Despite President Donald Trump’s promise to revive the domestic steel industry through tariffs, AK Steel has decided its time to sell.
The Ohio steelmaker agreed to be purchased by mining company Cleveland-Cliffs in a roughly $1 billion stock deal. Although it’s a premium from AK Steel’s recent valuation, that’s less than half the stock’s value from early 2018 after President Trump first announced he would place tariffs on steel and aluminum imports in an effort to help those industries. It’s roughly a third of the price of the stock the day he took office.
The deal came the day after Trump threatened a new round of tariffs on steel and aluminum imports from Brazil and Argentina.
The Trump administration’s original round of steel tariffs briefly led to a jump in domestic prices and increased American steel production. But prices have retreated since then as the increased production and decrease in demand put downward pressure on prices. Steel industry profits and stock prices have fallen along with the decline in prices. AK Steel recently reported a 96% drop in net income in the third quarter. In January it announced it would close a mill in Ashland, Kentucky, by the end of this year, cutting 230 jobs.
But the deal offers new hope to AK Steel and its workers according to Cleveland-Cliffs CEO Lourenco Goncalves. During a call with investors Tuesday he said the deal could allow the Ashland plant to reopen to produce pig iron, a steel component, at its blast furnaces. But he wouldn’t give any firm date for restarting the mill, saying it would depend on discussions with possible customers.
“It all depends on the clients,” he said. “We’d love to generate jobs there. But the clients need to understand that we don’t work for free, and we have to earn our cost of capital.”
Beyond the question of the Ashland mill’s future, Goncalves vowed that the deal will make AK Steel far more profitable than it has been, both through refinancing its higher cost debt, cutting costs and having a supply of the iron ore pellets that Cleveland-Cliff produces. He noted that other steelmakers may continue to struggle, but the deal would give AK a competitive advantage in a troubled industry.
“AK Steel is going to survive,” he vowed.
“We believe this transaction is a compelling opportunity for AK Steel shareholders,” said AK Steel CEO Roger Newport, whose retirement was announced as part of the deal.
Stockholders of AK Steel (AKS) will get 0.4 shares of Cleveland-Cliff for each of their shares, worth about $3.36 at Monday’s closing price. But Cleveland-Cliffs’ stock tumbled 14% Tuesday on the news of the deal. Goncalves, who has a history of battling with stock analysts during conference calls, dismissed the market reaction.
“Unfortunately, Wall Street sells first and thinks later,” he said.