STLC.TO - Stelco

[Viking]

Here is a great summary from ‘The Fabricator’ on steel pricing dated Feb 16. The link goes into a fair bit of detail.

 

Steel price increases losing steam?

Several factors suggest the decline will start at the end of Q2 at the latest

- https://www.thefabricator.com/thefabricator/blog/metalsmaterials/steel-price-increases-losing-steam

 

Steel prices have risen relentlessly since bottoming out last summer and hit new record highs in February. But there are signs the astonishing uptrend in steel may finally be losing steam.

 

Steel Market Update (SMU) canvassed the market Feb. 8-9, and results revealed the benchmark price for hot-rolled steel at a new record high of $1,180/ton ($59/cwt) (see Figure 1). Prices were up 168% from the August 2020 low of $440/ton. They also were up 9.3% from $1,080/ton in mid-January, when the spot price first surpassed the prior record of $1,070/ton ($53.50/cwt) published by SMU in 2008.

 

Analysts at SMU’s parent company, the CRU Group, forecast that hot-rolled prices will peak in late Q1 or in Q2 and decline for the rest of 2021. They think prices could fall below $600/ton as supply and demand reach a better equilibrium. Supply is expected to increase more quickly than demand in the second half of the year as mills add capacity and as imports ordered now hit U.S. shores over the summer.

 

Steel buyers surveyed by SMU in February predicted that hot-rolled steel prices will peak around $1,200/ton and head south beginning in March. But that is just an educated guess. Some market participants have been calling a peak since Q4 2020. They have been wrong to date. Is this time different?

———————-

For added perspective here is ‘the Fabricator’ article on steel pricing from Dec 1.

 

Steel prices defy predictions of a peak

Demand rises as steel mills keep supply tight, expected to continue into 2021

- https://www.thefabricator.com/thefabricator/article/metalsmaterials/steel-prices-defy-predictions-of-a-peak

 

Steel prices continued to move higher through the fourth quarter, surprising many steel buyers who were predicting a peak as new capacity and seasonal factors were expected to bring the uptrend to an end. But steel supplies remain tight relative to demand, and buyers tell Steel Market Update (SMU) that negotiations with the mills have become quite contentious as steelmakers hold the line on spot and are less willing to compromise on contract tons.

 

...As the year winds down, a major event will take place that will impact the flat-rolled steel markets. Cleveland-Cliffs, owner of AK Steel, will finalize its purchase of most ArcelorMittal USA assets (except for its Calvert, Ala., joint venture mill). In comments to SMU last month President/CEO Lourenco Goncalves said his guiding philosophy regarding mill production is creating value. (Goncalves: “I have said time and time again that I am for value, not for volume.”) SMU interprets this to mean the mills controlled by Cleveland-Cliffs would prefer to see the market stay tight and prices high.

 

...In summary, the upward slope of the steel prices is as much about the tight supplies as it is about the growing demand as the economy rebounds from the pandemic shutdowns. Mills idled significant capacity in the second quarter and have taken their time about bringing production back. Lead times for delivery of spot tons from the mills have nearly doubled since early in the year as the mills scramble to keep up with orders. As of November, most mills were filling their order books for January already as buyers hurried to secure their share of the limited tons available.

 

 

[petec]

I honestly wouldn’t put too much effort into predicting short term steel prices. Very low odds of success!

[hasilp89]

Interested but skeptical. Have not invested directly in steel but am in EAF and was in HCC. I've followed Nucor fairly closely - highly recommend Plain Talk by Ken Iverson (Long time CEO of Nucor). Their culture and decentralized operating system is a big contributor to their success over the years IMO, which the book outlines along with the progress of EAF production. Petec I feel your pain, I sat around sucking my thumb when Nucor was in the $30s, such is life.

 

Ok so my initial thought was just first level thinking negative on blast furnace production - mkt has/is shifting to EAF, BF is high fixed cost etc etc. BUT what I'm reading in your quotes from mgmt. their belief is that input costs for EAF's are rising due to low scrap demand, while input costs for BF & Stelco are remaining steady. Have you guys seen any commentary on this from the EAF's? 

