Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Keith Busse – Chairman and CEO

Fred Warner – IR Manager

Mark Millett – EVP, Steel Operations

Richard Teets – EVP, President and COO, Steel Operations

Gary Heasley – EVP, Strategic Planning and Business Development

Theresa Wagler – EVP and CFO

Analysts

Kim McKenners [ph] – UBS

Michelle Applebaum – Phil Market Intelligence [ph]

Luke Folta – Longbow Research

Brett Levy – Jefferies & Company

Brian Yu [ph] – Citi

Michael Davelo [ph] – J.P. Morgan

Sal Tharani – Goldman Sachs

Charles Bradford – Affiliated Research Group

Mark Parr – KeyBanc

Steel Dynamics Incorporated (STLD) Q3 2010 Earnings Conference Call October 19, 2010 10:00 AM ET

Operator

Good day everyone and welcome to today’s Steel Dynamics Third Quarter Earnings Conference Call. Today’s conference is being recorded. Joining us today are Keith Busse, Chairman and Chief Executive Officer, Richard Teets, Executive Vice President of Steel Dynamics In. and President and Chief Operating Officer of Steel Operations, Mark Millett, Executive Vice President of Steel Dynamics Inc. and President of Steel Dynamics In. and President of New Millennium Building Systems, Theresa Wagler, Executive Vice President and Chief Financial Officer of Steel Dynamics Inc., and Fred Warner, Investor Relations manager. For opening remarks, I will turn the call over to Mr. Keith Busse. Please go ahead sir.

Keith Busse

Actually, we’re going to turn it over to Fred Warner to start with.

Fred Warner

Welcome to the Steel Dynamics third quarter 2010 conference call. The call is being webcast live on October 19, 2010 from Fort Wayne, Indiana. Later today, you will be able to replay the call on our website or download the call as a podcast.

During today’s call, our management will be making some statements that are forward-looking. All statements regarding anticipated future results or expectations are intended to be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements, which by their nature, are predictive and are not statements of historical fact are often preceded by such words as believe, anticipate, estimate, expect or other conditional words. These statements are not intended as guarantees of future performance. We caution that actual future events and results may differ materially from such forward-looking statements or projected that may be made today. Some factors that could cause actual results to differ include general economic conditions, governmental policy monetary or fiscal, industrial production levels, changes in market supply and demand for our products, foreign imports, conditions in the credit market, the price and availability of scrap and other raw materials, equipment performance or failures or litigation outcomes. You may find additional information concerning a variety of factors and risks that could cause actual results to differ materially from today’s forward-looking statements. Refer to Section entitled forward-looking statements and risk factors in our most recent annual report on Form 10-K and in our quarterly reports on Form 10-Q as well as in other reports we file from time to time with the Securities and Exchange Commission. These reports are publicly available in the SEC website, www.sec.gov and on our website, www.steeldynamics.com.

Now to begin today’s call, we’ll hear comments from our Chairman and Chief Executive Officer, Keith Busse.

Keith Busse

Good morning ladies and gentlemen. It’s good to have you with us today. As you can see, we had earnings in the third quarter, $19 million, a little weaker quarter certainly than the second quarter but within the range of $0.05 to $0.10 as we guided and as reported by most parties right on top of the consensus of $0.09.

In the second paragraph, we talk a lot about our net sales, and we note that they were 3 percent lower than the second quarter of 2010, yet shipments, as you go on to read in that paragraph were 4 percent higher than the second quarter, which implies the prices were lower overall and given what happened in the metals universe, at least as applied during the quarter, probably found ourselves in a margin squeeze.

On a year-to-date basis, I want to point out that net income of $133 million compares to a loss of $35 million for the first nine months of 2009, a significant positive change. Operating income was $218 million versus $41 million in the first nine months of 2009.

In the next paragraph, we talk about the markets a little bit and the third quarter steel volume remained relatively flat. While it remained flat, declining selling prices mainly sheet steel, outpaced the decline in scrap prices, and that’s true, as average selling prices were down $47.00 to $782 from $829, and the average scrap cost only decreased $23.00 as a result of reduced margins, operating income for the segment, fell to $88 million in the third quarter.

In our Metals Recycling business, shipments were about flat but income was, operating income was $22 million, down from the $25 million in the second quarter, actually better results than we had anticipated sort of early in the month when we gave our guidance.

I think the earnings for Metals Recycling segment was really injured by having an upside down July. We really had a fairly good August, and a fairly good September in recycling, but we really had a pretty lousy July. I think most people anticipated that scrap prices would be up $40.00 in July and they were actually down $40.00, so that hurt our performance rather dramatically in that particular month of the quarter.

Mark might have mentioned, not having talked to Mark, my outlook for scrap which you know is down some $40.00 on primes and $25.00 or so on $30.00 on cut grades is probably flat the remainder of the quarter.

I don’t see a lot of movement, and I don’t see a lot of demand response out there either, so I don’t think scrap is probably going to move a lot. Prices in the steel business have moved down so much, scrap costs. It should not result in any margin loss, at least as we move forward.

I’m pleased to report that New Millennium’s operating losses has narrowed in the third quarter in the Mississippi River with three operating installations or soon to be operating installations. We will have a national presence in fabrication and I think will be of value to people that construction on a more national scope, if you will.

So things are moving in the right direction there even though demand in the non-res segment of our universe remains rather anemic at this point in time. Not having the second largest competitor around any longer certainly will be helpful to everyone engaged in the fabrication of steel bar joists, trusses and girders.

The Nugget start up progressed. It says well in the third quarter with production increasing, and not a monumental percentage. It was a large increase in terms of real tons delivered, not such a big deal yet. As you read, the overall activity continues to be hampered by equipment availability and refractory issues.

I think we solved a lot of problems. Mark will talk about that, during the quarter. We’re having a very, very good October actually, but unfortunately, there’s still another problem that remains in the furnace environment which will take the facility down for a couple of weeks in November to deal with, and hopefully that will be the last time we have to deal with activity in that arena.

The impact of the Mesabi Nugget startup operations were relatively flat at $12 million for the quarter. During the quarter, increased new shipments for (inaudible) combined with weaker flat roll volume resulted in a change of product mix, causing flat roll shipments to decline from 64 percent of our full steel to 60 percent.

Our engineered bar products achieved record production levels and had a very, very strong third quarter. Their back logs remain very healthy. Back logs for flat roll products have declined. In the first week of October, order entry was at about 60 percent of capacity, yet rebounded in the second week to 100 percent capacity.

So it’s kind of a mixed bag out there folks. You know it’s catch as catch can and a very sloppy market and it’s been that way with fits and starts throughout the entire year.

I do believe the economy will probably stay in the malaise that it’s in for some time, although slow progress is being made. I think it’s, I don’t think we’re in danger of a double dip, but an extended malaise if you will, but I think it’s just getting marginally better with fits and starts along the way.

So I see 2011 being a better year in my mind than certainly 2010. One more notable things that we have put out press releases on is the approval of STI products by all the nation’s leading railroads including class two railroads, second tier railroads, short lines if you will, and I think we’re going to be in a lot better position on a very steady state basis to be able to deliver product as required by the nation’s railroads both cut length product and welded product for that matter.

