Articles in Category: M&A Activity

Vertical integration may play well in classic corporate HBR (Harvard Business Review) circles, but steel industry observers may have a hard time envisioning the synergies Cliffs outlined in its merger announcement and presentation Dec. 3, creating a best-in-class, EBITDA-maximizing combined Cliffs-AK Steel entity!

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To us, the best rationale for the deal appears on slide 14, outlining AK Steel’s short-term debt position:

If you buy the notion that Cliffs can swallow AK and convert that company’s debts to its own and save on interest expense, then score one for the deal!

So why would Cliffs buy AK Steel?

A compelling reason appears on slide 11:

Despite AK Steel’s relatively improved financial performance under the leadership of CEO Roger Newport, if AK Steel represents ~30% of Cliff’s annual iron ore sales, Cliffs faces significant “customer concentration risk.” In other words, the health of AK Steel would significantly — negatively — impact Cliffs.

Forget about “renewal risk” — let’s just call it “customer risk.”

Cliffs would be hosed without a healthy AK Steel!

What about AK’s Ashland Works?

We continue to see different public announcements from AK Steel about the cost of Ashland Works. The Ashland Works facility today operates a hot-dipped galvanizing line (the blast furnace was idled nearly four years ago).

According to comments from AK Steel directly, “…the company announced it would close the ‘largely-idled’ Ashland Works facility by the end of 2019 to ‘increase utilization’ at its other U.S. operations. The plant employs 230 people and the closure would yield approximately $40 million in annual cost savings, according to the company.”

But by keeping it open, as detailed by Cliffs, the Ashland Facility, “Eliminates up to $60m of closure-related costs.” The Ashland facility will instead undergo a conversion, which it says, “Potentially provides a compelling, low-capex, high-return opportunity to be a significant merchant pig iron supplier in the Great Lakes.” (We presume U.S. Steel and ArcelorMittal will avail themselves of this compelling offering.)

So, we’re not sure if keeping Ashland Works open saves money or if closing it does.

We won’t pontificate over the “AK Steel best-in-class position in non-commoditized steel” for a variety of reasons that we have previously covered here in our GOES MMI series. (Or the fact that the rise of electric vehicles will start to make a dent in the need for the kinds of automotive exhaust grades, such as 439 and 441, produced by AK Steel.) We acknowledge AK does have a strong position in ultra-high-strength steels.

So, the real question comes down to the “synergies” outlined by Cliffs.

Does the margin Cliffs generates — approximately $30/$40 per short ton for every pellet produced and sold to AK — translate to an EBITDA jump of that same amount for steel products sold by AK, such that they leapfrog the EAF producers, as Cliffs suggests?

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Well, now isn’t that the $1.1 billion question?

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This morning in metals news, the world is waiting on the Trump administration’s Section 232 auto tariff decision, an Indian Supreme Court ruling opens the door for ArcelorMittal to finally acquire the bankrupt Essar Steel and Rio Tinto plans to raise funds for the rehabilitation of the Ranger uranium mine in Australia.

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Section 232 Auto Tariff Decision Expected Soon

In May 2018, the Trump administration launched a Section 232 investigation related to the national security impacts of imports of automobiles and automotive parts.

The administration had already delayed the decision earlier this year, as talks with major exporters — including the E.U. and Japan — continue. The latest self-imposed deadline fell Thursday, Nov. 14.

A decision has yet to be announced, although E.U. officials have previously expressed confidence Trump would delay the decision once again.

Supreme Court Rules in Favor of ArcelorMittal’s Essar Acquisition Effort

ArcelorMittal’s bid to acquire the bankrupt Essar Steel has dragged on through the courts over the last two years, including a challenge of a National Company Law Tribunal order earlier this year.

According to Reuters, the Indian Supreme Court has approved ArcelorMittal’s resolution plan for the distressed steel firm, overturning a previous appellate court ruling regarding the claims of financial creditors versus those of operational creditors.

Rio Tinto to Invest in Ranger Rehabilitation Project

Rio Tinto plans to assist Energy Resource of Australia Limited (ERA) — of which Rio Tinto is a 68.4% shareholder — in efforts to raise money toward the rehabilitation of the Ranger Project Area in Australia, the company announced Friday.

The Ranger uranium mine is located in Australia’s Northern Territory.

“As a 68.4 per cent shareholder in ERA, Rio Tinto will subscribe to its full entitlement of approximately $221 million (A$326 million),” Rio Tinto said in a release. “Given ERA’s inability to secure third-party underwriting support, Rio Tinto has also agreed to fully underwrite the offer to ensure ERA has the funds it needs to meet its current rehabilitation obligations.”