 

I get that it is cheap now trading at maybe ~2x 2021 EBITDA etc. but what is going to cause it to rerate because those EBITDA numbers likely aren't repeatable and every investor knows that. This is where it feels more like a trade then an investment (which is fine), you're probably not holding this for 5 years so who is the next buyer and what are they paying at the end of 21 when they've produced record cash flow that isn't repeatable. Is cost issue for EAF's above longer lasting than 21, is it a huge industry shift (would be huge if so).

 

What are management and Bedrocks plan for cash. Reminds me of BAM with Graftech however BAM had made multiples by the time of IPO. How is bedrock faring, how aligned are they with us, how much money have they already made etc. If they are committed to returning cash, riding their coattails might not be a bad outcome.

 

Obviously a lot more to it all but wanted to share my 2 cents. Appreciate the idea and through research from you both.

[petec]

For what it’s worth I’m not remotely interested in management’s arguments about why the steel price will be higher for longer. If it happens that’s gravy.

 

But at a long term price of 600 and a cost of 400 (USD) this trades on just over 3x ev/ebitda if you subtract 2021 fcfps from the share price (which I’m happy to do since most of it will be generated within the next 6 months).

 

I think that valuation - which includes nothing for a very valuable land bank - gives me a nice margin of safety. I fully intend to hold this for years while it generates cash and develops the land.

 

On capital allocation, I think management have more than earned the benefit of the doubt and they own 15% so they’re aligned. My guess is we see a lot of special divs.

[Viking]

Hasilp89, thanks for chiming in. Unlike Petec, this is not a long term hold for me. What i see right now is a big disconnect to what is going on with steel pricing and earnings estimates for Stelco for both Q1 and Q2. My guess is as investors start to understand the size of the profit Stelco will book in Q1and Q2 the shares will move higher. What really surprised me (in a good way as it motivated me to buy stock) is Stelco stock sold off by 10% the day after releasing results and hosting the conference call. The stock rebounded yesterday nicely; my guess is analysts likely started raising estimates for Stelco :-) Stelco is not followed very closely (RBC just initiated coverage but have not yet sent out an updated report); and the stock does not have a big float.

 

So my thesis is Stelco stock should move higher based only on where steel prices are today. If steel prices stay at elevated levels into Q2 or longer then this will just make the story even better.

 

It was almost comical on the Stelco Q4 conference call. Here is one of the exchanges.

- https://ca.news.yahoo.com/edited-transcript-stlc-earnings-conference-140000112.html

 

David Francis Gagliano, BMO: Okay. That's helpful, Alan. And then just not to -- I'm going to put you on the spot a little bit here. So we've got 2 theses here on EBITDA per ton. And obviously, we started out with $123 this quarter. We just probably added $300 at least on the price side and then costs probably down. Is there any reason we should expect -- we shouldn't expect EBITDA margins per ton of at least $450 to $500 in the first quarter and then going higher from there into the second quarter given the lags in pricing?

 

Alan Kestenbaum, Stelco CEO: I've said I expect that, yes. We expect that. And it's, again, pretty remarkable as you start moving into Q2, it gets much higher than that

 

——————————————————

This is not only a Stelco issue. A week ago Nucor issued a press release that basically said analysts are WAY underestimating margins and earnings for Q1. I don’t think Nucor has done this before.

 

Nucor Provides Update on First Quarter Performance

CHARLOTTE, N.C., Feb. 9, 2021 /PRNewswire/ -- Nucor Corporation (NYSE: NUE) today announced that it expects to generate record earnings for its first quarter ending April 3, 2021. Nucor believes its first quarter net earnings could exceed $900 million.

 

... While it is difficult to provide precise guidance this early in the quarter, Nucor has elected to provide this update due to what it sees as an unusually large gap between its internal forecast and the current mean estimate for its first quarter earnings. Strong January operating results, as well as recent revisions to internal forecasts, reinforce Nucor's confidence in its expected results. The Company will continue its regular practice of providing more specific quantitative earnings guidance on or about the 11th week of each quarter going forward.

