AK Steel Slips, Q3 Outlook Falls Short on Furnace Outage
Shares of AK Steel (AKS) slipped after it revealed its earnings guidance for third-quarter 2014 that fell well short of analyst expectations. The Ohio-based steel maker said that it expects third-quarter results to be dragged down by unplanned outage at its Ashland Works blast furnace in Kentucky.
AK Steel sees earnings in the band of 5 cents to 10 cents per share for the third quarter. Analysts polled by Zacks currently expect earnings of 26 cents per share on an average for the quarter. AK Steel’s shares sagged 6.4% to close at $10.01 yesterday.
AK Steel expects that the outage at the Ashland Works blast furnace will hurt results in both third and fourth quarter of 2014 with respect to production, shipments, operating costs and margins. The outage and the resultant lower-than-normal production levels will affect the company’s third-quarter results by around $25 million, which has been factored in its guidance for the quarter.
The total unfavorable impact of the outage has been forecast to be roughly $42 million for the fourth quarter associated with repair and reduced production expenses. Despite the negative impact of the outage, AK Steel expects improved financial results on a sequential basis in the fourth quarter.
AK Steel envisions shipments for the third quarter to be roughly 1,350,000 tons, a 3% fall from 1,398,000 tons shipped in the previous quarter. The decline reflects reduced production at Ashland Works, partly masked by sustained strong demand from the automotive market.
AK Steel also expects average selling price for the third quarter to be around $1,100 per ton, a modest rise from $1,095 per ton registered in the second quarter. It expects to gain from considerably lower iron ore and energy costs in the third quarter.
While the Ashland Works blast furnace has returned to operation, it continues to operate at production rates that are below its normal levels. In order to return the blast furnace to normal levels, AK Steel plans to accelerate a planned outage from first-half 2015 to fourth-quarter 2014. It will also purchase merchant carbon slabs and beef up production of carbon slabs at its Butler Works electric arc furnace to offset a part of the reduced production at Ashland Works.
The planned outage, which will include a reline of the blast furnace hearth, is now expected to start in late October and last roughly 28 days. AK Steel expects to spend around $17 million for the hearth reline.
Separately, AK Steel noted that it has received regulatory clearance for its planned acquisition of Severstal Dearborn, LLC. The company now expects to close the acquisition in the third quarter.
The buyout of Severstal Dearborn is expected to boost AK Steel’s future earnings and improve its credit profile and liquidity. The company plans to utilize the operational flexibility enabled by the addition of the Dearborn blast furnace to cater the needs of its customers.
AK Steel, which currently sports a Zacks Rank #2 (Buy), also expects the start-up of its iron ore pellet plant at Magnetation in Sep 2014.
Other companies in the steel space with favorable Zacks Rank are Grupo Simec S.A.B. de C.V. (SIM), TimkenSteel Corp. (TMST) and POSCO (PKX). While both Grupo Simec and TimkenSteel hold a Zacks Rank #1 (Strong Buy), POSCO retains a Zacks Rank #2 (Buy).
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