Steel Dynamics Inc (STLD) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Steel Dynamics second-quarter 2011 earnings conference call.

This conference is being recorded.

Joining us today are Keith Busse, Chairman and Chief Executive Officer; Mark Millett, President and Chief Operating Officer of Steel Dynamics, Inc.; Richard Teets, Executive Vice President of Steel Dynamics, Inc.

and President and Chief Operating Officer of Steel Operations; Russell Rinn, Executive Vice President of Metals Recycling, and President and Chief Operating Officer of OmniSource Corporation; Gary Heasley, Executive Vice President of Steel Dynamics, Inc., and President of New Millennium Building Systems; Teresa Wagler, Executive Vice President and Chief Financial Officer of Steel Dynamics, Inc.; and Fred Warner, Investor Relations Manager.

For opening remarks, I will now turn the call over to Mr.

Fred Warner.

Please go ahead, sir.

Good morning, and welcome to the Steel Dynamics Second Quarter 2011 Conference Call.

The call is being webcast live July 19, 2011, from Fort Wayne, Indiana.

Later today you will be able to replay the call from our website or download the call to listen to it as a webcast.

During today's call, our Management will be making some statements that are forward-looking.

All statements regarding anticipated future results or expectations are intended to be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements, which by their nature are predictive and are not statements of historical fact, are often preceded by such words as believe, anticipate, estimate, expect, or other conditional words.

These statements are not intended as guarantees of future performance.

We caution that actual future events and results may differ materially from such forward-looking statements or projections that may be made today.

Some factors that could cause actual results to differ materially include general economic conditions, governmental monetary and fiscal policy, industrial production levels, changes in market supply and demand for our products, foreign imports, conditions in the credit markets, the price and availability of scrap and other raw materials, equipment performance or failures, or litigation outcomes.

You may find additional information concerning a variety of factors and risks that could cause actual results to differ materially from today's forward-looking statements.

Refer to sections entitled Forward-Looking Statements and Risk Factors in our most recent annual report on form 10-K and in our quarterly reports on form 10-Q, as well as in other reports we file from time to time with the Securities and Exchange Commission.

These reports are publicly available on the SEC Web site, www.sec.gov, and on our website, www.steeldynamics.com.

Now we will open today's call with an introductory discussion by Keith Busse, SDI's Chairman and Chief Executive Officer.

Thank you, Fred.

Good morning, ladies and gentlemen.

Before we begin this morning, I would like to introduce to you Russ Rinn.

Many of you know Russ, he joined our team and he will be running the recycling segment of the business.

Many of you know him from his days at Commercial Metals, wherein Russ met with many of the analysts that follow both companies, and we are tickled to death to have Russ on our team and with us here today.

As to the results for the second quarter, now I would basically tell you that when you do the pluses and minuses, with the hedging, and things of that nature, we essentially had the same kind of a quarter.

It was, on a net income basis, it was $99 million, slightly less than $106 million we reported in the first quarter, or $0.43.

That $0.43 was positively impacted by a tax entry to the tune of a penny, and negatively impacted by hedging losses to the tune of about a penny.

And as you compare that against the first quarter, which is $0.46, it was impacted by about $0.03 from a hedging perspective, on a positive side.

So if you kind of back all that noise out, the quarters were essentially about the same, which I think is what we're attempting to do for you in paragraph two of the press release.

In talking about shipments, they were essentially the same as they were in the first quarter, 15% higher than 2010.

The average -- I want to underline -- external steel selling price per ton shipped from the second quarter increased by $118, to $947, from the second-quarter average of $829, and increased $57 from the first-quarter average.

The next paragraph talks about scrap.

And I just want to provide a little bit of clarity there, for everyone.

A lot of people like to just say okay, we had an increase in revenue of $57, an increase in scrap of only $15, shouldn't that just follow to the bottom line.

It doesn't really work like that.

I want to point out that internal sales are included in our results as reported.

But we're really reporting on external steel selling prices as we always historically have.

And I also want to mention that the techs are in these numbers, and that's a value-added product, number one.

And number two, it doesn't carry a scrap component, which is probably the biggest disconnect.

So you can't just take $57 and subtract $15 and multiply it times some number of internal tons, which you can't find here on the front page, and have a result.

It doesn't work that way.

I think most of you know that already and probably understand that.

But just wanted to really point that out to you.

So as you look at our overall earnings posture here in this quarter, we had a little bit better results as regards steel, and a little worse in the way of results in recycling and ferrous resources, which we had not contemplated.

So one basically offset the other and provided essentially the same kind of quarter.

As to where are we today, and so on and so forth, and I think that is really the issue at hand, the flat-rolled -- there is volatility in order entry in flat-rolled.

One minute we're flying high and the next minute the orders are somewhat weak.

So it's a little uneven.

It's been a little uneven in terms of order entry in the second quarter.

But the order book at the structure division, although nowhere near where we need to sustain a healthy level of net income, has improved.

We have a better backlog in the structural arena today.

The backlogs and SBQ bars remain very healthy yet, and operating results there were very good.

We were profitable in structural and rail.

You should know that.

We had a really great quarter in SBQ.

Steel West Virginia did a good job, and we were profitable down at Roanoke.

So as we head into the third quarter, like I said, there is some unevenness there.

And, as you all know, the transaction values have come down during the quarter and scrap hasn't.

So there has been a lot of chatter on the air waves about margin squeezes, things like that, and as there should be.

I think overall, as you look towards the third quarter, my guess is the average selling value is going to be down in the neighborhood of $40, $45 per ton, but the -- if you look at just flat-rolled, they're going to be down $60, maybe $65, somewhere in that area, but mitigated by values that weren't changing as dramatically as flat-rolled during the quarter.

So there is going to be some margin squeeze there undoubtedly.

Scrap, we think could be down, by the time the quarter is over, maybe $5, maybe, on an average.

But we do anticipate seeing scrap weaken going into the August and September time frame.

Steel selling values have come down, but scrap, as you know, has remained fairly flat to up a little, and certainly that cart is way ahead of the horse, I think.

And as steel selling values have started to come down, I would expect scrap to weaken.

Although I will tell you, I'm in the same camp that a lot of people are, that I think we've kind of reached the bottom, in terms of retrenchment of selling values, and I think we will see, given the weakness in inventories that are out there, I think we will see order entry pick up and perhaps pricing start to reverse course sometime during the quarter.

What kind of an impact that's really going to have on us is yet to be seen, because the backlog had flat-rolled.

The lead times are so short yet today.

Given the fact that we did talk a little bit about, in the press release, the upcoming quarter, last time I would have told that you a fairly solid quarter, one quarter equaled another, even though that's not the way the analysts started to write about it, so I want to mitigate that, and tell that you that in light of the economic circumstances that are out there, in light of the weakness that has been prevailing in the last month or two, especially in flat-rolled, we're not going to be able to repeat the quarter, given the economic climate.

But given the economic climate, I would tell you it is still going to be a fairly solid quarter and we will have -- we will better be able to define that for you going forward.

It will be impacted by a margin squeeze.

It'll also, I might point out to you, with the kind of heat wave that is plaguing the nation, the buy-through pricing to run some of our shops just makes it uneconomical to do so.

So we're probably going to take some curtailments during this time frame, which is also going to have somewhat of an impact on the quarter.

But the message I guess we're trying to send, it's going to still be a very profitable quarter.

It's just I wouldn't anticipate it being in the 40s but rather in the 30s, and we'll have some tighter numbers for you as we walk forward with that.

We have made progress at Mesabi Nugget.