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According to Rio Tinto, ERA is “required to end mining and processing activities at Ranger by January 2021 and complete final rehabilitation by January 2026.”

This morning in metals news, a Chinese firm is poised to take over the insolvent British Steel, Chinese iron ore futures were down Monday and speakers at a recent convention in Budapest weighed in on the stainless steel market.

Jingye to Buy British Steel

After talks with Turkey’s Ataer Holding fell apart, Chinese firm Jingye Steel has reportedly signed a deal to rescue British Steel, the BBC reported.

British Steel was put into forced liquidation in May, setting off a bidding process for the ailing steelmaker.

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According to the BBC, Jingye plans to £1.2 billion in British Steel.

The deal is pending and still requires regulatory approval, according to a statement by the Official Receiver.

“Completion of the contract is conditional on a number of matters, including gaining the necessary regulatory approvals,” the Official Receiver said. “The parties are working together to conclude a sale as soon as reasonably practicable.

“The business will continue to trade as normal during the period between exchange and completion. Support from employees, suppliers and customers since the liquidation has been a critical factor in achieving this outcome.”

Chinese Iron Ore Futures Slide

According to Reuters, Chinese iron ore futures fell by as much as 3.1% on Monday.

The most-traded iron ore futures contract on the Dalian Commodity Exchange fell 2.1% to 594 yuan ($84.93) per ton.

Rising Nickel, Falling Stainless Steel

At the recent BIR World Recycling Convention Round-Table Sessions held in Budapest, speakers delved into the seemingly curious current relationship between nickel prices and stainless steel values.

According to Natalie Scott-Gray, senior metals demand analyst at INTL FCStone, stainless steel production is forecast to rise 2% this year, with demand projected to rise 16% over the next five years, Recycling Today reported.

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Another guest speaker at the event, Olivier Masson, said the stainless steel market is going through a “relatively soft patch,” partially impacted by a shift in trading patterns as a result of the U.S.’s Section 232 tariffs and China’s exports of hot-rolled material, according to the Recycling Today report.

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This morning in metals news, miner Rio Tinto has advanced work on its Oyu Tolgoi copper and gold mine project, the U.S. is reportedly considering rolling back some tariffs against China, and Novelis announced its quarterly financial results.

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Rio Tinto Reaches ‘Significant Milestone’

Earlier this year, MetalMiner’s Stuart Burns weighed in on delays at Rio Tinto’s massive Oyu Tolgoi project in Mongolia, citing possible delays of 16-30 months.

This week, however, the miner offered positive news, announcing the completion of a portion of the project.

“Rio Tinto has achieved a significant milestone at the Oyu Tolgoi mine in Mongolia with the completion of Shaft 2, which enables the acceleration of work on the underground development,” the miner said. “Shaft 2, a 10 metre diameter shaft sunk to approximately 1.3 kilometres below the surface, has now entered into the final stages of commissioning.

“This is a critical piece of infrastructure and will enable a step change in terms of delivering the underground mine. Shaft 2 can carry 300 people per cage cycle versus a maximum of 60 people per cage cycle through Shaft 1. The 48 tonne capacity cage can now be used to support logistics, transporting supplies and components for development of the mine.”

Tariff Talks

Among other issues, tariffs remain at the center of the trade dispute between the U.S. and China.

China has asked the U.S. to drop tariffs in exchange for an initial deal. In that vein, according to several media reports, the U.S. is considering rolling back approximately $112 billion worth in tariffs on Chinese goods toward a first-phase trade deal.

Novelis’ Net Income Rises 31% YoY

For the second quarter of Novelis’ fiscal year 2020, the firm reported net income of $160 million, marking a 31% year-over-year increase.

Adjusted EBITDA reached $374 million, up 5% year over year.

In addition, Novelis’ acquisition of Aleris Corporation is expected to close in the coming months.

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“On July 26, 2018, Novelis announced it signed a definitive agreement to acquire Aleris Corporation,” the company said. “Having received conditional approval in the European Union, as well as a clear path forward for approval in the U.S., Novelis continues to work closely with the Chinese State Administration for Market Regulation to receive its approval. The company expects to close the transaction by January 21, 2020, the outside date under the merger agreement.”

The Automotive Monthly Metals Index (MMI) ticked up one point for an MMI reading of 86.

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U.S. Auto Sales

As mentioned in previous reports, the top three automakers in the U.S. — General Motors, Ford and Fiat Chrysler — all now report sales on a quarterly basis.

