Steel Dynamics Inc (STLD) 2012 Q4 法說會逐字稿

Good day and welcome to the Steel Dynamics fourth quarter and full-year 2012 financial results conference call.

At this time all participants are in a listen-only mode.

After Management's remarks we will conduct a question-and-answer session, and instructions will follow at that time.

Please be advised that this call is being recorded today, January 29, 2013, and your participation implies consent to our recording this call.

If you do not agree with these terms, simply disconnect.

At this time I would like to turn the conference over to Marlene Owen, Director of Investor Relations at Steel Dynamics Incorporated.

Please go ahead.

Thank you, Rob.

Good morning, everyone.

My name is Marlene Owen and I am the Director of Investor Relations at Steel Dynamics.

We want to welcome you to Steel Dynamics' fourth quarter and full-year 2012 earnings conference call.

As a reminder, today's call is being recorded and will be available on the Company's website for replay later today.

We will start the call with introductory remarks and commentary on our fourth quarter and full-year 2012 financial results including a number of highlights relative to our markets from Steel Dynamics President and CEO, Mark Millett.

Next Theresa Wagler, Executive Vice President and Chief Financial Officer for Steel Dynamics Inc.

will provide additional financial details for the fourth quarter 2012 and full-year 2012 periods and comment on a few financial matters.

Following Mark's and Teresa's prepared remarks we'll be happy to take your questions.

In addition to Mark and Teresa, also joining me for today's call are the Company's platform Executive Vice Presidents, including Dick Teets, President and Chief Operating Officer for our Steel Operations; Russ Rinn, President and Chief Operating Officer for our Metals Recycling Operations; and Gary Heasley, Business Development and President of our Fabrication Operations.

Please be advised that certain comments made today may involve forward-looking statements that by their nature are predictive.

These are intended to be covered by the Safe Harbor Protections of the Private Securities Litigation Reform Act of 1995.

Such statements however speak only of this date, today January 29, 2013 and involve risks and uncertainties related to our metals business or to general business and economic conditions which may cause actual results to turn out differently.

More detailed information about such risks and uncertainties may be found at the Investor Center Advisory Information tab on our Steel Dynamics website and our Form 10-K annual report under the captions Forward-Looking Statements and Risk Factors.

Or if applicable in subsequently filed Form 10-Q's filed with the SEC.

Now for opening remarks I'm pleased to turn the call over to Mark Millet.

Thanks, Marlene.

Good morning, everyone and I'd like to also thank you for joining us this morning.

Not only to discuss Q4's results of last year but also to talk about our near-term earnings catalysts that will further differentiate us from our peers we believe, increase our value added product portfolio and strengthen our earnings potential going forward.

As I've mentioned before, in challenging times, I think true character becomes apparent.

I absolutely believe that and I also believe that the challenging times we've experienced both in our industry and the overall global economy have been met with increased character by the excellent team of Steel Dynamics employees throughout our organization.

The industry continues to navigate through many cycles with the frequency which does not appear to be slowing down, yet in spite of those ebbs and flows I'm pleased to report again we continue to perform at the top of our peer group maintaining our low-cost of highly competitive position.

Before we jump into the discussion of our financial results, though, I want to pause to commend our team for their safety record last year.

Even though our performance has always been better than industry standards, we strive for zero incidents throughout our organization and in 2012 we made significant improvements thanks to the dedication of every one of our employees.

At our Jeffersonville and Minnesota nugget, the teams there worked for the second year in a row with zero lost workdays.

They were joined in 2012 by Steel West Virginia, which also had no lost workdays in the year.

The teams at our Engineered Bar Division and The Techs each had only one lost workday for the year.

OmniSource's Michigan division had zero recordable injuries in 2012, an incredible turnaround for the folks up there.

And four of our six teams in our Fabrication platform finished the year with zero lost workdays -- Butler, Continental, Lake City, and Hope, Arkansas.

Our employee safety and welfare are and will continue to be our highest priorities.

Our Company wide goal as I said is zero incidents and we have made good progress toward that goal in 2012.

So congratulations to the team for doing a job well done and safely.

As you know 2012 was a tough year for business as global economic conditions remain difficult.

And I don't have to tell you all in America, that US gross domestic product was weak, consumer confidence waned, we had angst of our US elections that churned the political landscape and future further fueled uncertainty and China's growth cooled.

Nonetheless our talented team was up to the task and we believe that there are reasons for optimism in 2013 and in the years ahead.

There appears, in our mind, to be sustainable upward momentum in residential construction, consistent API data would suggest nonresidential construction will follow as is typically the case.

A lot of companies have significant cash positions that need to be invested and I think companies are recognizing the effectiveness and efficiency of the American workplace and reassuring of manufacturing is also taking place.

And perhaps longer-term and probably most important, inexpensive shale gas will make the US energy [long] providing a tremendous incentive for investment and for job growth.

We at SDI will be the beneficiaries of the associated economic growth as we leverage our latent production capacity and, furthermore, we have several growth projects that are being implemented in 2013 that will provide increased earnings potential specific to Steel Dynamics.

Turning to our financial results, during the fourth quarter we saw financial improvement in both our Steel and Metals Recycling platforms but saw a slight decline in the profitability of our Fabrication Operations as decreased volumes met with flat pricing.

We reported net income of $61 million or $0.27 per diluted share on net sales of $1.7 billion for the fourth quarter of 2012.

This is meaningfully above the $0.06 reported in the third quarter of the year and the $0.14 reported in the fourth quarter of 2011.

As we stated the fourth quarter 2012 benefited from the positive tax adjustment that increased earnings by $0.07 per diluted share.

Nonetheless, a phenomenal performance by all, by the team.

From an annual perspective, 2012 revenues and general volumes were only moderately less than 2011 results.

However operating income declined $194 million or 33%.

The majority of the decline was related to compressed steel margins as operating income for the segment declined 24% year-over-year.

Steel conversion costs stayed fairly steady and the culprit was metal spread compression which we define as the difference between average pricing and the cost of ferrous scrap of primary raw materials.

Average 2012 steel prices per ton shipped declined $66 while average ferrous scrap consumed for production only declined $32 a ton.

During the quarter, operating income from our Steel Operations increased $8 million or 7% as overall steel demand slightly improved with increased shipments of 4%.

The increased volume from our Sheet Operations more than offset decreased long product shipments led by declines at our Roanoke Bar Division.

During October our Flat Roll Division had incredible order entry rates and we believe this was customer reaction to announced price increases and an expectation that raw material prices were also on the uptick.

Operating income per tons shipped for Steel Operations increased slightly from $80 in the third quarter to $82 this quarter.

Increased volume and improved product mix more than offset compressed metal margins.

Our average fourth quarter steel pricing declines $25 per ton in the quarter, or about 3%, whereas the cost of scrap using our furnaces for production only declined $9 per ton.

Our steel mills operated at 80% utilization rate during the fourth quarter, slightly improved from the third quarter but not back to the 84% achieved during the first half of the year.

Automotive and manufacturing sectors remain strong but transportation and heavy equipment softened as over exuberant build rates early in the year resulted in oversupply.

The energy sector also came under pressure as low natural gas prices impacted drilling rates.

Even though end markets remain mixed, we believe there's additional momentum that could be seen in 2013 related to both the automotive and manufacturing sectors and if the current administration embraces the exploration of the extensive US energy reserves we could also see several other sectors starting to improve.

Our Steel Operations continued to outperform our industry peers throughout the market cycle.

The team delivers best in class results by maintaining their laser focus on being the lowest cost producer out there with a commitment to exceed our customers' highest expectations.

The domestic metals recycling industry experienced a volatile year driven by changes in both export and domestic mill demand fluctuations.

Like everyone else we were impacted by compressed margins throughout the year.

However, our Metals Recycling business finished 2012 with a strong fourth quarter.

