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

Executives

Keith Busse - Co-Founder, Executive Chairman, Chief Executive Officer, Chief Executive Officer of Iron Dynamics Inc, President of Iron Dynamics Inc and Director of Iron Dynamics Inc

Richard Teets - Co-Founder, Executive Vice President for Steelmaking, Executive Director, President of Steel Operations and Chief Operating Officer of Steel Operations

Gary Heasley - Executive Vice President of Business Development and President of New Millennium Building Systems

Mark Millett - Co-Founder, President, Chief Operating Officer, Executive Vice President for Metals Recycling & Ferrous Resources, Executive Director, President of OmniSource Corporation, Chief Operating Officer of OmniSource Corporation and Director of Iron Dynamics

Theresa Wagler - Chief Financial Officer and Executive Vice President

Fred Warner - Manager of Investor Relations

Russell Rinn -

Analysts

David Cass

Timothy Hayes - Davenport & Company, LLC

Arun Viswanathan - Susquehanna Financial Group, LLLP

Luke Folta - Jefferies & Company, Inc.

Timna Tanners - UBS

Mark Parr - KeyBanc Capital Markets Inc.

David Lipschitz - Credit Agricole Securities (USA) Inc.

Evan Kurtz - Morgan Stanley

Kuni Chen - CRT Capital Group LLC

Michelle Applebaum - Michelle Applebaum Research

Aldo Mazzaferro - Goldman Sachs

Brian Yu - Citigroup Inc

Sal Tharani - Goldman Sachs Group Inc.

Michael Gambardella - JP Morgan Chase & Co

Steel Dynamics (STLD) Q2 2011 Earnings Call July 19, 2011 10:00 AM ET

Operator

Good day, everyone, and welcome to today's Steel Dynamics Second Quarter 2011 Earnings Conference Call. Today's conference is being recorded. Joining us today are Keith Busse, Chairman and Chief Executive Officer; Mark Millett, President and Chief Operating Officer of Steel Dynamics Inc.; Richard Teets, Executive Vice President of Steel Dynamics Inc. and President and Chief Operating Officer of Steel Operations; Russell Rinn, Executive Vice President of Metals Recycling and President and Chief Operating Officer of OmniSource Corporation; Gary Heasley, Executive Vice President of Steel Dynamics Inc. 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 now turn the call over to Mr. Fred Warner. Please go ahead, sir.

Fred Warner

Good morning, and welcome to the Steel Dynamics Second Quarter 2011 Conference Call. The call is being webcast live, July 19, 2011, from Fort Wayne, Indiana. Later today, you will be able to replay the call from our website or download the call to listen to it at a webcast.

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 facts, are often preceded by such words as believe, anticipate, estimate, expect or other conditional words.

[Technical Difficulty]

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 projections that may be made today.

Some factors that could cause actual results to differ materially include general economic conditions; governmental, monetary and fiscal policies; industrial production levels; changes in market supply and demand for our products; foreign imports; conditions in the credit markets; 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 the actual results to differ materially from today's forward-looking statements. Refer to sections 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 on the SEC website, www.sec.gov and on our website, www.steeldynamics.com.

Now we will open today's call with an introductory discussion by Keith Busse, SDI's Chairman and Chief Executive Officer.

Keith Busse

Thank you, Fred. Good morning, ladies and gentlemen. Before we begin this morning, I would like to introduce to you Russ Rinn. Many of you know Russ. He joined our team, and he will be running the recycling segment of the business. Many of you know him from his days at Commercial Metals, wherein Russ met with many of the analysts to follow both companies and we are tickled to death to have Russ on our team with us here today.

As to the results for the second quarter, I basically tell you that when you do the pluses and minuses with the hedging, things of that nature, we essentially had the same kind of a quarter. It was -- on a net income basis, it was $99 million, slightly less than $106 million we reported in the first quarter or $0.43. That $0.43 was positively impacted by a tax entry to the tune of a $0.01 and negatively impacted by hedging losses to the tune of about $0.01. And as you compare that against the first quarter which was $0.46, it was impacted by about $0.03 from a hedging perspective on a positive sides. So if we cut back all that noise out, the quarters were essentially about the same, which I think is what we're attempting to do for you in paragraph 2 of the press release.

In talking about shipments, they were essentially the same as they were in the first quarter, 15% higher than 2010, and the average underline external steel selling price per ton shipped on the second quarter increased by $118 and $947 from the second quarter average of $829 and increased $57 from the first quarter average.

The next paragraph talks about scrap, and I just want to provide a little bit of clarity there for everyone. A lot of people, like to this [indiscernible], we had a increase in revenue of $57 and increase in scrap of only $15, shouldn't that just fall to the bottom line, it doesn't really work like that. And I want to point out that internal sales are included in our results as reported, but we're really reporting on external steel selling prices as we always historically have. I also want to mention that the tax are in these numbers and that's a value-added product, #1, and #2, it doesn't carry a scrap component which is probably the biggest disconnect. So you can't just take $57 subtract $15 and multiply times some number of internal tons, which you can't find here on the front page, and have results. It doesn't work that way. I think most of you know that already and probably understand that, but just wanted to really point that out to you.

So if you look at our overall earnings posture here in this quarter, we had little bit better results as regards steel and a little worse in the results in Recycling and Ferrous Resources, which we had not contemplated. So, one, basically offset the other and provided essentially this same kind of quarter.

As to where are we today and so on and so forth, and I think that's really the issue at hand, the Flat Roll, there's volatility in order entry in Flat Roll. One minute, we're flying high, and the next minute, the orders are somewhat weak. So it's a little uneven in terms of order entry in the second quarter. But the order book at the Structure Division, although -- though we're near what we need to sustain a healthy level of net income has improved. We have a better backlog in the structural arena today. The backlogs of SBQ bars remain very, very healthy yet, and operating results there were very good. We were profitable in Structural and Rail, you should know that. But a really great quarter in SBQ, still West Virginia did a good job, and we are profitable down at Roanoke. So as we head into the third quarter, like I said, there's some money with us there. And as you all know, the transaction values have come down during the quarter and scrap hasn't. So there has been a lot of chatter on the airwaves about margin squeezes, things like that, and as there should be.

I think overall, as you look towards the third quarter, my guess is the average selling value is going to be down in the neighborhood of $40 to $45 per ton, but if you look at just Flat Roll, they're going to be down $60, maybe $65, now somewhere in that area, but mitigated by values that weren't changing as dramatically as Flat Roll during the quarter. So there is going to be some margins squeezed there undoubtedly.

Scrap, we think could be down, by the time the quarter is over of maybe $5 maybe on an average. But we do anticipate seeing scrap weaken going into the August and September timeframe. Steel selling values have come down but scrap, as you know, has remained fairly flat to up a little and certainly that cart is way ahead of the horse I think. And steel selling values have started to come down, I would expect scrap to weaken. Although I will tell you, I'm in the same camp that a lot of people are that I think we've kind of reached the bottom in terms of retrenchment and selling values, and I think we'll see, given the weakness in inventories that are out there, I think we'll see order entry pickup and perhaps pricing start to reverse horse sometime during the quarter, with that of an impact that's really going to have on us is yet to be seen because the backlog in Flat Roll lead times are so short yet today.