GM reported net income of $2.3 billion in the third quarter, down 8.7% on a year-over-year basis. GM delivered 739,000 vehicles in the third quarter, up 6% on a year-over-year basis.

Ford reported third-quarter net income of $400 million, down from $1 billion in Q3 2018.

Fiat Chrysler’s worldwide shipments fell 9% “primarily due to continued dealer stock discipline in North America.”

Honda’s U.S. sales rose 7.6% in October, with its truck sales rising 15%. For the year through October, Honda’s U.S. sales are up 0.6% compared with the same period in 2018.

Toyota Motor North America saw its October sales drop 1.2% on a volume basis and by 4.9% on a daily selling rate basis.

Nissan’s October sales dropped 5.8% on a year-over-year basis.

According to a forecast report by J.D. Power and LMC Automotive, new-vehicle retail sales in October were forecast to decline by 0.9% year over year (when adjusted for number of selling days).

Average transaction prices, however, are at a record high. According to the jointly released report, the average transaction price moved above $34,000 for the first time ever in October and was up nearly $1,300 compared with October 2018.

GM Strike Comes to an End

After 40 days, the nationwide strike at General Motors finally came to an end.

“The work stoppage in the U.S. negatively affected North American business results in the third quarter and expected results for the year,” GM said in its third-quarter earnings release. “In the third quarter, about two weeks of vehicle production was lost.”

According to GM, the strike resulted in a net EBIT-adjusted impact of $1 billion, or $0.52 per diluted share; GM expects the full-year impact to come in at $2.00 per diluted share.

In September, the United Auto Workers union initiated the first nationwide strike at GM since 2007.

On Oct. 25, UAW announced it had ratified a new four-year labor deal.

“General Motors members have spoken,” said Terry Dittes, UAW vice president and director of the UAW-GM department. “We are all so incredibly proud of UAW-GM members who captured the hearts and minds of a nation. Their sacrifice and courageous stand addressed the two-tier wages structure and permanent temporary worker classification that has plagued working class Americans.”

According to UAW, the approved deal included “an economic package of an $11,000 per member signing bonus, performance bonuses, two 3% annual raises and two 4% lump sum payments and holding the line on health care costs.”

Fiat Chrysler to Merge with PSA Groupe

As MetalMiner’s Stuart Burns explained earlier this week, Fiat Chrysler and France’s PSA Groupe — maker of Peugeot — have plans to merge.

According to Fiat Chrysler, the merger would create the world’s fourth-largest OEM by annual unit sales.

“FCA abandoned attempts to merge with Peugeot’s French rival, Renault, earlier this year when the French government, a 15% shareholder, blocked the move,” Burns explained.

“But the FCA has long held that consolidation within the European car industry, if not globally, is inevitable as the industry goes through unprecedented disruption in terms of a switch to electric and competition from Asia.

“There is arguably a better logic to a Peugeot-FCA merger than a Renault-FCA tie-up.”

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Actual Metal Prices and Trends

U.S. HDG fell 7.2% month over month to $746/st as of Nov. 1.

LME three-month copper rose 3.7% to $5,840/mt. U.S. shredded scrap steel fell 11.4% to $225/st.

The Korean 5052 aluminum coil premium rose 2.2% to $3.21/kg.

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This morning in metals news, miner Antofagasta lowered its full-year copper guidance by 20,000 tons, a new favorite has emerged in the British Steel sweepstakes and the U.S. unemployment rate was unchanged in October.

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Antofagasta Lowers Copper Guidance Amid Supply Disruptions

Protests and labor stoppages in Chile have impacted copper production in the country, the world’s top copper producer.

Antofagasta announced it was lowering its full-year copper guidance from a range of between 750,000 to 790,000 tons down to a range of 750,000 and 770,000 tons.

“Further to the 3Q 2019 Production Report announcement on 23 October 2019 and following the unrest in Chile, all of the Company’s mines are now back in operation,” the company said. Disruptions of the mines’ supplies mainly affected Los Pelambres whose access road was blocked. This, combined with some damage to ancillary infrastructure outside Los Pelambres’ perimeter, is estimated to have an impact on the Company’s full year production of approximately 10,000 tonnes of copper, including the 5,000 tonnes previously disclosed.

“At Antucoya, labour negotiations have been successfully concluded with the union ending the strike which started on 16 October. The impact on copper production is estimated at approximately 4,000 tonnes.”

New Favorite in British Steel Bidding

Following the failure to reach a deal with Ataer Holding, an arm of the Turkish military pension fund OYAK, a Chinese firm has emerged as the favorite to take over the insolvent British Steel.