[Viking]

Here is an earlier exchange on the Stelco Q4 conference call that is informative:

- https://ca.news.yahoo.com/edited-transcript-stlc-earnings-conference-140000112.html

 

David Francis Gagliano, BMO - ... I think it would help us if you could give us a bit of a framework around the outlook. Obviously, prices have had a huge run, and it doesn't look like it's reflected yet in the results fully. So I just want to ask a few questions to get to that point as well as the unit cost side. So on pricing, given the lags and the move higher that we've seen, in our math, it's perfectly reasonable to expect at least on average prices, at least a CAD 300 per-ton increase in the first quarter. Does that seem reasonable to you?

 

Alan Kestenbaum, Stelco CEO: Yes. I mean the -- we've been operating. If you think about it, David, if you follow the pricing, like a lot of steel mills, we've been operating on about a 3-month lag because of lead times, which is a good thing. You want lead times to be out. I think a lot of the customers looked at the market, saw markets start moving higher and we're a little bit shy about making commitments -- especially Q4 is typically a time then then doesn't happen. And that created a situation as buyers started to buy, the lead times went out. And so yes, you're looking at lags. And like right now, we're selling into May right now. So I mean you're looking now at the forward curve showing over $1,200 a ton, and you convert that into Canadian, and you're at CAD 1,500 a ton. I mean those prices will start appearing in the May timeframe.

 

David - BMO: Okay. And you are signing volumes at CAD 1,500 a ton for delivery out in May. Is that correct?

 

Alan - Stelco CEO: Yes. Yes.

 

David - BMO: Okay. Great. That's very helpful. Switching on the cost side, just obviously, very impressive improvement in unit costs, especially considering the low volumes, we've got a 35% increase in volumes in the first quarter. Typically, that means with fixed cost absorption issues or opportunities, there's usually a meaningful decline in unit cost with that kind of increase in volumes, especially now with annual [met coal] contracts, I believe, being lower heading into the first quarter. Are there other offsets that we need to think about here on the unit cost side that would mitigate that decline sequentially?

 

Alan - Stelco CEO: I mean you're right. That's exactly right. The one thing I would say on cost is, of course, we do use a little bit of steel scrap, but the amazing thing is higher steel scrap prices is great news for us because in our case we're impacted 15% as opposed to 115% from our competitors when you take into account the yield loss of about 15% that an EAF producer has to absorb. So it's pretty remarkable. And so the answer is, basically, that will be offset, as you said, by the absorption of fixed costs. So yes, it's -- we modeled this company and built this company, we've been talking about this for a few years about getting to this place, and we did it, and here we are.

[petec]

Viking, to be clear, I think you’re absolutely right in how you’re reading management comments re q1/2.

 

I just think there’s deep value here in the long term, too.

[Viking]

Another key to investing in Stelco is management: how good are they? What is their track record? What is the long term plan? Most importantly, are their interests aligned with those of shareholders?

 

My read is management is very good and they just might be exceptional. So many of their decisions have been strategic, involved risk, cost lots of money and have worked out very well over time for Stelco. Stelco looks exceptionally well positioned as we enter what looks to be a very strong steel pricing cycle - the significant investments made over the years to maximize volume production and lower costs are largely completed. Starting in Q1 we should see free cash flow explode higher :-)

 

Stelco is majority owned by a company called Bedrock Industries - a private equity firm.

- http://www.bi15.com/strategies/

- Alan Kestenbaum is Executive Chairman and CEO of both Stelco and Bedrock.

 

Bedrock purchased Stelco for about CAN$450-$500 million in June 2017. The deal was structured very favourably for Bedrock Industries.

- https://www.thespec.com/business/2017/06/14/stelco-deal-bedrock-gets-steelmaker-for-less-than-500-million.html

 

Bedrock currently currently owns 46.4% of Stelco. Fairfax is the second largest shareholder with a 13.7% stake (12.2 million shares) purchased from Bedrock in 2018 for CAN$20.50/share. Bedrock sold this stake to Fairfax for $250 million at the peak of the last steel pricing cycle - when Stelco had a market cap of $1.8 billion. Selling at this time was a very good decision for Bedrock.

- https://www.bnnbloomberg.ca/billionaire-watsa-becomes-second-biggest-shareholder-in-stelco-1.1170391

 

After their initial purchase of Stelco in 2017, management in June 2018 acquired the adjoining real estate in Hamilton ($114 million) for what now looks like a steal and, once again, on very favourable terms for Stelco.