I think we’re in pretty good shape and I know there’s been some very, very positive comments about the micro structure of SDI’s rail product as opposed to our competition so we’re feeling pretty good about that.

We produce rail as you know in Colonial City. That’s where we also make beams and the beam market continues to be rather anemic and weak. Made a little progress in that area, but certainly not sufficient to deliver the kind of earnings that that facility has demonstrated that its capable of delivering. So we’re a ways away from that event, if you will.

Looking forward to the fourth quarter, we believe that margin improvement in the latter stages of the quarter is possible and could result in slightly stronger quarter, but as we have in the past, we will provide guidance in early December about where we see our specific outlook for the quarter.

With that, with those comments I will conclude and turn it over to Mr. Millett, who’s prepared to tell you about Metals Recycling business, Mesabi Nugget, Iron Dynamics and such as that. Mark.

Mark Millett

Thank you. Good morning everybody. Relative to the Metals Recycling, flat quarter. Operations had a, as Keith said, a very mixed quarter. August results essentially balanced or offset a July loss, resulting from strong downward movement in July, very surprising, and the associated margin (inaudible).

However, the team has an excellent September, achieved strong shipping volumes in both ferrous and non-ferrous material. The nonferrous group had a particularly good month as they were able to push up their – expand their metal margins appreciably.

Quarter over quarter operating expenses remain relatively flat. Ferrous volumes edged up slightly to 1.4 million tons. Non-ferrous volumes increased 8 percent to 257 million tons, and as Keith suggested, our operating income for OmniSouce decreased from $25 million in the second quarter to $22 million. That’s principally the lowest ferrous margins in July.

In Iron Dynamics, they posted another consistent solid quarter. They shipped 45 ferrous metric tons of liquid pig iron and 12,000 tons of HBI over to the Butler fab mill, and it continues to be an integral part of the recent productivity gains at Butler, so the team did well there.

Regarding Mesabi Nugget, again for pioneering effort, I guess it started to progress well. Obviously not as well as we’d like to see. Shipments rose 33 percent to 24,600 metric tons. The Nugget’s achieving 97 percent metallic FE, and with the signs content ranged in the quarter up to five percent. It is now being regularly consumed at both the Butler flat roll mill and engineered products at this point.

Recent performance has confirmed our confidence in the process itself with extended periods of operation in excess of 60 percent, and interim periods in excess of 85 percent of its anticipated capacity.

However, as with most pioneering efforts, these high productivity levels have exposed further equipment and factory limitations that are hampering our equipment in time and productivity. Solutions are in hand and they should be effective during the fourth quarter and will likely include a three week shut down in November for the refractory work on the (inaudible). However, earnings projection is anticipated to be similar to that of Q2 and Q3.

Financial performance there continues to be impacted obviously by the divergence of iron concentrate and pig iron market pricing, and the securing of permit to mine remains a critical issue to us and we’ve actually been infused quite recently by renewed energy demonstrated by the Minnesota State Environmental Agencies in concluding the permitting process and anticipate permit issuance late in 2011.

Keith Busse

Thanks Mark. Dick, we’ll turn it over to you.

Richard Teets

All Right. Thank you Keith. Good morning everyone. I’d like to go over a few additional comments by each of the steel operations facility to what Keith has already mentioned. At Butler, we’re operating approximately at 85 percent with a three to four week backlog in hot rolled and (inaudible). The back log is actually extended on the value added products.

The team has successfully completed all of their items on the maintenance list during their annual maintenance outage earlier this month and are ready for a pickup in the order entry rate. Last week, we actually had the best order rate in over two months, but only time will tell if this is sustainable, and we anticipate a slow and steady improvement in sales occurring due to low inventories and decent shipping rates to the manufacturing sector. Those end users are automotive, appliance, pipe and tube and the agricultural markets.

The techs are running in the 55 to 60 percent level but these tons really only dependent upon sub-strait availability. Without wanting to jinx the techs team, I would like to say, and actually for them being on path to a test based performance ever for the year.

Columbia City, as Keith mentioned, continues to deal with the weakest of all of our markets. They’re operating at 35 to 40 percent, though present rate of capacity which is actually approximately 50 percent of our historical levels. Their current rate is being lowered because of the added addition of our second roll unit there.

The great news out of Columbia City as Keith mentioned, is that we now have continued to gain acceptance in the standard strength rail market, and we believe we captured 10 to 12 percent of that market and we expect that trend to continue in the coming months.

Our 240 foot rail sections have met with overwhelming enthusiasm by the mainstream railroads. This team continues to make the most of an excellent backlog. For two months during the third quarter, the team has actually accomplished a 50/50 performance. That means they cast 50,000 tons and rolled 50,000 and shipped 50,00.

This has only been accomplished two times prior in the plants history. It was also the best quarter ever for rolling, shipping and execute tons shipped performances, and actually, and would also setting records for quarterly production if they had not lost four and a half days due to a EAF sub failure. So congratulations to everyone on those efforts.

During October, (inaudible) failure in the 3D furnace, resulting in the annual maintenance, obviously pulled ahead of the rolling mill. Both repairs and capital projects were accomplished with the projects focused on de-bottlenecking the [unlink] in the areas.

The mill shop will have its outage as planned this month. This outage is mainly for the completion of the installation of a new metal crane. Other work scheduled for completions are routine maintenance requirements.

Roanoke is running the melt shop five days a week and rolling mill six days a week currently as production and shipments have been hampered in the short term, by the downward strap pricing pressure. This discouraged customers from placing orders until the last minute, and then they depend on mill inventory for immediate shipment.

Roanoke has recently begun participating in the bill and export business. That’s appropriate sales terms to present themselves. There are no major outages planned for the Roanoke plant, as repairs and improvements can be accomplished within the existing schedule of production.

Ashfield, West Virginia sales have continued to improve in the truck/trailer and corporate markets as well as other special section markets such as railroad splice bars, off highway equipment and solar projects. This results in a full book and a solid backlog for Steel, West Virginia.

I’m proud to report that the mill shop continues to improve, resulting in improved and increased yield in quality, and due to initiatives in those areas. These improvements will continue as several capital projects are slated for completion during the November annual maintenance outage. These projects include a new EEAF pulpit, new cast oscillators, and new scrap charging frame and EEAF (inaudible) equipment for both their furnaces. Keith.

Keith Busse

Thank you Dick. Gary

Gary Heasley

Thanks Keith. Demand for joints and deck were up slightly in the first half. We gave most of that back in July and August which were off from 2009 levels fairly significantly for booking. Now we’re looking at 2010 at about the same level of demand that we had in 2009 which is dramatically off from the average of the past ten years, about 50 percent off that average.

Some months are up. Some months are down, so we’re expecting to see a bit more bumping along at this level before we begin to see slow steady growth, which we think will happen starting the second half of 2011.

With what we saw in August and July, we believe that the early part of 2011 is going to be a little less robust than we hoped for, but we’re still confident that 2011 is going to be better than ‘10. All things seem to be pointing that way.

Prices and spreads improved over the quarter, and that gave us the opportunity to look at improved earnings. The facilities in Ohio and South Carolina that we idled in ‘08, continue to cost some interest and costs related to depreciation charges, insurance, property taxes, other interim charges.