Our upgrading income increased 56% from the third quarter.

Despite lower volumes in the quarter profitability improve as both ferrous and nonferrous metal spread expanded.

Increased copper margins provided the most significant improvement driven by increased global copper prices related to the improved demand from China.

We also took advantage of a strong December 1 market as late in the quarter we could see that the typical market strength of January would be challenged.

Instead of the strong upward ferrous price movement generally seen in January or February due to cold weather and associated decreased supply, scrap flow remained good while export activity decreased and steel mill demand remained stable.

During 2012 in Metals Recycling we implemented several initiatives to offset some of the macro supply and demand dynamics that continue to hinder the metals recycling market.

We opened additional retail yards to increase flow of higher margin material and we focused on the reduction of our cost structure.

In the first quarter 2013 we plan to commission new technology to recover even more nonferrous materials from our shredding operations to reduce yield loss and to increase margins.

As we said, the Metals Recycling business was quite a roller coaster ride throughout 2012 and is unlikely we will see that volatility subside in a meaningful way during 2013.

However as is typical for us, we are taking deliberate actions to mitigate the impact market volatility has on our business performance at least to the degree we can.

The team is doing a good job thinking outside the proverbial box and I'm expecting to see positive results from their innovative ideas.

One of the key aspects of our success over the years has been controlling our costs as far into the supply chain as possible, coupled with innovative and effective approaches to execution.

We said that our pioneering efforts in Minnesota will provide SDI with a captive source of iron, eliminating dependence on foreign pig iron markets and they have.

Even though we purchased a small amount of third party pig iron this past year, production at both our Minnesota operations and our Iron Dynamics could have fully supported our steel production requirements.

Of note IDI achieved record volumes of liquid pig iron in 2012 supporting the phenomenal production efficiency of our Flat Roll Division.

During our last call we indicated that we had begun a six week outage at the nugget facility to set groundwork for future updates expected to be made in the first half of 2013.

Upgrades to increase productivity and to improve product quality.

As planned, operations resumed in November and the restart has gone reasonably well.

We have already seen significant improvements in product quality.

We currently anticipate implementing the remaining advancements in the second quarter of 2013.

Operations began at our iron concentrate facility in September, again as planned, and the startup has progressed nicely.

As a primary raw material for our iron nugget facility, this is a pivotal achievement in lowering the raw material input costs of iron nuggets.

The cost of internally sourced iron concentrate will be less than $50 per metric ton compared to current market priced iron concentrate that is selling on the spot market today in excess of $140 per metric ton.

If pig iron prices remain steady we anticipate that the losses associated with our Minnesota operations for the first quarter of 2013 could be similar to those recorded this past quarter as the plant depletes existing higher-priced third-party iron concentrate in inventory.

If production ramps up throughout the year as anticipated we would hope and expect the losses to decrease and hope to be at breakeven by year end.

Moving onto Fabrication, we are pleased to report a third consecutive profitable quarter with operating income of $1.5 million.

Changes we made earlier in the year are yielding efficiencies and improved productivity.

For the first time in three years the business achieved positive full-year operating income of $2.1 million in earnings.

The nonresidential construction market is still challenging.

We see selective areas in the US that indicate signs of market improvement.

The ABI index has remained above the 50 threshold for five consecutive months, a positive indicator for future building activity.

2012 volumes grew through gains in market share as the team continued to win new customers and broaden their geographic footprint.

We remain focused on customer service and cost containment.

Our facilities and their operating teams are ready to execute as market opportunities present themselves.

And we are poised to take full advantage when the construction recovery begins with our national presence supported by 425,000 tons of capacity and the team's unrelenting drive.

The Company continues to drive towards maximizing opportunities to effectively and efficiently perform through the cycle to maintain a sustainable differentiation from our peers.

Our operating and EBITDA margins continue to be best in class.

As [my uncle] used to say, the proof is in the pudding, the proof is in our results.

During this past year we entered new markets, gained market share, we introduced new product capabilities, we became iron self-sufficient, we implemented our low cost iron concentrate solution, we further improved and will continue to improve our Metals Recycling cost structure, we made strides to further solidify our balance sheet, and we identified and initiated several growth projects to increase future earnings.

I believe our superior operating and financial performance clearly demonstrates the sustainability of our business model.

In keeping with the entrepreneurial spirit that flows throughout the Company we will continue to assess opportunities for growth whether new products, new technologies or new business lines.

The focus is towards not only top line revenue growth but growth that will enhance and provide consistency to margins and provide our shareholders with returns that demonstrate our commitment to making Steel Dynamics the preferred investment decision.

We are squarely focused on positioning the Company for long term growth and there are a number of earnings catalysts that I would suggest are compelling.

Many of these we've mentioned before.

Our steel making capacity has expanded to 7.4 million tons and we've yet to fully realize the benefit.

We've not had a steel consumer economy which deleverage that capacity thus far.

We're expanding the capacity in product offerings of our special bar quality operations and that is on all key success drivers.

Product and market diversification, customer dedication, increased margins, and great return on capital.

We expect to have this additional capacity operating before the end of 2013.

The SBQ expansion will also allow for greater utilization at our structural and rail division as they will supply semi finished steel for the SBQ expansion.

We will grow our rail production capability to include premium, head-harden rail.

Again, providing value added product and market diversification, customer dedication, and enhanced margins.

We expect to have this capability as we enter 2014.

Minnesota operations as we said will benefit from our own lower cost in iron concentrate and after further equipment modifications are complete we expect to achieve increased productivity.

These are a few of many initiatives that have the potential to be appreciable earnings drivers.

Again we are focused on the long-term growth of our Company and I know and I'm confident we have a superior team that can deliver.

And with that I will pass the call over to Theresa for further comments on our financial results.

Theresa?

Thank you, Mark.

Good morning, everyone.

During 2012 our consolidated gross margin percentage decreased 178 basis points caused by margin compression within our Steel and Metals Recycling Operation.

Macro industry conditions did not allow for a repeat of historically high Flat Rolled and Ferrous Recycled margins that we achieved during the first half of 2011.

As Mark mentioned our earnings per diluted share for the fourth quarter was $0.27.

Above our earlier guidance of between $0.18 and $0.22 as earnings from both our Sheet and Metals Recycling Operations were better than we originally expected.

Additionally, our actual fourth quarter effective tax rate was considerably lower than previous quarters at 13.8% including noncontrolling interest.

The lower rate was caused by certain favorable adjustments in our reserves for unrecognized tax benefits.

These changes were based on new information that we gathered in the fourth quarter.

Excluding these adjustments our quarterly effective tax rate was actually 39.5%.

The positive impact of these tax adjustments for fourth quarter earnings was $0.07 per diluted share.

In comparison to the third quarter of 2012 revenues were relatively flat at $1.7 billion.

Nonetheless our consolidated tax income improved from $7 million to $64 million.

However the third quarter did include two unique charges related to both impairment and refinancing items that when combined reduced third quarter's pretax earnings by about $34 million.

We also saw a change in our unrealized hedging position which resulted in a $9.8 million gain recorded in the fourth quarter compared to a $9.3 million loss in the third quarter for our Metals Recycling Operations.

When we compare the fourth quarter of 2012 to the same period of 2011 our gross margin percentage improved 194 basis points despite lower volumes and mix -- excuse me, despite lower revenues and mix volumes.

Our pretax income improved 56% based on both operational improvement and reduced interest expense.

Our operating income per ton shipped for Steel Operations remain consistent at $82 resulting in basically unchanged operating income from our Steel Operations while Metals Recycling improved $10 million.

Gross interest expense for the year was $160 million compared to $179 million in 2011.

This is a reduction of 10%.

We're very pleased with the execution of our refining refinancing initiative completed during 2012.

We refinanced over $1 billion of debt, just less than 50% of our outstanding balances, effectively extending and laddering out our maturities while reducing our overall effective rate.