- https://www.thespec.com/business/2019/08/23/stelco-the-landlord-sees-big-bucks-in-leasing-out-surplus-industrial-land.html

 

In their 3.5 years of ownership management has been investing to build Stelco into one of the lowest cost and well positioned steel mills in North America. Below are three examples from just the past year that demonstrate how they are building shareholder value at Stelco with a long term focus:

———————

1.) April 2020: Stelco signs long term iron ore pellet supply agreement and option to acquire 25% interest in Minntac with U.S. Steel

- https://markets.businessinsider.com/news/stocks/stelco-announces-option-to-acquire-25-interest-in-minntac-the-largest-iron-ore-mine-in-the-united-states-and-entry-into-long-term-extension-of-pellet-supply-agreement-with-u-s-steel-1029152537

 

"This transaction represents a major milestone for Stelco as it secures a long-term supply of high-quality iron ore pellets and a highly valuable future option to acquire a 25% ownership interest in the Minntac Mine, one of, if not the, best assets on the iron range," said Alan Kestenbaum, Stelco's Executive Chairman and Chief Executive Officer. "Our actions today are an example of the type of decisive and strategic actions we are able to take in any operating environment, in order to drive significant and sustained long-term value creation for our shareholders." Stelco will pay US$100 million, in cash, to U.S. Steel in consideration for the Option.

————————-

2.) Oct 2020: Stelco Completes Blast Furnace Upgrade

 

Page 17 Feb 17, 2020 MD&A: On October 13, 2020, the Company announced the successful completion of the LEW blast furnace upgrade and reline project and the commencement of hot metal production. We expect that the upgrades to our blast furnace will result in improved quality, increased hot metal production of up to 300 thousand net tons per annum, and up to a corresponding $30 per net ton reduction in costs to produce our steel coils. As at December 31, 2020, the total cost of the blast furnace upgrade project was approximately $118 million.

 

- https://www.mromagazine.com/2020/10/15/stelco-completes-blast-furnace-upgrade/

“...once in a generation project...” Alan Kestenbaum, Executive Chairman and CEO, Stelco Holdings. “...As a result of this upgrade and reline project we believe we have created a best-in-class blast furnace at our Lake Erie Works facility.”

———————

3.) Jan 2021: New Pig Iron Caster

 

Page 17 Feb 17, 2020 MD&A: On January 28, 2021, the Company announced that Stelco successfully commissioned the new pig iron caster at its LEW facility which has the capability of casting up to one million net tons of pig iron per year. The addition of the pig iron caster to Stelco's operations further supports the Company's tactical flexibility strategy and will allow the Company to fully capitalize on increased hot metal capacity resulting from the recently completed blast furnace upgrade project. The cost of the pig iron casting project was approximately $51 million.

[Xerxes]

Was inspired by this heated exchange to finally getting into listening to the conference call. The last time i followed steel, was in 2008-09, when US Steel plunged from $200 USD into oblivion, as the BRIC-led commodity super cycle deflated, and then secular trend became today's cyclical; and then land-grab turned into a decade long overcapacity.

 

Reading the comments here, I understand that the thesis is mostly independent of cycle, and more about the value that you get vs. the quoted price. But there is a huge play here if indeed this so called new super cycle sustains (see link below). I still recall how Alcan (Canadian aluminum producer) was bought at a HUGE premium at the top of last super cycle by Rio Tinto (believed they paid all cash) and how Peter Munk's Barrick Gold paid a giant all-cash $7 billion price to buy copper asset at about the same time. Imagine what this clean asset would be worth in that type of environment, where it is all BUY BUY BUY. But we are not there and possibly years away from the animal spirit to fully unleashed, first we need to get this cyclical uptrend turned into secular trend, then turn the secular trend into a super cycle. And then you need Jim Cramer saying BUY BUY BUY. Anyone recalls, the infamous Goldman Saches analyst issuing a now-famous $200 USD per barrel price target in the summer of 2008, with crude near $147 USD, and literally four months away it went down to $35 per barrel as Lehman Brothers succumbed to its wounds ! seems like ages ago now.