Those totaled about $298,000 in the quarter, and then left us with an operating loss in the three operating plants of $196,000 but for August and September, generated an operating profit, so hats off to the folks at New Millennium who worked very, very hard to try to win in what are very difficult market conditions.

As Keith mentioned, on October 4 we acquired the joist operations run by Commercial Metals. That involves seven locations, four of which are going to be idled, and we only acquired the equipment not the real estate, three of which we will be operating and as Steve mentioned , Hope, Arkansas, Juarez, Mexico and Holland, Nevada, giving us the nationwide reach that many of our customers told us that we needed to have in order to really serve them properly.

In the time that we have now, as we get ready to start up, we are in the process of relocating equipment from idle facilities to those that will be operated to make sure that we have the optimum configuration every plant will run, and that we’re prepared to operate those plants at the highest level of productivity we can achieve.

With the new acquired facilities, we’re going to be bringing on staff very slowly. We’re going to staff up just at the level we believe will support the backlog. We’ll only grow that team and the related capacity as the backlogs tell us that we can profitably support additional hiring.

Now with the four plants coming down and the two that we idled in ‘08 and ‘09, that’s six joist plants that have been taken out of operations in these last couple of years, and with those six closures, capacity in the industry has gotten much more in line with demand, although there’s still excess capacity out there, and it wouldn’t surprise me if some of the less efficient plants may need to make some tough decisions.

But as construction activity continues to grow over the next two years, we will be extremely well positioned to take advantage of that and to generate great returns on the three plants that we’ve had historically and the three new ones that we’re starting up now. Keith.

Keith Busse

Thanks Gary. We’re now going to hear from Theresa Wagler, our CFO. By the way ladies and gentlemen, it’s Theresa’s 40th birthday. Black balloons all over her office, but she’s still a youngster. Theresa?

Theresa Wagler

I’m not sure I follow that. Thank you. I’d like to point out, everyone’s talked a little bit about the operational impact from the segments, but I would point out that even with the challenging third quarter, our year to date gross margin percentage improved almost three percent in comparison to last year, and our operating margin actually improved over five percent.

During the quarter, we also increased our liquidity from $1.1 billion to $1.2 billion which represents our cash on hand plus our availability under our $924 million revolving credit facility.

Our net debt also decreased $69 million during the quarter, as cash flow from operations was $89 million during the third quarter, and it was $92 million during the entire first half of the year as we required quite significant amount of working capital growth during the second quarter of the year. The third quarter working capital draw was fairly flat. We would expect the same in the fourth quarter.

In early October, we received the remained of our expected State and Federal income tax refund of $11.7 million. This resulted in a total refund during 2010 of $102 million.

You will have noted that our third quarter effective tax rate before excluding non-controlling insurance, increased to 50.4 percent from 36.9 percent recorded during the first half of the year. This was related to an increase in our estimated effective annual rate. The required cumulative catch up which was recorded in the third quarter totaled about $3.5 million, and this impacted the results by that $0.02 per diluted share.

Our leverage ratio total debt to EBITDA was 3.7 times at September 30, and our first lien leverage was .04 times. During the third quarter our capital expenditures totaled $24 million. Depreciation was $44 million and capitalized interest related to those projects was $1 million.

Our outlook relates to fourth quarter depreciation and amortization remains at between $65 and $66 million.

Our estimated 2010 full year capital investments, if you include the acquisition of the joist assets that Gary spoke of earlier, will be about $150 million. I know many of you would like to know about 2011. We actually go through our detailed planning here in October/November so we’ll comment on ‘11 during our first quarter conference call.

Net interest expense during the quarter was slightly higher than the second quarter due to the decrease in our capitalized interest. Gross interest expense was $45.3 million with an effective rate of 7.3 percent.

We have 217 million shares of common stock outstanding at September 30. Additionally, we had 16.4 million shares underlying our convertible securities and 6.9 million of outstanding stock options. Of those 6.9 million of outstanding options, 1.3 million were actually diluted during the quarter.

Our expectations for the fourth quarter would be to have average outstanding shares and equivalents at about 235 million shares.

I know many of you would like to have the breakdown of our flat roll shipments for the quarter, so I’ll give them to you now. Our hot roll shipments were $246,000, our pickle shipments were $71,000, our cold rolled shipments were $46,000, hot roll galvanized $1,100,000, cold roll galvanized $64,000, painted products $79,000 and our galvanized was $15,000. Keith?

Keith Busse

Thanks Theresa. Karen, we’ll now open it up to the Q&A component of the call.

Operator

(Operator Instructions) We’ll take our first question from Kim McKenners [ph] with UBS.

Kim McKenners [ph] – UBS

Yes, good morning. Happy birthday, Theresa.

Theresa Wagler

Thank you.

Kim McKenners [ph] – UBS

I wanted to if I could, draw a little bit more on the guidance please because the point about margin expansion makes sense if steel prices are holding up and if you haven’t yet started to see any increase in scrap like we’re starting to hear. But it seems like there’s been a lot of slippage lately in the steel price, especially in flat roll. So can you comment on that, and then again with the volumes, it seems like we’re hearing a lot of weakness in volumes, certainly in utilization. And so if you give us some clarity.

Keith Busse

I think that volume will continue to be from an order entry perspective erratic. I think we were a little out of the market for a while, and that’s why order entry in the latter part of August, early part of September suffered. You’re correct in the pricing has come down. It has not come down I think to the advertised arena.

I think we probably are approaching due bottoms again. I think the economy is going to continue to be in a malaise. I think inventories, it’s almost comical when we report final inventories up or down. They’re so anemic and so weak that any real movement in demand would shatter them, but the economy is what it is, an as I said, it will continue to have positive momentum with fits and starts. It really is a malaise.

I think order entry will be okay for the remainder of the quarter with pricing being off, or fourth quarter, with pricing being off from third quarter levels, and I do believe that the pricing, fall in pricing at least from our perspective in terms of raw numbers, may end up being less than we’re taking later in the quarter.

You’ve got to remember what we billed in October is what we had on hand essentially in September, but I think the scrap costs will be better and I think most of the margin loss early in the quarter will be flat roll, yet we could see some recovery.

I don’t think there’ll be much margin loss and maybe added margin in certain other arenas, so I, we’re not making a specific prediction. We think that earnings could be up slightly. That’s a current prognostication. If they’re better than that, we’ll report that to you in December. If they’re slightly worse than that, we’ll report that to you as well.

But I certainly believe we’ve got to be positive and certainly not negative. But at this point in time, given the weakness in backlogs, it’s just hard to reach out and predict it, but I do think the fourth quarter will be slightly improved over the third at this point in time.

Scrap will be, I don’t know. The market I think is going to end up weaker. I’ll let him comment on that. I think it’s probably going to end up probably about the same, not too much change there. We really hope to have a little better result in Mesabi Nugget. It may not. It may end up being the same level of losses given sort of, we hope one final round of repairs to the furnace, but they did demonstrate some awfully good momentum here in October.

Fabrication will probably be marginally better than what it was, but not a whole lot, or it could be the same or it could be a little worse by a little, but it’s not going to be a material dip one way or another.

So I hope I’ve answered your question.