Near term maturities are very manageable.

We only have $13 million due in 2013 and $380 million due in 2014.

We also reduced our interest burden from 7.5% of the end of 2011 to 6.4% at the end of this year, over a 100 basis point improvement.

And based on our refinance capital structure and prevailing interest rate we would expect interest expense for 2013 to decline another $20 million as compared to 2012.

We also took the opportunity to repay $178 million of debt with available cash.

We've created even greater long-term strength and flexibility in our capital structure through the repayment of a portion of the debt which we indicated we would do, through the extension of our debt maturity profile and through the reduction of our interest burden.

And cash flow generation remained incredibly strong.

Cash flows from operations provided $446 million of funding during 2012, almost 50% was generated in the fourth quarter alone.

For the year working capital changes were fairly neutral requiring about $80 million.

However in the fourth quarter it provided $89 million in funding.

Customer receivables declined during the quarter.

Our annual 2012 capital investments totaled $224 million.

Just over 35% of these investments were for the construction of our completed iron concentrate and copper rod facilities, 28% from Metals Recycling and 25% for Steel Operation.

Full-year depreciation was $180 million and amortization of intangible assets $36 million.

I know some of you for modeling purposes like to understand what depreciation may be for the coming year.

Current estimates would be in the range of $190 million to $200 million for depreciation, and around $30 million for amortization of intangible assets.

In spite of capital investments of $224 million, debt reduction of $178 million, and dividend payments to shareholders of $88 million, our total cash and short-term investments only decreased $68 million.

We ended the year with cash of over $400 million.

We also still have full benefit of our $1.1 billion revolving credit facility which had no outstanding borrowings at the end of the year.

Combined this provides $1.5 billion of available funds.

Strong cash flow generation during this challenging environment is a continued testament to our low-cost highly variable cost structure and diverse value-added product portfolio.

Our credit metrics also continue to be strong.

At the end of the year, total debt was $2.2 billion with minimal secured borrowings.

Actually just less than 15%.

Our net debt defined as total debt less cash and short-term investments was $1.8 billion resulting in a net debt to trailing adjusted EBITDA of 2.9 times.

If trailing EBITDA is adjusted for the full year 2012 refinancing charges of approximately $38 million, our average net leverage would actually be 2.7 times.

Worth noting our long-term preference is to maintain that leverage below three times, which we are doing.

Our current estimate for 2013 capital investment is in the range of $200 million to $225 million.

We consider over 70% of these projects to be growth oriented or projects that are intended to increase capacity, efficiency and margin in future periods.

Some of the more significant items this year include approximately $60 million of remaining capital to be invested for the SBQ expansion, just over $25 million for the installation of equipment to allow for premium rail production, about $15 million for the completion of two nonferrous recovery systems, and just over $10 million for the completion of our flat rolled leveling mine.

As true for each year, capital investments go through considerable scrutiny before they receive final approval.

This initial estimate may include project that in the end just don't meet our expectations for return or aren't in line with cash flow and liquidity expectations.

Looking forward, our current 2013 capital allocation plan includes continuing to invest in existing operations to optimize capacity and margins, reducing a portion of our outstanding debt while maintaining sufficient liquidity for growth, and providing cash for dividends to our shareholders.

Our balance sheet's strong.

We believe the framework for robust cash flow generation coupled with our strong resilient capital structure has the flexibility to not only sustain current operations but to support future growth.

Thank you.

Now I'll pass the call back over to Mark.

Thanks, Theresa.

Before we open the call to take your questions, I would like to thank, firstly all our customers for your faith and support over the years and recently.

And hopefully we will continue to earn your business each and every day.

And thank our employees for their continued hard work and dedication and to remind them to work safely again each and every day.

So now, Rob, we would like to open the call for any questions you may have of me or Dick, Ross, Gary, and Theresa.

(Operator Instructions)

Michelle Applebaum, Steel Market Intelligence.

Morning.

I don't know if you guys ganged up and did this on purpose, all reporting the same day but I want you to know that we're writing longer and more critical notes, so the plan didn't work if the plan was to hit us, but this is a nice -- this is a real nice quarter.

I'm just wondering in terms of outlook you talked about potential for macros -- in terms of what your competitors have said today, it looks like AK expects a significant increase, Nucor expects level operating performance, but a reversal of LIFO, and US Steel is looking for near breakeven on their flat rolled, so we've gotten some kind of specific general guidance.

Do you want to give us anything a little bit more meath than your macro?

I don't want to speak for our competitors.

I guess as we see the current market climate, environment I think it's generally positive from our perspective.

We're operating in a backdrop of appreciating global pricing on the sheet side, which I think will help subdue import pressure.

It's not going to eliminate it but it's going to keep it under containment for the time being despite the global over capacity.

And obviously all pricing is appreciating and I think in combination, there could be some market support from those drivers.

Ideally our customer has the typically reasonable optimism, I think exists, supply chain inventories remain relatively tight.

Automotive remains incredibly robust, I think.

Manufacturing in our mind is robust and the PMI index in December popped up or moved up.

And I think lead times, given the order entry rate over the last couple weeks, three weeks, have moved out.

I think Dick can probably speak to it more than I, but the order input rate or order rates at our sheet mill has been very robust for the last two weeks and engineered products has been pretty good too, Dick, yes?

That's right.

So I think generally, it's a positive outlook.

Great.

I wanted to ask you in terms of the construction market, there's obviously residential is past the inflection point and the ABI has hit five months in a row of over 50 now for the fourth time in the last four years.

If it hits over 50 this month, it will be the first time of six months since '07 but it hasn't done that yet.

So the fingers are crossed.

Do you see the normal lead lag between res and non-res?

People have been talking about that a little bit more now that res is clearly established.

I don't think it's going to be the normal anymore.

I just think there's going to be a stretch to it because I think many of the developers are more cautious.

There's still a lot of vacancies as you drive around in your local communities.

And so I think it's going to be slightly extended rather than the normal that we've seen in the past, personally.

Okay.

And can't --

I do think, nonresidential, Michelle, aside from just the stats, the rental costs going up and the inventory coming down and greater housing starts, albeit coming from a low level, I think we're actually seeing it in our order book.

It's not just a matter of numbers.

I think the sheet mill in particular is seeing some benefits there.

In non-res?

Did you say --

Residential.

Okay.

Again, in my mind that's where it all starts.

To Dick's point, nonresidential tends to lag six months anyway.

Maybe nine months in this cycle.

Some people are saying it's going to lag longer because there's less building of new developments, there is more finishing of old developments and it's the infrastructure that goes with the new housing and development that usually tips the non-res pick up.

So that's why I was asking about what your thoughts on the lead lag were.

And obviously we've got a lot of latent capacity there for when it does recover but we have also taken steps, as we mentioned, the fact that our structural mill will be supplying brooms and millets to the SBQ expansion and the onset of premium rail, no matter how long it takes we believe the structural mill will change significantly over the next 12 to 18 months.

Yes.

Okay.

That's great.

Can I ask one more?

You talked about the benefit of product mix in the quarter.

And clearly you had expanding margins when metal margins were going in the other direction.

Can you talk about -- and you said that was in part due to mix as well as greater volume.

Can you talk about what is more profitable in your mix?

And then, is there any consistency from one quarter to the next about what is more profitable in your mix or is it all becoming quite random?

Right now I'd tell you that it's somewhat random.

We don't have the luxury to pick and choose when the economy is better.

We do a lot more of the having that scheduling opportunity and the picking and choosing, but as of right now it's random is the name of the game.

Okay.

Typically, Michelle, downstream, painted products, those products tends to have a higher margin than perhaps hot rolled coil for sure.

And I think the greatest benefit that we have compared to a lot of our peers is the diversification that Dick and his team have created in Butler, gives us huge advantages in these down cycles.

