Steel Mills

Stelco a Step Closer to Vertical Integration with Minntac Share Purchase

May 1, 2020

Canadian steel mill Stelco has entered into a new eight-year pellet sale and purchase agreement with U.S. Steel. The eight-year contract runs until Jan. 31, 2028, and will provide 100 percent of Stelco’s iron ore pellet requirements at Lake Erie Works including volume required to support the expansion in production projected after the upcoming blast furnace upgrade project.

Stelco also entered into an option agreement to purchase a 25 percent share of the Minntac iron ore operations. The company will pay U.S. Steel $100 million in 2020 and will have until Jan. 31, 2027, to exercise its option to purchase the share for another $500 million.

Stelco Executive Chairman and CEO Alan Kestenbaum said the company is investing in a best in class iron ore asset that produces 16 million net tons per year, compared to its competitors with a median annual net tonnage of 6.4 million tons.

Stelco has been performing well despite the pandemic, shipping at 100 percent of capacity in the first quarter and on track to deliver the same in the second quarter. The company is currently upgrading its blast furnace at Lake Erie Works and installing a new pig iron caster.

The eight-year contract for pellets from Minntac is substantially the same as the contract that was due to expire on Jan. 31, 2022.

Kestenbaum said that paying $100 million for a seven-year option to acquire the quarter share of Minntac is very good for the company. The $500 million price is also “very prudent,” he added. “When we get into weak markets, opportunities arise This opportunity has risen because of the current market. The ability to take your time to buy during this seven-year period is a great advantage.”

He stressed that the company does plan to exercise its option and will wait for optimal market conditions to do so. The agreement enhances EBITDA for both U.S. Steel and Stelco. U.S. steel gets an increase in volume of pellet sales and Stelco gets, with the improved capacity of its blast furnace, reduced costs and improved revenue, said Kestenbaum. Joint ownership of the mine will create a secure pathway for Stelco to become a vertically integrated player in the future.

“This transaction represents a major milestone for Stelco as it secures a long-term supply of high-quality iron ore pellets and a highly valuable future option to acquire a 25 percent ownership interest in the Minntac Mine, one of, if not the, best assets on the iron range,” said Kestenbaum. “Our actions today are an example of the type of decisive and strategic actions we are able to take in any operating environment, in order to drive significant and sustained long-term value creation for our shareholders.”