Mark will report on that.

And we had a weaker quarter operationally in recycling, and I would tell you that's principally driven by offshore demand, more than anything.

Although I tell you, there is just too many buyers sometimes chasing too few tons out there, and I think you can't do a lot about what the transactional bite is going to be, but you can do something about what you buy it at.

So perhaps some of that squeeze was we're our own worst enemy with respect to buying habits.

But I will tell you on the whole, the quarter turned out to be a fairly good quarter.

As I said, I think we're nearing a bottom in terms of this cycle, and we'll probably see a healthier order entry environment, improving pricing going forward in the quarter, although the quarter in and of itself may be a little bit weaker than the first two, but not off tremendously, and that's the kind of message we were trying to send.

So with that, I will end my comments and turn it over to Mark Millett at this point in time.

Mark?

Super, thank you, Keith.

Good morning, everybody.

I guess firstly, let me take this opportunity to again welcome Russ to our organization and echo Keith's thoughts.

Russ, as many of you know, brings a broad, comprehensive perspective on our industry, both from the steel side and on the recycle side of our business.

His values and business philosophies parallel, I believe, those that have driven SDI's success in the past.

And most importantly, I think he values people, and will be a great cultural fit.

So on behalf of the OmniSource team, welcome.

Referring to OmniSource, ferrous scrap flow, as you saw, was strong through the quarter, allowing shipment of 1.6 million gross tons, a slight increase relative to Q1 of 2011.

Non-ferrous volume was 255 million pounds, down 11%, quarter over quarter, and that was principally driven by a lower stainless shipment.

A little bit less aluminum, but principally stainless.

On an annualized basis, these shipping volumes parallel the high shipping rates OmniSource experienced in the period 2006, 2007, and 2008.

Given the depressed economic environment, and the low utilization rate of the domestic steel industry, such levels, I believe, are a testament to the talents and hard work of the OmniSource team and I would like to applaud each and every one of them.

Although we did not expect to emulate the significant profitability of the first quarter, the financial performance of the recycling division was still disappointing.

Operating income dropped to $18 million, down some $31 million from the $49 million achieved in Q1.

Although ferrous shipments were strong, ferrous metal spread contracted quarter over quarter.

The first quarter was the beneficiary of low-price inventory accumulated during November and December that was liquidated in the strong upturn in the market in January.

In the second quarter, the market was more stable, and we were unable to take advantage of such market positioning.

Further earnings compression was related to the non-ferrous market activity as we witnessed corrections in all of the commodities that we sell.

In stainless, inventories accumulated by the mills earlier in the year dampened the demand and pressured market pricing.

Our stainless shipments were off 34% from the first quarter, while margin evaporated as market pricing fell from its February peak and high-priced inventory flowed through our system.

Finally, as Keith suggested, of significant financial impact was the swing in the non-ferrous hedging position.

During the first quarter, unrealized hedging gains at $9.5 million were recorded, when a change in market pricing through the second quarter drove an unrealized loss of $4.8 million that resulted in a non-cash fluctuation of pre-tax earnings of some $14.3 million.

OmniSource continues to pursue a strategy of volume growth with a focus on margin expansion.

Eight new retail locations have been opened year-to-date as we re-brand that side of the business, with the intent of making all of our locations customer-friendly and the place to shop to bring your scrap.

Our shredding facilities have been upgraded to increase volume, and state-of-the-art dam stream separation technologies are about to be installed to maximize the value of the material stream.

Technology has been installed at our Fort Wayne facility to provide value-added low copper shred to the market.

The concept has proved successful year-to-date and will be expanded to other divisions through the year.

In May, SDI La Farga commenced construction of the new copper rod production facility in Fort Wayne, with an anticipated start-up in the summer of next year.

Capital expenditure is expected to be around $40 million, capacity 180 million pounds per year, and employment of about 40 people.

At Iron Dynamics, the folks continue to operate very, very smoothly.

60,000 metric tons of liquid iron and HBI were transferred to the Butler sheet mill during the quarter, providing an effective operating income of approximately $10 million.

I think on an interesting note, the team shipped its millionth ton in June, a milestone that is a testament to the perseverance and hard work of Dave Bednarz and his group.

Additionally, the current SEF refractory lining will be replaced after about 380,000 metric tons, which is a long cry from the 2,000 tons that the first lining had some years ago.

It's a true pioneering effort on their part.

Progress continues, as Keith said, at Mesabi Nugget.

After the 3 week outage in May for furnace refractory repairs, the team recorded its best production month to date in June.

A total of 38,000 metric tons were shipped during the quarter.

Startup losses from Mesabi negatively impacted consolidated earns by some $13 million.

Relative to mining, the state has designated a new project manager that we hope will accelerate progress.

However, no progress has been made in recent week due to the government shutdown at Minnesota and hopefully they'll resolve that issue up there.

But again, it slowed our progress down.

In the meantime, we are exploring the recovery of iron concentrate from tailings basins on the range through a mining technique called scram mining.

This is an attempt to bridge the time until full-scale mining can be implemented at our own Hoyt Lakes facility.

This technique is being commercially demonstrated on a day-by-day basis, by a company called Magnetation, a startup company founded by Larry Lehtinen, who as many of you know was an individual formally associated with both Iron Dynamics and our Mesabi project.

They have been a consistent supplier of concentrate to Mesabi, having shipped approximately 200,000 metric tons to date.

Our plan would be to partner with Magnetation and develop our own supply.

And with that, I would like to hand it to Dick Teets.

Before we do that, perhaps Russ, if you want to say anything, say hello.

Well I just thank Keith, you and Mark, for the kind introduction.

I will just say this, I'm learning how to drink from the fire hose again very quickly.

It's a welcome sip of water.

But I am enthused and excited and truly proud to be part of the Steel Dynamics team and I'm excited for the opportunity that we've got for the entire Company.

So thank you for bringing me on board.

Thank you.

Dick?

Okay.

Thanks, Mark and Keith.

Good morning, everyone.

I would like to give a few additional comments to what has already been stated, either in the press release or on the call this morning about the steel operations.

At the flat-rolled division in Butler and Jeffersonville, production of hot band in the second quarter was the highest ever.

Over 750,000 tons of hot bands were produced.

This supported the strong downstream galvanizing and painting operations.

Last week, the Butler mill was down 4 days as repairs were made to the mill in general, and to the static bar and the substation equipment that we previously had mentioned was damaged on February 1 during a wind and ice storm.

The engineering, maintenance and production personnel have all been very creative in transforming a potentially catastrophic situation into a record-breaking performance.

Thank you to all involved.

Backlog at Butler remains solid, as Keith mentioned, for all products, with a slight weakening in hot band.

But, as he mentioned, with the production curtailments due to high temperatures, the impact will be minimized.

As The Techs, the three lines ran with an average of about 75% of rated capacity in the second quarter.

We have a similar to slightly downward opinion of the third quarter at this time.

Congratulations to the Techs teams as the three lines did achieve a record -- a recordable-free safety performance in the second quarter.

At Columbia City, with the construction activity at or near the 2010 level, had very little report on beam and tiling production.

However the medium section mill, last week the team broke the shifts daily and weekly production records with the best yields ever.

Congratulations to all for this achievement while maintaining a zero safety incident record.

As to rail production, the prime shipments year-to-date approached 60,000 tons, with production and yield records being recognized.

The $17 million rail finishing project to de-bottleneck the mill is on track for commissioning at year's end.

Pittsboro continues to have the best backlog in the steel group.

