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How a Pellet Plant Closure by Magnetation Could Impact Cliffs

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Pellet plant closure

Magnetation, which is a joint venture between Magnetation and AK Steel (AKS), announced in August 2016 that it might close its Reynolds pellet production plant as well as its iron ore concentration plant. While the decision is not final yet, the closures could come on or after September 30, 2016. If Magnetation isn’t able to secure additional financing or a third-party purchaser, the company might seek approval from a bankruptcy court.

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Upside for Cliffs?

Speaking of the possible pellet plant closure, Larry Lehtinen, Magnetation’s CEO (chief executive officer), said, “While this was a difficult decision, the Company believes that, in light of current circumstances, preparing for a safe and orderly wind-down while we continue to seek an alternative to a shutdown is the best course of action to support what is in the best interests of our employees, creditors and other critical constituents.”

The plant provides ~3 million tons of iron ore pellets to AK Steel. If it’s closed, Cliffs Natural Resources (CLF) could be the potential supplier of those pellets. CLF is currently guiding for 18 million tons of iron ore sales in 2016. The upside, if any, from this contract would mostly be seen in the company’s 2017 sales.

You should note that Cliffs is a sole pellet supplier to mills in the Great Lakes area. Most of the remainder of the iron ore pellet capacity is owned by backward-integrated steel players such as United States Steel (X), AK Steel (AKS), and ArcelorMittal (MT).

Other positives

In our article Why Essar Minnesota’s Bankruptcy Filing Could Help Cliffs, we saw that a potential threat was out of the picture, benefiting Cliffs. The bankruptcy provides a potential opportunity for Cliffs. The company could take over Essar Minnesota’s assets at the site and work toward creating a direct reduced iron (or DRI) facility. CLF management also believes this is a long-term opportunity to produce iron substitutes in the United States (DIA).

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