Despite a drop in the prices it pays to buy metallurgical coal, AK Steel Holding (NYSE: AKS) is moving forward with a plan to develop coal reserves in Pennsylvania, and recently bought an existing prep plant that is already processing coal for its own supply.
James Wainscott, Chairman, CEO and President of the Ohio-based steel producer, said during an Oct. 23 earnings call that the company is nearly complete with negotiations to buy met coal from other parties in 2013. “Lower market pricing combined with sourcing a portion of coal needs with our own low-vol coal is expected to result in substantial savings for the year 2013,” he added. “We remain committed to our investments in both coal and iron ore that will allow us to become approximately 50% vertically integrated in the next few years.”
AK Coal Resources continues to make progress towards this goal of supplying 50% of coal requirements. During the third quarter, AK Steel completed the acquisition of a coal preparation plant under Coal Innovations LLC. “That plant is now part of AK Coal’s operations and it’s processing coal that has been mined in the area,” Wainscott noted. “The plant is also supplying prepared coal to our strategic partners at SunCoke Middletown for a conversion into coke to fuel our Middletown blast furnace.” SunCoke, the biggest independent coke producer in the U.S., a couple of years ago built a coke plant at AK Steel’s Middletown steel plant in Ohio.
U.S. Mine Safety and Health Administration data shows that the registration for a prep plant in Somerset County, Pa., was transferred on Aug. 14 from Coal Innovations LLC to AK Coal Resources. U.S. Office of Surface Mining data shows that as of an Aug. 14 update, Coal Innovations is a 100% subsidiary of AK Steel Natural Resources. The new President of Coal Innovations is John Kaloski. Prior to the Aug. 14 update, Coal Innovations was 85% owned by the Norman G. Caplan Revocable Trust and the President of the company was Norman Caplan, according to OSM data.
“AK Coal itself continues to make solid progress towards obtaining its necessary permits,” Wainscott noted. “Our investment in AK Coal continues to make excellent strategic sense for us, and eventually, we will supply about half of our coal needs from AK Coal. That positions us well for the future in a very volatile coal market.”
SunCoke has secured its coal requirements for next year for the coke obligations it has with AK Steel for 2013, Wainscott added. “We’re sourcing a significant amount of our low-vol coal needs from AK Coal through our own mining activities that we expect to begin in 2013, as well as from coal supplied from the Somerset area that are being watched at Coal Innovations,” he added. “So year-on-year saving is very significant. Again in order of magnitude, it’s 2 million, 2.5 million tons that we buy, every $10 is worth a lot. Savings there could approach as much as $100 million.”
Albert Ferrara, AK Steel’s Senior Vice President of Corporate Strategy and Investor Relations, noted that the company expects to be producing 1 million tons of coal a year. The company would probably hit that production rate in the second half of 2014.
AK Steel reported a net loss of $60.9m, or $0.55 per diluted share of common stock, for the third quarter of 2012, compared to a net loss of $3.5m, or $0.03 per diluted share, for the third quarter of 2011.
Net sales for the third quarter of 2012 were $1,463.5m on shipments of 1,363,500 tons of steel, compared to net sales of $1,585.8m on shipments of 1,368,800 tons for the year-ago third quarter and net sales of $1,538.4m on shipments of 1,335,800 tons for the second quarter of 2012. The company said its average selling price for the third quarter of 2012 was $1,073 per ton, a 7% decrease from both the second quarter of 2012 and the third quarter of 2011. The lower average selling price for the third quarter 2012 compared to the second quarter of 2012 was primarily due to lower spot market prices for carbon steel products, reduced raw material surcharges and a lower value-added product mix.
“Challenging domestic and global economic conditions continue to weigh on shipping volumes and prices,” said Wainscott. “Additionally, while we expect to enjoy lower raw material costs in the future, we are still working through some higher cost raw material inventories.”