According to The Guardian, Jingye is “extremely interested” in making a bid for the U.K.’s second-largest steelmaker, which was forced into liquidation in May.

Unemployment Rate Holds Steady

According to the latest jobs report from the Bureau of Labor Statistics (BLS), the U.S. unemployment rate held steady at 3.6% in October.

In October, nonfarm payroll employment increased by 128,000 jobs, according to the BLS.

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However, jobs declined in the motor vehicles and parts manufacturing sector due to strike activity (namely, the 40-day General Motors strike, which recently concluded).

Employment in manufacturing dropped by 36,000 in October. Employment in the motor vehicles and parts manufacturing sector fell by 42,000.

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This morning in metals news, the United Auto Workers (UAW) union has a tentative labor deal with Ford, the U.S. Office of Inspector General says the Section 232 tariff exclusion process needs more transparency and U.S. Steel officially completed the acquisition of a 49.9% ownership stake in Big River Steel.

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UAW Announces Tentative Ford Deal

Not long after UAW members voted to ratify a new labor deal with General Motors late last week, the union now appears to be close to finalizing a deal with Ford.

In a statement this week, the UAW said it had reached a tentative agreement with Ford.

“Our national negotiators elected by their local unions have voted to recommend to the UAW-Ford National Council the proposed tentative agreement,” UAW Vice President Rory Gamble. “Our negotiating team worked diligently during the General Motors strike to maintain productive negotiations with Ford. The pattern bargaining strategy has been a very effective approach for UAW and its members to secure economic gains around salary, benefits and secured over $6 billion in major product investments in American facilities, creating and retaining over 8,500 jobs for our communities.”

Ford confirmed UAW’s announcement but did not provide further details.

“Ford can confirm the UAW’s announcement that the UAW and Ford have reached a proposed tentative agreement on a four-year contract,” said Bill Dirksen, vice president for labor affairs at Ford. “Further details will be provided at a later date.”

IG: More Transparency Needed in Section 232 Exclusions Process

U.S. importers have been applying for Section 232 tariff exclusions over the last year — a process that has come in for criticism.

Criticism has focused on the Commerce Department’s capacity to process the thousands of applications and accusations that some domestic firms are asserting an outsized influence on the Commerce Department’s decisions with respect to exclusion requests.

In a letter and management alert to Commerce Secretary Wilbur Ross, Carol Rice, assistant inspector general for audit and evaluation, shared her office’s concerns.

“Attached is a management alert regarding a lack of transparency that contributes to the appearance of improper influence in decision-making for tariff exclusion requests under Section 232 of the Trade Expansion Act of 1962, as amended,” Rice wrote. “Issues regarding this topic came to our attention during fieldwork for the ongoing audit of the Bureau of Industry and Security’s and International Trade Administration’s processes and procedures for reviewing and adjudicating Section 232 exclusion requests.”

The Inspector General’s office initiated an audit of the process Oct. 29, 2018. The management alert lists some of the findings unearthed by the audit, which include:

  • Evidence of an “unofficial appeals process”
  • Communications with an objector “prompted a change in internal review criteria”
  • No documentation for off-record conversations between “interested parties and Department officials”

U.S. Steel Finalizes Big River Steel Deal

U.S. Steel has finalized its $700 million acquisition of a 49.9% ownership stake in Arkansas-based Big River Steel (initially announced Oct. 1).

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“Today is a true milestone for our 118-year old company,” said David B. Burritt, president and CEO of U. S. Steel. “The closing of our investment in Big River brings us one step closer to creating a differentiated, world-competitive company that can offer our customers, employees and stockholders the ‘best of both’ integrated and mini mill steel making technology. We have done more than make an investment in the newest and most advanced flat-rolled mill in North America … we have invested in the future of U.S. Steel. We are gratified by the positive response we have received from our stakeholders recognizing the strategic rationale of this transaction since we announced it on October 1. We now look forward to executing the next phase of our strategy with our new partners at Big River.”

The board of France’s PSA, owner of Peugeot, has given chief executive Carlos Tavares approval to launch a full-scale merger with Fiat Chrysler Automobiles, creating one of the world’s largest carmakers, the Financial Times reports.

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The FCA board is expected to follow suit, paving the way for the companies to pursue a deal that would create a combined group with a market value in excess of €44 billion (U.S. $48 billion).

Shares in FCA have risen some 7% since the merger was back on the table last week in anticipation of a successful outcome, Peugeot shares have barely moved. Both movements — or lack thereof — are in sharp contrast to the preceding year, during which Peugeot’s shares have risen 38% and FCA’s just 1%.

