every penny, a classic case of being right for the right reasons, and the cash register ringing. All in 3 pages. Link to comment Share on other sites More sharing options...
petec Posted May 6, 2021 Author Share Posted May 6, 2021 The amazing thing is the futures curve is still rising - it's now over $1500 through October and $1600 for June, July, and August. At $400 in costs they're just printing money. I am not sure what I think of a buyback though. My gut says I'd prefer a huuuuuge special. Very hard to get a buyback right in a frothy market. Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now