Given the fact that we did talk a little bit about in the press release the upcoming quarter, last time, I would have told you that a fairly solid quarter, one quarter equaled another, even though that's not the way the analysts started to write about it. So I want to mitigate that and tell you that in light of the economic circumstances that are out there, in light of the weakness that has been prevailing in the last month or 2, especially in Flat Roll, we're not going to be able to repeat the quarter given the economic climate. But given the economic climate, I would tell you, it's still going to be a fairly solid quarter. We will have -- we'll better be able to define that for you going forward. It'll be impacted by a margin squeeze and also I might point out to you with the kind of heat wave that's plaguing the nation, the buy-through pricing to run some of our shops just makes it uneconomical to do so. So we're probably going to take some months during this timeframe, which is also going to have somewhat of an impact on the quarter. But the message I guess we're trying to send, it's going to still be a very profitable quarter, just I wouldn't anticipate it being in the 40s but rather in the 30s, and we'll have some tighter numbers for you as we walk forward with that.

We have made progress at Mesabi Nugget. Mark will report on that. And we have weaker quarter operationally in Recycling, and I would tell you that that's principally driven by offshore demand more than anything, although I tell you, there's just too many buyers, sometimes chasing too few tons out there, and I think you can't do a lot about with the transactions but you can do something about what you're buying at. So perhaps some of that squeeze were our own worst enemy with regard to buying habits. But I would tell you the whole of the quarter turned out to be a fairly good quarter. As I said, I think we're nearing a bottom in terms of this cycle, and we'll probably see a healthier order entry environment improving pricing going forward in the quarter, although the quarter in and of itself maybe a little bit weaker than the first 2, but not off tremendously and that's the kind of message we were trying to send. So with that, I will end my comments and turn it over to Mark Millet at this point in time. Mark?

Mark Millett

Super. Thank you, Keith. Good morning, everybody. I guess firstly, let me take this opportunity to again welcome Russ to our organization. Russ, as many of you know, brings a broad comprehensive perspective on our industry both on the steel side and on the [indiscernible] sides of our business. His values and business philosophies parallel I believe those that have driven SDI success in the past. And most importantly, I think he found his people and will be a great cultural fit. So in behalf of OmniSource team, welcome.

Referring to OmniSource, ferrous scrap flow as you saw was strong through the quarter allowing shipment of 1.6 million gross tons, a slight increase relative to Q1 of 2011. Non-ferrous volume was 255 million pounds, down 11% quarter-to-quarter. And that was principally driven by lowest payment in the shipments, a little bit less aluminum but principally stainless.

On an annualized basis, these shipping volumes paralleled the high shipping rates OmniSource experienced in the period 2006, '07 and '08. Given the depressed economic environment and the low utilization rate of the domestic steel industry, such levels I believe are testament to the talents and hard work of the OmniSource team, and I'd like to applaud each and every one of them.

Although we did not expect to emulate the significant profitability of the first quarter, the financial performance in Recycling Division was still disappointing. Our operating income dropped to $18 million, down some $31 million from the $49 million achieved in Q1. Although ferrous shipments were strong, ferrous metal spread contracted quarter-over-quarter. The first quarter was the beneficiary of low price inventory accumulated during November and December that was liquidated in the strong upturn in the market in January. In the second quarter, the market was more stable, and we were unable to take advantage of such market positioning.

Further earnings compression was related to non-ferrous market activity, as we witnessed corrections in all the commodities that we sell. In stainless, inventories accumulated by the mills early in the year, dampened the demand and pressured market pricing. Our stainless shipments were off 34% from the first quarter, while margin evaporated as market pricing fell from its February peak and high-priced inventory flowed through our system.

Finally, as Keith suggested of significant financial impact was a swing in the nonferrous hedging position, during the first quarter unrealized hedging gains of $9.5 million were recorded or the change in market pricing through the second quarter, drove an unrealized loss of $4.8 million that resulted in non-cash fluctuation and pretax earnings of some $14.3 million.

OmniSource continues to pursue a strategy of volume growth with a focus on margin expansion, 8 new retail locations have been opened year-to-date as we rebrand that side of the business, with the intent of making all our locations customer-friendly and a place to shop to bring your scrap. Our shredding facilities have been upgraded to increase volume and state-of-the-art [indiscernible] separation technology prepared to be installed to maximize value of the material stream.

Technology has been installed at our Fort Wayne facility to provide value-added, low copper shred to the market. The concept has proved successful year-to-date and will be expanded to other divisions through the year.

In May, SDI LaFarga commenced construction of the new copper rod production facility in Fort Wayne, but anticipated startup in the summer of next year.

Capital expenditures are expected to be around $40 million, capacity 180 million pounds per year and employment of about 40 people.

At Iron Dynamics, the folks continue to operate very, very smoothly. 60,000 metric tons of liquid iron and HBI were transferred to the Butler sheet mill during the quarter, providing an effective operating income of approximately $10 million.

I think on an interesting note, the team shipped it's millionth ton in June, a milestone that is a testament to the perseverance and hard work that they've been to us and his group.

Additionally, the current SCF refractory lining will be replaced after by 380,000 metric tons, which is a long cry from the 2,000 tons that the first line had some years ago. It's a true pioneering effort on their part.

Progress continues as Keith said at Mesabi Nugget. After the 3-week outage In May for furnace refractory repairs, the team recorded its best production month to date in June. A total of 38,000 metric tons were shipped during the quarter. Start up losses from Mesabi negatively impacted consolidated earnings by some $13 million.

Relative to mining, the state has designated a new project manager that we hope will accelerate progress. However, no progress has been made in recent weeks to the government shutdown at Minnesota, and hopefully they resolve that issue up there. But again, it's slowed our progress down.

In the meantime, we are exploring the recovery of iron concentrate from tailings basins on the range through a mining technique called scram mining. This is an attempt to bridge the time until full-scale mining can be implemented at our own Hoyt Lakes facility.

This technique is being commercially demonstrated on a day-by-day basis by a company called Magnetation, a startup company founded by Larry Litton who as many of you know, was an individual formerly associated with both Iron Dynamics and Mesabi project.

They have been a consistent supplier of concentrate to Mesabi and have shipped approximately 200,000 metric tons to date. Our plan would be to partner with Magnetization and develop our own supply.

And with that, I'd like to hand it to...

Keith Busse

Before we do that, perhaps Russ would want to say anything, say hello?

Russell Rinn

Well, I just -- thank you, Keith, you and Mark for the introduction, kind introduction. I'll just say this morning habit, thanks for the fire, I was being very quickly, and it's a welcome sip of water. But I'm enthused and excited and truly, truly proud to be part of the Steel Dynamics team and I'm excited for the opportunity that for the entire company. So thank you for bringing me on board.

Keith Busse

Thank you. Dick?

Richard Teets

Okay. Thanks, Mark and Keith. Good morning, everyone. I'd like to give a few additional comments. Quarter has already been [indiscernible] there in the press release or on the call this morning about the steel operations. At the Flat Roll Division in Butler and Jeffersonville, production of hot band in the second quarter was the highest ever.

Over 750,000 tons of hot bands were produced. This supported the strong downstream galvanizing and painting operations. Last week, the Butler mill was down 4 days as repairs were made to the mill in general and to the static substation equipment that we previously had mentioned was damaged on February 1 during a wind and ice storm. The engineering, maintenance and production personnel have all been very creative in transforming a potentially catastrophic situation into a record-breaking performance. Thank you to all involved.

Backlog at Butler remains solid as Keith mentioned for all products with a slight weakening in hot band. But as he mentioned with the production containments due to high temperatures, the impact will be minimized.

At the tax, the 3 lanes ran with an average of about 75% of graded capacity in the second quarter. We have similar to slightly downward opinion of the third quarter at this time. Congratulations to the texting as the 3 lines did achieved a recordable free safety performance in the second quarter. At Columbia City where the construction activity at or near the 2010 level, as [indiscernible] the report on being [indiscernible] production.