 

On Q4 conference call, one thing that struck out to me as an outsider just listening in, is how excited these guys are of the potential, how proud they did not tap the equity/debt markets. It seems the company is being dressed up for sale but has to be top dollar given the quality of assets.

 

See interview with US Steel CEO. We still don't know all the implication and secondary effect that the pandemic created. The world's economic trajectory has been permanently shifted. An infrastructure bill, low US dollar, and a thriving emerging market, are all bullish signals for the commodity sector.

 

https://finance.yahoo.com/news/an-economic-super-cycle-will-likely-emerge-us-steel-ceo-175040055.html

 

I'll go listen to the Q results right before and right after the pandemic broke out. Always fun to look back at these things from a historical point of view.

[Viking]

Xerxes, i think the following is spot on... “It seems the company is being dressed up for sale but has to be top dollar given the quality of assets.” During the Q4 conference call the CEO said Stelco would be an ideal takeout for a larger player as consolidation in North America continues. Hard not to view his comment as a big advertisement :-)

 

From the Q4 conference call. Stelco CEO: “I think we probably represent a phenomenal opportunity for someone to look at acquiring us potentially, just that we have -- we've got a company with no debt. It's a free cash flow generation machine, top of the heap asset capabilities on the auto front, no legacy liabilities on our balance sheet, all sitting in trust, ca lean profile environmentally, most modern facility, integrated facility, in North America. So who knows what happens?”

 

In the last steel price spike in 2018 Bedrock sold 13.7% to Fairfax for $20.50/share. Stelco is a much stronger company today then it was in 2018. And the bull market in steel prices is much larger this time (with peak prices currently 50% higher and it appears it will be of longer duration).

 

——————

But before i get too carried away with speculation of an impending sale, below is the question from the analyst (that prompted the answer above) and the second half of the answer the CEO provided.

 

Curtis Rogers Woodworth, Crédit Suisse: “And then given the strategic investments you've made in the business, do you feel that it's more likely that you're going to pivot more to an M&A philosophy going forward? Are there any major organic investments that you're evaluating right now? Because it seems like from a free cash flow perspective, you really have a lot of options going forward, both in terms of capital return and M&A.”

 

Stelco CEO (the first half of his answer is what i copied above.) Here is the second half of his answer: “...Right now, we're going to be focused on cash flow generation, share price. We're going to be focused on organic opportunities they're identifying. We are constantly in conversations with other people on the M&A side. But if we do something M&A, it's going to be something that's going to be really exciting. It's not going to be about trying to just consolidate some additional capacity. It's going to be something that's going to be super exciting, modern, futuristic, things that are going to make this company into something more than what it is today.

 

“In my last company, we existed at a time we were known as a silicon producer. And at some point, the solar industry became very, very hot, and we decided that we wanted to be an extremely meaningful participant in the solar industry. And to do that, we strongly invested and succeeded to make upgraded silicon metal to get into futuristic growth opportunities. And that's one of the strategies that we did. And we see things like that could potentially really increase the value of Stelco as a company. So for now, we're focused on things that are going to make sense. A lot of the consolidation has already occurred. And I think to the benefit of our competitors, to the benefit of the industry, to our benefit and everybody else. And we just want to do things that are going to be smart and make our value grow.”

[petec]

All very good points above. I’d add that the severance of the land could be key. Once they’re separate titles it’s easier to sell one part or the other if a buyer won’t offer full value for both.

 

Or, better yet, use that free cash to build a major industrial hub and rent it out at a 5% cap rate.

[Viking]

Hasilp89, you asked up thread “ What are management and Bedrocks plan for cash?”

 

From the Q4 conference call:

1.) build up our liquidity to a nice comfortable level (Stelco did not tap debt markets or issue shares during 2020 when covid hit business and while they were also making significant investments to improve operations)

2.) extraordinary dividends (paid 2 of these in July 2018 and Feb 2019 = $1.69 and $1.13 = $2.82)

- regular dividend of $0.10/share)q dividend - company just restarted this

3.) share buybacks

4.) re-invest in business - something transformative

 

“But every decision we make is always, how is this going to help the share price in the short-term and the long-term because we recognize that our holders have different hold periods and while you can't make everybody happy, we're always geared towards how do we build shareholder value, and that's how those decisions will be made.”

