STLC.TO - Stelco

[hasilp89]

3 hours ago, petec said:

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.

Finally got to read the transcript. Some additional takes to your summary

• My fav was when the RBC analyst asked what the downside was to $2b of EBITDA and Alan said ... “Well, I mean, as we said, the number is based on real numbers that are out there today. On the CME, you can open up the CME and see the forward curve and do the math. So -- and as we said, it's in excess of $2 billion. So the answer is that, yes, that's the reference point.” so basically he sees no downside.... 
• Demand picture remains strong, as indicated by the fwd curve but also anecdotally “Inventories are exceptionally low with our customers. End markets are really strong. Imports are not moving because people don't want to take the risk on 6-month lead times. Scrap is surging every day. ”
• not really concerned about the pension if they hit $1.4bn FCF “there'll be another meaningful dent in that this year as a result of the free cash flow suite. But that pension is going to go away.”
• acknowledged the hedge was a mistake, but only a minor one. They’re gone let the “trend be their friend”. Not planning to hedge in this environment 
• Liked his answer on product mix “ We're not committed to anything other than making money serving our customers and having the highest margin.“

one question I did have was if you understood how that 1m of pig iron capacity flows through P&L. Sounds like they have flexibility to sell that directly to EAFs if capacity gets tight, but assume they need it for their own production.

 

My preference would be buybacks, for tax reasons and because it’s still so cheap. While I try not to get sucked into his salesmanship (he alluded to it being worth double a number of times and outright said he’d buy back half the shares)all signs point to the setup remaining strong. 

 

[Xerxes]

There was a press release on March 1. If read this correctly, they already did a buyback via direct buy from a major shareholders. Pre-announcement #shares was 88 million outstanding. So they pulled 7% of outstanding shares in Q1 via below at a good price.

I am guessing the seller is the private equity behind this re-organization since they own 34 million shares still.

 

_{HAMILTON, ON, March 10, 2021 /CNW/ - Stelco Holdings Inc. ("Stelco" or the "Company") (TSX: STLC) announced today that the previously announced bought deal secondary offering (the "Offering") of 7,000,000 common shares of the Company (the "Common Shares") by Bedrock Industries Coöperatief U.A. (the "Selling Shareholder") at a price of $26.25 per Common Share for aggregate gross proceeds of $183,750,000 to the Selling Shareholder has closed.}

_{The Offering was completed by way of a prospectus supplement dated March 5, 2021 (the "Prospectus Supplement") to the final base shelf prospectus of the Company dated February 11, 2021 (the "Base Shelf Prospectus"). The Base Shelf Prospectus and the Prospectus Supplement have been filed with Canadian securities regulators and are available under the Company's profile at www.sedar.com. The Offering was led by BMO Capital Markets. All net proceeds of the Offering, after deducting the underwriting commission, were paid to the Selling Shareholder.}

_{Prior to the Offering, the Selling Shareholder held 41,172,315 Common Shares, which  represented approximately 46.4% of the outstanding Common Shares. Following the Offering, the Selling Shareholder holds 34,172,315 Common Shares, representing approximately 38.5% of the outstanding Common Shares.}

 

[petec]

1 hour ago, hasilp89 said:

Finally got to read the transcript. Some additional takes to your summary

• My fav was when the RBC analyst asked what the downside was to $2b of EBITDA and Alan said ... “Well, I mean, as we said, the number is based on real numbers that are out there today. On the CME, you can open up the CME and see the forward curve and do the math. So -- and as we said, it's in excess of $2 billion. So the answer is that, yes, that's the reference point.” so basically he sees no downside.... 
• Demand picture remains strong, as indicated by the fwd curve but also anecdotally “Inventories are exceptionally low with our customers. End markets are really strong. Imports are not moving because people don't want to take the risk on 6-month lead times. Scrap is surging every day. ”
• not really concerned about the pension if they hit $1.4bn FCF “there'll be another meaningful dent in that this year as a result of the free cash flow suite. But that pension is going to go away.”
• acknowledged the hedge was a mistake, but only a minor one. They’re gone let the “trend be their friend”. Not planning to hedge in this environment 
• Liked his answer on product mix “ We're not committed to anything other than making money serving our customers and having the highest margin.“

one question I did have was if you understood how that 1m of pig iron capacity flows through P&L. Sounds like they have flexibility to sell that directly to EAFs if capacity gets tight, but assume they need it for their own production.

