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SBB Special Report: AK Steel makes coal, iron ore moves - 6 October 2011

In response to rising raw material costs, US sheet producer AK Steel will integrate upstream with two raw material acquisitions – metallurgical coal and a joint venture with an iron ore company, Steel Business Briefing understands.

Speaking on a conference call yesterday with analysts and investors, AK ceo James Wainscott characterized both moves as "game-changers" and key pieces of the company's vertical integration plan.

When fully realized, the acquisitions would make Ohio-based AK about 50% self-sufficient in both met coal and iron ore pellets.

AK has acquired all of the stock of Solar Fuel Co, a private company that controls estimated reserves of 20m short tons of low-volatile met coal in western Pennsylvania. AK will pay $36m for the company, which it plans to rename AK Coal Resources Inc. It expects to invest about $60m to develop its mining operations and begin coal production.

AK said it believes met coal production will provide “significant" cost savings. “Such savings may be achieved through direct consumption and/or third party sales as a financial hedge to the market prices of met coal,” AK said.

The company’s $297.5m iron ore investment is through a jv with Magnetation Inc, a private company based in Minnesota that makes concentrate from previously mined ore deposits.

AK Steel owns 49.9% of the new jv, Magnetation LLC, which currently produces about 400,000 tonnes of ore concentrate annually from a plant near Keewatin, Minnesota. The jv is constructing a second plant with an annual capacity of approximately 1m t. The jv should expand to a rate of about 3.5m t annually by 2016 with a total of four concentrate plants.

Steel Dynamics Inc, which signed a jv recently with Magnetation, said its project would not be impacted by any agreements Magnetation has with others.

Magnetation LLC also plans to complete construction, by 2016, of a 3m t/year pelletizing plant that will consume the majority of the jv’s iron concentrate production. The iron ore pellet production will satisfy about 50% of AK Steel’s pellet requirements “at a cost substantially below the current world market price,” the company stated.

 

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