And I think our utilization rate for Butler in the fourth quarter was probably -- I didn't calculate it.

It was probably 90%, 95% or thereabouts.

And when you are only -- you only need to get a little bit of hot band, a little bit of coiled roll, a little bit of gosling, a little bit paint, a little bit of each product, and we can pick our market niches to have higher margins, and the end result is the mill is running at a utilization rate higher than our peers, and our average selling value will be higher also.

Great.

Okay.

Thank you.

I'll go back in the queue.

Thanks Michelle.

Evan Kurtz, Morgan Stanley.

Good morning everyone.

I was hoping we could talk a little bit about Mesabi.

Maybe first off could you give us a little bit of guidance on how many tons you think you could actually produce out of the facility in 2013?

As I said coming out of the shutdown, startup went okay.

I think from a product quality standpoint it's been significant.

There's been a dramatic change and the guys at Electric Art Photoshop in Butler have been incredibly appreciative and have been applauding the product quality.

So that was good.

Productivity has been a little disappointing in all honesty.

We've been around about 20,000 tons, 20,000 metric tons a month, November, December and we'll probably finish January in around about that same number.

Few issues -- still impacted a little bit from some mechanical problems.

The cold weather has impacted us.

Although we've suffered a lot less downtime than last winter and learned some lessons, operating in minus 30 degrees is just an experience.

My hat's off to the guys up there actually but that's cost us a couple days in January.

So we are slowly progressing up the production curve.

We've been having periods of good production, 1,000, 1,200 tons a day.

So if you extrapolate that out, as I think I mentioned in our last call, we can see a production rate of 300,000, 350,000 tons a year as being achievable with the facility as is.

That's not going to happen immediately, and we see that slowly ramping up through 2013.

We've got to take a shutdown here in the spring to make some more mechanical changes and install some option enrichment equipment.

Got you.

We certainly need to get the efficiency, the thermal efficiency in the hearth furnace to get the 400,000 to 450,000 tons.

And we won't know that for sure until we install that equipment.

Understood.

Okay.

And then on the iron ore input side, are you at below $50 a ton now or is that something you're still ramping to get to?

We are not at the absolute design capacity today.

We have and are achieving on a daily basis the throughput is at the rate of capacity.

The recovery is less than we've designed it for.

And that's just a matter of commissioning and starting up the bore mill.

We've commissioned the bore mill late December or early this month.

And that should give us that additional recovery.

So Dave and his team have done in my mind a phenomenal job in horrendous weather, and that plant, that startup has gone incredibly well.

And they anticipate no problems getting the volume and the cost structure is as expected if not better.

Great.

And then you mentioned that iron ore price is currently about $140 a ton.

What is roughly the value of the inventory that's flowing through in the first quarter?

On a per ton basis?

Was most of that was most of that bought at the beginning of last year?

Right.

It's probably closer to the $120-ish, $125 range.

Okay.

Great.

Thanks.

And one other question on scrap, curious to hear your thoughts on if that's scrap pricing and also wondering if Mississippi River levels have been impacting the market at all?

Russ is the only one in the leadership team that has a crystal ball.

Russ?

Evan, I think Mississippi River certainly has had some impact.

It's prevented flows out of the upper Midwest, Chicago in particular.

So it has had some additional pressure on the markets in the Midwest.

But again I think as you look at the scrap pricing trends where it's going to go, it's going to follow the order books of steel mills.

And I think as those steel mills and foundries business picks up, certainly there's going to be pressure on the pricing to move it up.

At this point, it's just been kind of steady.

I think Mark characterized it well when he said it was a volatile year last year.

I think we are expecting something very similar this year.

Great.

Thanks, guys.

Brett Levy, Jefferies.

You gave part of the answer to the capacity utilization question in the total answer.

You said Butler was at 90%.

As you go through sheet, rail, each of the different assets, do you have a rough utilization rate for the quarter?

I believe we gave the utilization rate for the quarter was 87%.

I believe 80%.

Right.

I'm asking sort of by business unit.

Well, it's fairly easy.

The production -- because we don't build inventory to a great extent if you just take each of the shipments and you look at them on a quarterly basis with the capacity of each of the divisions you can come up with that.

And our capacities are actually in the presentation that's out on the Internet.

That you --

Okay, I'll do the math on that one.

As you guys look at the Pittsboro expansion, are you guys continuing to take market share as you roll out this capacity?

Do you anticipate there will be any sort of pressure on pricing as Pittsboro is rolling out or are you encountering just favorable swings in terms of your market share?

That capacity won't be added until the third and fourth quarter of this year.

And so there is no impact right n ow.

We've been out addressing the different quality requirements and certifications to get that business.

And of course there is always a niche opportunity that applies some pressure when you attempt to gain a business, but it's going to be what it's going to be and so we believe that their customers are going to be favoring us with the business that they give us with the larger bars.

And as you guys head hardening on the rail mill can you guys talk about what target volumes are as head hardening is implemented over the course of 2013 and into '14?

We're targeting total rail sales somewhere between 300,000 to 350,000 tons a year.

And I think it's not a matter of the capacity of the mill.

The capacity of the mill might be more than that, but when we get into that business, we are in that business on the standard rail side, but we want to maintain a commitment to the railroads.

We don't want to flip in and flip out of the rail business depending on the vagaries of the structural arena so we're targeting a solid 300,000 to 350,000 tons of rail.

Again, as Dick said, that's being installed later this year.

It's not going to really start ramping up on the head hardening side until 2014.

So I wouldn't expect that volume, that level of volume to go out until probably 2015 or thereabouts.

In 2012 our total rail shipments I believe were 147?

144,000.

144,000 tons.

Again, that's all standard rail.

All right.

And nothing major in the M&A pipeline as far as you guys can consider?

Well, if we were, we wouldn't talk about it probably, Brett.

Okay.

I got it.

Thanks very much.

Sure.

Just one comment that comes to mind on the SBQ expansion, we're focused there with three and five eighths and that diameter?

That makes up about 50%, 55% of the SBQ market, which typically can be 8 million to 10 million tons so we feel gaining market share 300,000, 350,000 tons in that 4.5 million-ton arena should not be a massive undertaking, given the loyalty and support we have from our customer base and the quality level of our product down there.

Thanks very much, guys.

Thank you.

Luke Folta, Jefferies.

Hi, good morning everybody.

First, I have three quick ones if I could.

Firstly, you had some pretty dramatic shipment trends in the fourth quarter both in the flat rolled side and for SBQ.

It would seem to me that stocking trends probably played a factor there.

I wanted to get a sense in the first quarter so far of what you're seeing as far as order entry relative to fourth quarter shipment levels.

I imagine SBQ probably had a big destock that may or may not be continued in the first quarter.

Seems like by the strength of your flat roll there was probably some pre-buy, the price increases.

Just trying to get some color around that.

I think in both cases there was some pre-buy, but I would tell you that we're pleasantly -- we're pleased with the continuation of the order intake in both those arenas.

And the shipments are not -- the orders that we are taking are not for long-term backlog but for product shipments.

And so neither one -- we weren't robbing Peter to pay Paul.

We weren't taking orders in December to ship that were really for January consumption.

They were -- they were concerned about price increases and so forth but it really wasn't a real wild stock up at the end of the year type of ride.

Okay.

So something like at Butler something like in the vicinity of where fourth quarter levels were is a reasonable outcome you think for the first quarter at this point?

So far.

We are only three weeks into the quarter, but --

Sure.

Okay.

And then just on the SBQ side, the SBQ shipments there were some of the lowest levels we've seen since '09 so are we seeing any sort of pick up at this point in the first quarter?

I think in SBQ world, across the board and as I've read from others too, that the order intake in SBQ has been seasonally good.

Across-the-board.

So that's good for all of us.