 

My preference would be buybacks, for tax reasons and because it’s still so cheap. While I try not to get sucked into his salesmanship (he alluded to it being worth double a number of times and outright said he’d buy back half the shares)all signs point to the setup remaining strong. 

 

Good notes. A few things:

1) The $2bn assumes the forward curve holds. It might not. That's the downside.

2) I think suite was actually sweep - referring to the cash flow sweep on the pension.

3) Pig iron. I think this gives them an additional product, which means they have more options when enhancing margins. It also means they can produce something and keep the blast furnace running when downstream equipment is being maintained. Other than that I don't think it has a huge impact on the P&L. Could be wrong.

 

[petec]

1 hour ago, Xerxes said:

There was a press release on March 1. If read this correctly, they already did a buyback via direct buy from a major shareholders. Pre-announcement #shares was 88 million outstanding. So they pulled 7% of outstanding shares in Q1 via below at a good price.

I am guessing the seller is the private equity behind this re-organization since they own 34 million shares still.

 

_{HAMILTON, ON, March 10, 2021 /CNW/ - Stelco Holdings Inc. ("Stelco" or the "Company") (TSX: STLC) announced today that the previously announced bought deal secondary offering (the "Offering") of 7,000,000 common shares of the Company (the "Common Shares") by Bedrock Industries Coöperatief U.A. (the "Selling Shareholder") at a price of $26.25 per Common Share for aggregate gross proceeds of $183,750,000 to the Selling Shareholder has closed.}

_{The Offering was completed by way of a prospectus supplement dated March 5, 2021 (the "Prospectus Supplement") to the final base shelf prospectus of the Company dated February 11, 2021 (the "Base Shelf Prospectus"). The Base Shelf Prospectus and the Prospectus Supplement have been filed with Canadian securities regulators and are available under the Company's profile at www.sedar.com. The Offering was led by BMO Capital Markets. All net proceeds of the Offering, after deducting the underwriting commission, were paid to the Selling Shareholder.}

_{Prior to the Offering, the Selling Shareholder held 41,172,315 Common Shares, which  represented approximately 46.4% of the outstanding Common Shares. Following the Offering, the Selling Shareholder holds 34,172,315 Common Shares, representing approximately 38.5% of the outstanding Common Shares.}

 

What makes you think that's a buyback? I just assumed Bedrock were selling shares (which seemed odd, and worries me). 

 

EDIT: checked the 1q accounts. shares out did not change between 31/3/20 and 31/3/21. So whatever happened on 1/3/21 was not a buyback.

Edited May 6, 2021 by petec

[hasilp89]

3 hours ago, petec said:

What makes you think that's a buyback? I just assumed Bedrock were selling shares (which seemed odd, and worries me). 

 

EDIT: checked the 1q accounts. shares out did not change between 31/3/20 and 31/3/21. So whatever happened on 1/3/21 was not a buyback.

Agree I thought it was just them selling down. NO reduction in shares. May read that way because it was a bought deal. BMO likely bought and led knowing they’d have no issue selling those shares in the market at higher prices / they had buyers lined up. Don’t believe that is uncommon method for a controlling shareholder to dispose of shares. EDIT: forgot to point out the potential conflict of interest with BMO buying the deal and BMO analyst liking the stock.... 

Is it concerning

Yes: why would they sell anything if he’s gonna go on the call and say it’s gonna double.
 

no: Can’t fully know their fund structure etc, but not unreasonable for them to take some money off the table. Typical PE deal would have done a levered recap by now. I thank the lord they aren’t doing that. My sneaky suspicion he sells 7% at $183m for some return now BUT he knows his ownership will go right back up 7% when he starts buying back shares, win win?

Leaning towards no but obviously I’m very biased.

thanks for the other responses petec - here’s to a strong fed curve.

Edited May 7, 2021 by hasilp89

[bearprowler6]

What to do with the free cash that builds up throughout 2021? Announce a huge special dividend or massive share buyback? Why choose between the two? Why not do both?

Doing both could be achieved by adopting a page from the Fairfax play book by having Stelco enter into a TRS with a counter party for a block of the company’s own shares. Stelco could separately announce a share buyback to commence soon in order to take advantage of the current share price.

Start the share buy back now at current prices in anticipation of a rise in the share price as operating results for the remainder of the year come in. Enter into the TRS at the current share price and then cash out and record a large gain should the expected share price increase occur. Use the proceeds from the closing out of the TRS to pay a huge special dividend or continue with the share buyback. 

