Stelco Inc. abandoned an attempt to raise US$300-million in the bond market despite offering a 9-per-cent interest rate, in a sign of growing pessimism about the steel industry as global economic expansion slows.
Stelco’s stock sank 11.9 per cent Tuesday, the first day of trading after the Canadian steelmaker cancelled the bond sale late Monday, to close at $9.41.
Rival North American steelmakers also suffered, with shares of companies such as Nucor Corp. and Steel Dynamics falling Tuesday amid expectations of cooling steel demand, however Stelco’s drop was double the next largest fall.
The steelmaker’s shares have now plunged 65 per cent from their peak in 2018, and they are trading 45 per cent below their 2017 initial public offering price.
The drop has hit value investor Prem Watsa, who bet on Stelco last November by acquiring a 14-per-cent stake for $20.50 a share through his company Fairfax Financial Holdings Ltd. Stelco’s shares are now trading for less than half his purchase price.
Over the same time period, shares of global steel giant ArcelorMittal SA have dropped 43 per cent.
While concerns about the strength of the global economy and its effect on the steel sector have existed for some time, on Monday JPMorgan Chase & Co. analyst Michael Gambardella slashed his estimates for industry stocks, including Stelco. Mr. Gambardella now expects a “more flattish” steel price outlook, and in a note to clients he wrote that the sector faces “concerns about supply additions planned for the next several years, continued uncertainty surrounding trade, and some softening in demand."
Once a major player in North American steel production, Ontario-based Stelco was acquired by United States Steel Corp. in 2007 as the global steel sector consolidated. Loaded with debt from acquisitions, many steel companies suffered during the global financial crisis a year later, and Stelco was eventually put into bankruptcy protection in 2014.
After a restructuring eliminated $3-billion in debt and $1.4-billion in pension and benefit obligations, Stelco went public in 2017, and for the first few months on the Toronto Stock Exchange, the stock performed well. The past year, however, has been rough for the company’s share price.
Before the debt offering was pulled, Moody’s Investor Service gave the proposed bonds a rating of B3, which is deep in junk territory.
The rating agency cautioned about the company’s small size, with just one operating blast furnace; expected volatility in Stelco’s cash flow because of constantly moving steel prices; and high leverage, with adjusted debt expected to total six times earnings before earnings, interest, taxes, depreciation and amortization at the end of 2020.
However, Moody’s noted that Stelco runs a relatively low-cost steel business, has minimal pension obligations and that the company’s base in Hamilton offers competitive transportation costs because of its proximity to the Great Lakes.
Stelco’s largest shareholder is private equity firm Bedrock Industries LP, which has a 46-per-cent stake.
Stelco did not return a request for comment.