Kim McKenners [ph] – UBS

Definitely. Just to follow up with one more, just taking a step back may philosophically. As we look at the flat roll market with more supply coming on scrap based, some not, we look at the global market for scrap maybe improving into next year. Is there any compare that we could see a breakdown in the correlation between scrap and steel prices further and see the further disability for the margin or the scrap price to be passed through. How do you think about scrap availability and margin sustenance I guess into that environment next year?

Keith Busse

I think you’re going to see Europe continue to be a fairly significant exporter of recycled metallic’s. United States, the volume won’t change a lot. It may get a little better. The real offshore demand is probably going to come from Turkey in fits and starts rather than Asia. I think Japan is still a net exporter.

I think you’re going to see with China’s industrial production having grown so significantly over time, they’re going to start to generate a lot more scrap and even obsolete scrap will be in greater supply. So China will kind of be probably just in the market not on the market, but more dependent on iron ore resources than scrap.

I don’t see the relationship between scrap pricing and steel pricing disconnecting. There’s never going to be a perfect chart out there, but I think it’s essentially going to be a relationship between the two that has existed for some time.

I don’t think there’s going to be a complete break down or positive improvement one direction or another that’s significant.

Kim McKenners [ph] – UBS

OK. Great. Thank you.

Operator

Next we’ll go to Michelle Applebaum with Phil Market Intelligence [ph].

Michelle Applebaum – Phil Market Intelligence [ph]

Hi. I didn’t hear you mention – a nice quarter by the way. I didn’t hear you mention anything about the details about the new flat roll mill. Could you give us some idea of what you’re looking for, what the time frame would be?

Keith Busse

Well, not a lot has changed. I think we said that we would be in a position to present the concept of any new mill and what it’s going to look like and the technological configuration of it, and the product capability complete with a market study associated with the markets we intend to serve to our Board later this year.

We have a Board meeting in November. We’ll also have one in February. So it could be at either time that we’re going to discuss that in great depth and have more to report on it. But a lot of people I know worry about added capacity when if you could understand the capability of the mill as proposed, it’s going to be capable of reaching markets today that we don’t even have an opportunity to quote, and whether they’re on the hot roll side of the street or on the poll roll side of the street.

So I think it’s a fairly significant configuration. It’s not huge in terms of volume. I guess every million tons counts, but it’s contemplated to be around 1.7 million tons of capability or in that arena. If it’s blessed, it could provide some product to the techs, which gives it a natural jump start or head start.

It also gets us into product markets that we’re not servicing today or don’t have the opportunity to service. I don’t really want to expand on that too much deeper, but I’m not terribly worried about placing that volume in the market and having the resources to drive success.

I still tend to think it would be even carrying a new capital load, a significantly profitable facility which would only get stronger in time as you shed over the course of ten years or so or 12 years much of the capital charge effect of any new project.

I don’t think it would require significant financing. I think most of it could be financed internally out of earnings in the next couple of years essentially. What does that mean? Well we probably would retire some debt in the meantime. We may have to take on some additional debt as time goes along, but I don’t think our debt load will significantly change.

It would have the potential to actually drop two years from now a few hundred million dollars and have a brand new mill completely paid for through our earnings which certainly increases the equity base of the company, not increase the debt load, which puts us in a much better leverage position than we are today.

But those decisions are really yet to come, and the presentations haven’t been made.

Michelle Applebaum – Phil Market Intelligence [ph]

In terms of when you’re saying it’s going to reach products and markets you’re not in now, should I presume that that means that it might replace or displace either imports or perhaps some of these hanging on mills that are currently shuttered and for sale, may never to be sold or opened, if you’re starting up this new mill? Is that sort of how things will work out?

Keith Busse

And people that own those assets will be responsible for those decisions in the due course of time. I think this mill would be market positioned well if it goes forward and I think the markets it would serve would impact domestic production as well as imported product.

It would just give us an opportunity in markets that we don’t have today, or capability more specifically in markets we don’t have today.

Michelle Applebaum – Phil Market Intelligence [ph]

And can you tell me just one more question on this, and then I’ll go back into the queue. Can you give me an idea of what the equilibrium hot rolled price you’d be assuming Theresa, you’d need to have to make this project to go.

Theresa Wagler

Michelle, I don’t think that – I mean to make the project a go, as Keith said earlier, we’re still looking at models to present to the Board and different working scenarios, etc. I don’t even want to comment on today.

Michelle Applebaum – Phil Market Intelligence [ph]

OK.

Keith Busse

I think it’s more margin based anyway, pricing based. I mean if we deliver – the cost process that we have in our (inaudible) relation of our prices, in really depressed economic times, a little different answer than in not so depressed economic times and a rather consistent margin. And that margin would make that mill I think very profitable.

Michelle Applebaum – Phil Market Intelligence [ph]

OK. Can I ask one more?

Keith Busse

Sure.

Michelle Applebaum – Phil Market Intelligence [ph]

OK. The MSCI stock came out yesterday, and I was kind of stunned to see that the shipping levels for every product on the list hit a post-recession high whether it’s September, October, November of ‘08, but every product hit a high, and I was surprised to see the service center shipments to customers doing as well. Is that consistent with what you’re seeing in the marketplace?

Keith Busse

It’s consistent with what’s being reported by the people we talk to, and most of them are relatively significant suppliers to the industry. Most service centers are seeing marginal improvement and feel good about their business, and obviously that makes us feel very good about the future, although all of us would like to see demand increase at a higher rate of speed.

But unfortunately, in the probably kind of political environment we’re in, you know people are sitting on their hands and waiting for outcomes and solutions to the things that ail the nation if you will.

Michelle Applebaum – Phil Market Intelligence [ph]

Well that’s great, and also most of that inventory increase was stainless. That was kind of shocking, so the inventories were scarcely maintained at a constant level. So I was surprised to see that, so.

Keith Busse

Well that goes to my comment about how fragile what’s on the shelf is. I mean if they were hitting substantial momentum, although I don’t think the market’s going to be up 33 percent tomorrow morning on an average, I mean you would have enough product to supply it.

I mean the rather fragile levels of inventories sitting on the selves. They’re there today intended to service demand as it exists.

Michelle Applebaum – Phil Market Intelligence [ph]

Right. Right. OK, that’s great. Well thanks, and I’ll go get back into the queue.

Operator

Thank you. For our next question, we’ll go to Luke Folta with Longbow Research.

Luke Folta – Longbow Research

Good morning guys.

Keith Busse

Good morning. How are you?

Luke Folta – Longbow Research

Doing quite well, thank you very much. How are you doing?

Keith Busse

Well.

Luke Folta – Longbow Research

Quick question on your – I just wanted to dig in a bit more on the steel side of the business. It looks like you guys reported about 75,000 tons higher shipments quarter on quarter, and you had said that metals prices were down about $24 a ton. If I do the math, looking at metals spread on a total dollar basis, it looks like spreads are actually up quarter over quarter and EBIT looks like it was down $45 million after intangibles.

So I’m just trying to understand, of course that’s all excluding the tax. Is there something else in the cost structure that had moved up quarter on quarter?

Theresa Wagler

No, Luke. I’m (inaudible) logic because prices definitely were compressed second quarter to third quarter so I’ll have to make the kind of calculation that you had to back into that. It’s above the line, it’s not below the line.

