In 2011, AK Steel acquired all the stock of AK Coal, which controls, through ownership and lease, and is developing estimated reserves exceeding 20 million tons of low-vol metallurgical coal in Pennsylvania, said parent AK Steel Holding in a Nov. 13 prospectus related to a stock offering.
“We expect AK Coal to achieve run-rate production of approximately 1 million tons by 2015 (approximately 50% of our projected metallurgical coal requirements), with initial production expected in 2013,” the prospectus added. “Remaining investments are estimated to be approximately $56.0 million over the next three to four years. The estimated benefits associated with AK Coal will vary based on the market price of low volatile metallurgical coal. While the future pricing of metallurgical coal is not known, we currently estimate that our annual margin benefit attributable to AK Coal when fully operational would be approximately $20.0 million, $30.0 million and $40.0 million based on assumed low volatile metallurgical coal of $110, $120 and $130 per net ton, respectively. This estimated benefit assumes the development of the mine is successfully completed and required permits are obtained, and reflects our current estimate of capital investment and operating costs. Actual results could differ.”
As a result of various factors with respect to spot market sales and contract sales, AK Steel is not always able to recover through the price of steel the full amount of cost increases associated with our purchase of energy or key raw materials, the prospectus said.
“In such circumstances a significant increase in raw material or energy costs likely would adversely impact our financial results and cash flows,” the company added. “Conversely, we lock in raw material prices over a period of time and our financial results and cash flows can be affected when raw material prices decline, as such declines may coincide with lower steel prices, compressing our margins. The prices of commodities such as iron ore and coal have been meaningfully lower in the fourth quarter than earlier this year, but due to our existing inventory levels and the terms of our raw materials contracts, we are not yet experiencing the full benefit of lower raw materials costs (which is adversely affecting our margins) and do not expect to do so in a significant manner until 2013.”
The impact of this risk is particularly significant for iron ore, because of the volume used by AK Steel’s operations and the associated costs. “Our exposure to the risk of price increases with respect to iron ore and coal has been reduced by virtue of our recent investments in an iron ore joint venture and in the acquisition of coal reserves,” the company said. “These investments are expected over time to enable us to acquire approximately one half of our annual iron ore and coal needs at prices that are less exposed to market fluctuations and are below current market prices, but there is a risk that the volume of iron ore and coal acquired by us through these investments will be less than that due to delays in development or otherwise, or that the cost of raw materials from these operations will be higher than expected. To the extent that we must acquire our iron ore and coal at market prices, the overall trend of these prices remains high in comparison to historical prices. Going forward, cost increases could be significant again with respect to iron ore and coal, as well as certain other raw materials, such as scrap.”
Currently listed with the U.S. Mine Safety and Health Administration under AK Coal Resources is the Coal Innovations #1 prep plant in Somerset County, Pa., with the registration on that facility transferred in August from Coal Innovations LLC. Somerset County is a center of met coal production in Pennsylvania, with other major producers there being Corsa Coal and PBS Coals.