First and second quarter discussions for 2012 on commitments in pricing are under way.

The melt shop broke the monthly production record in May and then turned around and did it again in June.

The rolling mill also broke its production record in June and the bar finishing continues to set records in regards to percentages of shipments.

All these performances occurred in spite, in June, of 3 incidences of power curtailment and it only being a 30-day month.

The rolling mill took a 10-day outage for maintenance purposes in April to make the repairs to the Reedy furnace and to install capital improvements.

Much of the equipment installed will de-bottleneck the stacking and bundling area on certain products.

It wasn't too long ago that we celebrated when the Pittsboro team, in casting and hot rolling shipments, all exceeded 50,000 tons in a month.

Well, in June, a 60,000-ton performance in all areas was narrowly missed by a few hundred tons of shipments, a tremendous job by all.

Thank you.

Roanoke, like Columbia City, continues to be negatively affected by the lack of improvements in construction activity, but the plant did have the highest capacity utilization rates in the quarter since 2008.

The melt shop achieved 96.6%, and the rolling mill, 91.2%, a very good job in a tough market.

At Steel of West Virginia, the core transportation markets of truck/trailer and industrial forklifts continues to improve.

The second-quarter shipments increased 4% over the first-quarter shipments.

In contrast to the first half of 2010, the first half of 2011 has seen the melt shop produce at a 6% higher tons per hour rate, the number one rolling mill at an 8% higher, and the number two mill at 19% higher hourly rates.

The Finishing department will be commissioning a new robotic welding line for truck/trailer products in the third quarter of this year.

The capital improvements at Steel of West Virginia and improved scheduling continue to deliver benefits to the team.

Congratulations to everyone involved.

Gary?

Thanks, Dick.

A few comments on New Millennium.

Obviously non-residential construction remains very weak.

However, bookings for the joist industry are up 15% year-over-year through May, and deck industry shipments were up 25% through March, both positive indicators there is some concern that positive momentum may slip away a bit here in the second half.

We'll see how things go.

In response to the stronger order entry for the industry, and New Millennium penetrated new markets, our backlogs are up 30% for joists and 18% for deck.

We're expecting 2011 to be a slightly stronger year for joist and deck demand, but again it remains unclear how strong it will be.

We're not yet giving up ground which is good news.

Our facility in Juarez, Mexico, has been ramping up production over the first half and generated its first operating profit in June.

Congratulations to the team in Juarez.

And for the group, production and sales increased both year-over-year and sequentially.

However, margins in the quarter were squeezed by steel cost increases that hit this quarter.

Excluding construction costs, startup costs, and costs associated with idle assets, the plants that we are operating generated a small operating profit for the quarter, which is a good indication that results should continue to improve as market conditions gradually improve.

And our facilities in Arkansas/Nevada are nearly ready to commence operations.

We'll start up gradually as the backlog supports the addition of production personnel, which should, again, further positively impact results.

So the market remains very tough, but there is a lot of good news, and things gradually, day-by-day, seem to be getting a little bit better.

Keith?

Obviously, your losses, as a group, have been coming down, and I think given the climate that's out there, even though there is some uncertainty, we are hopeful that we can stop hemorrhaging and at least break even here in the third quarter in fabrication.

Teresa?

Thank you, Keith.

Good morning, everyone.

During the second quarter, we had two non-operating items of note that I would like to just mention.

The first, as you've already heard, involved a non-cash impact of an unrealized marked-to-market adjustment, which impacted the quarter negatively by about $0.04.

And then we also had -- I'm sorry, it was a quarter-over-quarter change of $0.04.

It impacted the second quarter by about $0.01.

And then the second item of note was caused by a change in the Indiana state tax law, which reduces the state tax rate from 8.5% to 6.5%.

The rate reduction is allocated over a period of years, becoming fully effective in 2016.

Based on current estimates, we reduced our deferred tax rate from 38.5% to 38.1%, effective June 30.

This increased our quarterly earnings by about $0.01 per diluted share.

Our effective rate during the second quarter with non-controlling interest was 35.8%, compared to 37.4% in the first quarter.

There have been some questions regarding other income in the quarter as well.

Other income consists of interest income from fundings that we have available on our balance sheet, as well as equity income from certain very small joint ventures in our metals recycling area, which did improve in profitability this quarter.

And then it also includes such items as insurance proceeds, et cetera.

But I'd like to note that there was nothing that occurred in this quarter that was significant or unusual.

During the second-quarter of 2011, our consolidated EBITDA margin remained steady, even though our gross margin percentage and our operating income margin decreased slightly in comparison to the sequential quarter, although all of these metrics improved very nicely from 2010 results.

Availability on our revolver was $907 million at the end of June, and our liquidity remains very strong and actually increased $117 million during the quarter.

For that, our liquidity stands today at $1.2 billion.

We remain well within compliance of our financial covenants.

Our ratio of total debt to trailing EBITDA improved during the quarter to a current level of 3 times, which is compared to 3.7 times at the end of December.

Cash flows from operations provided $166 million of funds, as working capital was fairly neutral in the quarter, after being a draw of funds in the fourth quarter of 2010, and the first quarter in 2011, as we were ramping up our operations based on improved demand.

We believe our working capital position is currently sufficient and we don't anticipate any meaningful use of funds in the near term.

During the second quarter, our capital expenditures totaled $35 million, depreciation remained at $44 million, and capitalized interest related to those projects was less than $1 million.

Our current outlook regarding capital expenditures for the second half of the year would be in a range of $100 million to $150 million.

Depreciation for 2011 is still expected to be in the range of $200 million.

Gross interest expense for the quarter was $45.2 million, with effective interest rate of 7.3%.

At June 30, we had 218.6 million shares of common stock outstanding.

And additionally, we had 16.4 million shares underlying our convertible securities, and 7.5 million outstanding stock options.

Our current expectations for the current third-quarter dilutive share count is in the range of 236.5 to 207 -- excuse me -- 237 million shares.

And lastly, there are many of you that like to know the composition of our flat-rolled shipments during the quarter.

For hot roll, the shipments were 291,000 tons; pickled and oiled, 73,000 tons; cold-rolled, 41,000 tons; hot-rolled galvanized, 111,000 tons; cold-rolled galvanized, 53,000 tons; painted, 89,000 tons; and finally, galv alum with 22,000 tons, for a total of 680,000 tons.

Keith?

Thanks, Teresa.

I don't know if you mentioned it, but our leverage is now, what, 51/49?

Oh, our debt to equity capitalization, yes.

Down a little bit from where we've been.

And when you look at converts, if you think about the converts as equity, it's nigh on 45/55.

So going in the right direction.

Absolutely.

Thanks, Teresa.

Jim, it's time for Q&A, so let's open up this conference call up to questions.

Certainly, sir.

(Operator Instructions)

We'll take our first question from Kuni Chen from CRT Capital Group.

Hi, good day, everybody.

Hi Kuni.

How are you?

I guess just first off, can you comment a bit on the pace of order entry, July versus June?

Maybe talk about that in flat-rolled, and structural, and just talk about things we're tracking on a sequential month basis?

At the end of June, order entry started to head downward.

And just recently, again, it started to pick back up.

So you might say it reached the bottom of the dip for us somewhere around the early part of July.

And that's just a flat-rolled comment or that's across the board?

That's just flat-rolled.

Order entry elsewhere has been pretty good, actually pretty steady.

At structural, backlog being higher, it's been a fairly good second quarter from an order entry perspective.

Clearly, as you heard Dick talk about SBQ, we're talking to people about first and second quarter of 2012.

