STLC.TO - Stelco

[petec]

On costs, my understanding is this:

1. Stelco has invested CAD1bn or thereabouts over the last 3 years and has reduced costs dramatically. Once the cogen plant is complete costs will be about $400/t although on the 1q call they suggested they are there already.
2. Historically, $400 is about the bottom of the steel price range and the price never spends long there, so Stelco should be able to make money through the cycle. (This strikes me as important when it comes to valuing boom-time cash flows: they do not need to be saved to ensure the company survives the bust.)
3. Relatively speaking, EAF costs are more variable. But they do have a fixed component in collecting and processing scrap, so there is a floor (which probably drives the apparent $400 floor in the steel price cycle). And Stelco does have a variable component, since it buys raw materials like iron ore and coking coal. I am not sure what assumptions for these inputs are baked into the $400/ton cost guidance.
4. Stelco *claims* to be a low cost producer. In fact in 1q they said they might be the lowest cost in the world. That's probably hyperbole, and it's only true at the top of the cycle - Stelco will probably look like a high cost one at the bottom. But as Kestenbaum points out, it keeps all the benefit of rising prices, and at the moment that's incredibly valuable.
5. Increased EAF capacity in both the US and China (which recently opened its borders to imported scrap) may have caused a permanent change in the scrap price. Kestenbaum promotes this idea. As Haslip says, the EAF producers disagree and think pig iron is part of the solution. But it is interesting to consider who will capture the margin on that. IIRC Stelco said that they're in the process of "educating" EAF's as to what the cost of pig iron will be - in other words, Stelco will produce whatever is best for Stelco (pig iron or steel) and capture the margin; EAF's can take it or leave it. Again, Stelco look like the strong hand at the top of the cycle.

Bottom line, I think: Stelco is competitive throughout the cycle, but with more fixed costs their cash flows will be more variable. 

[hasilp89]

well said. Attached are the slides I had referred to and would support the points mentioned above.

 

 

[petec]

HRC curve is up quite significantly today/this week while other commodities are selling off. Intriguing. If it holds at these levels I think Stelco does C$2.5bn in ebitda this calendar year and more in the 12 months ending March 2022.

 

 

[hasilp89]

I was happy with C$2b. I’ll take 2.5 though.
JPM came out with a 50+ target. Not sure if it was new coverage or an upgrade. 

[Viking]

Has anyone come across any recent articles discussing the supply demand dynamic for steel? It is a little bizarre the HRC future pricing just keeps going higher regardless of what is going on in the rest of the commodity complex.

[bearprowler6]

2 hours ago, Viking said:

Has anyone come across any recent articles discussing the supply demand dynamic for steel? It is a little bizarre the HRC future pricing just keeps going higher regardless of what is going on in the rest of the commodity complex.

https://www.hellenicshippingnews.com/steel-demand-bouncing-back/

 

https://www.mining.com/iron-ore-price-correction-delayed-as-global-steel-demand-tops-2bn-tonnes-first-time-ever/

 

As described by the JPM analyst covering the steel sector...current and projected steel pricing is presenting a "generational opportunity" for steel stocks! Michael Glick, the JPM analyst who made this statement, initiated coverage on Stelco earlier this week with an overweight rating and a price target of $54 (the highest in the street)!

 

 

[petec]

Astonishingly, Stelco’s 2021/2 earnings power continues to rise: https://www.cmegroup.com/trading/metals/ferrous/hrc-steel_quotes_globex.html

[hasilp89]

This is absurd.

 

 

[Viking]

I think lead times are close to 3 months out. So we know Q2 earnings are going to be historically high. We also know Q3 earnings will be even higher. 
 

For Stelco the cash build on their balance sheet will start when they report Q2 earnings. With Q3 earnings in the bag (by the time they report Q2) Stelco management will have confidence in the cash build to communicate more concretely what the plans are for returning cash to shareholders. The CEO is HIGHLY motivated to get the share price higher (given his significant holdings of +10% and blunt comments on the Q1 call). 
 

Given where Stelco stock is trading today, Mr Market clearly expects

1.) steel prices to crater lower shortly

2.) Stelco management to do something stupid with the cash

 

It is not clear to me that either of the above will happen.

1.) the demand / supply for North American steel looks like prices will remain higher for longer

2.) since bringing Stelco out of bankruptcy in 2017 Stelco management would get an ‘A’ grade in my book for their strategic vision and capital allocation decisions

—————————

Pretty amazing what Kestenbaum has done with Stelco in 4 years. Interesting to read the news stories from 2017 and the scepticism. Great example of what is possible when you have strong management. 
- https://www.cbc.ca/news/canada/hamilton/stelco-emerges-from-bankruptcy-protection-after-nearly-3-years-1.4186708

Edited June 22, 2021 by Viking

[Viking]

I think another under-appreciated part of the current steel pricing story is the concentration that now exists in North America on the supply side. Given all the acquisitions (especially those by Cleveland Cliffs) there is now an oligopoly. And NA steel producers are talking/focussed on profitability NOT volume. This makes the current cycle a little different than past cycles and, if true, supports the higher prices for longer thesis.