Over the medium section mill, last week, the team broke the shift's daily and weekly production records with the best yields ever. Congratulations to all for this achievement on maintaining a 0 safety incident record.

As to rail production, the prime shipments here to date approached 60,000 tons, with production yield records being recognized. The $17 million rail finishing project to debottleneck the mill is on track for commissioning at year's end.

Pittsboro continues to have the best backlog in the steel group, first and second quarter discussions for 2012. Our commitments in pricing are under way.

The melt shop broke the monthly production record in May and then turned around and did it again in June.

The rolling mill also broke its production record in June and the bar finishing continues to set records in regards to percentages of shipments. All these performances occurred in spite in June of free incidences of power curtailment and it only being a 30-day month.

The rolling mill took a 10-day out extended outage for maintenance purposes in April to make the repairs to the furnace and to install capital improvements. Much of the equipment installed will debottleneck the stacking and bundling area on certain progress.

It wasn't too long ago that we celebrated when the Pittsboro team in casting hot rolling shipments all exceeded 50,000 tons in a month. While in June, a 60,000-ton performance in all areas was narrowly missed by few hundred tons of shipment, a tremendous job by all. Thank you.

Columbia City continues to be negatively affected by the lack of improvements in construction activity. But the plant did have the highest capacity utilization rates in the quarter since 2008. The melt shop achieved 96.6% and the rolling mill, 91.2%, a very good job in a tough market.

At Steel of West Virginia, the core transportation markets of truck trailer and industrial forklifts, continues to improve. The second quarter shipments increased 4% over the first quarter shipments. In contrast to the first half of 2010, the first half of 2011 has seen the melt shop produced at a 6% higher tons per hour rate, the #1 rolling mill at an 8% higher, and the #2 mill at 19% higher hourly rates.

The finishing department will be commissioning a new robotic welding line for truck trailer products in the third quarter of this year. Capital improvements at Steel of West Virginia and improved scheduling continue to deliver benefits to the team. Congratulations to everyone involved.

Gary?

Gary Heasley

Thanks, Dick. A few comments on New Millennium. Obviously, non-residential construction remains very weak. However, bookings for the joist industry are 15% year-over-year through May, indicative industry shipments were up 25% through March, both positive indicators. There is some concern that, that positive momentum may slip away a bit here in the second half. We'll see how things go.

In response to the stronger order entry for the industry and New Millennium penetrated new markets, our backlogs are up 30% for joists and 18% per deck. We're expecting 2011 to be a slightly stronger year for joists and deck, but again it remains unclear how strong it will be. We're not yet giving up around which is good news.

Our facility in Juarez, Mexico has been ramping up production over the first half and generated its first operating profit in June. Congratulations to the team in Juarez, and for the group, production in sales increased both year-over-year and sequentially. Our margins in the quarter were squeezed by steel cost increases that hit this quarter.

Excluding construction costs, start-up costs and costs associated with idle assets, the plants we are operating generated a small operating profit for the quarter which is a good indication that results should continue to improve as market conditions gradually improve. And our facilities in Arkansas and Nevada are nearly ready to commence operations. We'll start up gradually as the backlogs support the addition of production personnel, which it again further positively impact results.

So the market remains very tough, but there's a lot of good news and things gradually, day by day, seem to be getting a little bit better. Keith?

Keith Busse

Obviously, your losses as a group have been counting down, and I think given the climate that's out there, there's some uncertainty. We are hopeful that we can stop hemorrhaging and, at least, break even here in the third quarter fabrication. Theresa?

Theresa Wagler

Thank you, Keith. Good morning, everyone. During the second quarter, we had 2 nonoperating items of note -- that I'd like to just mention. The first, as you've already heard, involved the non-cash impact of an unrealized mark-to-market adjustment, which impacted the quarter negatively by about $0.04. And then, we also had -- I'm sorry, with a quarter-over-quarter change of $0.04 that impacted the second quarter by about $0.01. And then the second item of note which caused slight change in the Indiana state tax law, which reduces the state tax rate from 8.5% to 6.5%. The rate reduction is allocated over a period of years, becoming fully effective in 2016. Based on current estimates, we reduced our deferred tax rate from 38.5% to 38.1% effective June 30. This increased our quarterly earnings by about $0.01 per diluted share. Our effective rate during the second quarter with noncontrolling interest was 35.8%, compared to 37.4% in the first quarter.

There have been some questions regarding other income in the quarter as well. Other income consists of interest income from fundings that we have available on our balance sheet, as well as equity income from certain very small joint ventures that are at recycling area, which did improve the profitability this quarter. And then it also includes such items as insurance proceeds, et cetera. But I'd like to note that there was nothing that occurred in this quarter that was significant or unusual.

During the second quarter of 2011, our consolidated EBITDA margin remained steady, even though our gross margin percentage and our operating income margin decreased slightly in comparison to the sequential quarter, although all of these metrics improved very nicely from 2010 results.

Availability on the revolver was $907 million at the end of June and our liquidity remains very strong and actually increased to $170 million during the quarter. So that our liquidity stands today at $1.2 billion.

We remain well within compliance in our financial covenants. Our ratio of total debt to trailing EBITDA improved during the quarter to a current level of 3x, which is compared to 3.7x at the end of December.

Cash flows from operations provided $166 million of funds, as working capital was fairly neutral in the quarter after being withdrawal of funds in the fourth quarter of 2010 and the first quarter in 2011 as we were ramping up operations based on improved demand. We believe our working capital position is currently sufficient, and we don't anticipate any meaningful use of funds in the near term.

During the second quarter, our capital expenditures totaled $35 million, depreciation remained at $44 million and capitalized interest related to those projects were less than $1 million.

Our current outlook regarding capital expenditures for the second half of the year would be in the range of $100 million to $150 million.

Depreciation for 2011 is still expected to be in the range of $200 million. Gross interest expense for the quarter was $45.2 million with effective interest rate up 7.3%. At June 30, we had 218.6 million shares of common stock outstanding. And additionally, we had 16.4 million shares underlying our convertible securities and 7.5 million outstanding stock options.

Our current expectations for the current third quarter diluted share count is in the range of 236.5 million to 207 -- excuse me, 237 million shares.

And lastly, there are many of you that like to know the composition of our Flat Roll shipments during the quarter. For hot Roll, the shipments were 291,000 tons; [indiscernible] and oil, 73,000 tons; cold roll, 41,000 tons; hot roll galvanized, 111,000 tons; cold roll galvanized 53,000 tons; [indiscernible] 89,000 tons; and finally, Galvalume, with 22,000 tons for a total of 680,000 tons. Keith?

Keith Busse

Thanks, Theresa. I don't think you mentioned, but our leverage is now what, 51 49?

Theresa Wagler

Our debt to equity capital ratio, yes.

Keith Busse

All right. Down a little bit where we've been. And when you look at converts, if you think about the converts, its equity, it's nigh-on 45 55, so going in the right direction.

Theresa Wagler

Absolutely.

Keith Busse

Thanks, Theresa. Jim, it's time for the Q&A. So let's open this conference call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Kuni Chen from CRT Capital Group.

Kuni Chen - CRT Capital Group LLC

I guess just first off, can you comment a bit on the piece of order entry, July versus June, maybe talk about that in Flat Roll and Structural and just talk about things tracking on a sequential month basis?

Keith Busse

At the end of June, order entry started to head downward. And just recently again, it started to pick back up. So you might say it reached the bottom of the dip for us somewhere around the early part of July.

Kuni Chen - CRT Capital Group LLC

And that's just the Flat Roll comment or that's across-the-board?