Backlogs at Steel West Virginia are in excellent shape.

That team's doing a great job of churning out a profit with fairly healthy volumes in their backlog.

And Roanoke's backlog hasn't changed a lot, but it usually doesn't.

We do anticipate Roanoke probably making a wee bit more money in Q3 than they did Q2, but the backlogs are essentially unchanged there.

Okay, great.

And then, just as one follow-up here, can you just give us some color on what you're seeing in the competitive environment?

Any impacts you're seeing in the market from some of the new capacity starts?

Dick might be able to better speak to that.

I have not heard that our team has been impacted at all by RG or Thyssen at this point in time.

Obviously Severstal's impact is just starting to be felt, whatever it is, but I don't know that we've been -- we've encountered them in the market, but I don't -- wouldn't say it's all that impactful.

Dick, you might better comment on that?

I would just build on that.

Needless to say with our Techs being -- a sourcing opportunity from the outside, we do -- have run into RG with them as a supplier on a minimal basis, and they do see some product from Thyssen, but it's not -- we don't see it as a downward pressure at this moment.

There's a little more talk than there is impact at this moment.

But they're real and they'll be dealt with.

Okay.

Great, thanks.

I will turn it over.

Moving on, we will take our next question from Brett Levy from Jefferies and Company.

Hi, guys.

Some of the bigger moving parts -- can you guys talk about the discussion/approval process regarding a potential new southern sheet mill?

Obviously, I think you mentioned you need 11 Board votes to get it.

Is there kind of a continued evaluation process?

And then also as it relates to kind of the CapEx plans for some of the bigger pieces, as you guys continue to build up Mesabi Nugget, can you talk about the timing of that CapEx, as you now plan it?

Well, not a lot has changed since we talked.

We only have 11 directors, so you only need six votes.

But you would like to see uniformity.

But I think if you took the Board's temperature today, it is improving.

I think they're becoming more positive about the project.

I don't think it has anything to do with its impact on Butler.

Market studies would show that there is very little impact to Butler.

Financially, it is certainly affordable, still in the billion-dollar range.

It's not going to come online to 2014, as we said earlier.

That ought to be an entirely different economic climate than what we're seeing today.

Much easier to fit into, with hopefully demand well in excess of 100 million tons, still growing today.

Albeit slowly, but growing.

So I think they're concerned, like any other directors' concern, is about where is the nation heading, and what are the barriers to continued success and continued expansion of our economy.

And I think everybody is getting a little uptight and paranoid, as they ought to, about the level of indebtedness, the inability to find a compromise on those issues, to get to a balanced budget kind of environment, to -- I think there has been a lot of conversation about stimulating the economy with a corporate tax rate decline, things that actually might stimulate the economy.

So if there's anything related to the other project, which is still a couple years off, it has more to do with the economic climate at hand than anything.

People are talking about double dip.

I'm still not a guy convinced that's going to happen.

I think slow, steady, maybe yet uneven growth is out there.

But it is going to be growth, I think.

And so I think it will be a topic that is discussed a lot again, here in our August meeting, and we will let you know if there is any sea change at that point in time.

As to your questions on CapEx, for Nugget, what-not, and where that project is going, and when we might achieve success, and what that might mean for additional capital expenditures down the road, we'll let Mark speak to that.

Yes, Brett, I think from our best guess, from a permit for the mining up in Minnesota, we would hope to get a permit probably by the end of 2012, so that we actually start construction of the mine in 2013.

So I think we have $150 million allocated or approved for that.

But that is not until a 2013-type expenditure.

Obviously, expansion of Mesabi Nugget itself into module 203, we wouldn't necessarily entertain that until we do have a concentrate supply sort of almost guaranteed.

Relative to the scram mining, the tailings basin, as I suggested earlier, we are exploring that.

That could be perhaps a $40 million to $50 million expenditure, and if we go forward, it would be kind of a Q4 of this year, going into first half of next year.

And then with respect to the curtailments you guys talked about potentially, can you talk about sort of the size or length that you're considering at this point for the third quarter?

Well, Brett, I don't think there is so much.

They may curtail us on a very, very hot day, where we're under some strain and some pressure here and there, but it is more about the price of power.

We're already seeing squeezed margins on pricing in relation to input costs, that being principally scrap and some iron content.

But clearly, when the price of power goes crazy, and you can buy through, and it's up $100 a ton, you're not going to do it.

I mean you start to take yourself into a loss position potentially.

So it's more about us not wanting to run, perhaps, than it is not being allowed to run.

Dick, is that --?

And these are a mid-day to 8 o'clock or 9 o'clock at night issues.

The (inaudible) was curtailed yesterday.

They may get curtailed today.

I mean we're forecasting to have mid-90s here in Indiana and that is a possibility.

But this week is going to be a hot week, but hopefully that things will cool off, and we will get back to more normalcy here.

So it's not a third-quarter major issue.

It's right now, it's a July issue.

And as Dick aptly pointed out, that probably fits our order entry pattern from three or four weeks ago pretty well.

Brett, I would also add, just of that $100 million to $150 million of CapEx we just talked about, what Mark just mentioned, Mesabi, potentially represents within that five -- sorry, $45 million-$55 million -- so that's why there is such a wide range, because again, it's tending to claim some of the scram mining that we talked about.

Great detail.

Thank you.

Moving on, we will take our next question from Luke Folta from Jefferies.

Good morning, guys.

Good morning.

The first question I had, I just wanted to talk a little bit further about what you guys could be doing with Magnetation.

Just regarding your intentions there, would this be something like a joint venture with those guys, or would you be buying a license from them?

How would that work?

It would be a joint venture, Luke.

Okay, and would you expect that to have the capacity to enable you to stop buying from Cliffs or other outside sources, or would this be something that would just supplement that supply?

We have a contractual supply from Cliffs for this year and next year.

But it would be the intent to have the scram mining supply all our needs in 2013, 2014.

Okay.

Are there minimum quantities you have to buy from Cliffs next year?

Yes, we've got a contract with them.

Okay.

And just secondly, you mentioned, Mark, that there is some -- you had expanded eight new facilities for OmniSource.

Can you give us a sense for how much capacity that might have added?

Well, they're new locations, and so it is customer by customer by customer.

The actual volume, right this second, Luke, I wouldn't be able to give you a precise number.

They are probably more retail yards than they are -- they're not yards that have necessarily an investment -- well they wouldn't have shredders -- and I'm sure all of them would -- they wouldn't even have a bailer.

No, these yards with essentially no real equipment, at least processing equipment, and it's our focus on higher margin.

If you look at your material margin through our ferrous material streams, obviously brokerage is the slimmest, you may make 5, 6, 7 dollars a ton or so on brokerage.

Industrial [cags] today, for [cromp] scrap are -- it's very, very competitive and you may make $15 to $20 a ton perhaps.

Retail remains, obsolete scrap, retail remains the larger margin opportunity for us.

So we just want to exploit that arena.

With the feeder yard, or the retail yards, obviously the intent would be at a later date, as the volume grows, then perhaps you put processing in, depending on the experience of volume.

All right, guys.

Thanks.

And just last question, just in regards to your Pittsboro operation, are you starting to see some of the benefit from the price increases that have been announced recently for SBQ?

And also I wanted to ask if you could give us some sense of what your mix is between large and small diameter SBQ bars.

Thanks.

Well, I will take a wing at that.

From a price increase standpoint, it is a -- I won't call it minimal but we have a lot of pricing mechanisms that are in place, and those follow either market indices or in a trailing manner.

