U.S. Steel to Buy Remaining Big River Stake Amid Steel Surge

U.S. Steel Corp. agreed to acquire the remaining stake in Big River Steel for about $774 million to expand into newer and lower-cost operations, taking advantage of a recent 85% rally in the industrial metal.

U.S. Steel is exercising a call option and will use cash on hand to buy the stake, the company said Tuesday in a statement. Chief Executive Officer David Burritt previously said that acquiring the rest of Big River was U.S. Steel’s “top strategic priority,” after the Pittsburgh-based company agreed to purchase 49.9% of the steelmaker last year. Shares were up 11% at 12:08 p.m. in New York and touched the highest level since April 2019.

Taking full control of Big River will help U.S. Steel in its push to revitalize its aging facilities. Big River’s Arkansas mill, with a capacity of 3.3 million tons per year, uses electricity to produce steel with a lower carbon footprint, while some of U.S. Steel’s facilities use coal and iron ore. The transaction is expected to add to earnings immediately, the company said.

“By completing our top strategic priority, Big River Steel, we expect to strengthen our order book, increase our competitiveness and accelerate further product innovation for our customers,” Burritt said in the statement. “Longer term, the lower, variable cost structure will increase our efficiency, profitability and cash flow across the business cycle.”

The company had until 2023 to exercise the call option to purchase the rest of the mill. Prospects that they would make the purchase anytime soon seemed impossible earlier this year as a historic decline in demand accelerated by the coronavirus pandemic left the company doing everything it could to boost its cash position and defend against the worst.

The transaction wasn’t a surprise, BMO analyst David Gagliano said in a note to clients, but the primary concern was debt load and implied valuation multiples prior to huge gains in domestic steel prices. The domestic benchmark for steel prices is up 40% this year, and has gained about 85% since a multi-year low hit in August. BMO raised its price target on U.S. Steel to $19 a share from $16, but said the rally could soon run out of fuel.

“However, with underlying steel prices approaching a first-quarter 2021 peak, in our view, and with U.S. Steel shares remaining highly sensitive to changes in underlying prices, in our view, the timing of the underlying pricing cycle suggests there will be a better opportunity to buy into this strategic improvement,” Gagliano wrote.

©2020 Bloomberg L.P.

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