HenryTo
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Joined: 06 Aug 2004
Posts: 11707
Location: Los Angeles, California
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 Posted: Thu Oct 06, 2011 11:32 pm Post subject: AK Steel (AKS) |
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Morningstar's latest comments on AK Steel:
| Quote: | | AK Steel AKS announced major steps in increasing its captive raw-material sources, which we think could have a positive effect on its cost structure, but we are keeping our fair value estimate unchanged until we learn more details on the transactions will be financed. On the iron ore front, AK has entered into a joint venture with Minnesota mining company Magnetation Inc. to form Magnetation LLC, in which AK will have 49.9% ownership. Magnetation LLC has 441 thousand tons of annual iron ore concentrate capacity with plans for additional capacity and a pelletizing plant that will produce a total of 3.3 million tons of iron ore pellets by 2016, which would meet 50% of AK's current iron ore requirements. AK's total investment in the project is $297.5 million, or abou t $90 per ton of annual production, with $100 million invested initially, $47.5 million in 2012, and the remaining $150 million in 2013 or later. On the metallurgical coal side, AK acquired Solar Fuel Company, a junior coal miner with an estimated 20 million tons of reserves in Pennsylvania, paying $24 million up front and an additional $12 million over the next three years. The company will develop the mining operations to produce coal, requiring total capital expenditures of $60 million to be spent largely in 2013-15. The company expects these transactions to be accretive in 2012. The cost to produce iron ore pellets through Magnetation is probably far below current market prices, and a capital cost of $90 per ton sounds reasonable. But the iron ore marketplace might be quite different five years from now, so this transaction could look less economically attractive should iron prices fall 50% from current levels, a scenario we think could materialize. Still, the fluctuatin g price of iron ore has been the largest cause of earnings volatility for AK in the past two years, and having captive sources has benefits beyond cost. It lowers raw-material inventory and working capital requirements, ensures a reliable supply and better quality control, and enables the company to leverage third-party purchases opportunistically. Our larger concern centers on how the transactions will affect the capital structure. While the initial investment is small, cash is precious in the uncertain steel market and financing options appear limited, in our view. With AK's $926 million in total debt as well as $1.6 billion in pension and other postemployment benefit liabilities as of June 30, we do not think the balance sheet can support much additional leverage. Operating cash flow is still weak, and the timing would be unfortunate for an equity offering with the stock trading near a 52-week low after declining some 60% since late July. |
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