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Finally, a U.S. Steel Investment Pleases the Markets

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  • Today, U.S. Steel announced that it would acquire a 49.9% stake in Big River Steel. The stock is trading sharply higher today after the announcement.
  • Earlier this year, U.S. Steel announced investments in its existing plants. However, those plans didn’t impress the markets, and the stock tumbled after the announcement. So, what makes the markets optimistic about the Big River investment despite concerns over U.S. Steel’s cash burn? We’ll explore these issues in detail in this story.
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U.S. Steel

Today, U.S. Steel (X) announced that it would acquire a 49.9% stake in Big River Steel for a consideration of $700 million in cash. The transaction also has a call option in which U.S. Steel can acquire the remaining 50.1% stake within the next four years.

According to the company, it has “committed financing to execute the transaction.” The deal values Big River at an enterprise value of approximately $2.3 billion.

About Big River Steel

Big River Steel is a relatively new steel mill that produces flat rolled steel products. U.S. Steel’s Flat Rolled segment also produces flat rolled steel products.

Earlier this year, U.S. Steel idled two of its blast furnaces in the United States, citing weak market conditions. During the company’s third-quarter guidance release, it said that it expects the blast furnaces to be idled at least until the end of 2019.

According to Big River Steel, it’s the only LEED-certified steel mill. The company produces steel in an electric arc furnace (or EAF). However, U.S. Steel and AK Steel (AKS) produce steel in traditional blast furnaces.

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Nucor (NUE) and Steel Dynamics produce steel in EAFs. Generally, EAFs have a lower fixed-cost structure, which is beneficial in a cyclical industry like steel. Earlier this year, U.S. Steel also restarted the construction of its Alabama EAF. The project was shelved in 2015 amid weak market conditions.

Where Big River fits into the company’s plans

Currently, Big River Steel has an annual production capacity of 1.6 million metric tons, which is expected to double after its ongoing expansion. The acquisition would complement U.S. Steel’s current flat rolled capacity. As a new-age EAF, Big River’s operating dynamics would be better than U.S. Steel’s aging blast furnaces.

As U.S. Steel said in today’s news release, the acquisition “increases profitability, predictability and cash flow generation through the business cycle due to Big River’s low-cost position, highly variable cost structure and low sustaining capex requirements.”

Plus, U.S. Steel expects to close the transaction on October 31, “subject to satisfaction of customary closing conditions.”

In our view, this transaction makes strategic sense for U.S. Steel. Firstly, it would get access to a new plant with low-cost operations. Secondly, it would help in market consolidation at a time when companies like Nucor and Steel Dynamics are aggressively expanding their production capacity. However, this transaction does not help address the steel industry’s medium-term weakness.

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