All right.

And then just on Mesabi, with iron ore prices stepping down quite a bit for you, iron ore costs I should say with Magnetation, can you give us a sense with that in mind and with your outlook for utilizations to ramp over the course of the year, I'm surprised we aren't expected to hit some sort of profit by the end of the year.

I was just curious if you could give us what you think breakeven utilization is with your now reduced concentrate costs.

I think if we are -- it all depends on the transport price, obviously.

But I think as we've said in the past we are hopeful that we'll be in that breakeven posture by year end.

And I think that is at a production rate of roughly 325,000 tons on an annualized basis.

Somewhere like that.

Okay.

Just lastly quickly, we're hearing from some folks that electrode prices might be stepping down pretty meaningfully in 2013.

I just wanted to understand if that was going to be any benefit for you for the year.

Such a small number in our total -- I can't even comment on it.

We don't even talk about it at the general managers meetings anymore.

Okay.

Very good.

Thanks.

Thank you.

Dave Katz, JPMorgan.

Coming back to the iron savings, so I know that eventually you're looking for 350,000 tons a year.

With the $90 per ton savings, that sounds like a potential $32 million savings, but it really sounds like this year overall might just be e a breakeven.

Is that the right way to think about it?

I think that the first part of it is correct in the way you think about it as really when you get to that -- Mark talked about getting to 350,000 tons under our current configuration but we still believe that there's the ability to get to the 450,000 tons after we make some changes in the second quarter and we just can't tell yet.

So that first part is true for the environment we're in right now.

As we go through the year -- because the first quarter were using up the higher-priced inventory and then we're actually ramping up and we need to take the outage in the second quarter, I think 2013 is still a development year for Mesabi, so even though we expect to get to breakeven rate on a monthly basis, toward the end of the year, that won't result in a breakeven year.

Okay.

Understood.

And then coming back to engineered bar products with the understanding that things are looking a little better, still for I guess the six quarters starting first quarter of 2011, there was kind of a consistently strong rate that was around 150,000 per quarter.

And it's definitely been below that the last few quarters.

When you look at the inventory of your customers, what do you think it would take to get back to that level?

We are not back there.

I'm not trying to give any indication that we're running strong and full.

I can't tell you what it's going to take.

Again, we take advantage of our schedule.

We run our large furnaces at off-peak hours and so forth.

We are using the things we've done well with combining products into efficient casts.

And we're pleasantly surprised that with the orders we've taken, the sequences -- we're doing the things we've learned and practiced over the past few years and trying to continue those in very efficiencies and the like and so we continue to do well even in a down turn.

But I don't want to imply that everything is great and rosy, that's why when we set our aggregate operating rate is 80%, we're not full.

And so I don't want that to be implied and I can't tell you what it's going to take to get there.

Okay.

So then, asked a different way when you speak with your customers and you're seeing that slight change in the order rate, which perhaps indicates an inflection, is the indication from them that that's due to an end of destocking or rather an increase in demand from their ultimate customer?

I think it's a newfound consumption rate by the end users that there was -- the consumption rate -- inventories have been flushed.

They've been cleaned.

I talked to a large off-road equipment manufacturer who was actually here calling on our OmniSource Group.

And I said hey, what's going on out there?

He said, I had to make two budgets, one with more upside potential and one with a little bit more realism that it's not going to get much better than it was last year.

And he says, it's just more ho-hum.

He said, I honestly believe that's what it's going to be for a bit more continuation in 2013, so I think it's a realization that that's the level and that's not the consumption rate that they were forecasting.

And that they were running at in the past few years when things were going great.

I think it's a little bit more of the ho-hum, things are what they are.

Without a real break in construction projects worldwide, it's not going to run at a humming rate.

Okay.

Thank you for that information.

Mark Parr, KeyBanc.

It's a nice quarter.

Thank you.

Team did a great job.

Yes.

That's terrific.

I wanted to just ask a question based on a word you guys used, transfer pricing.

And so as far as how we're going to see the Magnetation material, that savings, it may not necessarily come through Mesabi Nuggets.

It comes through the Magnetation joint venture.

Is that where it will show up?

No.

Actually, what we've started doing purposely, Mark, is talking about our Minnesota operations.

And when we talk about Minnesota operations, that includes three entities.

It includes the nugget facility, Mesabi Nugget.

It includes our mining resources which is the Magnetation joint venture.

And it includes Mesabi mining which is our wholly-owned entity.

Right now that value would be extracted at the Mesabi mining which we own 100% of.

When we report it to you, it will all show up in the same area.

Okay.

All right.

That's helpful.

And, Mark, looking at some of these other releases this morning, you've got some mixed signals.

I think US steel is suggesting that their flat roll business in the first quarter's going to be weaker from a profit perspective, but volume will be up a bit.

I think AK has come out and said they expect an improved results, i.e.

as a smaller loss or maybe -- I don't know if there's profits in their mind yet, but at least moving in a different direction than US Steel.

Nucor has also suggested 1Q will be weaker than 4Q.

Do you have enough color that you could give us any at least directionally which way you think the earnings momentum is going to be in the first quarter?

Asking Russ this morning on his crystal ball to tell me what the scrap pricing would be doing the next three months I'd be able to tell you.

Obviously we are a spread business as you know, Mark.

And it's wholly dependent on where scrap moves over the next couple of months to be honest.

I've been hearing that scrap could be down $20 in February.

Is that anywhere close to what you guys would be seeing?

Mark, I think it's going to be -- I think we've characterized it as soft sideways, which could be down $10.

Could be up $10.

I think a lot of it is just going to depend on the available, or the utilization rate of the mills, what their order books look like.

Again, if our mills are any indication certainly they haven't deteriorated.

So again I think scrap is there.

Weather has not been a real factor as of yet, although we're not done with the month yet so I think we'll have to see where that goes.

So I think at this point we're looking at mostly sideways.

Okay.

All right.

I appreciate all that color and good luck on the first quarter.

That's great.

Thanks.

Sal Tharani, Goldman Sachs.

Good morning.

Couple of questions on the raw materials side or the input side.

First of all, Theresa in your income statement, the loss attributable to noncontrolling interests, $5.5 million, is that all towards Magnetation joint venture?

Those losses are a combination of the copper rod mill and the Minnesota operations, which would include Magnetation.

Okay.

Is that like -- what is the bigger chunk in there from -- or is it equally divided?

Minnesota.

Pardon me?

The biggest amount is from Minnesota.

Okay.

And that will be mostly Magnetation?

Because -- is mine also -- a lot of losses in mine at the moment?

No.

Most of that would be a Mesabi Nugget.

Okay.

I wanted to ask you something, I'm looking -- I just want to understand the way you report, which first of all, thanks for making it more and more granular every quarter.

You have a manufacturing and resources P&L and also the metals recycling, which is more OmniSource and if I look at 2012 operating income for metal recycling was $72.5 million while the metal recycling and ferrous resources was a loss of $11.7 million and the operating income of metal recycling does not even include the hedging gain which is about $3.6 million, but that's about $84 million swing.

And Mesabi Nugget was only a $40 million loss, $10 million a quarter you're taking so I was just wondering that other $40 plus million, $40 million to $45 million, is that Magnetation and others in there?

Or what would that be?

Or IDI maybe in there mostly?

Well, the one thing to recognize is your $40 million that you're saying from Minnesota operations is actually a net of tax number.

And you're comparing that to operating income.

So you're going to have to make that number pretax.

So you're more looking at even if you just use the 40% tax rate which it wasn't that, you're looking at $65 million, $67 million from an operating perspective for the losses related to Minnesota.

Okay.

So the rest would be mostly divided between Magnetation and IDI?

Or IDI will be in there also?

Is that correct?

Correct.

The other thing that's in there is IDI which is a small amount and Magnetation.

Okay.