Luke Folta – Longbow Research

(Inaudible) if you’ve got $24 per ton less spread, and you multiply that, the total over 75,000 tons for shipments, if you look at the total dollar amount that you’ve earned, total revenues minus total scrap cost, at least in my calculations, it’s going up quarter over quarter.

So I’m just trying to understand. It seems like to me like, and I know the techs was a negative contributor sequentially, but it seems to me like there was some other cost included in the increase.

Keith Busse

Well we haven’t done your math, as Theresa said, but the spreads are definitely down. We had – I’m looking for the data sheet on the ties. The ties shipped was, total shipments combined were 1.3 million. I don’t have a calculator. The spread progression of ...

Luke Folta – Longbow Research

I don’t want to make you guys – I can – you don’t have to go through all the math on the phone. But as far as you know you know, there was no other extraordinary cost items that have gone up sequentially.

Keith Busse

Many times volume is off a little bit, your other costs convert are certainly going to go up per ton. It doesn’t mean you’re spending more, it just means you have existing cost structures in place both variable and fixed related to a lower level of production which would yield a higher cost per ton.

I wish I would have brought my calculator, but the margins were off $24. They’re off $30 some million.

Luke Folta – Longbow Research

But you had higher shipping.

Keith Busse

It’s still off $30 some million when we look at the gross profit line quarter over quarter. It was off more than $31 million. I think that’s your point.

Theresa Wagler

The difference is the operations operating income second quarter, third quarter, $46 million, but that inclusive of the tax, and he’s trying to back out the tax. And the thing is around the yield segment that was. So I’m sure that I can help you offline, but right now with the information we have in front of us, to back out the taxes is a little bit difficult.

Luke Folta – Longbow Research

OK. All right. And the second question, on the fabrication operation, do you have a sense of how much new capacity these recent acquisitions will give you and secondly, will all the steel for those operations be shipped internally?

Keith Busse

Luke, it’ll come in bits and pieces. We’re not going to start them up. All of them will have three physical line capability in the end times the number of shifts you want to run them. So you have generally you have to run first or second shifts, so you’d have six shifts worth of production at each plants times three plants.

It’s not going to start out that way. It’s going to start out with a lot of them having two lines running and each of the others have one line running and we’ll grow from there. Gary.

Gary Heasley

That’s right Keith. So you know, we’ll start out again very modestly. Putting in the first crew at each of the three plants will give us maybe 33,000 tons or 35,000 tons incremental capacity across those markets from Arkansas all the way over to California, and as we add crews over time, that capacity will grow dramatically if the market gives us the reason to build those three.

Keith Busse

I think what’s significant about all this as Gary commented on, we’ve lost actually seven facilities minus the properties for $17 million, about $2.5 million per piece of property and all equipment related to it, and four of them go away permanently.

They’ll never to constituted in any form with the equipment gone, so given the two we’ve shuttered on top of our other assets, I think we’re geographically well dispersed and I think to Gary’s point, there’s six lines no longer in service in the country, and I think that’s going to bode well for everyone in the fabrication business.

The only two entities capable of servicing demand on a national scope would be New Core and SGI at this point in time. The others are regional guys, but the elimination of this capacity in the end helps everyone.

Now we understand it’s a rather good market in time, but this is when you prepare yourself for future activity to increase in the zip code, and I think it will in time, like a year or two, but I think we’ll be as well positioned as anybody.

I imagine you’ve got some excellent equipment coming out of these facilities and going into the existing ones. I can’t imagine them being inferior to any fabricating asset, anywhere in the world. So I think from a cost structure perspective, we’re going to be in awfully good shape and as we march forward in that business.

Luke Folta – Longbow Research

OK. And if I could ask [audio beak}

Keith Busse

In by the real shipments. I mean rail, yes ...

Gary Heasley

I mean it’s almost 20,000 tons of rail shipments in the third quarter and I would tell you that our fourth quarter projections are double what we’ve shipped year to date at Columbia City. So (inaudible).

Keith Busse

That’s very, very significant. I think the other thing Luke that’s significant to note, is that that pioneering effort which really got underway earlier in the year and hit its crescendo you might say in the second and third quarters, there was a lot of steel pent up and we pulled. We become as cost effective and as productive as we are today, and that should not reoccur as we move forward.

Luke Folta – Longbow Research:

OK. Thanks a lot for the color guys, and sorry to make you break out the calculator.

Operator

Next, we’ll go to Brett Levy with Jefferies & Company.

Brett Levy – Jefferies & Company

Hey just to refine the rail question, what is year to date in terms of rail shipments and did you just say you were going to double that in the fourth quarter?

Keith Busse

Yes, rail shipments just over 30,000 tons year to date, and we look to end the year with over 60,000 tons of rail.

Brett Levy – Jefferies & Company

You’re saying you’re going to produce in the last quarter, the same amount of cutting you produced through three quarters?

Keith Busse

Yes, that’s it.

Brett Levy – Jefferies & Company

Got it. OK. But not double that. Just in the last quarter.

Keith Busse

(Inaudible) we produced 30,000 in three quarters and will produce I think an additional 30,000. I hope to do even better than that in the fourth quarter which will in effect double where we’re at on a year to date basis from this moment in time forward.

Brett Levy – Jefferies & Company

Got it. And then there’s probably a logical point where 240 rail takes market share from 40 or 60 foot ranks, and I think that some people have estimated that you guys get to 30 percent market share of that sort of million ton a year market sometime soon. Do you guys have a target date for that?

Keith Busse

Let’s be careful. Half of the market of a million tons is head hardened material and we have not qualified ourselves with head hardening material. It’s a – we’re in the class one, and that’s the other half of the market, and we expect to penetrate that half rather significantly, hopefully 40 to 50 percent in time.

But we have new technology that we’re developing in the head hardening arena and we have yet to crest that hill if you will. So only half the market is available to us at the moment.

Brett Levy – Jefferies & Company

And then just to follow up on that, what do you think the timetable is to kind of perfect your head hardening technology.

Keith Busse

In all honesty, that’s measured in probably years because we have yet – we are just looking at the technologies. We’re exploring what we currently have in place from a capability standpoint, and we’re still walking into the standard strength realm and we’re not going to jeopardize that performance by rushing into the head hardening world.

Brett Levy – Jefferies & Company

Last question. Keith, your thoughts on scrap prices in 2011.

Keith Busse

Well, you know it has been historically, they’ll probably improve in the first quarter. It’s the winter months when the flows are down. It would be my hope that they don’t get the carts so far ahead of the horse this time.

Scrap prices literally got out of control I think in the first quarter and we paid for it all year long, and they’ve been coming back. I hope that where we go is more orderly, but I think they’ll probably increase in the first quarter as they normally do, and possibly come down late second quarter and into third quarter it will probably go back up in fourth.

So it’s hard to say. I imagine scrap will finish higher next year than it finished this year and I’m pretty confident steel prices will too. How much remains to be seen for everyone.

Brett Levy – Jefferies & Company

Thanks very much guys. And happy birthday Theresa.

Gary Heasley

Just going back to your comment, I think the most important thing we should be looking at obviously is scrip between product pricing and scrap and I think it would be our estimation that it’s going to expand next year from where it is today.

