The Minimill That Acts Like A Biggie

Low-cost Steel Dynamics wants to lure high-end customers

Three years ago, when Keith Busse set out with a couple of his pals to raise $310 million dollars to build a steel mill, their resumes sported one vital word: Nucor Corp. In the '80s, Busse had led the construction of Nucor's revolutionary flat-rolled minimill in Crawfordsville, Ind. By using scrap metal to make far cheaper steel, Busse's minimill allowed Nucor to grab markets held by the industry's giants.

Since then, Nucor's success has led a slew of others to build minimills. But none of these rivals can match Busse and his partners on experience. "We know where the gopher holes are and how to avoid them," Busse said. Investors such as GE Capital agreed--and poured money into Busse's privately held Steel Dynamics Inc. (SDI). In December, ahead of schedule, his Butler (Ind.) plant rolled its first sheet of steel.

Now, even before SDI reaches its full capacity of 1.2 million tons a year, Busse is racing to expand. Although most minimills simply melt scrap metal to make standard grade steel, Busse wants to spend $300 million on additions that will allow SDI to make more refined steel for the auto makers. And to protect SDI from rising prices for scrap metal, Busse is developing new substitute raw materials. By 1998, Busse expects to have assembled a fully integrated steel company for just $600 million--a fraction of the cost of old-style steel mills. "We're building a lot more, for a lot less money," boasted Busse in an August interview.

The expansion is a page right out of Nucor's playbook. To finance it, SDI plans to file for a $300 million initial public offering by the end of September. Since August, company officials have had to stop talking, citing the quiet period mandated by the Securities & Exchange Commission. But given Nucor's stellar performance, the pitch for SDI is sure to be simple: Son of Nucor.

RISK LOVER. The quiet period also means Busse can't talk numbers, but sources close to his outfit say he's off to a quick start. SDI broke into the black in June, with operating profits of $1 million. That's a far faster--and smoother--startup than other Nucor wannabes. Gallatin Steel in Warsaw, Ky., for example, suffered big production problems, and its CEO quit late last year. Based on current prices for scrap and steel--and not counting the planned additions--industry sources say SDI could earn some $40 million in pretax profits on revenues of $420 million for 1997. "They've done a very nice job," concedes Bill Wiley, president of rival Trico Steel Co.

Still, if Nucor in Charlotte, N.C., provides much of Busse's model, SDI is also something of a Nucor renegade. Under the leadership of F. Kenneth Iverson, the $3.4 billion Nucor avoids debt and moves, for the most part, into safe markets. Busse, a confrontational, risk-loving former gun dealer, long chafed under this methodical approach, say former colleagues. When one of his more straight-laced rivals, U.S. Steel alum John D. Correnti, beat him for the CEO's job three years ago, Busse left.

Busse set out to run a steel company his way--and that has meant greater risk. While Nucor builds most of its mills in the South, avoiding direct competition with the integrated behemoths along the Great Lakes, Busse set up between Detroit and Chicago to be closer to the best available scrap metal. And unlike Nucor, he'll battle the likes of U.S. Steel Group and Bethlehem Steel Corp. for the carmakers' business. He's betting that by refining Nucor's basic technology, SDI will be able to make the high-quality steel only the big mills turn out today. Already, SDI has made steel that meets Detroit's standards. But rivals are watching whether he can produce high quality consistently as output grows. Given his record, Wall Street figures he has a chance. "With the new technology, it's critical to have experience under your belt," says J.P. Morgan & Co. analyst Michael F. Gambardella. "Keith is the only guy who has set up two of these plants."

Still, it's a high-stakes gamble in a crowd. With five other new minimills starting up, many at Nucor are skeptical. "Starting up one plant and having a few people who know the culture does not necessarily make it a twin," warns Iverson. "He'll have his own problems."

MOLTEN PIG. Busse's strategy is simply to beat all comers on price. Although strong demand helped send prices up 12% on average this year, to $360 per ton, the new capacity might make that short-lived. What's more, weakening auto markets mean all steelmakers could get hit. Busse is betting he can make profits at $300 per ton, while many rivals lose money below $320.

Meanwhile, rising demand for scrap is pushing costs up. That has drawn Busse into the iron business. He has bought a piece of an iron-carbide plant going up near Corpus Christi, Tex., and plans to use a big chunk of the production as a high-quality substitute for scrap. He's also betting $100 million on a new mill that will create molten pig iron, another scrap substitute. If both plants work as planned--and rivals figure Busse can pull them off--SDI could cut dependence on scrap by half.

Still, investors looking at Busse's IPO will be hard-pressed to project the future. SDI's low fixed costs should help buffer it from the industry's cyclical swings. And its estimated $200 million of debt adds only $10 per ton in costs, say industry sources. With less to fear in downswings, investors typically pay more for minimill stocks. Nucor currently trades at 17.4 times estimated 1996 earnings, versus just 11.4 for the industry. But the real test facing Busse and his Nucor renegades will be to make steady profits in a steel market increasingly loaded with wild cards.

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