Thursday, August 23, 2007

United States Steel Corp And Others

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." -- Warren Buffett

Some of the stocks covered in Monday's post received a lot of attention in today's rally. BHP's earnings report with the guidance that they do not see global demand slowing coupled with a Credit Suisse upgrade of the sector to "overweight" helped the rally that started a couple days ago continue. This group is not always the easiest to trade with a short time-frame. Lately some of the selling in this group has felt like forced selling. Often times when the market is volatile, funds can not always sell what they want to but instead sell what they can, where the liquidity is great. This seems to be the case in some of the steel stocks and was also the case in the energy sector. This selling has less to do with fundamental reasons and more to do with the necessity for some funds to raise cash and reduce exposure.

Below is a spreadsheet with a cross section of some steel companies. In this list it can be seen in the fundamental data that not all of these companies are equal in terms of their internal health. This is important to keep in mind in times of market and credit stress. Companies with lower levels and manageable debt compared to free-cash flow should trade at a premium compared to the sector.

The companies with the highlighted shades of blue seem to have the best ratios when comparing net-income to debt. The companies with the green highlighted free cash-flow areas have the best ratios between free cash-flow and debt. As the price of credit increases, the cost of their debt could increase should it need to be refinanced. Therefore companies with the lower ratios should have an easier time if they do enter tough times. If things improve and this group is the recipient of the strong global economic growth, then the entire group should do well.

On August 1, 2007 Senator Hagel and Senator Dodd introduced a bill,National Infrastructure Bank Act of 2007, that would streamline the process by which national infrastructure projects are targeted. It would create an independent national bank that would identify, evaluate and help finance infrastructure projects of substantial regional and national significance. Infrastructure projects under the Bank’s jurisdiction would include publicly-owned mass transit systems, roads, bridges, drinking water and wastewater systems, and housing properties. Steel companies will directly benefit from a change in focus on the national infrastructure. This will not be a short term change, but should last for decades.

Another area that is worth keeping an eye on is the upgrade and expansion in the energy and refinery sectors. U.S.Steel(X) purchase of Lone Star Technologies should help gain exposure to this vital growth area. Lone Star produces and markets premium casing, tubing, line pipe and couplings for the oil and gas industry; specialty tubing for the industrial, automotive, and power generation industries;and flat rolled steel and other tubular products and services.

Below are some charts(click to enlarge) of various steel companies covered in the spread sheet above. The ones not shown below are covered in a previous article.

AK Steel Holding Corporation - AKS

Cleveland Cliffs Inc. - CLF

Nucor Corp. - NUE

Rio Tinto Plc. - RTP

Steel Dynamics Inc. - STLD

U.S. Steel Corp. - X


AK Steel Holding Corporation (AK Holding) is a fully integrated producer of flat-rolled carbon, stainless and electrical steels, and tubular products through its wholly owned subsidiary, AK Steel Corporation (AK Steel). The Company’s operations consist of seven steelmaking and finishing plants located in Indiana, Kentucky, Ohio and Pennsylvania that produce flat-rolled carbon steels, including coated, cold-rolled and hot-rolled products, and specialty stainless and electrical steels that are sold in slab, hot band, and sheet and strip form. The Company’s operations also include AK Tube LLC (AK Tube), which further finishes flat-rolled carbon and stainless steel at two tube plants located in Ohio and Indiana into welded steel tubing used in the automotive, truck and construction markets. In addition, its operations include European trading companies that buy and sell steel and steel products.

Cleveland-Cliffs Inc (Cliffs) is a producer of iron ore pellets in North America. The Company manages and operates six North American iron ore mines located in Michigan, Minnesota and Eastern Canada that have a rated capacity of 37 million tons of iron ore pellet production annually. On April 19, 2005, Cliffs Asia Pacific, a wholly owned subsidiary of the Company, completed the acquisition of 80.4 % of Portman, an iron ore mining company in Australia. As a result of the Portman acquisition, the Company operates in two segments: North America and Australia. The North America segment comprises its mining operations in the United States and Canada. The Australia segment comprises its 80.4 % Portman interest in Western Australia. During the year ended December 31, 2006, the Company produced a total of 33.6 million tons of iron ore pellets. In July 2007, Cliffs acquired PinnOak Resources, LLC, a metallurgical coal producer located in the United States.

Nucor Corporation is engaged in the manufacture and sale of steel and steel products. It operates in two segments: steel mills and steel products. Principal products from the steel mills segment include hot-rolled steel and cold-rolled steel. Steel mills segment's hot-rolled steel products include angles, rounds, flats, channels, sheet, wide-flange beams, pilings, billets, blooms, beam blanks and plate. Principal products from the steel products segment include steel joists and joist girders, steel deck, cold finished steel, steel fasteners, metal building systems and light gauge steel framing. In February 2005, it purchased the assets of Fort Howard Steel, Inc.'s operations in Oak Creek, Wisconsin. In June 2005, Nucor Corporation's wholly owned subsidiary, Nucor Steel Marion, Inc., purchased the assets of Marion Steel Company. This facility produces angles, flats, rebar, rounds and signposts. As of March 2, 2007, the Company had acquired over 96% interest in Harris Steel Group Inc.

Rio Tinto plc and Rio Tinto Limited operate as one business organization (Rio Tinto). Rio Tinto is an international mining company. The Company's principal product and global support groups include Iron Ore, Energy, Industrial Material, Aluminium, Copper, Diamonds, Exploration and Technology. Rio Tinto’s Iron Ore group comprises iron ore operations in Australia, Canada and Brazil and development projects in Guinea (West Africa) and India. The Rio Tinto Energy Group comprises uranium, thermal coal and coking coal operations. Rio Tinto's Industrial Minerals group produces borates, talc, industrial salt, and titanium dioxide feedstock. Rio Tinto Aluminium is an integrated product group with operations in Australia, New Zealand and the United Kingdom. Rio Tinto's Copper group comprises Kennecott Utah Copper in the United States and interests in the copper mines of Escondida, Grasberg, Northparkes, Palabora Mining Company (Palabora) and the Resolution Copper project.

Steel Dynamics, Inc. (SDI) is a steel producer in the United States, with an annual steelmaking capability of 5.2 million tons. During the year ended December 31, 2006, consolidated shipments, which excluded shipments between the Company’s operating divisions, totaled 4.7 million tons. The Company has three segments: steel operations, fabrication operations and steel scrap and scrap substitute operations. On April 11, 2006, the Company acquired Roanoke Electric Steel Corporation (Roanoke Electric). In July 2007, SDI completed the acquisition of The Techs, a flat-rolled steel galvanizing company. The Techs’ operations consist of three facilities in the Pittsburgh area: GalvTech, MetalTech and NexTech. Each plant specializes in the galvanizing of specific types of flat-rolled steels.

United States Steel Corporation (U. S. Steel) is an integrated steel producer with production operations in the United States and Central Europe. The Company has an annual raw steel production capability of 19.4 million net tons (tons) in the United States and 7.4 million tons in Central Europe. U. S. Steel is also engaged in several other business activities, most of which are related to steel manufacturing. These include the production of coke in both the United States and Central Europe, and the production of iron ore pellets from taconite, transportation services (railroad and barge operations) and real estate operations in the United States. During the year ended December 31, 2006, the Company had three operating segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (USSE) and Tubular Products (Tubular). In June 2007, the Company completed the acquisition of Lone Star Technologies Inc.

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