 

“As I mentioned in my comments, more than 15% of the shares in this company is owned by the management, the people on this call. And our goal is to get the share price to reflect the great things that we've done in this company.

[Viking]

All very good points above. I’d add that the severance of the land could be key. Once they’re separate titles it’s easier to sell one part or the other if a buyer won’t offer full value for both.

 

Or, better yet, use that free cash to build a major industrial hub and rent it out at a 5% cap rate.

 

Petec, it looks like they want to redevelop the land and lease out. The rental income, which will be large and stable, will be an ideal offset to volatile steel prices. Bottom line the land will just be another asset that lowers their will reduce their steel cost per ton even further.

 

A steel company (with no debt) AND an industrial REIT (of sorts) housed under one roof. The income from the real estate would help the company greatly at the next cycle low in steel prices.

 

[petec]

All very good points above. I’d add that the severance of the land could be key. Once they’re separate titles it’s easier to sell one part or the other if a buyer won’t offer full value for both.

 

Or, better yet, use that free cash to build a major industrial hub and rent it out at a 5% cap rate.

 

Petec, it looks like they want to redevelop the land and lease out. The rental income, which will be large and stable, will be an ideal offset to volatile steel prices. Bottom line the land will just be another asset that lowers their will reduce their steel cost per ton even further.

 

A steel company (with no debt) AND an industrial REIT (of sorts) housed under one roof. The income from the real estate would help the company greatly at the next cycle low in steel prices.

 

It would, but the market almost never values these kinds of conglomerates properly in my view so my guess is they start building and leasing, and then sell/spin one or other subsidiary whenever makes sense for IRR maximization.

[Viking]

All very good points above. I’d add that the severance of the land could be key. Once they’re separate titles it’s easier to sell one part or the other if a buyer won’t offer full value for both.

 

Or, better yet, use that free cash to build a major industrial hub and rent it out at a 5% cap rate.

 

Petec, it looks like they want to redevelop the land and lease out. The rental income, which will be large and stable, will be an ideal offset to volatile steel prices. Bottom line the land will just be another asset that lowers their will reduce their steel cost per ton even further.

 

A steel company (with no debt) AND an industrial REIT (of sorts) housed under one roof. The income from the real estate would help the company greatly at the next cycle low in steel prices.

 

It would, but the market almost never values these kinds of conglomerates properly in my view so my guess is they start building and leasing, and then sell/spin one or other subsidiary whenever makes sense for IRR maximization.

 

Agreed. A spin off would make a lot of sense.

 

And the Stelco management team have demonstrated they are creative, financially disciplined, outside the box thinkers - all with a focus of driving shareholder value. It will be very interesting to see how the land is developed and what the financials look like. A clear benefit for current shareholders... we just don’t know timing or magnitude. Patience :-)

[petec]

That’s why I’m thinking about this on a 5y view. Mid-cycle cash flows will drive good returns from the current valuation with room for error, and land and super cycle arefree - but might take time.

[hasilp89]

Hasilp89, you asked up thread “ What are management and Bedrocks plan for cash?”

 

From the Q4 conference call:

1.) build up our liquidity to a nice comfortable level (Stelco did not tap debt markets or issue shares during 2020 when covid hit business and while they were also making significant investments to improve operations)

2.) extraordinary dividends (paid 2 of these in July 2018 and Feb 2019 = $1.69 and $1.13 = $2.82)

- regular dividend of $0.10/share)q dividend - company just restarted this

3.) share buybacks

4.) re-invest in business - something transformative

 

“But every decision we make is always, how is this going to help the share price in the short-term and the long-term because we recognize that our holders have different hold periods and while you can't make everybody happy, we're always geared towards how do we build shareholder value, and that's how those decisions will be made.”

 

“As I mentioned in my comments, more than 15% of the shares in this company is owned by the management, the people on this call. And our goal is to get the share price to reflect the great things that we've done in this company.

