Metal Producers Told to Cash in on Rally as Pullback Risk Grows

  • Window for capital raises may slam shut, say BMO, Morningstar
  • ArcelorMittal, AK Steel already tapping equity markets

Metal producers whose debt soared as prices collapsed now have a chance to pay some back by tapping rallying equity markets, but only if they act before the recovery fades.

That’s the view of analysts from BMO Capital Markets Corp., Clarksons Platou Securities Inc. and Morningstar Inc.

U.S. Steel Corp. to Freeport-McMoRan Inc., whose share prices have more than doubled this year along with a commodity rebound, would benefit from following the example of AK Steel Holding Corp., which announced an equity issuance this week, David Gagliano, an analyst at BMO in New York, said Friday.

“The challenge with the sector has been too much debt,” Gagliano said. “Any opportunity to help fix the balance sheet by shifting more of the total enterprise value to equity is something that these companies should be considering.”

AK Steel registered a share offering to raise as much as $282 million for debt repayment, it said Thursday. On April 8, Luxembourg-based ArcelorMittal, the world’s biggest steelmaker, raised $3 billion by issuing 1.26 billion shares.

Freeport Chief Executive Officer Richard Adkerson told analysts this week that rallying markets open up opportunities for more capital raises, although the world’s biggest publicly traded copper miner is focusing on asset sales for now.

Leverage Healing

U.S. Steel, which like AK produces steel by refining iron ore in blast furnaces, may turn to equity markets to achieve the 35 percent ratio of the company’s debt to capital it targeted in its April 27 earnings conference call, Lee McMillan, an analyst at Clarksons Platou, said Friday. The Pittsburgh-based company’s ratio of long-term debt to total capital is 56 percent, according to data compiled by Bloomberg.

“There’s a lot of risk to waiting,” McMillan said in an interview. Capital markets “are open now because metal prices are higher but that may not last forever.”

Domestic steel prices have surged 37 percent this year amid a commodity rally that has lifted the Bloomberg Basic Materials Index of 437 global companies by 8.9 percent. As steel production ramps up in China, the biggest producer, prices may drop again, Andrew Lane, a Chicago-based analyst at Morningstar, said in an interview.

“I’m concerned about the sustainability of this price rally based on the fact that market fundamentals haven’t substantially improved,” Lane said.

He warned that shares in producers of steel raw materials -- such as Anglo American Plc, Teck Resources Ltd. and Vale SA -- are at risk of of tumbling by 50 percent if prices of iron ore and metallurgical coal retreat.

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