Keith Busse

That's just flat rolled. Order entry elsewhere has been pretty good. Actually, pretty steady, at Structural backlog being higher. It's been fairly good in the second quarter from an order entry perspective. Clearly, as you heard Dick talking about SBQ, talking to people about first and second quarter of 2012, backlogs Steel West of Virginia are excellent shape, that team is doing a great job. We're turning out a profit, with fairly healthy volumes in their backlog. And Roanoke's backlog hadn't changed a lot but it usually doesn't. And we do anticipate Roanoke probably making a little bit more money in Q3 than they did Q2 with the backlogs are essentially unchanged there.

Kuni Chen - CRT Capital Group LLC

Okay, great. And then just one follow-up here. Can you just give us some color on what you're seeing in the competitive environment? Any impact you're seeing in the market from some of the new capacity starts?

Keith Busse

Dick, I think, will be able to better speak from that. I have not heard that our team has been impacted at all by RG at this point in time. Obviously, some results impact just starting to be felt whatever it is, but I don't know that we've encountered them in the market, but I wouldn't say it's all that impactful. Dick, you might better comment on that.

Richard Teets

I would just build on that, that the -- let me say, with our tax being in our sourcing opportunity from the outside, we do have run into -- -- RG with them as a supplier on a minimum basis, and I do see some product from [indiscernible] but it's not -- we don't see it as a downward pressure. At this moment, it's more a little more talk than there is impact at this moment. But they're real, and they'll be dealt with.

Operator

We'll take our next question from Brett Levy from Jefferies & Company.

Brett Levy

Some of the bigger moving parts, can you guys talk about sort of the discussion, approval process regarding potential new southern sheet mill. Obviously, I think you mentioned you need 11 board votes to get it. Is there kind of a continued evaluation process? And then, also as it relates to kind of the CapEx plans for some of the bigger pieces as you guys continue to build up Mesabi Nugget, can you talk about the timing of that CapEx as you now plan it?

Keith Busse

Well, not a lot has changed as we talked. We only have 11 directors, so you only need 6 votes. But we would like to see uniformity. But I think if you took the board's temperature today, it's improving. I think they're becoming more positive about the project. I don't think it has anything to do with its impact on Butler. Market studies would show that there's very little impact to Butler. Financially, it's certainly affordable, still in the billion-dollar range. It's not going to come online to 2014. As we've said earlier, that ought to be an entirely different economic climate than we're seeing today, much easier to fit into with hopefully demand and well in excess of 100 million tons. Still growing today, albeit slowly but growing. So it's -- I think their concern like any other directors' concern is more about where is the nation heading. And what are the barriers to continued success and continued expansion of our economy. And I think everybody's getting a little uptight and paranoid as they ought to be about the level of indebtedness, the inability to find a compromise on those issues, to get to a balanced budget kind of environment. I think there's get a lot of conversation about stimulating the economy with a corporate tax rate decline, things that actually might stimulate the economy. So if there's anything related to the other project, which is a couple years off, there's more to do with the economic climate at hand than anything. People are talking about double-dip. I'm still not a guy convinced that that's going to happen. I think slow steady, maybe yet uneven growth is out there, but it's going to be growth I think. And so I think it will be a topic that's discussed a lot again here in our August meeting and we'll let you know if there's any seachange at that point in time. As to your questions on CapEx for Nugget whatnot, and where that project is going, and when we might achieve success and what might that mean for additional capital expenditures down the road, I'll let Mark speak to that.

Mark Millett

I think from -- our best guess for the permit for the mining up in Minnesota, we would hope to get a permit probably by the end of 2012, so that we actually start construction of the mine in 2013. So I think we have $150 million allocated or approved for that. But that's not a 2013 type expenditure. Obviously, the expansion of Mesabi Nugget itself into module 2 or 3, we wouldn't necessarily entertain that until we do have a concentrated supply, sort of almost empty. Relative to the scram mining of the tailings basin as I suggested earlier, we're exploring that. That could be perhaps a $40 million to $50 million expenditure, and if we go forward, it would be kind of a Q4 of this year going into first half of next year.

Brett Levy

And then with respect to the curtailments you guys talked about potentially, can you talk about sort of the size or length that you're considering at this point of the third quarter?

Keith Busse

Well, Brett, I don't think there's so much -- they may curtail us on a very, very hot day. We're under some strain and some pressure here and there, but it's more about the price of power. We're already seeing squeezed margins on pricing in relation to input costs that the principally scrapped and some iron content, but clearly, when the price power goes crazy and you can buy through and it's up $100 a ton, you're not going to do it. You start to take yourself into a loss position potentially. So it's more about us not wanting to run perhaps than it is not being allowed to run. Dick, is that...

Richard Teets

And these are midday to 8:00 to 9:00 at night issues curtailed yesterday or they may get curtailed today. I mean, we're forecasting mid-90s here in Indiana, and that it's a possibility. But this week, it's going to be a hot week, but hopefully that things will cool off, and we'll get back to more normalcy here. Though it's not a third quarter major issue, right now it's a July.

Keith Busse

And as Dick pointed out, that probably fits our order entry pattern from 3 or 4 weeks ago pretty well.

Theresa Wagler

Brett, I would also add, of the $100 million to $150 million of CapEx we talked about, what Mark has mentioned, Mesabi potentially represents within that 5 -- I'm sorry, $45 million to $55 million, so that's why there's such a wide range we could begin and dependent upon some of the scram mining that we talked about.

Operator

We'll take our next question from Luke Folta from Jefferies.

Luke Folta - Jefferies & Company, Inc.

First question here, just wanted to talk a little bit further about what you guys could be doing with Magnetation. Disregarding your intentions there, would this be something like a joint venture with those guys or is this -- would you be buying a license from them? How would that work?

Keith Busse

It would be a joint venture, Luke.

Luke Folta - Jefferies & Company, Inc.

Okay. And would you expect that to have the capacity to enable you to stop buying from Cliffs or other outside sources or will it just be something that will supplement that supply?

Mark Millett

We have a contractual supply from Cliffs for this year and next year, but it would be the intent to have the scram mining supply all our needs in 2013 and '14.

Luke Folta - Jefferies & Company, Inc.

Okay. Are there minimum quantities you have to buy from Cliffs next year?

Mark Millett

Yes, we got a contract with them.

Luke Folta - Jefferies & Company, Inc.

Okay. And then just secondly, you've mentioned, Mark, that there's some -- you had expanded 8 new facilities for how many source? Can you give us a sense of how much capacity that might have added?

Mark Millett

Well, they're new locations and so its customer by customer by customer. The actual volume, right at this second, Luke, I wouldn't be able to give you a precise number.

Keith Busse

They're probably more retail yards than they are -- yards that'd have, necessarily an investment -- they wouldn't have shredders, and I'm sure they wouldn't have a bailer.

Mark Millett

These yards with the essentially no real equipment, at least, their processing equipment and our focus on higher margin. If you look at your margin, material margins through our various material streams, obviously, brokerage is the slimmest. You may make $5, $6, $7 a ton or so on brokerage. And industrial accounts today for prompt scrap, it's very, very competitive, you can make $15 to $20 a ton perhaps. Retail remains absolute scrap. Retail remains the larger margin opportunity for us. So we're going to exploit that arena. With the feeder yards or the retail yards , obviously, the intent would be at a later date as the volume grows and processing depending on the experience of the volume.

Luke Folta - Jefferies & Company, Inc.