 

thank you - i've spent a lot more time researching now. i was trying to reconcile was the size of their pension liabilities. mgmt. mentions on most of the calls the fact that they don't have legacy liabilities. However reading the filings (pg 25 of annual filing) they do have a few (and i'm heavily summarizing)

1) Main Pension Plan - Appears to be capped at $400m but contributions include 10% of FCF and 33.5% of tax savings

2) New Pension plan - $4m a year

3) OPEB Funding agreement - a) annual contribution of $9-15m a year in year 1-10 and $15m/year after that, b) advance payment of $30m in year 1-4, c) 6.5% of FCF to a max of $15m/annually, d) 16.75% of tax savings, e) $3.8m per year in years 1-10 and 6-10m annually in years 11-25.

 

are you guys just taking balance sheet values for these liabilities roughly ~$500m / how are you thinking about these?

[hasilp89]

Petec - i think you mentioned it in some of your posts and looking back at Q3 earnings call mgmt mentions it also. they say they are going to get down to $450 CAD/ton. where are you getting confidence on that number from - i know they're implementing different cost measures but they haven't broken $600 CAD/ton (believe spekulatius had some comments on this back in 2019), hopefully i'm missing something obvious as that seems very necessary to the longer term thesis.

 

[petec]

Petec - i think you mentioned it in some of your posts and looking back at Q3 earnings call mgmt mentions it also. they say they are going to get down to $450 CAD/ton. where are you getting confidence on that number from - i know they're implementing different cost measures but they haven't broken $600 CAD/ton (believe spekulatius had some comments on this back in 2019), hopefully i'm missing something obvious as that seems very necessary to the longer term thesis.

 

They said that once all capex is done they’ll be at about USD400/ton which comes to about CAD500. I don’t think that’s comparable with historical numbers because:

- they needed to make several investments to get there, such as the blast furnace upgrade which has only just completed and which saves them USD30/ton, and the cogen facility which hasn’t been done yet;

- because (partly because of downtime for making these investments) they haven’t been running at full capacity so they haven’t been diluting fixed costs as much as they will be able to in future.

 

Still, the guidance could obviously turn out to be optimistic. But I think it’s cheap enough that there’s room for error.

 

Two other points on costs.

- We don’t know what input prices are baked into the USD400 number, although we do know that they’ve effectively locked in the biggest two (iron ore and electricity) via the Minntac and cogen deals)

- Their union deal comes up for renegotiation in 2022.

[hasilp89]

Petec - i think you mentioned it in some of your posts and looking back at Q3 earnings call mgmt mentions it also. they say they are going to get down to $450 CAD/ton. where are you getting confidence on that number from - i know they're implementing different cost measures but they haven't broken $600 CAD/ton (believe spekulatius had some comments on this back in 2019), hopefully i'm missing something obvious as that seems very necessary to the longer term thesis.

 

They said that once all capex is done they’ll be at about USD400/ton which comes to about CAD500. I don’t think that’s comparable with historical numbers because:

- they needed to make several investments to get there, such as the blast furnace upgrade which has only just completed and which saves them USD30/ton, and the cogen facility which hasn’t been done yet;

- because (partly because of downtime for making these investments) they haven’t been running at full capacity so they haven’t been diluting fixed costs as much as they will be able to in future.

 

Still, the guidance could obviously turn out to be optimistic. But I think it’s cheap enough that there’s room for error.

 

Two other points on costs.

- We don’t know what input prices are baked into the USD400 number, although we do know that they’ve effectively locked in the biggest two (iron ore and electricity) via the Minntac and cogen deals)

- Their union deal comes up for renegotiation in 2022.

 

Got it, thought that could be it. They’re definitely setting themselves up for success with their cost structure. Saw this from Alan on $600/ton cost in q4 after I posted which makes the point aswell “by the way, a quarter where because of the blast furnace start-up in October was really only operating at 2/3 of capacity.” Would assume some operating leverage as they get to better utilization.

 

Isn’t met coal up there as well in terms of costs (1nt steel = 1.5nt iron ore + .6nt met coal + .25 scrap). Wonder if they’re looking at anything to be integrated with on that front. HCC is still cheap..

[Viking]

Hasilp89, you asked up thread “ What are management and Bedrocks plan for cash?”