Peugeot’s Tavares has earned widespread praise for his turnaround of car maker Opel — formerly owned by General Motors — since 2017.

FCA shareholders are maybe hoping he can do the same for them.

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The British government has ended negotiations with the Turkish company Ataer Holding regarding its bid to buy British Steel, the Steel Times reported.

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Ataer owns almost 50% of Erdemir, Turkey’s biggest steel producer, and is also the investment vehicle of Oyak, the Turkish Armed Forces Assistance Fund (the pension fund for the Turkish armed forces, the article reports).

The British government has voiced concerns about Ataer’s links with the Turkish government and has now opened the bidding process for British Steel up to other interested parties.

The Financial Times suggests conditions Ataer had demanded, such as price cuts from suppliers, had also proved a hurdle in the negotiations.

Either way, the ten-week exclusivity period is not going to be extended and the bidding process is again open to all comers.

Although suggestions that Sanjeev Gupta’s Liberty House, which already owns steelmaking facilities in Rotherham and Stocksbridge in South Yorkshire and employs some 5,500 people across 30 sites, is mooted as a preferred buyer, the company previously said it would want to close Scunthorpe’s two blast furnaces and invest in new electric arc furnaces. That is a move unions fear could lead to job losses, while the government probably fears will cost them support money in one form or another.

However, Liberty remains the preferred bidder by most in the industry despite a return to the table by Chinese steel producer Jingye.

Hebei-based Jingye produces hot-rolled ribbed bars, round steel bars, medium-thick plates and hot-rolled coil; as such, it carries considerable manufacturing experience across Scunthorpe’s product range.

Although it has only produced steel since 2002, Jingye is among the top 300 firms by size in China and is said to be involved in real estate, finance, trade, pharmaceutical, hotels and tourism, according to a local newspaper closely following the prospects for the U.K. plant.

Whether Jingye would be a better steward for British Steel than Ataer Holidings is debatable.

Both firms have a strong presence in steel production, if not via the holding companies then via subsidiaries within the group.

But so did Tata Steel, the previous owners of British Steel, before it was sold to Greybull Capital in 2016 — for a nominal £1 — and eventually led to British Steel’s collapse.

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Most would agree a U.K.-based and owned firm like Liberty would make more sense, even if it doesn’t have the deep pockets a state-owned overseas firm could bring.

But British Steel’s ongoing uncertainty reflects the economic challenge all steel producers in Western markets face in trying to remain viable against cheap imports, while still operating in a high-cost base like the U.K.

The value of mining and metal company deals in the third quarter slowed considerably, according to a recent report by PwC.

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According to PwC’s most recent quarterly deals insight report, omnipresent concerns over global economic health — including the specter of recession — have loomed over dealmaking in the sector.

“The theme of uncertainty, which adversely impacted much of the year, has seemingly carried into the third quarter of 2019,” said Brian Kelly, PwC’s metals deals leader. “Concerns over a looming recession have the potential to exacerbate these unresolved issues and negatively influence deal activity through the remainder of 2019.”

Total deal value in the sector reached $3.2 billion in 3Q 2019, down 46% from Q2 2019. For the first nine months of the year, global deal value reached $25.6 billion, down 48% compared with the equivalent period in 2018.

A total of 147 deals were inked in Q3, down 9% compared with Q2 2019. Meanwhile, for the year to date, the 446 deals recorded marked a 15% decrease compared with the same period in 2018.

Average deal size dropped 45% to $40.8 million in Q3. For the year to date, average deal size checked in at $109.9 million, down 40% compared with last year.

The largest deal of the quarter came with Baosteel Hong Kong Investment Co. Ltd.’s acquisition of Maanshan Iron and Steel Co. Ltd. for $659 million.

“The uncertainties surrounding ongoing trade negotiations, retaliatory rounds of tariffs, and the health of the global economy have seemingly continued to hinder deal activity through Q3 2019,” the PwC report stated. “Overall, deal volume and deal value in the Metals sector declined both on the quarter-over-quarter and year-over-year basis, with deal value experiencing a severe decline.”

The report notes that although steel accounted for the largest year-to-date share of deal volume among metal subsectors, the sector faces several challenges that could weigh on the dealmaking climate.

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Struggles in the automotive sector have contributed to lagging steel demand. In No. 1 automotive market China, the country’s automotive production fell 11.4% year over year during the January-September 2019 period, according to the China Association of Automobile Manufacturers. In the U.S., the UAW strike at General Motors has impacted production; the two sides reached a tentative agreement earlier this month, but the proposed deal requires ratification by UAW members.