And just last question. Just in regards to your Pittsboro operation. Are you seeing -- are you starting to see some of the benefits from the price increases that have been announced recently for SBQ? And also, I wanted to ask if you could give us some sense of what your mix is between large and small diameter SBQ bars?

Keith Busse

Well, I'll take a wing at that. From a price increase standpoint, It's on call minimal but we have a lot of pricing mechanisms that are in place, and those follow either market indices or in a trailing manner. And some of them also, needless to say, are spot purchases and those are the ones that are affected by price increases. And one of our competitors just rolled out price increases effective November 1, trying to give everyone opportunity to recognize the requirements and do some planning. And, of course, we follow any of those and lead some of them ourselves. So yes, we're taking advantage of every pricing increase opportunity we have available to us, but it doesn't affect even 50% of our tonnage of shipments. As far as split between small and large diameter bars, and we really look at it 3 ways, small, medium and large, we don't do a lot of large bar product. The biggest that we can roll round is about a 9-inch, but we don't get the reduction required for quality purposes until we get down about 6.5 inches, 6 3/8-inch bar. And so large bar is a very minimal amount of our tonnages, on an annual basis, maybe 15,000 tons or so. So we don't recognize this as large. Medium, I would tell you, is the largest portion of our shipments, in a year, maybe 300,000 tons, 275,000 tons would be achieved. And our small bar, we don't get down to smallest normally that the mill is capable of because we have such a good medium section market, and we probably ship about 175,000 to 200,000 tons of small bar diameters.

Operator

Moving on to the next question from Michelle Applebaum from SMI.

Michelle Applebaum - Michelle Applebaum Research

My question is this. Looking forward on the Columbus expansion, I was wondering, is that big enough that you could hit the prime scrap pool, at the same time add new capacity? I know we take for granted that higher scrap prices mean higher steel prices. But we've seen some prior startups where the raw material pull is pressured a little bit during the startup while new capacity is added and prices are pressured in the other direction?

Keith Busse

Michelle, define Columbus.

Michelle Applebaum - Michelle Applebaum Research

I'm sorry?

Mark Millett

Are you talking about Semicore, Michelle?

Michelle Applebaum - Michelle Applebaum Research

Yes.

Mark Millett

Well, I think Columbus itself, Michelle, is not going to be a massive enough change to dry the market. I think just the prime market in general is going to be under pressure. Obviously, the manufacturing -- domestic manufacturing is down. Prime scrap is not being generated at the same volumes as we've historically seen, and the mills' inventories today on the prime side are pretty tight. So I think prime scrap [indiscernible] is kind of the volatile agent and it's just the overall demand is going to drive the pricing, not just Semicore itself.

Michelle Applebaum - Michelle Applebaum Research

So Semicore is just one piece of the equation?

Mark Millett

Yes. Obviously, any demand in a tight market is going to impact it.

Michelle Applebaum - Michelle Applebaum Research

Okay. Then my other question is with regard to Nuggets. I'm confused about the timing of when -- and I hate to ask you this. But we talked a lot about when you expect it to hit break even. And I hate asking with the new process I've learned from experience, sometimes the answers we just don't know, and having to deal with. And again, this is a being public issue where you should be investigating science projects like Mesabi Nugget and other things like that and having to report quarterly results and give a projection on when you breakeven. It's very difficult to understand that. But I have different things -- conflicting things in my notes from these calls in terms of the timing and the conditions on when you expect to break even. Can you give an update, or is the answer you just don't know?

Mark Millett

I Appreciate your thought on the longer-term horizon as opposed to what we're doing next week, so to speak. Because, again, just as Iron Dynamics was our pioneering effort, that was a long-term vision. It's come to fruit, and we're benefiting from it today as we benefit from Mesabi Nugget.

Michelle Applebaum - Michelle Applebaum Research

And I just -- forgive me for interrupting, but if we care and worried about when something would hit profit so intensely, Crawfordsville would never have been built. So it's a real issue. I'm not just being nice here. I think it's a real issue. But go ahead.

Mark Millett

I think what we have said in the last couple of calls, and I will sort of reiterate, as long as we can get some volumes over the next few months, we would hope to present a monthly basis. It won't be the whole fourth quarter. But we would hope to get a month under our belt yet this year as sort of breakeven level.

Keith Busse

Michelle, I think the scram, I would agree with Mark that, that is a possibility later this year, reiterating stock quarter or perhaps a month. But the effective of scram mining and those input costs on a JV basis could be material. With that same considered volume that Mark just spoke about, that the impact of scram would be substantial and could make it very comfortable.

Mark Millett

Sorry, Michelle, just one added piece of color. If we're willing to go positive or barely breakeven here, yet this year, we're probably going to see early next year as it turns slightly negative as high concentrate cost hit us. And then, hopefully, the volume will kick in and we will be positive again.

Keith Busse

The impact would be second half of 2012.

Mark Millett

Yes, we would hope to get lower cost concentrate in the second half of 2012.

Keith Busse

Michelle, it's materially lower, would nicely drive profitability.

Michelle Applebaum - Michelle Applebaum Research

That's great. Are you looking for joint venture partners for the operation now that you're getting closer to it being more fully proven out?

Keith Busse

Joint venture partners for scrap mining?

Michelle Applebaum - Michelle Applebaum Research

No. Nugget?

Keith Busse

No, as Mark said, we need a client in which we have a proven technology, intel and a mining permit that could drive profitability. If we have the promise of a permit coupled with scram mining, that's a pretty easy decision but you have to get there first.

Operator

Moving on to the next question from Michael Gambardella from JPMorgan.

Michael Gambardella - JP Morgan Chase & Co

I have a question on the Recycling business. You paid a little bit more than $1 billion I think at the end of 2007 for OmniSource. And clearly, no one saw the downturn that we had after that, but also you'd have to say that recycling business so far has been a disappointment in terms of the returns. Couple of questions. One, I don't want to put Russ on the spot right now, although if he want to chime in, feel free. But what do you, Keith, think have to be done at recycling to really turn it around? And then the second question is are we seeing some of the earnings benefits of recycling in the steel operation numbers and we just can't see them from outside?

Keith Busse

Well, it's transferred pretty much at markets, so I would tell you, you're not seeing much of it there. We transfer our material at [indiscernible] essentially for the more remote yards from Butler, Columbia City or Pittsboro wherever. The local yards gets transferred at [indiscernible] minus 5. So for all practical purposes, when you average all that, it should be a couple of bucks, which is the market. So no you're not. As to the character of the business, I think you hit the nail right on the head, and to clarify that, we paid $800 million in equity, we would have the debt component material one way or another, but with debt that carried with it was a $1 billion. But we bought it right at the outset of the decline and we never had the benefit of a positive market environment overall in the steel community. Although, you could argue that with the kind of pressure you get from abroad pushing the price up, that you might have a better return than we have had. And I would tell you my humble opinion is, we still got work to do on the buy side. We could do a better job there. I don't know if Russ is going to agree with that or Mark's going to agree with that comment, but that's where I see it. Mark?