 

From the Q4 conference call:

1.) build up our liquidity to a nice comfortable level (Stelco did not tap debt markets or issue shares during 2020 when covid hit business and while they were also making significant investments to improve operations)

2.) extraordinary dividends (paid 2 of these in July 2018 and Feb 2019 = $1.69 and $1.13 = $2.82)

- regular dividend of $0.10/share)q dividend - company just restarted this

3.) share buybacks

4.) re-invest in business - something transformative

 

“But every decision we make is always, how is this going to help the share price in the short-term and the long-term because we recognize that our holders have different hold periods and while you can't make everybody happy, we're always geared towards how do we build shareholder value, and that's how those decisions will be made.”

 

“As I mentioned in my comments, more than 15% of the shares in this company is owned by the management, the people on this call. And our goal is to get the share price to reflect the great things that we've done in this company.

 

thank you - i've spent a lot more time researching now. i was trying to reconcile was the size of their pension liabilities. mgmt. mentions on most of the calls the fact that they don't have legacy liabilities. However reading the filings (pg 25 of annual filing) they do have a few (and i'm heavily summarizing)

1) Main Pension Plan - Appears to be capped at $400m but contributions include 10% of FCF and 33.5% of tax savings

2) New Pension plan - $4m a year

3) OPEB Funding agreement - a) annual contribution of $9-15m a year in year 1-10 and $15m/year after that, b) advance payment of $30m in year 1-4, c) 6.5% of FCF to a max of $15m/annually, d) 16.75% of tax savings, e) $3.8m per year in years 1-10 and 6-10m annually in years 11-25.

 

are you guys just taking balance sheet values for these liabilities roughly ~$500m / how are you thinking about these?

 

Hasilp89, thanks for your post as i had not spend much time on this topic. The legacy pension liability looks like it has a both fixed and variable cost components. Interesting the liability is not tied to market returns of the actual pension assets... Great deal for Stelco: they know the fixed amounts each year and only pay more if they make money.

 

So there will be finance costs every year of what ... about $35-$40 million? plus? (depending on how profitable Stelco is). Bottom line the number does not look concerning to me (in terms of size). So even though Stelco likes to talk about having little debt they do have financing charges from the pension liability.

 

The deferred tax asset is another piece to follow this year :-)

 

Unfortunately, i do not have an accounting background so i do find it difficult to understand and make sense of some of these items (in terms of exactly how much they will impact the calculation of free cash flow). Thanks again for your post as it helped a great deal.

 

[petec]

I just take the balance sheet values for these although they are discounted so that’s arguably too generous. I think the key point is that they are controlled liabilities (vs some pensions which are uncontrolled). I definitely include these liabilities in EV as one would with debt.

 

I think you both need to check your facts around the % profit share though. After the bankruptcy Stelco definitely paid a percentage of profits to the pension fund. But I think they did a deal in 2018 to stop this. I’d need to check, but I think they only have fixed payments now.

[bearprowler6]

The analyst community are falling all over themselves with their upgrades on Stelco Holdings. Credit Suisse upgraded yesterday followed by RBC and BMO today. Not surprisingly the stock price is moving up nicely in response. I am in with an average cost of just over $22 CAD per share. Currently at $25.70. Not too late to get in however in my view STLC remains a trade and not a permanent long term hold. Well done to Petec and Viking and yes Prem too for their efforts on this one!

[Viking]

The analyst community are falling all over themselves with their upgrades on Stelco Holdings. Credit Suisse upgraded yesterday followed by RBC and BMO today. Not surprisingly the stock price is moving up nicely in response. I am in with an average cost of just over $22 CAD per share. Currently at $25.70. Not too late to get in however in my view STLC remains a trade and not a permanent long term hold. Well done to Petec and Viking and yes Prem too for their efforts on this one!

 

bear, I actually sold my Stelco position into the close today for a 14% gain in about a week. I also bought a bunch of Fairfax yesterday when the stock traded under CAN $500 so I was looking to raise some cash. Not to say that I think Stelco can't go much higher. I am just more comfortable getting my cyclical exposure through  Fairfax (more diversified). And Fairfax under $500CAN is pretty attractive given Q1 investment results could be very good (as good as Q4).

[Xerxes]

1 bird (FFH) in a hand is worth more than 2 birds (Stelco & Resolute) in the bushes.

That said, happy to own both through FFH.

 

A few bags ago on both names, i would have added them.