And one last question, Mark, when I look at the path from $10 million a quarter loss to a breakeven by the end of this year or later part of this year, obviously raw material input cost which is iron ore will play a role.

You lost less about $40 million post-tax or $65 million last post-tax on a 170,000-ton shipment is about $382 a ton.

Iron ore is just going to contribute $75, $80 based on $125 market price you're paying $125 minus $55 your costs are $50 across, I was wondering the rest of the stuff is coming from efficiency and improvement, do you expect this -- the Mesabi to be running pretty heavily by the end of this year to get to that kind of savings that you break even by the of this year?

Yes.

Obviously at the impact or the start up curve at this moment in time is very, very steep.

And so it doesn't take a huge increase in volume to have an appreciable impact on your cost per ton.

Okay.

Great.

Thank you very much.

Thanks, Sal.

Timna Tanners, Bank of America.

Thank you, good morning.

So, not to pick on you, I was already going to ask this question after Sal started, but I just wanted to actually offer you a chance to remind us why Mesabi is the right technology for Steel Dynamics.

Really, you could have walked away from it like we've seen with other scrap substitute technologies like high smelt or others, you could adopt a different one.

Can you give us a high level reminder of why Mesabi is so compelling for you and why it's the right alternative?

I think from our perspective, we still see the potential to get the volume capacity.

If we were -- not to be optimistic or not to see the potential there, perhaps we would have a different opinion today.

Again, the quality of material is excellent.

And we feel like we get the volume to where it should be, the cost structure should be competitive.

Okay.

So --

When you look at all these different materials whether you look at DRI, whether you look at the Mesabi, whether you look at Iron Dynamics whether you look at scrap, whether you look at the blast furnace route, there are a lot of variables and a lot of assumptions that come to play.

We still feel that Mesabi Nugget will be competitive certainly against integrated mills that have market-based ore as a raw material.

How do you compare it to what we're hearing about DRI?

DRI?

We've got the DRI facility utilizing captive -- and I emphasize captive ore, and $4 per decatherm gas, there are very few technologies out there that will beat that.

Okay.

Switching gears if I could, the other question I wanted to hone in on is you talk about improving nonresidential construction as an opportunity to deploy the mills at full utilization and also about using gas, about the greater manufacturing in this country because of cheap natural gas.

All those just things that you're modeling?

Are you seeing any of that yet?

And then if you talk about cheap gas benefits I don't know how to quantify the steel that would go into say, a chemical processing plant or some of those opportunities.

Can you help us with that?

I think it's more macro than that, Timna.

I think the shale gas or just having gas at $4 -- some would say, long-term, gas will perhaps come out at $5 through the cycle, when you compare that with Europe, at probably around $8, $10, $11 a decatherm, you have Asia probably $10, $15, that gives an incredible incentive to invest in this country.

And it's not the specific consumption of steel units in building a chemical plant.

It's the fact that it has the opportunity to truly change the economy of America.

And we'll be the beneficiary thereof through manufacturing, and oil, and energy, and transportation, all those things.

Okay.

Thank you.

Arun Viswanathan, Longbow Research.

Thanks.

So, question on recycling, it looks like there was some pretty good performance in the quarter.

How do you see that playing out sequentially over the next couple quarters?

And why?

Anytime we can get a market that rises in the quarter, I think recycling's got a pretty good chance of doing well.

Which is what happened in the third quarter.

We had significant price increases throughout the quarter.

I think as we go into the first quarter here, those look like they played out, so I think we're looking at more of a flat market so again, I think we won't get the benefit of those market swings upwards.

To that degree.

I think on the other side, you look at the nonferrous and that market seems to firm somewhat although we do have Chinese new year coming up, which generally tends to put a damper on nonferrous.

So I think what we're looking at at this point is a very similar year to 2012 where it's going to be -- where the scrap is going to be traded largely in a range and it's not going to have the big spikes up and down.

Or if they do they're going to reverse themselves very quickly.

Okay.

Thanks.

And similarly, on the natural resources side, it was helpful that you guys broke it out from recycling within the segment.

And what's the path to profitability from a time line perspective and are there any road blocks to achieving that?

Well, the primary thing that's affecting the metals recycling and ferrous resources segment really is the Minnesota operations.

So much of what we've talked about on the call already, that path to profitability, that's what's going to cause the segment to become more profitable as well as some of the initiatives were taking in metals recycling even though Russ mentioned that the year in a volatility or pricing perspective could be very similar to 2012.

There's other things that we're doing to enhance margins that are outside of the market arena such as some of the nonferrous recovery systems and some of the cost reduction initiatives that we're taking in certain areas as well.

So there's a lot of things that we're implementing in 2013 that should cause that to improve.

Okay.

Thanks.

The last question I had was on construction in flat rolled.

I guess as Michelle said we are seeing some improvement in ABI and so on.

Do you believe that non-res trends would ultimately translate to stronger construction market in the second half, what are your customers telling you and is that a fair assumption?

Thanks.

Well, all I can tell you is that we still have some galvanizing capacity that services mostly the construction market.

And I don't see that being filled up in the summertime or in the fall.

And so I don't really believe -- I know and I understand what trends do and what they send the messages for and so forth but I think we're still a long way away from recognizing a healthy non-res and residential construction market.

Okay.

Thanks.

Tim Hayes, Davenport and Company.

Good morning.

A couple housekeeping items.

Did you give the operating income from OmniSource in the quarter?

The operating income for OmniSource in the quarter was $25.8 million.

And does that include $9.8 million mark to market gain?

That's correct.

And quickly the shipments the steal ops by the categories, the hot rolled, pickling, oil, et cetera, do you have those?

I do.

For the fourth quarter final shipments we had 300,000 tons of hot rolled, 92,000 tons of P&L, 37,000 tons of cold rolled, 117,000 tons of hot rolled galvanized, 53,000 tons of cold rolled galvanized, 97,000 tons of painted, and finally 18,000 tons of galvalume.

Thank you.

You're welcome.

Tony Rizzuto, Dahlman Rose.

Thanks a lot, hi everyone.

I've just got a couple quick questions here.

How far at now are your lead times at Butler?

And how does that compare to lead times before the latest price hike announcements?

We don't really talk about backlogs that much anymore almost across the board.

We look at what our casters are scheduled at and we continue to have two casters scheduled, so if I set out a couple weeks again, we've got our payment products that are sold out into March, and so forth.

So again, the hot band, we've probably got some spots in the beginning of February that we're hoping and so forth -- the value added products, we're filling up the end of February and into March already.

So again, we don't really think of it as a backlog like that that much.

We look at it from when we scheduled casters for.

Okay.

Dick, so that is about three to five weeks on average type of level?

Yes.

I would guess that's what it would translate to, yes sir.

And have there been discernible changes since the latest?

You guys indicated that maybe it was a little pre-hike buying that was maybe going on a little bit?

It was a little bit, that's true.

Okay.

And as far as, just a couple other things here, I think Mark, you mentioned your response to an earlier question about the M&A and it was kind of an open-ended response that you made.

Strategically though, should we think about any M&A activity?

Would it be most likely more bolt on for you guys rather than transformational in terms of magnitude?

I think our growth focus at least this past year -- and our implementation standpoint into 2013 has been to leverage our existing assets.

Try to enhance the margin and the utilization of those.

I think the expansion and the supply from Columbia city along with the head hard and rail initiative at Columbia city is going to bode very, very well for that enterprise.

And it follows our focus or our strategic thought that were want to enhance margins but we also want to get a little more consistent margin through the cycle.

And that's certainly going to help there, but our focus of the past year has been more internal.

From a standpoint of M&A activity as we said, we are a growth Company and we will look at opportunity.

We certainly would not consider getting out of our discipline.

There needs to be comfortable fit.

And there needs to be good capability of margin enhancement.

That's very helpful.

I appreciate that.