Mark Millett

I think, if you look at our recycle business, as I said earlier, the team has done a phenomenal job at getting volumes back both from the non-ferrous side and the ferrous side to the '06, '07, '08 to the historic highs for the recycle industry. And as you rightly point out, we're not getting the earnings from that. That is essentially -- and online has been driven by the squeezed metal spread between our ability to buy scrap for the shredders in particular, as compared to selling prices to steel mills. And hence, our focus on increasing that margin. And we're doing that in several different ways, the downstream separation of non-ferrous from the ASR, that can appreciably improve our margin, the rebranding and expansion of our retail activity, again it's to drive or shift our input from low margin sources at higher margin retail, focus on producing value-added parts, the low copper gamma shred and other products that we can sort of get into niche markets and improve our margin. But it's the -- fundamentally, the competition for feedstock is coming from 2 sources. One is the export market. We're exporting 22 to 24 million tons a year today as opposed on an annualized basis, as opposed to 10 to 12 million tons in the past. And there's been a prolific increase in shredded capacity. We would calculate some 60%, 65% increase in shredding capacity over the last perhaps 6 years. Everyone pushing or everyone competing for a very defined reservoir of scrap. I think as markets come and go, you'll see that over the next 3 or 4 years, a lot of these new shredders are probably going to suffer. In fact, they're suffering today, and so there might be opportunities to acquire or otherwise rationalize that market and quite possibly margins will come back just from that itself, but that's a 3, 4, 5, 6 year sort of outlook.

Keith Busse

Mike, I'll also tell you that we like the margins, but our peers haven't been able to do any better. If you look at the average scrap bottom line from other providers, we've been as good as, if not better, throughout these last 3 or 4 year cycles. So not that we're proud of that, but we're certainly, as you heard Mark talk about all the things we're trying to do better, have a better opportunity going forward and hopefully and a better market.

Michael Gambardella - JP Morgan Chase & Co

But you have very little scrap exports in your business, right?

Mark Millett

Correct. The only real export was on the non-ferrous side, probably I would say 15%, maybe 20% of our non-ferrous gets exported. And I guess just one closing comment on the impact or potential upside to our steel mills. As Keith said, on scrap transferring across in said market but given the position of scrap we have going to our steel mills, our own scrap, it does allow us to leverage our third-party buys a little and perhaps we can trim $2 or $3 a ton off those tons and obviously, having a good control of the supply here of the material supply chain, we are able to control and have been controlling our inventory of steel mills, which tends to give us a little better position from a working capital perspective.

Keith Busse

Yes, I think that's right on the money kind of commentary. We -- I think buy better than our peers do because of our position and the leverage we have which then does benefit the most.

Operator

Moving on, we'll take our next question from Evan Kurtz from Morgan Stanley.

Evan Kurtz - Morgan Stanley

Just one more follow-up on scram mining. It's not a process that I'm usually familiar with. I'm just hoping you can share some of your assumptions on cost per ton for the process and what are some of the factors that drive that than can push it one way or another?

Russell Rinn

I think my purpose would not be to share the actual price other than as Keith said earlier, it's significantly lower. It would be probably a little higher though than ultimately from our own line by perhaps $5 to $10.

Evan Kurtz - Morgan Stanley

Okay, that's helpful. And then just lastly, Keith, you mentioned that you thought hot rolled prices could start to reverse this quarter. Would you mind just elaborating on some of the supply demand factors there as far as imports and new supply and demand connected factor into that inflection point?

Keith Busse

I don't think imports are much of a factor. And I think with continued help in the automobile universe, the agricultural, the appliance, the transportation equipment environment, the yellow iron business. Those markets remain fairly even to increasing. The rough market is construction and obviously with all the squabbling in Washington very few federal dollars available today for some needed infrastructure projects. So as you heard so many times before it is -- it is the lack of any emphasis by the business community to invest, and I think that will come in time but there's a reluctance there now, and you couple that with infrastructure activity that's pretty low ebb right now. I think it just continually creates a very lackluster construction environment, which could drive entirely different results almost for every business unit but certainly impacting structure more than any.

Operator

Moving on, we'll take our next question from Timna Tanners from Bank of America Merrill Lynch.

Timna Tanners - UBS

I wanted to just clarify, you talked a lot about order entry but I was just wondering what the lead time behavior has been on the Flat Roll business.

Keith Busse

It's just a couple of weeks, I think.

Richard Teets

Yes, for hot band. The furthest out would be totally galvanized and painted product.

Timna Tanners - UBS

So with better order entry had you seen lead times extending?

Keith Busse

Well, we've had better order entries deployed out value added, not so much in hot roll yet.

Timna Tanners - UBS

Okay, got you. And then, I know we've had a lot of discussion about the different components of the Recycling business between scram mining and [indiscernible], but I just -- I think you talked really helpfully and clearly about how the first quarter was kind of an abnormal and normally positive environment. Maybe that second quarter was an abnormally challenging environment. But for the near term, I mean, when we think about it in terms of either margin or EBIT per ton, which do you think is, I mean, should we split the difference? I mean, how would you got us to thinking about the near-term trend in the Recycling business and what the potential is?

Keith Busse

I think clearly, being a spot producer, we saw some benefit earlier and then perhaps, others in the industry saw and have really good first quarter results. I think we maintain that those good results into the second quarter. I think our challenging quarter is going to be the third quarter. And we might actually see a better fourth quarter than we see certainly a third quarter, I think. I think the last time we said fairly solid, I was interpreting it to be about the same, and everybody wrote about something a little bit higher and fairly solid addresses your point of view, Timna, today, within the margin squeeze. But for those who think we're going to fall off the end of the earth and have a loss, it's certainly not the case. We're going to report a respectable profit. It'll be lower, I believe that in the 40s or be in the 30s. As I said, I don't have precise guidance there, but it won't be as strong as $0.43 or $0.46, I'm pretty sure of that. In spite of the environment, it will be okay. And it does address that margin squeeze that you wrote about, the others have written about.

Timna Tanners - UBS

Okay, that's great. I was trying to ask about the OmniSource and the recycling piece of it though, and I just was trying to figure out, obviously, first quarter, fantastic result; second quarter, challenging result, like, which should we think about until we see the scram mining or until we see the Mesabi permit, which should we think about is more than normal for the Recycling business?

Mark Millett

Well, I guess, Timna, if you could give us a crystal ball, tell us where the covered market, stainless market, aluminum market, the first market is going, we'll give you that forecast. Obviously, I think it's frustrating for us all here at the table and that it's such a difficult business to be able to forecast and get your hands around, because its commodity driven. And in up markets, we're going to do well. And in down markets, we're not going to do as well. We've got no greater visibility as to what those markets are doing than yourself.

Keith Busse

We had a pretty good first quarter as Mark said, and a little bit disappointing second quarter. We'll probably have a better third quarter, how much better remains to be seen and that's where the visibility is yet, but we're kind of forecasting it's going to be a little better.

Operator

Moving on to our next question from Arun Viswanathan from Susquehanna.

Arun Viswanathan - Susquehanna Financial Group, LLLP

So I guess I just wanted to clarify as well, Keith, you mentioned that pricing could be down about $60 in the third quarter in flat-rolled and -- right. What does that imply, I guess, going forward? I mean, you said prices have stabilized, and then, so do you think the fourth quarter could actually see a bounce up if we do get some better the next second volumes here.

Keith Busse

I think that fourth quarter could come back on an average profit as much as $40 or something.

Arun Viswanathan - Susquehanna Financial Group, LLLP

Okay. And then, similarly on EBIT per-ton basis, which scrap kind of holding in there, does that mean that your profitability could actually accelerate as well in the fourth quarter?

Keith Busse

You heard me say earlier, I think there's really some doubling this in the recycling universe perhaps, in August, September, maybe it's September, October, I don't know. But it will strengthen again by year-end, but there will be some window of opportunity there that made up of better recycling cost with improving steel pricing that produce potentially a better fourth quarter.

Arun Viswanathan - Susquehanna Financial Group, LLLP

Okay. And how would you characterize the behavior out there? I mean, what do you think kind of helps to stabilize prices here? And do you think that, that could continue to move things forward? Or do you see any -- are you concerned about potentially some irrational behavior out there?