Brett Levy – Jefferies & Company

Thanks much.

Operator

For our next question, we’ll hear from Brian Yu [ph] with Citi.

Brian Yu [ph] – Citi

Hi, great. Thank you. My question is regarding the Mesabi Nugget. You’ve given, your guidance for fourth quarter looks like losses are going to be sequentially about the same so this would imply you have pushed back your target for breakeven on a run rate basis by year end. I was wondering if you could provide an updated thought on when that project would break even. And also, what percent of the production process do you think you’ve successfully troubleshooted here.

Keith Busse

I’m going to let Mark answer most of that. You’re right. We won’t hit a break even by the end of the year, at least I don’t contemplate we will. One month doesn’t make a battle, even if we think about a battle in December, so to speak.

But I do think with some of the final fixes, the projection rate that Mark’s been able to achieve in October, if sustainable could shove you a long way in the direction of stemming the losses and that would not be insignificant as you look at next year in terms of how many pennies per share that is.

Mark, you want to comment a little more?

Mark Millett

OK. We would hope to have a break even month in the first quarter of next year here. Again, it depends on how successful our modifications are. Again, I want to emphasize, the actual process we’ve got a lot of confidence in. it’s just a matter of breaking through and overcoming these mechanical track fissures.

Relative to stand alone capacity or whatever, we operated up until a couple of days ago, at 60 percent of our operated capacity consistently this month and we’ve had many interim periods where we’re at 85, 90 percent.

It’s purely getting the equipment bugs worked out. It is a pioneering effort. We have a – it’s been a scale up from the bottom facility. So we’re not going as quick as we’d like it to, but I think with every confidence that we’re going to get there.

Keith Busse

Brian, it reminds me a lot of 1989, 1990 in Crawfordsville. I mean that took a solid year to work through pioneering efforts with that new technology and this is the same kind of exciting breakthrough technology that’s going to have a very happy landing in the end. But it’s not a six month deal, and we’re solving each of the problems systematically as we go forward.

Brian Yu [ph] – Citi

OK. And then really the longer term objective here is to get your own mine permitted so that you can bring down the cost structure more. That’s when you’ll see the returns contribute to the bottom line?

Keith Busse

I think that’s exactly right.

Brian Yu [ph] – Citi

OK.

Keith Busse

Mark said we’re starting to see rays of sunshine now in permitting. It doesn’t mean it’s going to speed it up terribly, but it won’t delay another two years anyway, and he hopes to have a permit in hand late next year.

Brian Yu [ph] – Citi

All right. And then just a last question, switching topics a little bit. I want to get your thoughts on that new TK mill and how damage, just see if you’re hearing anything from indirect competition and would you attribute any of the flat roll weakness to perhaps TK trying to build market share?

Keith Busse

I think what happens to any new entry into a market is the clients tend to be satisfied with their suppliers, especially where demand is shorter than supply. And any time somebody tries to break into markets, the only tool in the end – I mean you can shout about your quality all day and all night but in the end the tool, especially in a depressed market is going to be price, and people aren’t going to let you into their house unless you show them something.

And unfortunately, that’s probably what’s been happening. It’s probably had a recent toll on pricing, but in time, they will be assimilated into the market and hopefully not be perhaps as impactful as a new start up would be when it’s grappling for business, or struggling with this initial production kind of thing.

So I think things will settle down. I believe we are at the bottom of another cycle in the market and I think there’s, there are brighter days ahead. I wish we’d just have a more significant increase in demand. I think it’s getting better, better, better, but again, we’re all impatient people and it’s a little too slow for all of us.

Our next questions comes from Michael Davelo [ph] – J.P. Morgan.

Michael Davelo [ph] with J.P. Morgan

Good morning.

Keith Busse

Good morning Mike.

Michael Davelo [ph] – J.P. Morgan

A couple of questions. First on the potential for exports, you know back in May the consensus in the market was that the dollar was going to go to parity with the Euro, and quite the opposite happened where it’s at 138. What are your exports now and do you think you have some opportunities to increase exports going forward?

Keith Busse

I think the industry does, Mike. I’m not so sure we’re the best position guy. We’ll continue to export flumes and SPQ and as Dick mentioned, perhaps billets out of Roanoke. But you know, Butler is not in a position to be an exporter, but that’s not a bad thing if other people are export successful. Then perhaps we’ll have a little more success in the domestic market collectively.

Michael Davelo [ph] – J.P. Morgan

And then in terms of nonresidential construction activity, are you seeing any glimmers of hope for any kind of improvement?

Keith Busse

Only those that you hear from architects and engineers, but not necessarily in terms of backlogs or order entry. Margins, as Gary has mentioned has improved, but the strength of the backlog certainly has not.

Michael Davelo [ph] – J.P. Morgan

OK. And last question, in terms of the potential for a new flat roll mill, is that predicated on getting Mesabi Nugget up and running you know, to capacity?

Keith Busse

It would be a factor I think. It’s probably not an absolute requirement, but I think you want to feel good about the ability to supply high grade ore raw materials to the facility.

Michael Davelo [ph] – J.P. Morgan

Would that facility, would you anticipate that facility’s product being produced with a much higher level of scrap substitute or Mesabi Nugget or DRI or whatever you want to call it.

Keith Busse

I personally would see it that way because of the markets it’s intended to serve. And I would think that where we’d like to be successful in dedicating our push battery to Butler, you’re dedicating it to a facility that produces three million tons or potentially even better in a strong market.

This one would not be as large. It would be half as many tons, so if you had an entire new battery dedicated to that, and the first time, it would be a higher percentage of virgin material going into the electric furnaces.

Michael Davelo [ph] – J.P. Morgan

OK. Great. Thank you.

Operator

Next we’ll hear from Sal Tharani from Goldman Sachs.

Sal Tharani – Goldman Sachs

Good morning. Keith, you had mentioned in the press release and also in the comments about a little bit better long product market. Can you give us a little detail? Is this the products you are in or general market is up and how do you reconcile (inaudible) at the New Millennium which you’re still facing.

Keith Busse

I think as Dick said, there’s, taking it from the smallest going forward, there’s some additional strength especially in the steel arena, special tapes. We’re experiencing West Virginia. Roanoke is kind of a niche producer. You know, it’s some people, feel very good about buying from our competition and other don’t and they do a good job of servicing the market from a product quality and service perspective.

We’re not better than the other fellow on price I’m sure, but we’re not worse either. But at the same time I think keeping them at their operating rate is a very strong possibility. You’ve already heard that we’re going to see more strength in SPQ large.

I think we’ll see a little more strength in structural. It won’t be significant, but most of the increase in volume coming from greater rail success, and then work to the final market where we’re not bumping along at a bad rate you know, in relation to our competition in terms of our operating rate, but we’d like to be 100 percent all the time. With demand steadily improve, I think we’ll get there, but it’s going to be a fits and starts kind of environment.

Sal Tharani – Goldman Sachs

Also, Gary on the joist end of the products, where at some point I believe late last year, early this year where the price of joists was actually below the cost of steel. Has that changed? Has that been a positive right now in these products?