Some of them also, needless to say, are spot purchases, and those are the ones that are affected by price increases.

I know one of our competitors just rolled out price increase effective November 1, trying to give everyone an opportunity to recognize their requirements and do some planning.

Of course, we follow any of those lead in some of them ourselves.

So we're taking advantage of every pricing increase opportunity we have available to us, but it doesn't affect even 50% of our tonnage of shipments.

As far as split between small and large diameter bars, we really look at it 3 ways.

Small, medium, and large.

We don't do a lot of large bar product.

The biggest that we can roll around is about a 9-inch, but we don't get the reduction required for quality purposes until we get down to about a 6 1/2-inch, 6 3/8-inch bar.

So large bar is a very minimal amount of our tonnages on an annual basis, maybe 15,000 tons or so.

So we don't recognize it at large.

Medium I will tell you, is the largest portion of our shipments, and in a year, maybe 300,000 tons, 275,000 tons would be achieved.

And our small bar, we don't go down to the smallest normally that the mill is capable of because we have such a good medium-section market, and we probably ship about 175,000 to 200,000 tons of small bar diameters.

Thanks for all the detail, guys.

Thank you.

Moving on, we will take our next question from Michelle Applebaum from SMI.

Hi.

Good morning.

Good morning.

So first, congratulations on Russ, and congratulations to Russ.

I think it's a great hire, and I think it says something about the stature of your Company, that you can attract a talent like Russ to the Company.

So great move there.

Second thing, I just want to apologize to you, having been part of the team that took your Company public about 20 years ago, if I knew that we'd ever hit an environment where you had to qualify a statement in a qualitative guidance like fairly solid, the way you've had to put together this outlook, I might have given you different advice 20 years ago.

So I'm sorry we're in a world where we have to -- where we have to talk that way.

My question is this -- looking forward on the Columbus expansion, I was wondering is that big enough that it could hit the prime scrap pool, at the same time add new capacity?

I know we take for granted that higher scrap prices mean higher steel prices.

But we've seen some prior startups where the raw material pool is pressured a little bit during the startup, while new capacity is added, and prices are pressured in the other direction?

Michelle, define Columbus?

I'm sorry?

Are you talking about Severcorr, Michelle?

Yes.

I think Columbus itself, Michelle, is not going to be a massive enough change to drive the market.

I think it's just the prime market in general is going to be under pressure.

Obviously, the domestic manufacturing is down, prime scrap is not being generated at the same volumes as we've historically seen, and the mills' inventories today on the prime side are pretty tight.

So I think prime scrap going forward is kind of the volatile agent, and it's just overall demand is going to drive the pricing, not just Severcorr itself.

So Severcorr is just one piece of the equation?

Yes.

Obviously, any demand in a tight market is going to impact it.

Okay.

Then my other question is, with regard to Nuggets, I'm confused about the timing of when -- and I hate asking you this -- but we talked a lot about when you expect it to hit break even.

And I hate asking with a new process, I've learned from experience, sometimes the answer is we just don't know, and having to deal with -- and again, this is a being public issue, where you should be investigating science projects like Mesabi Nugget and other things like that, and having to report quarterly results and give a projection on when you break even is very difficult.

I understand that.

But I have different conflicting things in my notes from these calls, in terms of the timing, and the conditions on when you expect to break even.

Can you give an update, or is the answer you just don't know?

Well, I appreciate your thought on the longer-term horizon as opposed to what we're doing next week, so to speak.

Because again, just as Iron Dynamics was a pioneering effort, that was a long-term vision.

It has come to fruit, and we're benefiting from it today, as will we benefit from Mesabi Nugget.

And you know, I just, forgive me for interrupting, but if we cared and worried about when something would hit profit so intensely, Crawfordsville would never have been built.

So it's a real issue.

I'm not just being nice here.

I think it is a real issue.

But go ahead.

I think what we've said in the last couple of calls, and I will sort of reiterate, as long as we can get some volume over the next few months, we would hope on a, perhaps on a monthly basis -- it won't be the whole fourth quarter -- but we would hope to get a month under our belt yet this year, at a sort of break-even level.

Michelle, I think the scram -- I would agree with Mark that's a possibility later this year, to reiterate it's not a quarter, perhaps a month.

But the effect of scram mining, and those input costs on a JV basis, could be material, with that same considered volume that Mark just spoke about, that the impact of scram would be substantial, and could make it very profitable.

Okay.

At one point --

And just -- sorry, Michelle, just one added piece of color.

If we were to go positive or barely break-even here yet this year, you are probably going to see early next year, a turn slightly negative, as higher concentrate costs hit us.

And hopefully volume will kick in, and we turn positive again.

Oh, that's a good point.

The impact of scram would be second half of 2012.

Yes, we would hope to get lower cost concentrate in the second half of 2012, correct.

Yes.

Okay.

But overall, you would --

Michelle, it's materially lower, or it would nicely drive profitability.

That's great.

Are you looking for joint venture partners for the operation, now that you're getting closer to it being more fully proven out?

Joint venture partners for?

Scram mining?

No, Nuggets.

No, as Mark said, we need a climate in which we have a proven technology in tow, and a mining permit that could drive profitability.

If we have the promise of a permit, coupled with scram mining, that's a pretty easy decision, but you have to get there first.

Great.

Okay, thanks.

Moving on, we will take our next question from Michael Gambardella from JPMorgan.

Yes, good morning.

Good morning, Mike.

Good morning, Keith.

I have a question on the recycling business.

And you paid a little bit more than a billion dollars I think at the end of 2007 for OmniSource, and clearly no one saw the downturn that we had after that.

But also, you would have to say that the recycling business so far has been a disappointment, in terms of the returns.

A couple of questions.

One, what -- I don't want to put Russ on the spot right now, although if he wants to chime in, feel free, but what do you, Keith, think has to be done at recycling to really turn it around?

And then the second question is, are we seeing some of the earnings benefits of recycling in the steel operation numbers and we just can't see them from outside?

Well, it's transferred pretty much at market, so I would tell you there's -- you're not seeing much of it there.

We transfer our material at [Remdas] essentially for the more remote yards from Butler, Columbia City, or Pittsboro, or wherever, the local yards get transferred at Remdas minus five.

So for all practical purposes when you average all that, it's Remdas minus a couple of bucks which is market.

So no, you're not.

As to the character of the business, I think you hit the nail right on the head.

And to clarify that, we paid $800 million in equity.

We would have had the debt component materialized one way or another, but with debt carried with it, it was a $1 billion.

But we bought it right at the outset of a decline, and we've never had the benefit of a positive market environment overall in the steel community.

Although you could argue that with the kind of pressure you get from abroad, pushing the price up, that you might have a better return than we have had, and I would tell you, my humble opinion is, we've still got work to do on the buy side.

We could do a better job there.

I don't know if Russ is going to agree with that or Mark is going to agree with that comment, but that's where I see it.

Mark?

I think, Michael, if you look at our recycle business, as I said earlier, the team has done a phenomenal job getting volumes back, both on the non-ferrous side and the ferrous side for the 2006, 2007, 2008, sort of historic highs for the recycle industry.

And as you rightly point out, we're not getting the earnings from that.

That is essentially, in our mind it's been driven by the squeeze metal spreads between the -- our ability to buy scrap for the shredders, in particular, as compared to selling prices to the steel mills.

And hence, our focus on increasing that margin.

We're doing that in several different ways.

The downstream separation of non-ferrous, from the ASR, that can appreciably improve our margin.

