Nucor: DRI Better-Than-Expected, Expansion Projects on Track

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Nucor Corp. (NYSE:NUE), the largest U.S. steel producer by market value, remains well-positioned to benefit from the continued steady recovery of non-residential construction. In the meantime, NUE will benefit from cost structure improvements with the addition of its DRI facility as well as a stronger value-added product mix with the addition of the Berkeley’s wide light sheet mill expansion, the Nebraska SBQ mill expansion, and the Nucor-Yamato sheet piling expansion. The company’s Louisiana DRI facility has performed well since its startup in December, quickly exceeding the high quality specifications of the company’s Trinidad DRI facility. While NUE is allowing for additional startup costs and startup hiccups as the facility ramps up, so far performance has been stronger-than-expected.

The Charlotte, North Carolina-based company reported 4Q13 operating EPS of $0.46, beating consensus estimates of $0.40 by 15 percent. The results also came in better than company’s own guidance range of $0.35-$0.40. Better-than-expected third party mill shipments of 4.485 million tons and lower-than-expected conversion costs largely drove the beat. Scrap input costs of $377 per ton on average were also came in slightly lower-than-expected. The results also included lower-than-expected LIFO charge of only $0.04 versus the previous guidance of an expected $0.06 per share charge. Nucor was able to improve its sheet profitability despite the planned outage at the Berkeley mill, where upgrades were completed during the quarter.

NUE indicated it expects 1Q14 earnings to be similar to 4Q13 levels, excluding the effect of the tax adjustments. First-quarter results are expected to benefit from having no major extended planned steel mill outages and decreased start-up costs at the Louisiana DRI facility offset by seasonally weaker fabricated products performance, which also has been negatively affected by bad weather. However, NUE has a history of reporting conservative guidance and we expect the company to improve earnings sequentially, as pricing remains strong and steel shipments improve in 1Q14.

Louisiana DRI Facility Meeting Expectations

The Louisiana DRI facility, since its startup in 4Q13, has been performing well in fact has exceeded expectations. Production at the facility began in December 2014 and within 24 hours achieved world class levels (quality levels of the Trinidad DRI plant) with initial output reported to be performing well at Nucor’s mills. Currently, in-line with the start up plans, the facility is running at a capacity of slightly above 80 percent, punctuated by shorter periods near 90 percent-95 percent capacity.

Natural Gas Needs Hedged Through 2015

Despite the recent decision to not move forward with the drilling program, the company’s natural gas needs are covered through 2015. The company maintains its optionality on gas drilling as it seeks a sustainable price environment before restarting the project. By the middle of this year, Nucor will have over 300 producing wells providing a full hedge for the Louisiana DRI plant’s expected consumptions in 2015. Moreover, if prices are similar to 2013, drilled wells are expected to generate a positive return.

Development/Expansion Projects on Track

Nucor’s Berkeley upgrade project completed the installation of its caster and mill upgrades in December and produced its first 72-inch wide coils in January, allowing the company to move up the value chain for automotive, agricultural, heavy equipment, machinery and pipe and tube applications. In addition, the Yamato structural mill remains on schedule to startup its expanded sheet piling production capabilities in mid-2014, providing a lighter, stronger product with lower installed cost. Finally, the Nebraska mill completed its upgrade of the rolling mill which will expand SBQ product offerings including auto and improve rolling mill yields.

Conclusion

We have a buy rating on Nucor. NUE is well positioned to benefit from being an innovative leader among its peers. Driven by improving performance in its flat rolled business, the largest U.S. steel producer continues to post strong results. Company’s new DRI startup in Louisiana has also exceeded expectations and achieved world class performance within 24 hours. Although the company’s commentary on adverse weather conditions in 1Q14 puts a slight damper on the non-residential recovery excitement, the long-term thesis remains intact. Not only among the North America steel producers but also globally, NUE sets the benchmark for effectively managing operating margins through the cycle. Moreover, the Charlotte-based company boasts one of the best balance sheet among its competitors. Finally, non-residential construction is also showing signs of improvement, as is evident from the improving construction indicators including ABI, vacancy rates, and construction expenditure, etc.

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