Shareholders are rewarded in three ways---i) outstanding share count reduce through the buy back ii) receipt of a large cash payout from the special dividend and iii) Company's balance sheet remains very strong since a majority of the free cash flow achieved through the expected $2 billion in EBITDA to be earned in 2021 is retained (except of course the portion used for the buyback at current prices).

Thoughts?

[petec]

5 hours ago, hasilp89 said:

Agree I thought it was just them selling down. NO reduction in shares. May read that way because it was a bought deal. BMO likely bought and led knowing they’d have no issue selling those shares in the market at higher prices / they had buyers lined up. Don’t believe that is uncommon method for a controlling shareholder to dispose of shares. EDIT: forgot to point out the potential conflict of interest with BMO buying the deal and BMO analyst liking the stock.... 

Is it concerning

Yes: why would they sell anything if he’s gonna go on the call and say it’s gonna double.
 

no: Can’t fully know their fund structure etc, but not unreasonable for them to take some money off the table. Typical PE deal would have done a levered recap by now. I thank the lord they aren’t doing that. My sneaky suspicion he sells 7% at $183m for some return now BUT he knows his ownership will go right back up 7% when he starts buying back shares, win win?

Leaning towards no but obviously I’m very biased.

thanks for the other responses petec - here’s to a strong fed curve.

I agree with “no”, fwiw.

[petec]

3 hours ago, bearprowler6 said:

What to do with the free cash that builds up throughout 2021? Announce a huge special dividend or massive share buyback? Why choose between the two? Why not do both?

Doing both could be achieved by adopting a page from the Fairfax play book by having Stelco enter into a TRS with a counter party for a block of the company’s own shares. Stelco could separately announce a share buyback to commence soon in order to take advantage of the current share price.

Start the share buy back now at current prices in anticipation of a rise in the share price as operating results for the remainder of the year come in. Enter into the TRS at the current share price and then cash out and record a large gain should the expected share price increase occur. Use the proceeds from the closing out of the TRS to pay a huge special dividend or continue with the share buyback. 

Shareholders are rewarded in three ways---i) outstanding share count reduce through the buy back ii) receipt of a large cash payout from the special dividend and iii) Company's balance sheet remains very strong since a majority of the free cash flow achieved through the expected $2 billion in EBITDA to be earned in 2021 is retained (except of course the portion used for the buyback at current prices).

Thoughts?

Too complex! And who’d take the other side of a TRS knowing a huge buyback is coming?

[valueinvestor]

I always liked the setup but unfortunately major shareholders and a PE at that scares me the most. Never had great experiences, as similar plays were prone to take under. 

Even if it goes to $2B, can one feel confident it will all go to us commoners/common shareholders? 

Congrats to all the longs! A fantastic pick by all of you. 

[bearprowler6]

6 hours ago, petec said:

Too complex! And who’d take the other side of a TRS knowing a huge buyback is coming?

Too complex?? Hardly.

The debate will come down to what is considered a "huge" buy back. CEO Kestenbaum did refer to a buyback of 50%. I think this was more to indicate the magnitude of the free cash flow he expects rather than the size of the buy back itself. But we shall see what develops on this point.

As for who would take the other side of this---Fairfax announced its usual normal course issuer bid in Sept/20 and got approval for a buy back of 10% of the outstanding voting shares and was still able to get a counter party to take the other side of the TRS subsequent to that. I can't see why Stelco would have trouble getting a counter party to do the same?

In any case---Kestembaum better get going on some plan sooner rather than later. The street is paying attention to Stelco now and the stock price will continue to move higher. Unless he acts soon Kestembaum will end up paying a much higher price for the buy backs or the strike price for the TRS which will leave less cash available for the "huge" special dividend.

 

 

[petec]

He explicitly referred to buying back half of the shares. It wasn’t a free cash comment. 
 

Fairfax did their TRS when they had no cash for significant buybacks. The fact that they got approval isn’t relevant. What’s relevant is that they couldn’t do much. Everyone knows Stelco can, and they’ve pretty much just told the market that they will. 

I love the idea, but I’m not getting my hopes up. 

[hasilp89]

8 hours ago, valueinvestor said:

I always liked the setup but unfortunately major shareholders and a PE at that scares me the most. Never had great experiences, as similar plays were prone to take under. 

Even if it goes to $2B, can one feel confident it will all go to us commoners/common shareholders? 

Congrats to all the longs! A fantastic pick by all of you. 

