Stelco, Bound To Build Upon Solid Q3 Results For Next Quarter

Stelco Holdings Inc STLC had a riveting third quarter after boosting dividends beyond expectations. Driven by soaring steel prices, the Canadian firm reported adjusted earnings of $787 million against an RBC Capital Markets estimate of $680 million and a $690 million consensus. With these results, the company is set to raise dividends again in Q4.

The company supplies steel within three key industries, energy, construction, and automotive. Stelco is a direct supplier for the latter and is currently boosting efforts to grow its customer base therein as steel is used in 40% of cars' body structure. 

So, how do things pan out for the steel firm ahead of the fourth quarter?

“Moving Where The Profits Are”  

According to its Q3 earnings report, Stelco increased its average selling price for steel by 165% year-on-year and 40% from the previous quarter. Alan Kestenbaum, The company’s chief executive, was rife with optimism during a conference call with financial analysts and said: “We move to where the profits are.”   

With several projects on track, Stelco said that the Lake Erie Works (LEW) coke battery upgrade is on the right way to completion before the end of this year, and is expected to reduce costs by $12 per ton. 

Kestenbaum said the firm is confident the LEW restart and the commissioning of a 65-megawatt cogeneration facility will decrease both electricity costs and carbon footprint. Stelco’s LEW facility is situated near Nanticoke, Ontario, on the shore of Lake Erie, while the Hamilton Works facility is located directly on the Hamilton Harbor.

Q3 Highlights

One of the several eye-catching results for Stelco was liquidity. The company finished the quarter with $410 million in cash from $247 million in Q2 and net of the $398 million buyback of Lindsay Goldberg shares. RBC reports the firm generated $586 million in cash from operations and $513 million in FCF in the quarter.

Although higher taxes prevented adjusted earnings-per-share to meet RBC expectations, they certainly punched above the $6.52 consensus with $7.60. This was driven by higher average realized steel prices than forecast “due to the timing of sales and better realizations on the spot market than we forecast.”

“Shipped tons were also above our estimates, although Stelco noted it expects Q4 sales to be more in line with first-half run rates,” the report says. Non-steel revenue came in slightly ahead of the forecast, while operation expenses were somewhat higher (3%). 

Peeping Into Q4

Stelco announced an increase to its regular quarterly dividend to $0.30 a share from $0.20 a share, suggesting a 3% yield at current price. As the company sails into Q4, the price is set to remain favorable while demand conditions are expected to continue.

However, the cyclical character of the steel industry –in which demand and pricing depend on the health of North American economies– is bound to play a critical role in how Stelco builds upon its third-quarter success. The steel market is also very competitive as the company has to grapple with both local and international producers, some of them with more access to resources.

RBC asserts Stelco is also exposed to operational risks “and if the company is not able to maintain consistent operations at reasonable costs or generate enough cash to fund required maintenance the business could become unviable.”

The Canadian firm also needs to keep an eye on how ESG criteria are growing among investors, since the steel sector is the biggest industrial CO2 emitter. As financiers switch their preferences towards sustainable companies, Stelco needs to catch up with environmental regulation and access to capital markets.

Disclosure: No positions