Finally, anything new to report in terms of your permit process on the mining side in Minnesota?

Certainly no.

That continues to be a very arduous task.

And unfortunately it changes, I wouldn't say daily, but the restrictions and the direction, the focus of the state agencies there are ever-changing.

And so it's tough to hit a moving target, to be honest.

But I would suggest that a permit for the Brownfield mine is not going to be forthcoming in the next year, 18 months.

Maybe two years.

Again, we're very fortunate in having the joint venture with Magnetation providing good material.

Again, that's not new material.

We've already used it.

We've been using Magnetation type material for the past year on and off.

But that is -- it's more than a bridge.

The reserves for that facility are substantial.

And the technology will be able to provide all the needs for Mesabi Nugget going forward.

So the mine is not an essential issue to gain that permit, but we do feel there's value there, going forward long-term.

And hence we will continue to pursue a permit.

Got it.

And on that topic, just to further follow it, obviously it looks like this president and the administration is starting to talk more and more about the carbon tax legislation.

I just wonder if you can give us your thoughts about how this might impact your Company and maybe some thoughts on manufacturing in this country.

And there's been a lot of excitement about a resurgence if you will of industrial activity here, but is this moving in the wrong direction?

If we start to see this talk rear it's ugly head again?

Well, I think it certainly will be a distraction for a lot of people.

And your guess is as good as mine as to the end result.

I would throw out there that some of it that is not openly discussed is the phenomenal reduction in carbon gases here in the last year or so by the shale gas phenomenon.

Utilities are changing their power generation by a large amount from coal-fired to gas.

If you look at their capital expenditures going forward, they're squarely focused on cash generation.

And it's a massive drop in the carbon footprint already.

And it seems that the administration and agencies don't want to even recognize that.

Thanks for your thoughts on that.

Appreciate it, guys.

Thank you.

Michael Gambardella, JPMorgan.

Good morning, Mark.

I just wanted to drill down a little bit more on this Minnesota operation.

So you're estimating that you're going to be right around breakeven by year-end.

And I just want to get some details on how you get there because if we're starting with about a $65 million pretax loss for Minnesota, I think I heard you say, for the year annualized, even if we take the benefit from a concentrate, the maximum benefit of say, $90 per ton multiplied by the top end of the range, 450,000 tons.

We're talking about a benefit or incremental improvement of about $40 million, $41 million, that still leaves us with about a $25 million loss.

So is that all going to be picked up on the conversion improving?

And what is the conversion cost?

What are the conversion costs right now and what do you hope for them to be?

Michael, we've always refrained from talking about conversion costs until we have the facility running closer to design so that we can speak intelligently about that.

And I would say that the principal difference is volume.

Obviously there's going to be some cost -- further work on cost compression from maintenance and all those good things.

And I think we may have the transfer price appreciating just a hair but not substantially.

Thank you.

But if you have a $65 million loss on a concentrate which you probably won't achieve -- probably not going to achieve that full $90 per ton against 450,000 tons by year-end, is all of the rest of the benefit to get up to the breakeven just on the conversion cost expectations improving?

Yes.

And I think our resulting cost is coming off a little bit.

You've got as I said incremental pickup in transfer price.

So together, we -- that's what we're predicting.

We may not make it and we may be better than that.

Mike, one thing I'd like to point out is it's not a one-for-one on the amount of conversion that you use to create one nugget.

It's more like --

Today it's closer to the 1.75.

1.7 to 1.75.

When you're thinking about incremental benefit you have to look at tons of concentrate that are actually needed to produce 1 ton of nugget.

Just because of the grade, right?

For the grade and just the efficiency of the process.

That yield will improve with time.

But that's where we are today.

Could you give us a ball park what you're paying today for landed pig iron or DRI or whatever kind of scrap substitute you're buying?

We haven't bought any pig iron recently, but --

Pig prices are about 405 New Orleans, probably both --

And then how much would be to get up to your mill?

Freight is close to $45.

$45, $47?

Yes.

So I guess you're looking -- how would you characterize where you hope to be versus landed pig iron price of like 445?

Pricing ton for Mesabi?

Yes.

Again, we've refrained from talking about that.

Mike, we still feel comfortable with what we believe the eventual cost structure will be with both all of our Minnesota operations combined and we feel like it's competitive for us to have it versus buying open market pig iron and being subject to the vagaries of what those markets are and whether or not they are available because of weather or whatnot so we still believe in the process.

But as Mark said a couple of times on the call, we do need to see what happens with the changes that we expect to make in the second quarter.

Okay.

Thanks.

David Gagliano, Barclays.

I just wanted to clarify a couple things with regards to the first quarter outlook.

I heard a couple of different moving parts here with regards to order books improving but potentially some pre-buying so these are very basic questions but just in general for your steel operations business, could you give us a sense as to volume expectations?

Overall Q1 versus Q4?

Maybe it's a range on a percentage basis or something along those lines?

That's my first question.

I think we will still be operating in our 80% range for utilization of the steel mills.

Flat roll continues to be at the higher end of it.

SBQ and rail, structure rail at the lower end.

Our Steel West Virginia is basically almost fully booked.

And Roanoke, the rolling mill has built a little bit of inventory but their mold shop is not running full because they are not selling any belts on the open market.

And so that's about where we are now.

So is the one word summary there, flat sequentially on volumes?

Flat -- (multiple speakers).

Okay.

And then my next question which is actually related, moving parts on pricing as well can you give us a sense directionally on your pricing expectations given where we are in the quarter at this point overall in steel operations?

We don't comment, David on that.

And secondly, again, we're operating in many cycles anymore.

And we could tell you one thing tomorrow, today and two weeks from now it would be very different so we would hate to speculate for you.

Okay.

And then the last question, scrap -- let's assume scrap is flat for the remainder of the quarter.

Any reason to expect unit cost to move directionally significantly sequentially in the steel operations?

I guess the one thing which we do seem to have consistency and that is our cost structure.

I don't think given volumes remain stable -- there's nothing on the horizon I don't believe.

Again, just to throw a couple plugs in, I'm very proud of the steel operations -- we're not spending huge capital monies but just about each of the operations have continued to improve their efficiencies, yield, we have had record production at many of these facilities.

And what we find our best -- the best opportunity for improved performance is by lowering our cost structures and we continue to make strides there, and that's where the best bang for the buck is, is we've been installing smaller pieces of equipment, better utilization of it and on and on, all from safety right on down through quality and yield and efficiency.

So I think we'll continue to see good performance.

And even in a not solid book.

Okay.

Perfect.

Thanks very much.

I appreciate it.

John Tumazos, John Tumazos Independent Research.

Thank you.

My question's on the recycling market.

Over the last several years, scrap in the nonferrous metals prices vary a good deal.

Copper is down about $1 from it's high.

Aluminum and zinc inventories are records.

Generally nonferrous is depressed.

How do these interactions affect your profitability?

Do they manifest themselves in lower scrap flows?

If the multi-product function like the dismantlement of automobile is a net residual value or do you buy at a lower price?

Does it necessarily affect your margins if your margin is a spread?

How do you look at the complex multi-variant function of dismantlement of an automobile or an appliance or some other good with many materials in it?

That's a good question.

I think in scrap world, recycling world, in essence your a trader.

You are buying and you are selling.

So those margins get compressed and expand depending on how well you do each side of that function.

So again I'm very proud of our team and their market knowledge and their market anticipation as to where these things are headed.

So I think again as we, particularly in the nonferrous, as we buy and sell certainly we get some extraction out of the shredders and out of the downstream facilities.

But again, they're going to move with the market both on the buy side and the sell side.

For example is your copper less than it was two years ago when copper peaked at $4.62?

Or is it coming in because people just collect the whole automobile or the whole good?