From what I've seen thus far Alan is pretty aligned. Given they own a good chunk I'm pretty confident that cash will get to us, whether its a buyback, special dividend, acquisition, capex with and ROI. One thing I've appreciated is he hasn't levered it up to take money out (See BAM with EAF).

There are some other interviews with him online, he bought Arthur Blank's minority share of the Falcons and has a sports SPAC out there. 

[Xerxes]

My mistake, the press release indeed did not mention a buyback from the private equity. The term bought deal confused me. 

Had a listen to the conference call, I admit this company is one of the few company' conference call, where the CEO very explicitly talks about where share price ought to be and that he will bring it there. When he talked about not hedging and riding the waive, it shows that he is not just a mining executive who would be probably more conservative, and that he has private equity/trading background.

Vis a vis return of capital:    there will be no drip-drip buyback to use his own words. My guess is one big tender offer against what the P/E outfit already has, but most likely, someone buying the whole thing. Viking had mentioned that the cash piling up, would not be good as it would make it attractive. I disagree, I think that is very idea behind this. 

Cash piling up + squeaky clean balance sheet + dividend paid completely via free cash flow + no debt + pension good ==> BUY ME 

if that fails, probably than tender buyback in block offer. 

 

 

[bearprowler6]

A few updates on Stelco (STLC):

Steel prices remain extremely strong with HRC futures prices above $1600 through the end of Aug/21 and above $1300 for the balance of 2021. If these prices hold (and nothing suggests they won't) then Stelco will have an insanely profitable year and will accumulate insane amounts of free cash. At these steel prices, the $2 billion 2021 EBITDA projection offered by the company's CFO at the time of the Q1 earnings release will be easily met and likely surpassed.

Quarterly index rebalancing is scheduled for June 11th with index additions and deletions being announced after market closing on June 4th. ATB Capital is suggesting that Stelco will be added to various indices including the TSX/S&P composite index. Bring on those index buyers!

Analyst's covering the stock continue to upgrade. Latest upgrade is from Stifel analyst Anoop Prihar who initiated coverage with a target price of $48/share --- the highest target price on the street. STLC currently trades at $33.96/share.

Also noteworthy---as of May 4, 2021 Fairfax Fairfax holds 12.994 million shares of STLC representing 14.65% of the outstanding shares which is an increase from the 12.2 million shares or 13.7% of the outstanding share count announced by Fairfax via a press release on Nov 19/18.

 

 

[petec]

3 hours ago, bearprowler6 said:

A few updates on Stelco (STLC):

Steel prices remain extremely strong with HRC futures prices above $1600 through the end of Aug/21 and above $1300 for the balance of 2021. If these prices hold (and nothing suggests they won't) then Stelco will have an insanely profitable year and will accumulate insane amounts of free cash. At these steel prices, the $2 billion 2021 EBITDA projection offered by the company's CFO at the time of the Q1 earnings release will be easily met and likely surpassed.

Quarterly index rebalancing is scheduled for June 11th with index additions and deletions being announced after market closing on June 4th. ATB Capital is suggesting that Stelco will be added to various indices including the TSX/S&P composite index. Bring on those index buyers!

Analyst's covering the stock continue to upgrade. Latest upgrade is from Stifel analyst Anoop Prihar who initiated coverage with a target price of $48/share --- the highest target price on the street. STLC currently trades at $33.96/share.

Also noteworthy---as of May 4, 2021 Fairfax Fairfax holds 12.994 million shares of STLC representing 14.65% of the outstanding shares which is an increase from the 12.2 million shares or 13.7% of the outstanding share count announced by Fairfax via a press release on Nov 19/18.

 

 

Good spot re Fairfax. 
 

To put rough numbers on this, if prices are 1400 and costs are 400, margins are 1000 per ton, or 1200 Canadian. 
 

They can do 2.7mt per year or 2mt in the last 9 months of the year, suggesting CAD2.4bn in ebitda in three quarters. 
 

The EV is 3.7bn. 
 

 

[hasilp89]

 

I’m pinching myself here. It really seems to good to be true. 
 

Every day is a step closer towards Alan’s massive capital return. Let’s hope it doesn’t disappoint.

Edited May 27, 2021 by hasilp89

[Xerxes]

This thing needs to go down to $5-7 per share so that i can buy it, without feeling shame. But if it does go down to $5-7, there is something really wrong that is about to happen (or happened) in the world that de-railed the secular trajectory. So in that case, i will end up not buying it at $5-7.

[petec]

2 hours ago, Xerxes said:

This thing needs to go down to $5-7 per share so that i can buy it, without feeling shame. But if it does go down to $5-7, there is something really wrong that is about to happen (or happened) in the world that de-railed the secular trajectory. So in that case, i will end up not buying it at $5-7.

I hope it does, just in time for the buyback!

[hasilp89]

7 hours ago, Xerxes said:

This thing needs to go down to $5-7 per share so that i can buy it, without feeling shame. But if it does go down to $5-7, there is something really wrong that is about to happen (or happened) in the world that de-railed the secular trajectory. So in that case, i will end up not buying it at $5-7.

Xerxes - where is the shame coming from? It’s still cheap. Set up for remainder of the year is strong. Capital return is still to come.

think it traded down to that level in March 2020, doubt it will get back there (famous last words!)

[hasilp89]

@Xerxes mr. market might be listening to you - down 7% today. 

[Xerxes]

The shame of me complaining about Prem Watsa buying this cyclical junk at $20 per share, and now feeling the need to own this cyclical junk myself at $34 per share. LOL

He bought an out-of-the-money call option ... while all I saw was a repeat of Resolute.

[hasilp89]

I hear you. I've done plenty of prem complaining myself. I look at it this way - cyclical junk can be gold at the right price, with right level of certainty and without overstaying my welcome.   

[petec]

The huge difference was the lack of liabilities, in my view.

Interesting to see Bedrock selling more, but notably Kestenbaum is not selling and will in future hold his shares directly rather than through Bedrock, if I read it right: Stelco InvestorRoom - News Releases

The only thing I find odd is that Stelco isn't just buying the shares back itself, given the statements made on the call.

Separately this is interesting: Microsoft Word - 27052021 Primobius - Stelco MoU Press Release (weblink.com.au). Apparently Stelco is planning a vehicle recycling facility and now a battery recycling one.

[hasilp89]

1 minute ago, petec said:

The huge difference was the lack of liabilities, in my view.

ditto - this was massive for me as well. 

11 minutes ago, petec said:

Interesting to see Bedrock selling more, but notably Kestenbaum is not selling and will in future hold his shares directly rather than through Bedrock, if I read it right: Stelco InvestorRoom - News Releases

shame on me i didn't even see that news alert - likely the reason for downward pricing pressure. summary of both below - i read it the same way as you, my numbers don't exactly tie but it does appear Alan has retained interest while bedrock sold.

• 3/10/21 Bedrock went from 46.4% (41.2M) to 38.5% (34.2) with the first BMO bought deal at $26.25.
  • At this time Alan directly owned 1.2M shares =1.34% (this is from Tikr dated 5/4/21)
• 5/26/21 Bedrock went from  38.5% (34.2M) to 22.5% (19.95M) with the second BMO bought deal at $33
  • BMO bought 5.8M shares
  • Total reduction of of 14M shares - BMO bought 5.8 - Net would be what Alan took which is ~8.2M
  • Doesn't tie exactly to the 11.6m or 13.1% in the PR (1.2+8.2=9.4) but i could be missing something

 

16 minutes ago, petec said:

The only thing I find odd is that Stelco isn't just buying the shares back itself, given the statements made on the call.

My only thoughts - They ended the quarter with only 47M of cash so don't have much to work with, as cash builds over the year they should be able to get moving. Additionally the sell down by bedrock both march and may should increase float making buyback easier.

 

18 minutes ago, petec said:

Separately this is interesting: Microsoft Word - 27052021 Primobius - Stelco MoU Press Release (weblink.com.au). Apparently Stelco is planning a vehicle recycling facility and now a battery recycling one.

This actually gives me some pause - my thesis has been based on cash getting returned given the lack of high ROIC investment opportunity for a business like this (through cycles) vs. new investment - hopefully it is either a small investment or it is actually high ROI and Alan is on to something.

[petec]

I haven't checked the numbers, but the way I read it is that Kestenbaum is not Bedrock's only shareholder, and it is the other shareholder who is selling Stelco. So Bedrock is spinning its Stelco shares out to its shareholders, and the selling shareholder is then doing the deal with BMO, while Kestenbaum is holding on.

Re: buybacks, Stelco could easily get someone to lend them $190m for a few weeks!

And as for investing in JVs, I suspect Stelco is contributing land as much as anything. My guess is that Stelco contributed land for the vehicle recycling facility in return for free steel scrap, and this facility sits alongside that to recycle the batteries. But I emphasise I am guessing.