Keith Busse

You heard me talk about all the markets and how I thought they'd respond going forward, I really don't think that's going to change a lot. I think they are the driver. The other thing is inventories are fairly low. We must constantly be reminded and the service centers wouldn't tell you anything different. They're talking about 2.4 months of inventory on hand or a number like that, they really maybe talking about 1.4 or 5 months of inventory on hand, because of the slow-moving nature of some of that inventory to obsolete nature of it. So you're getting pretty close to the best site. We're not dealing with excessive inventory out there, and we don't expect anybody to majorly restock. We're just expected to be even keel kind of order entry.

Operator

Moving on, we'll take our next question from Mark Parr with KeyBanc.

Mark Parr - KeyBanc Capital Markets Inc.

One thing, Keith, I was curious. Do you have any sense of where steel volume might be 3Q versus 2Q?

Keith Busse

I would guess steel volume is going to be off a little bit because of the impact of the June SAG and order entry at least on Flat Roll and the power curtailments. The power curtailments would likewise apply to other operating units, not so much to their backlog but could -- so I would expect that we are expecting steel production and shipments to sag somewhat in the third quarter.

Mark Parr - KeyBanc Capital Markets Inc.

All right. And then that would -- would that -- I'm just trying to -- normally in the fourth quarter, I mean, things are a little bit weaker than the summer months, and it sounds like you might be setting up or your thought process was based around some recovery and you said in earnings. But I'm wondering, do higher shipments factor into that thought process?

Keith Busse

It certainly would in the fourth quarter, I think. I think we'll have better opportunities for a wide variety of reasons. Hopefully, we'll have this national paralyzing calamity behind us and more positive consumer sentiment. I don't think the rate of our builds will decline, I think that momentum will be maintained. I think the transportation market is going to remain good. [indiscernible] I don't expect that -- and with service centers not having a lot of inventory being in a -- or less steady mode of buying, you're going to have some periods of uneveness in order entries. People play the psychology of what scrap doing. We going to buy today or tomorrow kind of thing, but I think -- I actually believe we'll have a better fourth quarter. I have yet to shape up the material [ph], but that's my personal belief.

Mark Parr - KeyBanc Capital Markets Inc.

Right. Now, I get that. I understand. And as Mark mentioned earlier, we all wish we had a crystal balls, so it would be a lot easier. One other thing, you had mentioned -- this is something I wanted to bring up as well about the third quarter outlook for the resource side. And looking at the hedging situation, that was helpful in 1Q, it was unwound in the second quarter. I mean, how does that play into your thought process as you move into the third quarter? And you said you thought things would be a little better for a resource or for Omni in the third quarter. Could you give us a little more color about your thought process there?

Mark Millett

It all depends on where directionally where the markets go. On copper, we keep a flat book. We have a little hedge in the aluminum world. We don't hedge on the stainless world. It all depends on where the markets move. And our visibility seemingly the recent the year or 2, its visibility is only a couple of weeks ahead.

Mark Parr - KeyBanc Capital Markets Inc.

So essentially, this is something that will have to be played month by month. Is there anything that -- seasonally, the third quarter and the first quarter typically are the better quarters for earnings. Is that fair?

Mark Millett

In the recycling world, I would suggest that. But again, I think if you looked historically, you bump off pretty weak because order shots and tops up. As Keith said earlier, we're seeing potentially a softer market in August and September, and again in the commodity business in which we live, the market doesn't bode well for great earnings.

Keith Busse

I don't think the earnings is trying to go back to the third quarter of last year. It's going to be a change of that magnitude. But given how weak they were on the second quarter, you could see an improvement surely I think in the third quarter. But it's not going to bounce back into the $40-million income.

Operator

Moving on to the next question from Brian Yu with Citi.

Brian Yu - Citigroup Inc

My question, it goes back to the scram mining. And, Keith or Mark, can you talk about the size of the separator [ph] that you'd like to build? How that's progressing on the permitting stage? And then, also in terms of tailing, roughly, how many tons of concentrate equivalent might we be talking about there that you could process?

Mark Millett

Again, as we said earlier, the intent would be to own a facility that would satisfy our appetite. Our appetite is going to be roughly 800,000 tons a year once Mesabi Nugget is in full swing. We are looking, at this is kind of a bridge, to bridge the time between now and when we make our own full-scale mining in hand. Relative to the reserves, there are a huge number of basins, and I wouldn't be able to quantify the hundreds of thousands of tons of concentrate up there that's available. But there's a significant availability of concentrate from this source. Relative to the permitting, scram mining by definition is kind of recovery of past mined material and at least the Magnetation has successfully permitted, I think, 2, maybe 3 reserves in relatively short order.

Brian Yu - Citigroup Inc

Going back, you'd mentioned earlier, Mark, you said that in the first half of 2012 that your concentrate cost would go up. Is this because of you and your adjustments and contracts or is this your expectations about where the price is going to be in the future?

Mark Millett

It is how the inventory evaluation is going through.

Brian Yu - Citigroup Inc

Okay. And then last one, a follow up on earlier questions about the Recycling business and this mark-to-market. And just so I understand, in terms the way you guys operate your business, you enter into these hedges to protect your margins, and it's the mark-to-market non-cash portion that causes the volatility in report earnings, but not the profitability of the business from a cash standpoint. Is that a fair way to look at it?

Mark Millett

That's correct. That's on target.

Operator

Moving on, we'll take our next question from David Cass with JP Morgan.

David Cass

I was hoping to follow up on the average selling prices. So you guys said that you thought that flat-rolled could be down 60 to 65. I was unclear if you were saying that would be for Steel Dynamics or for the industry overall?

Keith Busse

Well, that's for us. We can't speak for the industry, and I think I followed up by saying the overall average we might be down when you consider all of our operating ends is $40 to $45.

David Cass

Right. But specifically with regard to the Flat Roll, if one kind of looks at the benchmark price in the second quarter and compares that to where we are now, we're off more than $100. So if one were to expect levels to stay roughly on the same and then move up later in the quarter, the $60 to $65 that you guys are saying hereof seems to be a little better than perhaps what the industry is experiencing. I was curious if that was because of the way it floats through and the lag that you guys might experience. Is that correct?

Keith Busse

There is a lag. Dick, do you want to...

Richard Teets

Well, I think, also you're looking at it from reported numbers and so forth. And I must say that our follow-up operation is not taking the price down to the levels which you [indiscernible] and able to read about in the press, and so that's what's going to dampen the overall swing.

David Cass

Okay. But if one were to extrapolate and given that as you guys said there is a lag looking forward as prices move back up, and I think we've all agreed that it's likely they will, but as they move back up, wouldn't there be a lag as well in experiencing that in the fourth quarter?

Keith Busse

Well, lead times are fairly short, but yes, there actually would be some lag, and you have to understand that most of the conversations we all agreed about is always hot roll, hot roll, hot roll which is less than half our business. Some of the other value-added markets aren't impacted quite as severely as hot role, especially as you read about it in the American metal market every day. And as Dick pointed out, We're not the guys that tend to reach that bottom as fast and furiously as some others do.

David Cass

Okay. And then, the second question that I had was with regard to the additional steel that you're seeing from RG. How was that impacting in terms market share and your ability to maintain market share?

Keith Busse

First part of the question was what now?

David Cass

With extra steel that you're seeing in the market from both RG and [indiscernible]? Has that impacted your market share at all? And do you anticipate that doing so?

Keith Busse

Well, it could certainly be a reason for a period when your order entry is a little weaker than it had been if there's no change in economic climate. But that's hard to know. I would tell you, we're not -- our sales people although they're [indiscernible] we're getting [indiscernible] from RG. It's not have been an impact full of that in the real world in St. Louis, Missouri.

Operator

Moving on to the next question from Tim Hayes from Davenport & Company.

Timothy Hayes - Davenport & Company, LLC

Just 2 questions quickly. When looking at the automotive business in Q3, usually there's some seasonal weakness, and might that seasonal weakness be less this go around as we're catching up from the supply chains as the chain disruption that we saw in Q2 and might you be seen -- wondering if you're seeing any of that?

Keith Busse

I think that's a good observation.

Timothy Hayes - Davenport & Company, LLC

Okay. And then, could you remind me what are your inventory turns at steel and inventory turns in the recycling business, please?

Theresa Wagler

The inventory turns at the steel tend be a little bit different between sheet and the long product. So in the sheet side, it still tends to be on a monthly basis, which the long product can be 1.5 months sometime, maybe 2 months but typically 1.5 months. On the metals recycling side, on that day trends were typically to be a month-to-month basis. It can grow beyond that in periods of, I guess, what I would call opportunity but we tend to keep it month-to-month.

Timothy Hayes - Davenport & Company, LLC

All right. So metals recycling is turning about 12 times a year, right, maybe almost that amount.

Keith Busse

Yes.

Operator

Moving on, we'll take our next question from Aldo Mazzaferro from Burke & Quick.

Aldo Mazzaferro - Goldman Sachs

The [indiscernible] have $150-plus is pretty impressive considering the structural steel mills operating solo. I wonder if you could comment a little bit about how Rail portion of that business is impacting your profits? And what you think in terms of volume on the Rail business going forward?

Keith Busse

Well, I would tell you, it's kept us from losing money. It's probably as broad a statement as could be made. Without it, we'd probably would lose a little money on an operating basis every month and with it, we make a little money. So, Dick?

Richard Teets

In fact, we don't have a head hardened process for considered premium rail. Our standard rail products are priced very competitively in the marketplace. We're still gaining market share and there's cost to that. So therefore, there is not a huge big difference between that and the structural side, but we do gain from the volume compression and all of the efficiencies used for the shops through that reduction. As we become efficient, it raised our productivity, and we've made major strides here. That will definitely positively impact our earnings on a per ton basis on the rail product.

Aldo Mazzaferro - Goldman Sachs

So do you have any view for what you might be running in terms of shipping volume going forward?

Richard Teets

This year, as I said, the year-to-date, that's their half a year, basically, got 60,000 tons under our belt, and we talk around 150,000 tons for the year was our forecast at the end of last year. And needless to say going forward, we expect that to climb.

Aldo Mazzaferro - Goldman Sachs

And, Keith, can I ask you a one question on the scrap market. I mean, you guys have been commenting, that you expect the prices to go down. I just would ask a little question as to why do you expect that?

Keith Busse

Well, I don't know that they'll go down a lot in August, but I think -- what I think the bills kind of turned up your nose a little bit, you might say in July. That normally is an up market, and it sort of just went sideways to up a little, but demand has weakened. It's not just our order book that's a little uneven. I think it's weakened at other shops as well. So there's not quite the appetite. But I don't know that there's going to be any $100 sell off, scrap either, but it might directionally go down a little bit in August, maybe a little bit more in September, but I think the team can adjust for that from the buy-side perspective. But there's not going to be $100 climb in scrap costs although to get some of these margins back, you need something more than $20 or something, but who knows what's it's really going to hold out.

Aldo Mazzaferro - Goldman Sachs

Just one final quick one on the Mesabi Nugget situation. Can you help me understand a little bit about how the volume that you can get from Cliffs? I mean, what's the maximum run rate you could go if you just use exclusively Cliffs? And then, would you begin to add in those scram or scram already been -- starting to be added into the volume at that facility?

Mark Millett

I doubt that Cliffs would have enough concentrate available to solely supply Mesabi Nugget at 800,000 ton a year annualized rate. Again, one has to remember, we've been operating and will continue to operate here through the end of 2012 for sure on a myriad of different sources. We have some inventory that's left over from our relationship with QCM. We have a steady supply coming in from Magnetation, and we've augmented -- although it's augment the Cliffs' supply. The intent would be to transition from that combination to a Magnetation type product.

Aldo Mazzaferro - Goldman Sachs

And that transition will await the startup of the new facility that you're joint venturing? Or is there growth in the...

Keith Busse

That kind of volume would only be delivery, let's say, through the JV. The answer is yes.

Operator

Moving on, we'll take the next question from Sal Tharani from Goldman Sachs.

Sal Tharani - Goldman Sachs Group Inc.

Mark, the $40 million, $50 million you mentioned spending on the Magnetation joint venture, and then obviously, this will become -- will it become obsolete once your mine starts in, let's say, 2013 or '14?

Mark Millett

No. The intent would be -- and presuming this a good iron market out there, one could envision that, that consider to produce concentrate and be sold into the upper market.

Sal Tharani - Goldman Sachs Group Inc.

Okay. So you will own it even just [indiscernible] third party?

Keith Busse

The third party would have an interest in it, we think, because it would be priced better than new concentrate coming out of Cliffs side operation. It has a cost advantage and probably a pricing advantage, so it would not be hard to liquidate that at a fairly effective level of profitability.

Sal Tharani - Goldman Sachs Group Inc.

What kind of content are you expecting from the concentrate from magnetation process or scram process?

Mark Millett

What sort of [indiscernible] it would be a regular concentrate, just in the 60% to 63%.

Sal Tharani - Goldman Sachs Group Inc.

And, Keith, you have given some comments on the end markets, including construction. I just was wondering if the situation on both [indiscernible] has been stable or have you seen any decline? We have gotten some positive data on dodge data. Square footage data was up and clearly, residential housing starts were up significantly [indiscernible] seen any uptick in your business?

Keith Busse

Well, I think we have but I think the binoculars for that are a little bit better structure. Backlog is certainly better order entry of fabrication.

Operator

Moving on, we'll take our next question from David Lipschitz from CLSA.

David Lipschitz - Credit Agricole Securities (USA) Inc.

Question to you on pricing, you said you think prices are bottoming. Have you seen prices bottom or that's your expectation? And also, are you worried about market share with all the new participants and we're hearing prices although with what you're talking about? Before you said you would not take orders at some low levels. Is that what you're doing again and are you worried about with the new participants taking market share from that perspective?

Keith Busse

I would tell you, it's more of an anticipation right now in reality. And yes, there are levels in which we wouldn't chase the duck on the pond anymore.

David Lipschitz - Credit Agricole Securities (USA) Inc.

And then quickly on scrap. Do you expect to see continued divergence between prime scrap and the obsolete scrap in terms of you said you think price potentially could be flat to down. Do you think prime could stay higher and the obsolete would fall off or do you expect both to fall?

Mark Millett

Again, no great crystal ball, but the obsolete flow is at least strong out there, and the prime scrap flow has to be constrained. So one would think that they'll be greater divergence.

Operator

And at this time, that will conclude our Q&A session, and I'll turn it back over to our speakers for any additional or closing remarks.

Keith Busse

Thank you, Jim. Thank you, everyone, for joining us. It's one of the longer sessions we've had, good questions. We certainly appreciate the coverage you give the company and the support that you give the company. But more importantly, we certainly appreciate the support our employees give this company. We have a fabulous group of young men and women that work for this company, produce stellar results quarter in and quarter out. We thank you for your efforts. That concludes our remarks.

Operator

That will conclude today's conference. We thank you 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!

Source: Steel Dynamics' CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts