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Cleveland-Cliffs to acquire AK Steel for $1.1B

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$100 million investment

Cleveland-Cliffs Chairman, President and CEO Lourenco Goncalves address a comment to Congressman Pete Stauber and former Congressman Rick Nolan during Tuesday's official opening of a new $100 million DR-Grade processing plant at Northshore Mining in Silver Bay. The plant took 500,000 labor hours to build and puts the company in a strong position to provide the type of pellets electric arc furnace plants need.

Cleveland-Cliffs is entering the steelmaking business through a $1.1 billion deal to buy Ohio-based AK Steel, marking a major shift for the 172-year-old taconite producer, company officials said.

The purchase is expected to close in the first half of 2020, transforming Cliffs into a fully-integrated company with operations ranging from raw iron mining and pelletizing to making finished steel products.

Cliffs CEO Lourenco Goncalves told investors Tuesday that the purchase was a growth opportunity for the company, one that gives it control of the manufacturing process and opens new markets to higher end customers.

AK Steel sells most of its product to the automotive industry, and assets gained in the purchase can further open Cliffs’ exposure to the electric arc furnace market, among others.

“What we’re doing here is growth and this growth is coming from somewhere no one was expecting,” Goncalves said on an investors call. “This is not something that came out of the blue. We have been thinking of several ways to grow Cleveland-Cliffs. This is exactly in our wheelhouse.”

The deal also creates a continuous flow of pellets, from Cliffs-owned mining operations in Minnesota to blast furnaces involved in the purchase. Cliffs owns United Taconite and Northshore Mining, and remains partial owner of Hibbing Taconite on the Iron Range.

AK Steel, which will become a direct, wholly-owned subsidiary of Cliffs, has been one of the company’s three biggest pellet customers along with ArcelorMittal and Algoma Steel. By integrating the mining and steelmaking processes, Cliffs is now putting its operations on par with Range-based competitors and partners ArcelorMittal and U.S. Steel.

ArcelorMittal owns the Minorca Mine and is the majority owner and operator of Hibbing Taconite. U.S. Steel owns Keetac and Minntac, and is a minority owner of HibTac.

“We’re going to replicate what ArcelorMittal does in Minorca and Hibbing, and U.S. Steel at Keetac and Minntac — 100 percent self-sufficient,” Goncalves said. “We have a lot more production to sell to other clients. These clients are tied to us through contracts that are in place. They are happy with our performance.”

Cliffs spokesperson Pat Persico said the purchase, when finalized, will not have any impact on current operations in Minnesota.

AK Steel, which is based in Greater Cincinnati, currently employs 9,500 people and has manufacturing plants in the U.S., Canada and Mexico, and facilities in Western Europe.

Breaking down the deal

When the purchase settles, the agreement calls for AK Steel shareholders to receive 0.40 shares of Cliffs common stock for each outstanding share of AK Steel common stock. Cliffs and AK Steel shareholders will own 68 percent and 32 percent of the combined company, respectively, with each on a fully diluted basis.

Once the companies are combined, Goncalves will lead the integrated group. AK Steel CEO Roger Newport is expected to retire when the deal closes.

Expected to take on debt in the transaction, Cliffs has secured $2 billion in financing from Credit Suisse to refinance AK Steel’s finances.

This is where Goncalves said the company can work its “magic” when referencing his ongoing efforts to reduce Cliffs’s debt since becoming CEO in 2014. He inherited $3.6 billion in debt and reduced it to about $2 billion in his first year. By the end of 2017 that number was below $700 million and the company currently has a four-year window without maturing debt.

Goncalves plans to do the same thing with AK Steel.

“When you add existing debt of AK Steel, it’s very easy to get distracted by the total amount of debt,” he said. “After we start working our magic … AK Steel will look exactly like Cliffs today. We are in excellent shape with maturities pushed out.”

Cliffs a step closer to HBI

Newly produced DR-grade pellets are piled up and ready for shipping at the new Northshore Mining plant in Silver Bay.

Adding to the CEO’s optimism is the fact that AK Steel pulls in about four times the revenue of Cliffs at $8.205 billion compared to $2.152 billion, according to the investor presentation.

Of AK Steel’s total sales, 63 percent flows into the automotive industry, 22 percent goes into distributors and convertors and 15 percent into infrastructure and manufacturing, which includes being the sole source of U.S. Steel for the electrical grid, according to AK Steel’s filings.

Demand in the auto industry is expected to remain steady through 2025, per a market study referenced in the investor presentation. Demand for ultra high-strength steels — which are becoming critical to vehicle manufacturing — are also expected to grow, putting AK Steel in a potentially well-positioned spot in the current market.

Goncalves also credited the quality of maintenance at AK Steel’s blast furnaces and facilities as a key part of the deal and debt management moving forward.

“We are going to compete in the marketplace,” he said. “We are not in the bottom feeders and the ones that don’t take care of maintenance. We are not like that.”

Pig iron on the horizon?

Cliffs remains on schedule for next year’s production and delivery of hot-briquetted iron (HBI) from its facility in Toledo, Ohio. Once completed and the combined company finalized, the CEO said he may look in the direction of pig iron at an AK Steel furnace that is in the midst of closing.

That facility would be the Kentucky-based Ashland Works, which will close down by the end of the year.

Pig iron, like HBI, feeds electric arc furnaces. The cost to convert Ashland to pig iron is about $25-30 million, Goncalves said. How soon that happens depends on the HBI facility, and what sort of customer interest and profit margins the company would produce.

“We’ll see how things develop with HBI. If there’s interest and money, we’ll do it right away,” he said. “I would love to generate jobs there.”

Meanwhile, Cliffs has lobbied the state of Minnesota for land in Nashwauk to create a second HBI possibility on the Great Lakes. The company already owns and leases minerals at the former Essar Steel Minnesota — currently Mesabi Metallics — location, which faces a Dec. 31, 2019 deadline to complete its own project.

While Mesabi Metallics is unlikely to finish it, the future uncertainty of state-owned mineral leases has given Cliffs pause on making it part of future plans, despite continued interest.

Persico, the company spokesperson, said “there is nothing new to report” on the Nashwauk land.

Still, Cliff’s purchase of AK Steel and the potential for a new pig iron plant provides some stability and new investment in the Great Lakes mining region, the company said.

“The good EAFs will replace the bad integrated steel mills,” Goncalves said, referencing the current steelmaking trend. “We are going to survive. AK Steel is going to survive.”

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