I think the flows are generally stable or -- again, they'll move -- if we get a big construction market certainly the demand for copper will go up and the usage of copper will rise which will generate scrap as an example, so again, I think it's going to flow with the economic trends in general terms.

John, you might be amazed, obviously the industrial flow, those folks -- providers are very, very in tune with where the copper market is.

You're not going to hoodwinked or take advantage of them.

But it's amazing how even the peddler has a good knowledge.

So when you're buying a car, the hope -- they are baking in the value not only of the ferrous component of that hulk but also the nonferrous.

It's incredible -- incredibly how efficient the market is.

Thank you very much.

David Lipschitz, CLSA.

Good morning, I'll be quick.

My question is it seems like every fourth quarter your metal spread compresses but yet your operating income beats that spread.

And you said your conversion costs are kind of flat.

Just wondering what's -- is it a seasonal factor with the fourth quarter?

Just wondering why that is.

I'm not show sure I've studied it quite that way and can tell you to be honest.

If you look at like your metal spread each from third to fourth quarter continues to -- has compressed the last three years but your operating profit this year was up $2 a ton in the flat rolled division, last year it was up $13 I think, but metal compression was $29 a ton.

So you said conversion costs were kind of flattish so I was just wondering if there's anything else in that number that would cause it to be that way.

Actually, if you look from division to division -- and we don't talk about it in that granularity -- but the conversion costs at some other some of the divisions were much lower from different cost initiatives that they took, whether it was less maintenance because of the holidays or whatnot and it did make a difference.

So maybe that could be impacted it I guess every fourth quarter.

We've not looked at it from that form or fashion but say that conversion costs were relatively steady, I think if you look at the impact each mill had, overall conversion costs were lower.

Okay.

Is that a normal thing for fourth quarter though, overall ask as you go back over time?

Were there holidays, less maintenance, things like that?

I'm hesitant to say that it is only because to Mark's point too, I haven't looked at it from that way but we will.

And it could be just because of the holidays that that's the case but I'll get back to you on that, I'm not sure.

Okay.

Thank you.

Brian Yu, Citi.

Great, thank you.

Mark, you've given a lot of information on Mesabi.

I just want to make sure that I've got my numbers right here.

So currently it's running at about 240,000 tons annualized run rate.

And you're expecting to get up to 325,000 annualized by year and at which point you'll reach breakeven?

Is that correct?

That would be the hope, yes.

Okay.

The expectation for the team.

In terms of the capital improvements, you're going to finish those up in the second quarter.

So what else are you anticipating or buffers are you building into your expectations that -- where do we get from here like better than breakeven so that this starts on a return on capital?

What else needs to be done?

Again, volume is the most pivotal thing.

Now that we have a lower raw material input cost, and as with any pioneering effort, you don't put equipment in and certainly turn it on and you get that productivity.

There's a learning curve.

It's just the saying we put in some option enrichment in the -- in this past shut down, just to trial certain things ahead of the spring shut down.

And it's a learning curve.

I mean, it certainly had an effect of improving the thermal efficiency.

And we melted all the nuggets on the hearth and had one big plate of iron there.

So it's just learning how the new technologies, the new processes, behave.

So we see just a continued -- my hope is a continued ramp-up through the year.

All right.

Is there a way to think about how much the process has been troubleshooted thus far?

Again, I used the word earlier disappointing from a productivity standpoint.

Because I think the experience -- the learning curve from a knowledge perspective and a process perspective has been absolutely huge the last six months or so.

And again, if you look at certain periods of time, we're achieving 1,000, 1,200 tons a day for several days in a row.

It's a matter of getting that consistency as I guess, key.

Okay.

I'll switch topics just quickly on the current scrap march.

We have seen iron ore move up pretty significantly.

I would have thought that the international demand for US scrap would be stronger than what we've seen thus far.

Any color you can share on what you guys are seeing from some of your more traditional buying partners and why maybe we're not seeing scrap price actually move up consistent with the iron ore markets?

Well, I would think, Brian, part of it has to do with oil demand.

I think the Chinese certainly -- the Asians certainly have continued on a relatively static basis.

The Turks have been erratic.

They are the big consumer on the East Coast and the Gulf.

I think as I look at the exchange rate, the dollar-euro exchange rate, as the dollar continues to weaken, certainly I think that's going to wind up making the US-based scrap more affordable for the Turks.

And so I would anticipate that their appetite will grow as far as US-based scrap is concerned as long as that euro stays at the $1.34, $1.35, certainly that makes scrap attractive.

Okay.

Thank you.

Charles Bradford, Bradford Research.

Good morning.

I'd like to talk for a minute or two about your energy usage.

I've got a model that about 6% or 7% of sales in total -- does that make sense?

Yes.

When I -- I'm trying to break --

Charles, I'm sorry.

Not of sales, but of cost of goods sold.

Okay.

When I try to break that down between electricity and natural gas, I get something like more than 75% being electricity.

Does that also make sense?

Yes.

Now, an area where I'm having a lot of trouble is the electricity portion, how much of that is coal based power, how much of it might be nuclear or how much might be gas?

Do you have any idea on how much is changing?

We don't know that, Chuck.

When we contract for power, it's faceless.

Power company contact holding the contract, regardless of the supply, you'd normally go out without a contract into the market.

It's just at whatever the rate the market supplies, and you can normally tell -- you used to be able to tell what you were getting based on the price when natural gas was so expensive relative to nuclear or coal but now with the shale gas you can't tell that anymore.

So it's totally faceless to us.

We have no idea what electricity generation is -- what source of the generation is, whether it's coal, nuclear or gas.

Are you seeing any trend toward increased electric costs on some of the -- we keep hearing about the coal as you mentioned being converted to gas.

And some of the solar subsidies affecting what you're paying.

All I can say is that we have had indications from several of our contract suppliers that in the next round of contract there will be part of our discussions associated with significant increases due to costs that they will be expected to expend for the conversion to natural gas or for the installation of scrubbers for Mercury.

And so we see that.

And you can also see out a little bit as far as sometimes in the future strips that they have an anticipation of an increase in costs on the futures markets.

Thank you very much.

Thank you, Charles.

Sal Tharani, Goldman Sachs.

Thanks.

Russ, a quick question, there was a remark made by Mark, I think it's in the press release also that you took some advantage of strong December in the ferrous market.

I was just wondering if you can quantify A or B, does it mean that we should expect a lower volume as you enter the year with a lower volume of inventory on hand?

In the first quarter should we assume a lower volume number?

Sal, I think the inventory chain or the supply chain throughout the inventory, whether it is our yards or the mills is pretty narrow, it's really thin.

So I think what you're seeing is most of the scrap is being collected is flowing.

So I think again it comes down to the order books of the mills and our foundry customers and other customers as to what those volumes would be.

I think the scrap is available out there.

I think it's just a matter of what those order books look like.

So if their order books remain flat, remain stable, I think we'll have a flat to stable supply of scrap in terms of volume.

With the current pricing of scrap, is the flow okay into the yard?

It is generally okay.

Again, I think certainly there are spots where it does not meet the expectations of the sellers.

There are spots where -- there is parts where it does not meet the expectation of the buyer.

In those cases, there are times when scrap gets held off the market to some degree, but it's not troubled.

Okay.

Great.

Thank you very much, guys.

Thank you.

Thanks, Sal.

Thank you.

That concludes our question-and answer-session.

I'd like to turn the call back over to Mr. Millett for any final and closing remarks.

I just wanted to thank you all for your patience, quite a long call.

Thank you for your interest in our Company and hopefully you will continue to support us.

To our customers, thank you for your support also.

And employees -- a big heartfelt thanks from all of us here for your hard work, your dedication and we implore you to work safely each and every minute out there.

Thank you all.

Bye-bye.

Once again, ladies and gentlemen, that concludes today's call.

Thank you for your participation.

You may now disconnect.

Have a great day.