Gary Heasley

That has changed. The prices have come up and that’s the comment I made earlier about margins being better. Clearly pricing is not at that level anymore. It’s still a very competitive market and certainly in the east as much as in the west, there’s still excessive supply.

But we have done a lot to cut our costs, making us a lot more efficient, producing every dollar of cost we can, which has really helped us get over the hump on spreads here. So pricing is better, and cost structure is better, and together, that’s how we’ve managed to hit an operating income two months in a row here.

Sal Tharani – Goldman Sachs

Do you think the two plants you’re going to open will be profitable from the very beginning or it’s going to take you time to make them profitable.

Gary Heasley

I think it will take a little time as we build a backlog, but given the cost structure we think we’re going to have, it shouldn’t be too long. But really the major contributor is going to take some amount of increase in non res construction activity, so we’re looking at that probably more toward the latter half of ‘11.

This is a more long term investment that we think over time is going to pay great dividends, but we’re going to have to be pretty careful about how we bring it up and make sure that we’ve got the backlog in place before we put on the personnel to grow capacity.

Sal Tharani – Goldman Sachs

And last question on the rail, Keith you mentioned in your comments (inaudible) products for rail. Do you, are you selling these in shorter lengths also? I thought you were making 240 foot lengths only.

Keith Busse

We are selling them in shorter lengths also which hampers our volume metric capability because the railroads just haven’t got there. You know, it takes time to change people’s modus operandi, operating methodologies in order entry patterns and also their ability to deal with shorter product. A longer product going into their own well facilities are those under contract.

And in time, that will change because there are significant advantages to the railroads to deal with 240’s rather than 40’s. Cost of welding, that many more welds is much greater and the cost of inspecting them in the field is that much greater.

So I think it’s positively received by the railroads, but not knowing whether or not we’d ever get there and having the only facility that can do it, and weld shops that they deal with not being able to deal with it, I think requires them to go out into their own facilities and those under contract and force change to occur in terms of length.

And if they can do that, a length that they can accommodate on the entry side that is, if they can do that, I think 240’s will grow in popularity and our productivity will grow.

Sal Tharani – Goldman Sachs

Have any of the class one or class two rail companies bought 240’s yet?

Gary Beasley

I think the answer is yes. They only buy it through our weld plant because they don’t have any means in which, as Keith was saying, there’s not one of their weld plants because there’s no other producers in North America and that means factoring in greater, the Navy foot.

In just about every facility, loads and unloads off of incoming trains with a fork truck and they cannot lift anything significantly greater than the 80 foot length. So with us, as Keith said, we just decided to make 240’s and take them right to our weld plant and weld them.

Whereas when we’re servicing other people’s weld plants, we’re forced to cut them into 80 foot. And there’s also a market that we’re serving that’s 39 foot which is the traditional marketplace and we’ve just approved a $17.5 million to help de-bottleneck that processing capability at Columbia City so that we’re more efficient when we’re producing the shorter lengths which are being ordered by the railroads because they’re having to keep it.

It takes time to change. And no one buys the 240’s just to take them out in track and drop them off because they need a mini rail train for that. 80 foot lengths stay on one car and that’s the standard way we can load them today. But we have had discussions that we’re hoping to change the standard practices within the industry.

Sal Tharani – Goldman Sachs

Thank you very much.

Operator

Charles Bradford with Affiliated Research Group has our next question

Charles Bradford – Affiliated Research Group

Hi. Good morning. Could we talk a bit about the ironless supply going into the Mesabi Nugget plant? Are you getting that currently spot or contact and we’ve been hearing about lower iron ore prices in the market in the fourth quarter. Are you seeing the same kind of thing?

Mark Millett

Chuck, we’ve had a myriad of different sources, along with just a quite a large inventory that we’re carrying through to next year, and it’s a mix of current spot pricing and discounted pricing.

Charles Bradford – Affiliated Research Group

(Inaudible) they talk about you being tied up with the poly met situation. But if you get the permits by the end of next year, when would you be mining and your own product and have it into the Mesabi Nugget plant?

Mark Millett

We would hope within eight months from getting the permit.

Charles Bradford – Affiliated Research Group

Thank you.

Operator

Now we’ll go to John Simofis [ph] with John Simofis Very Independent Research [ph].

Unidentified Analyst

Good morning.

Keith Busse

Morning.

Unidentified Analyst

Steel imports have been over two million tons for the last six months of KSI data into August.

Keith Busse

What has been John?

Unidentified Analyst

Steel imports.

Keith Busse

OK.

Unidentified Analyst

Given that most of your business is relatively close to your Indiana larger mills, does this have any direct impact on your business or do you think it’s indirectly relevant as even as a semi-finished volume going into California steel for example, has some impact on the U.S. market.

Keith Busse

I think the impact is more indirect, John, and thank you for talking about semi-finished and slabs and all that as part of that two million tons. So I think the important material being put into play by services centers and OEM’s is actually significantly down as you know, and probably going to stay down.

It’s not going to change semi-finished coming into California or slab requirements by others, but I think the impact of that material semi-finished and slabs, is more of an indirect thing.

Unidentified Analyst

Does it matter enough to your business to make you wonder in retrospect if prices would be better off $10 to $20 lower in retrospect earlier this year and having fended off some of that foreign supply?

Keith Busse

I don’t think so. I think the market has a keen sense of the information age of where it’s at, whether it’s east coast, west coast, Midwest, and pricing that exists in one neck of the woods tends to be responded to rather rapidly in the other neck of the woods, so I don’t think there’s a lot of sheltering going on there.

Unidentified Analyst

Keith, would the foreign coastal supply impact where you site your next sheet mill?

Keith Busse

Would the foreign ...

Unidentified Analyst

Would import competition influence your next endeavor. And for example, might you locate an import dominated region as an opportunity.

Keith Busse

I was just going to say, I think it is the opposite. We’d have probably a negative impact on imports with our presence and that’s a positive event, although it just doesn’t allow us to serve other markets we’re not currently powerful in or don’t have the capability to serve.

Unidentified Analyst

Thank you.

Operator

Mark Parr with KeyBanc has our next question.

Mark Parr – KeyBanc

Yeah, hi Keith, can you hear me?

Keith Busse

Yeah, I can Mark. Good morning.

Mark Parr – KeyBanc

Good morning. I had a couple of questions if I could. First, could you talk at all about the kinds of spreads that you’re seeing on rail products compared to spreads on beams and the other products within Columbia City?

Keith Busse

I will tell you, it’s really hard to get your hands around that. We know product pricing on one in relation to another. The input costs aren’t a heck of a lot different, and spreads are a difficult subject when you’re running at very low operating rates we’re running at today.

Mark Parr – KeyBanc

What’s the, how does the average price on rail compare to the average price of the rest of the Columbia City portfolio?

Keith Busse

I think it’s slightly higher (inaudible) $50 to $100 higher.

Mark Parr – KeyBanc

OK. So that theoretically could be pretty helpful to profitability as you continue to increase the mix of that product going forward as that mill recovers.

Keith Busse

(Inaudible) be helpful, but it’s going to put you back as I said earlier to the level of profitability that facility is at when it’s fully loaded.

Mark Parr – KeyBanc

Right. OK. One thing I was curious about, the wells facility that you have at Columbia City, what’s the capacity of that right now? Do you have several hundred thousand tons of welding capability built into the site yet?

