5 Metals And Mining Stocks Getting Bruised By Lower Commodity Prices

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 |  Includes: ACIIQ, AKS, CMC, FCX, STLD
by: Vatalyst

Average commodity prices have continued to fall throughout 2011, which can be expected to translate into sequentially weaker results for most steel, metals, and coal producers. Steelmakers are expected to post sequentially weaker earnings due to the decline in spot pricing, which has not been offset by input cost decreases.

Additionally, North American light vehicle production has continued to decline along with pricing for flat-rolled products. Average hot rolled coil (HRC) transaction prices dropped 14.9% during the third quarter of 2011, from $812 per ton to $691 per ton QoQ. Spot metal margins for HRC have declined to $201 per ton, a reflection of continued 2H weakness and far below the average of $283 per ton 2011 year-to-date. For coal, production issues have affected multiple producers throughout the year, reflected in a 1.3 mln tons fall YoY in CApp shipments.

Adverse weather impacts also contributed to a drop in PRB shipments, now down 7.1 mln tons year over year. Hard coking prices have declined to $290/ton, a drop of 7.8% QoQ, primarily due to still recovering Queensland supply. Thermal coal prices have remained relatively robust, with NApp experiencing a $0.40/ton drop QoQ to average $77 per ton 3Q11, and CApp rising $1.4/ton QoQ due to cost push from rising mining and regulatory costs. PRB pricing uptrended $1.60/ton QoQ to average $14.3 per ton 3Q11, supported by strong demand for low sulphur coal.

Steel Dynamics Inc (NASDAQ:STLD)

STLD provided a 3Q earnings outlook of $0.18-$0.22/sh, below consensus of $0.29/sh, expected to be driven mostly by lower than expected earnings from the company’s recycling and ferrous resource operations. The company hedges its base metals exposure in Recycling, and the drop in Cu, Al and Ni values may lead to mark-to-market losses. Based on guidance, 2011 is estimated to drop below $1.50. Compared to the $0.43 per share reported for 2Q, the sequential earnings decline is driven by weak flat-rolled pricing with benchmark HRC averaging $694 per ton quarter to date versus $823 per ton during the second quarter. Investors should keep in mind that STLD tends to be more spot oriented with its sales versus Nucor (NYSE:NUE) and US Steel (NYSE:X), that have contract lags in their sheet business.

AK Steel Holding Corporation (NYSE:AKS)

AKS announced that the company entered into two transactions to bolster its raw materials position, 1) a JV with Magnetation to process low-grade tailings into usable iron ore concentrate and 2) the purchase of privately held Solar Fuel that controls over 20 mln tons of low-vol met coal in Somerset County, PA. The economics of these two deals largely depends on the degree of debt and/or equity financing. As of the end of 2Q11, the company had $46 million of cash on hand vs. initial payments totaling $124 million for both transactions. For 49.9% interest, AKS will contribute $298 million into the JV over several years, including an initial $100 mln in 2011. Magnetation currently produces roughly 400,000 tons per year of iron ore concentrate and has plans to expand production to 3.5 mln tons by 2016.

Since U.S. blast furnaces need pellets vs concentrate, production will likely be sold to 3rd parties until Magnetation completes construction of a pelletizing plant in 2016. Permitting is much simpler than starting a new mine but cash costs would be $5-$10 per ton higher than traditional mining. After pelletizing, cash costs could be close to $65 per ton. On the coal side, AKS is acquiring over 20 million tons of low-volume met for $36 million and expects to invest $60 million between 2013-2015 to bring these reserves into production. This will likely be a high-cost room-pillar type operation, with cash costs in excess of $90 per ton, but still represents a significant savings over market prices.

Commercial Metals Co (NYSE:CMC)

CMC announced that the company intends to either sell or close the company's Croatian Sisak pipe mill over the next few months. In addition, the company plans to close five rebar fabrication operations (four in the U.S. and one international) and sell or close eight construction services operations. These are the right strategic decisions to stem losses. The company expects fiscal year 2011 pre-tax charges of $135-$165 million, including $120 million that is non-cash. An additional $25-$40 mln of charges related to the announced closures will take place in fiscal year 2012 (excluding the costs of operating the Croatian mill to close out the order book).

On the plus side, management expects Croatian mill closing activities (working capital wind down and tax savings) to be a cash positive event. The Croatian operations have been a continued drag on the international mills segment profit. CMC posted an operating loss of $46 million in both fiscal year 2009 and fiscal year 2010 and had lost $33 million in the first three quarters of fiscal year 2011. The three year average annual operating loss for CMC of $45 million equates to approximately $0.23 on an EPS basis.

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)

2011 copper guidance was lowered by 1.0% to 3.79 billion pounds from 3.85 billion previously. For 2012, copper guidance was trimmed by 100 million pounds to 3,900 mln lbs, while gold sales guidance was reduced by 100k ozs to 1,100k ozs. Site Production & Delivery unit costs are expected to remain at $1.70/lb, however the Unit Net Cash Costs estimate was favorably cut to $0.95/lb vs $1.01/lb due to higher gold prices. 2012 capex budget climbed to $2.7 bln from $2.5 bln. Budget for the 3 major growth projects under evaluation jumped 15% to $6.1 bln, but returns would still be attractive on current copper prices. FCX may generate $5.22 - $5.33 2011 but $3.90 2012 is looking far less than the expected $4.78.

2012 revision primarily reflects adjustments to copper and gold volumes to match guidance, a higher South American tax rate assumption of 38% vs 33% previously, and higher site production and delivery cost of $1.71 per pound versus $1.69 per pound previously. On the plus side, lower operating risks associated with the Grasberg labor dispute with the company demonstrate that it can minimize the business impact. Because of Grasberg’s scale and flexibility, available labor resources are being deployed to high-grade sections to maximize production and mill rates while curtailing stripping activities. This is allowing 75-80% milling rates versus 66% mining rates.

Arch Coal (ACI)

ACI lowered guidance for 2011 adjusted earnings per share to $1.00 to $1.40 from the prior estimate of $1.75 to $2.15, while EBITDA guidance was also revised down to $900 million to $1 billion from the prior estimate of $1.08 to $1.2 billion. The company attributed the lower profit guidance to reduced metallurgical coal production at Mount Laurel. According to the company, the lower production at Mount Laurel was due to adverse geological conditions as well as a roof fall in August which resulted in a 45-day idling of the longwall. Longwall idling would account for approximately 560,000 tons of lost production, while the unfavorable geology would also have contributed an additional but smaller output reduction. The company resumed production on the longwall in September. ACI expects to transition the longwall from the Alma seam to the Cedar Grove seam in the first quarter of 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.