The re-branding and expansion of our retail activity, again is to drive or shift our input from low-margin sources to higher-margin retail.

Our focus on producing value-added products, the low-copper gamma shred and other products that we can sort of get into niche markets and improve our margins.

But it is the -- fundamentally, the competition for feed stock has come from 2 sources.

One is the export market.

We're exporting 22 million to 24 million tons a year today, as opposed -- on an annualized basis -- as opposed to 10 million or 12 million tons in the past.

There has been a prolific increase in shredder capacity.

We would calculate some 60-65% increase in shredding capacity over the last perhaps six years.

Everyone pushing or everyone competing for a very defined reservoir of scrap.

I think as markets come and go, you will see that over the next perhaps three or four years, a lot of those new shredders are probably going to suffer.

In fact, they're suffering today.

And so there might be opportunities to acquire or otherwise rationalize that market, and quite possibly margins will come back just from that itself.

But that is a three-, four-, five-, six-year sort of outlook.

Mike, I would also tell you that, not that we like the margins, but our peers haven't been able to do any better.

If you look at the average scrap bottom line from other providers, we've been as good as, if not better, throughout this last three- or four-year cycle.

So not that we're proud of that, but we certainly, as you heard Mark talk about all of the things we are trying to do better, have a better opportunity, going forward, and hopefully in a better market.

But you have very little scrap exports in your business, right?

Correct.

The only real export we do, Michael, is on our non-ferrous side.

Probably I would say 15%, maybe 20%, of our non-ferrous gets exported.

And just one closing comment on the impact or potential upside to our steel mills.

As Keith said, Omni scrap transferring across, it's at market.

But given the position of scrap that we have, going to our steel mills, our own scrap, it does allow us to leverage our third-party buyers a little, and perhaps we can trim 2 or 3 bucks a ton off of those tons.

And obviously, having good control of the supply, or the material supply chain, we're able to control and have been controlling our inventories at the steel mills, which tends to give us a little better position from a working cap perspective.

I think that is right on the money kind of commentary.

We, I think, buy better than our peers do, because of our position and the leverage we have, which then does benefit the mills.

Okay.

Thank you.

Moving on, we will take our next question from Evan Kurtz from Morgan Stanley.

Hi, good morning.

Just one more follow-up on scram mining.

It is not a process that I'm hugely familiar with.

I was just hoping you could share some of your assumptions on cost per ton for the process, and what are some of the factors that drive that; that could push it one way or another?

Well, I think my purpose for not being able to share the actual price, other than as Keith said earlier, it is significantly lower, it would be probably a little higher though than ultimately from our own mine, by perhaps $5 to $10.

Okay.

That's helpful.

And then just lastly, Keith, you mentioned that you thought hot-rolled prices could start to reverse this quarter.

Would you mind just elaborating on some of the supply-demand factors there as far as imports and new supply and demand, and how that could factor into that inflection point?

Well, I don't think imports are much of a factor.

And I think with continued health in the automobile universe, the agricultural, the appliance, the transportation equipment environment, the yellow iron business, those markets remain fairly even, to increasing.

The rough market is construction.

And obviously, with all of the squabbling in Washington, very few federal dollars available today for some needed infrastructure projects.

So as you heard so many times before, it is the lack of any emphasis by the business community to invest, and I think that will come in time, but there is a reluctance there now, and you couple that with infrastructure activity that's pretty low ebb right now.

I think it just continually creates a very lackluster construction environment, which could drive entirely different results almost for every business unit, but certainly impacting structural more than any.

Great, thanks.

Moving on, we will take our next question from Timna Tanners from Bank of America Merrill Lynch.

Yes, good morning, thanks for taking my call.

I wanted to just clarify, you talked a lot about order entry, but I was just wondering what the lead time behavior has been on the flat-rolled business.

It is just a couple of weeks, I think.

Yes, for hot band.

For hot band.

And of course, the furthest out would be totally galvanized and painted products.

So with better order entry, have you seen lead times extending?

Well, we've had better order entry, as Dick pointed out, in value added.

Not so much in hot-rolled yet.

Okay.

Got you.

I know we've had a lot of discussion about all the different components of the recycling business between scram mining and Mesabi and et cetera, but I think you've talked really helpfully and clearly about how the first quarter was an abnormally positive environment.

Maybe the second quarter was an abnormally challenging environment.

But for the near-term, when we think about it in terms of either margin or EBIT per ton, which do you think is -- should we split the difference?

How would you guide us to thinking about the near-term trends in the recycling business, and what the potential is?

Oh, I think clearly being a spot producer, we saw some benefit earlier that perhaps others in the industry saw, and had really good first-quarter results.

I think that we maintained that -- those good results into the second quarter.

I think the more challenging quarter is going to be the third quarter.

And we might actually see a better fourth quarter than we see certainly in third quarter, I think.

But I think the last time we said fairly solid, I was interpreting it to be about the same, and everybody wrote about something a little bit higher, and fairly solid addresses your point of view, Timna, today, that you're in the market squeeze.

But for those, you think we're going to fall off the end of the earth and have a loss, that is certainly not the case.

We're going to report a respectable profit.

It will be lower, I believe instead of the 40s it will be in the 30s.

As I said, I don't have precise guidance there but it won't be as strong as $0.43 or $0.46, I'm pretty sure of that.

Okay.

But in spite of the environment, it will be okay.

And it does address that margin squeeze that you wrote about, and others have written about.

Okay.

And that's great.

I was trying to ask about the OmniSource and the recycling piece of it, though.

And I was just trying to figure out, obviously first quarter, fantastic results; second quarter, challenging result.

Which should we think about, until we see the scram mining, or until we see the Mesabi permit, which should we think about as more the normal for the recycling business.

Okay.

Well, I guess Timna, if you could give us a crystal ball, that would tell us where the copper market and stainless market and the aluminum markets and the ferrous markets are going, we (inaudible - multiple speakers) that forecast.

Okay.

Obviously, I think it's frustrating for us all here around the table, in that it's such a difficult business to be able to forecast and get your hands around, because it is commodity-driven, and in up markets we're going to do well, and in down markets, we're not going to do as well.

But we've got no greater visibility as to what those markets are doing than yourself.

We had a pretty good first quarter, as Mark said.

Had a little bit disappointing second quarter.

We will probably have a better third quarter.

How much better remains to be seen.

That's where the visibility isn't yet.

But we're kind of forecasting it is going to be a little bit better anyway.

Okay.

Understood.

Thanks so much.

Moving on, we will take our next question from Arun Viswanathan from Susquehanna.

Thanks, guys.

Thanks for taking the question.

So I guess wanted to clarify as well, Keith, you mentioned that pricing could be down about $60 in the third quarter in flat-rolled, and -- What does that imply, I guess, going forward?

I mean you said prices have stabilized, and so do you think the fourth quarter could actually see a bounce-up if we do get some better-than-expected volumes here?

I do.

I think the fourth quarter could come back by on an average probably as much as $40 or something.

Okay.

And then similarly, on an EBIT-per-ton basis, with scrap kind of holding in there, does that mean that your profitability could actually accelerate as well in the fourth quarter?

You heard me say earlier, I think there is going to be some weakness in the recycling universe here, perhaps in August/September, maybe in September/October -- don't know.

But it will strengthen again by year-end, but there will be some window of opportunity there that could have made up better recycling costs with the improving steel pricing that could produce potentially a better fourth quarter.

Okay.

And how would you characterize the behavior out there?

What do you think helped to stabilize prices here, and do you think that could continue to move things forward?

Or do you see any -- are you concerned about potentially some irrational behavior out there?

Well, you heard me talk about all the markets and how I thought they'd respond going forward.

I really don't think that's going to change a lot.

I think they are the driver.

The other thing is the inventories are fairly low.

We must constantly be reminded, and the service centers wouldn't tell you anything different, that when they're talking about 2.4 months of inventory on hand, or a number like that, they're really maybe talking about 1.4, or 5 months of inventory on hand, because of the slow-moving nature of some of that inventory, the obsolete nature of it.

So you're getting pretty close to the vest.

So we're not dealing with excessive inventory out there and I don't expect anybody to majorly restock.

We just expect it to be even-keel kind of order entry.

Great, thanks.

Moving on, we will take our next question from Mark Parr with KeyBanc.

Thanks very much.

Good morning, guys.

Good morning, Mark.

One thing, Keith, I was curious.

Do you have any sense of where steel volume might be 3Q versus 2Q?

I would guess steel volume is going to be off a little bit, because of the impact of the June sag in order entry, at least on flat-rolled, and the power curtailments.

The power curtailments would likewise apply to other operating units, not so much for their backlog, but could -- so I would expect -- we are expecting steel production and shipments to sag somewhat in the third quarter.

All right.

And then that would -- would that -- I'm just trying to -- Normally, in the fourth quarter, things are a little bit weaker than the summer months.

It sounds like you might be setting up, or your thought process is based around some recovery in, you said in earnings, but I'm wondering, do higher shipments factor into that thought process?

They certainly would in the fourth quarter, I think.

I think we will have better opportunities for a wide variety of reasons.

Hopefully we will have this national paralyzing calamity behind us, and more positive consumer sentiment.

I don't think the rate of auto build is going to decline.

I think that momentum will be maintained.

I think the transportation market is going to remain good.

The ag and appliance markets, I don't expect, and with service centers not having a lot of inventory, and being in a more or less a steady mode of buying, you're going to have some periods of unevenness in order entry as people play the psychology of what scrap is doing.

They're going to buy today or tomorrow kind of thing.

But I actually believe we will have a better fourth quarter.

Okay.

It has yet to shape up materially.

But that's my personal belief.

No, I get that.

I understand.

And as Mark mentioned earlier, we all wish we had crystal balls so it would be a lot easier.

One other thing, I was wondering, you had mentioned, and this is something I wanted to bring up, as well, about the third quarter outlook for the resource side.

And looking at the hedging situation that was helpful in 1Q, it was unwound in the second quarter.

How does that play into your thought process as you move into the third quarter?

And you said you thought things would be a little better for resource or Omni in the third quarter.

Could you give us a little more color about your thought process there?

Mark, it all depends on where, directionally, where the markets go.

On copper, we keep a flat book.

We have a little hedge in the aluminum world.

We don't hedge in the stainless world.

But it all depends on where the markets move.

And our visibility seemingly, the recent year or two, the visibility is only a couple weeks ahead.

All right.

So essentially, this is something that will have to be played month-by-month.

Is there anything that -- Seasonally, the third quarter, and the first quarter, typically, are the better quarters, for earnings.

Is that fair?

In the recycle world, I would [suggest] that.

But again, I think if you look historically, you bump off a pretty weak July, because the ore shuts and it pops up.

And as Keith said earlier, we're seeing potentially a softer market in August and September.

And again, in the commodity business in which we live, a down market doesn't bode well for great earnings.

I don't think the earnings, trying to go back to the third quarter of last year, it's going to be a change of that magnitude.

But given how weak they were in the second quarter, you can see an improvement certainly, I think, in the third quarter.

But it's not going to bounce back into the $40 million range.

Okay.

Thanks, Keith.

I appreciate it.

And good luck on the third quarter.

Congratulations on the second-quarter results.

Thank you.

Moving on, we will take our next question from Brian Yu with Citi.

Thanks.

My question goes back to the scram mining, and Keith or Mark, can you talk about the size of the separator that you would like to build, how that is progressing on the permitting stage?

And then also in terms of tailings, roughly how many tons of concentrate equivalent might we be talking about there?

That you could process?

Again, as we said earlier, the intent would be to build a facility that would satisfy our appetite.

Our appetite is going to be roughly 800,000 tons a year once Mesabi Nugget is in full swing.

We are looking at this as kind of a bridge, to bridge the time between now and when we get our own full-scale mining in hand.

Relative to reserves, there are a huge number of basins, and I wouldn't be able to quantify the hundreds of thousands of tons of concentrate out there that is available.

But there is a significant availability of concentrate from this source.

Relative to the permitting, scram mining by definition is kind of recovery of past mine material, and at least the Magnetation has successfully permitted I think 2, maybe 3 reserves, in relatively short order.

Okay.

And then going back to something you mentioned earlier, Mark.

You said that in the first half of 2012, that your concentrate costs would go up.

Is this because of year-on-year adjustments and contracts?

Or is this your expectations about where iron ore prices are going to be in the future?

This is about how -- just as the inventory valuation is going through.

Okay.

And then the last one, in follow-up on earlier questions about the recycling business and these mark-to-markets.

Just so I understand in terms of the way you guys operate your business, you enter into these hedges to protect your margins, and it is the mark-to-market non-cash portion that causes the volatility in reported earnings but not the profitability of the business from a cash standpoint.

Is that a fair way to look at it?

That's correct.

That's on target.

Great.

Thank you.

Moving on, we will take our next question from David Katz with JPMorgan.

Hi, I was hoping to follow-up on the average selling prices.

So you guys said that you thought that flat-rolled could be down $60 to $65.

I was unclear if you were saying that would be for Steel Dynamics or for the industry overall?

Well, that's for us.

We can't speak for the industry.

And I think I followed up by saying the overall average, we might be down, when you consider all of our operating units, is $40 to $45.

Right.

But specifically, with regard to the flat-rolled, if one kind of looks at the benchmark price in the second quarter and compares that to where we are now, we're off more than $100.

So if one were to expect levels to stay roughly the same and then move up later in the quarter, the $60 to $65 that you guys are saying you're off seems to be a little better than perhaps what the industry is experiencing, and I was curious if that was because of the way it flowed through and the lag that you guys might experience.

Is that correct?

There is a lag.

Dick, do you want to --?

I think also, you're looking at it from reported numbers and so forth, and I would tell that you that our Butler operation has not taken the price down to levels at which you might have been able to read about in the press.

So that's what is going to dampen the overall swing.

Okay.

But if one were to extrapolate, given as you guys said, there is lag, looking forward, as prices move back up, and I think we've all agreed that it is likely they will, but as they move back up, wouldn't there be a lag as well in experiencing that in the fourth quarter?

Well, lead times are fairly short.

But yes, there would be some lag.

And you have to understand that most of the conversation we always read about is always hot-rolled, hot-rolled, hot-rolled, which is less than half our business.

And some of the other value-added markets aren't impacted quite as severely as hot-rolled, especially as you read about it in the American metal market every day.

And as Dick pointed out, we're not the guys that tend to reach that bottom as fast and furiously as some others do.

Okay.

And then the second question that I had was with regard to the additional steel that you're seeing from RG and Thyssen, how is that impacting in terms of market share and your ability to maintain market share?

First part of the question was what now?

With the extra steel that you're seeing in the market from both RG and Thyssen, has that impacted your market share at all?

And do you anticipate it doing so?

Well, it could certainly be a reason for a period when your order entry is a little weaker than it had been, if there is no change in economic climate.

But that is hard to know.

I would tell you we're not -- our sales people, although they're -- like Dick said, we're getting quotes in the Techs from RG, it has not been an impactful event in the real world in St.

Louis, Missouri, kind of thing.

Okay.

Thank you very much.

Moving on, we will take our next question from Tim Hayes from Davenport and Company.

Good morning.

Good morning.

Just two questions, quickly.

When looking at the automotive business in Q3, usually there's some seasonal weakness.

Might that seasonal weakness be less this go-around as we're catching up from the supply chain disruptions that we saw in Q2?

And might you be -- wondering if you're seeing any of that?

I think that is a good observation.

Okay.

And then could you remind me, what are your inventory turns at steel ops, and the inventory turns in the recycling business, please?

The inventory turns at the steel ops tend to be a little different between sheet and the long products so on the sheet side, it still tends to be on a monthly basis.

The long product side can be a month and a half sometimes, maybe 2 months.

But typically, a month and a half.

On the mills recycling side, on that they trend more typically to be a month-to-month basis.

It can grow beyond that in grades of -- I guess what I would call opportunity -- but we tend to keep it month-to-month.

So metal recycling is turning about 12 times a year then, right?

Or maybe almost that much?

Yes.

Okay.

Thank you.

Moving on, we will take our next question from Aldo Mazzaferro from Burke and Quick.

Hi, Keith.

Thanks for taking my question.

Hi, Aldo.

Can you guys hear me okay?

Yes.

Good morning.

Okay, good.

The profit per ton you have of $150 plus is pretty impressive considering the structural steel mill is operating so low.

I wonder if you could comment a little bit about how the rails portion of that business is impacting your profits and what you think in terms of volume on the rail business going forward?

Well, I would tell you it's kept us from losing money, it's probably as broad a statement as could be made.

Without it, we probably would lose a little bit of money on an operating basis every month.

And with it, we make a little money.

So -- Dick?

The fact that we don't have a head-hardened process for our considered premium rail, our standard rail products are priced very competitively in the marketplace, we're still gaining market share and there is a cost to that.

Therefore it's not a huge big difference between that and the structural side, but we do gain from the volume compression of the efficiencies of the shops through that production.

As we become efficient, and raise our productivity, we make major strides there, that will definitely positively impact our earnings on a per-ton basis on the rail product.

So do you have any view for what you might be running in terms of shipping volume going forward?

Well, this year, as I said, we're year-to-date, through half a year, basically, and got 60,000 tons under our belt.

And we talked around 150,000 tons for the year, was our forecast, at the end of last year, and needless to say going forward we expect that to climb.

And Keith, could I ask you one question on the scrap market?

You guys have been commenting that you expect the prices to go down.

I just would ask a little question as to why do you expect that?

Well, I don't know that they will go down a lot in August.

But I think the mills kind of turned up their nose a little bit, you might say, in July.

That normally is an up market, and it sort of just went sideways to up a little.

But demand, as you know, has weakened.

It's not just our order book that is a little uneven.

I think it's weakened at other shops as well, so there's not quite the appetite.

But I don't know that there is going to be any $100 sell-off in scrap either.

But it might directionally go down a little bit in August and maybe a little bit more in September, but I think the team can adjust for that from the buy-side perspective.

But there's not going to be $100 decline in scrap costs, although to get some of these margins back, you need something more than just 20 bucks or something.

But who knows what it is really going to hold, Aldo.

Right.

And just one final quick one.

On the Mesabi Nugget situation, can you help me understand a little bit about how the volume that you can get from Cliffs -- I mean what's the maximum run rate you could go if you just use exclusively Cliffs, and then would you begin to add in the scram, or has the scram already been -- starting to be added into the volume at that facility?

I doubt that Cliffs would have enough concentrate available to solely supply Mesabi Nugget at an 800,000-ton a year annualized rate.

Again, one has to remember, we have been operating and we will continue to operate here through the end of 2012 for sure, on a myriad of different sources.

We have some inventory that is left over from our relationship with QCM.

We have a steady supply coming in from Magnetation.

And we've augmented -- or those augment the Cliffs supply.

The intent would be to transition from that combination to a Magnetation type product.

And that transition will await the startup of the new facility that you're joint venturing, right?

Or is there room for --?

That kind of volume would only be delivered, he is saying, through the JV?

Yes.

Yes.

The answer is yes.

Okay.

All right.

Thanks very much.

Thanks, Aldo.

Moving on, we will take our next question from Sal Tharani from Goldman Sachs.

Sal, good morning.

It will be just one moment, sir.

Sal must be traveling today.

Sorry again for that delay, sir.

Sal, please go ahead.

Sorry.

Can you hear me now?

We can.

Okay.

Good morning.

Hey Mark, the $40 million to $50 million you mentioned spending on the Magnetation joint venture, and then obviously this will become -- will it become obsolete once your mine starts in let's say 2013 or 2014?

No.

The intent would be, and presuming there is a good iron concentrate, or iron market out there, one could envision that continues to produce concentrate and be sold into the open market.

Okay so you will only -- so you will only sell it to third parties.

A third party would have an interest in it, we think, because it would be priced better than new concentrate coming out of a Cliffs-type operation.

It has a cost advantage, and probably a pricing advantage.

So it would not be hard to liquidate debt at a fairly effective level of profitability.

What kind of feed content are you expecting from the concentrate from Magnetation process or scram process?

What sort of --

FE.

FE?

It would be approaching regular concentrate.

Which is in the 60%, 63%.

Okay.

And Keith, you have given some comments on the end markets including construction.

I just was wondering if the situation on both non-res and res has been stable, or do you see some decline?

We have found some positive data on (inaudible - technical difficulty) data was up and really residential housing starts, particularly from the housing starts that are up significantly, I was wondering if you have seen any up-tick in your business?

Well, I think we have, and I think that the binoculars for that event are a little bit better structural backlog.

and certainly better order entry and fabrication.

Great.

Thank you very much.

Moving on, we will take our next question from David Lipschitz from CLSA.

Good morning, good afternoon.

What time is it?

I don't know what time it is anymore.

A long call.

Good morning.

A question to you on pricing.

You said you think prices are bottoming.

Have you seen prices bottom, or that's your expectation?

And also, are you worried about -- someone asked about market share.

With all of the new participants and we're hearing prices below with what you're talking about, are you -- before you said you would not take orders at some low levels.

Is that what you're doing again?

And are you worried about what the new participants taking market share from that perspective?

I would tell you it's more of an anticipation right now than a reality.

And yes, there are levels at which we wouldn't chase the duck on the pond anymore.

And then quickly on scrap, do you expect to see continued divergence between the prime scrap and the obsolete scrap in terms of, you said you think prices potentially could be flat to down.

Do you think prime could stay higher and the obsolete would fall off?

Or do you expect both to fall?

Again, no great crystal ball.

But the obsolete flow is reasonably strong out there.

And the prime scrap flow has a constraint.

So one would think there would be a greater divergence.

Thank you.

And at this time, that will conclude our Q&A session.

I will turn it back over to our speakers for any additional or closing remarks.

Thank you, Jim.

Thank you, everyone, for joining us.

It is one of the longer sessions we've had.

Good questions.

We certainly appreciate the coverage you give the Company, and the support that you give the Company.

But more importantly, we certainly appreciate the support our employees give this Company.

We have a fabulous group of young men and women that work for this Company, producing stellar results quarter in and quarter out.

We thank you for your efforts.

That concludes our remarks.

Thank you.

That will conclude today's conference.

We thank you for your participation.