Keith Busse

We have about 200,000 tons or slightly more and it’s also expandable, Mark. Did you hear that Mark?

Mark Parr – KeyBanc

Yeah, I got that. And that’s really helpful. Another thing I’m curious, Jake you had talked about how it takes a while for the rail guys to kind of shift around and one of the constraints there is the longer term contracts they have with existing weld shops where they’ve outsourced that step in the process. Are these multi-year contracts? Are these annual contracts? Is it something you can make inroads on in ‘11 or do you have to wait until ‘12 or ‘14 or ‘15 before you can really see the market kind of move in your direction. You know, that being the 240 foot to 320 foot section.

Gary Heasley

The railroads are needless to say, very meticulous in their business dealings and they don’t have multi, multi-year periods. But there’s investments. There’s relationships that are existent. The weld shops are in appropriate locations based on where our competitors produce the rail or the rail is imported into, and nobody’s going to just rush off and abandon those relationships that they have.

We’ll continue to make inroads based on quality and service and so forth, but we are already quoting as we have in the past, quoted towards annual or semi- two year, six month contract with the railroads and those are not cast in stone. We are making inroads in those.

Keith Busse

Mark, I had one railroad guy tell me just recently that they were truly excited about our product, wanted to buy more from us, that they wanted to feel good about our commitment to being in this business, and I assured them we’re here to stay. So as we give them confidence in our capability on our arena rail land our willingness to dedicated time and resources to it, I think they’ll buy more and more product.

Gary Heasley

I was going to make just one clarification, Mark. On the pricing we were talking about, we’re talking about where the market’s at. We have been shipping low volumes and so forth and we’ve had higher yield issues, meaning tough performances should be more to the IQ market. We will see a significant improvement. I was trying to refer more to market, not necessarily all these (inaudible) where we’re at.

Mark Parr – KeyBanc

Great. I just, I appreciate that color. I had one other question. And Keith, I don’t know if you have any color on this or not, but given some of the – if you believe the press, you know we’re looking at some changes in Washington in the next couple of weeks, at least with the upcoming elections. And along the lines of that, has there been any discussion that you’re aware of potentially a new infrastructure build, as that is really more focused around job creation that could result in an increase in steel going into our infrastructure for ‘11, ‘12 and ‘13?

Keith Busse

I’ve only heard reference to it Mark. I don’t know if it’s substance at this point in time.

Mark Parr – KeyBanc

There is some discussion of that that you’re aware of?

Keith Busse

That I’m aware of yes.

Mark Parr – KeyBanc

OK. Any particular congressional offices that would be worth contacting to discuss that a little bit further that you could share?

Keith Busse

I don’t know. They’re all running for cover. I don’t know how much color you’re going to get out of anyone at this point in time.

Mark Parr – KeyBanc

You’re not going to get much before the election I know that. That’s for sure.

Keith Busse

I think we had a, if we had a box to check to cast them all out of office, that’d be the one that most everybody would check probably. So I think they’re in their potholes at this point in time.

Mark Parr – KeyBanc

OK Keith. Thanks a lot and congratulations on making money in a really tough environment.

Keith Busse

Thank you.

Operator

We’ll now take our final question which is a follow up from Michelle Applebaum with Phil Market Intelligence [ph]

Michelle Applebaum – Phil Market Intelligence [ph]

Hi. It’s interesting to hear all the progress on Nuggets. Can we go back and talk about what the cost of Nuggets are and compare perhaps to a more traditional DRI facility kind of thing if you were building one from the ground up or the material that you could buy, like pig or CRI in the spot market, or in a longer term contractual kind of thing? And then also, just sort of the economics.

Keith Busse

I don’t think it’s worth talking about where you are today.

Michelle Applebaum – Phil Market Intelligence [ph]

Oh, no, I don’t mean today.

Keith Busse

From productivity, I think the discussion really centers around where you’re going to be six, eight months from now with the ore content at our disposal, and that cost structure and the one you’ll have with your own ore content, and that cost structure, and you’d have to define it at full capacity, the sooner we get there. And I’ll let Mark address that.

Michelle Applebaum – Phil Market Intelligence [ph]

I’m sorry, I meant full capacity, and I actually meant the question for you Mark. Sorry.

Mark Millett

That’s OK. I think as we’ve stated in the past and given our, when we’ve been running the facility at the sort of 80 to 85 percent capacity level, the consumption numbers, natural gas consumption numbers I think we’ve confirmed it’s going to meet our expectations. And so with our own concentrate, which we have told you in the past will be fully loaded in the $40 to $45 range that would give you nuggets in the $300 to $325 range. And current concentrate price today adds about $120 to $140.

Michelle Applebaum – Phil Market Intelligence [ph]

And how does that compare over the cycle to market prices for comparable material and how would it compare if you were doing a more traditional way?

Keith Busse

Well $300 a ton is a heck of a lot better than what you can buy it at, let’s put it that way. It probably includes in time profit to the mining industry as well. But I’m not so sure it compares all that favorably to a fully appreciated mining operation that exists on the range today.

Michelle Applebaum – Phil Market Intelligence [ph]

Nothing would compare to that.

Mark Millett

Mine costs, if you just take out the fixed cost, you know a mine today is probably going out of the ground for about $21 to $23, and to honest we’re not going to be much different than that. We’re probably going to be $25 to $26.

Michelle Applebaum – Phil Market Intelligence [ph]

That’s (inaudible), right?

Keith Busse

On a depreciated basis, what he’s saying to you is that if they’re at $23, we may be at $26. We may be $3 more expensive than the existing well refined assets.

Mark Millett

And then you load that up with depreciation, interest, that’s where you get up to the $40 to $45.

Michelle Applebaum – Phil Market Intelligence [ph]

And a lot of the older facilities don’t necessarily have such depreciation.

Mark Millett

No, we’ve only been able to glean their operating cost structure. We don’t necessarily know whether the mines up there even know what their cost is to be honest with you.

Michelle Applebaum – Phil Market Intelligence [ph]

No, it’s difficult. You can see some of it implicitly in their numbers, but it’s very difficult. And those are all assuming you’re where you want to be on the production side.

Mark Millett

Yes.

Michelle Applebaum – Phil Market Intelligence [ph]

But then what about product capabilities? Would we be seeing you be able to expand the products that you offer on the flat roll side and maybe even SBQ because of this, or no.

Mark Millett

I think from the standpoint of product capability on sheet and engineered rolls it would have the same basic positive characteristics as pig iron today. We would pick up added productivity perhaps, and better quality as we continuously feed it during the melt process, but it’s essentially pig iron.

Keith Busse

It’s got better yield.

Michelle Applebaum – Phil Market Intelligence [ph]

Ok. That’s great. OK. Thank you.

Keith Busse

Thank you. Karen, does that conclude it?

Operator

That does conclude our Q&A portion of today’s conference.

Keith Busse

It’s been a long call, but a good call and I want to thank everyone for joining us and thank you for your continued support. To all of our employees that are listening, thank you for the wonderful job you’ve done throughout these very difficult periods. Until next time, we’re signing off.

Operator

Once again, that does conclude our conference for today. Thank you again for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Steel Dynamics Incorporated CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts