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New York, July 19, 2022 -- Moody's Investors Service ("Moody's") noted that Steel Dynamics, Inc.'s ("Steel Dynamics") decision to build a recycled aluminum flat rolled mill and two satellite recycled aluminum slab centers is credit positive since it will be funded by available cash and internally generated cash flow, will diversify its end markets and product offerings, provides a natural hedge against market share losses for steel versus aluminum and grows its long-term cash generating potential. This investment will have no impact on the company's ratings including its Baa3 senior unsecured rating or its stable ratings outlook.
Steel Dynamics plans to construct a 650,000 tonne per year aluminum flat rolled mill to be built in the Southeastern US with expected start up in Q1 2025. It also plans to build recycled aluminum slab centers in Mexico and the Southwestern US that will commence operations in 2024 and 2025, respectively. The three facilities are estimated to have a total cost of about $2.2 billion. The flat rolled mill will require about 900,000 tonnes of recycled aluminum slabs, with onsite capacity from existing operations supplying 50% and the remainder supplied by the two satellite slab centers. The products from the mill will be sold to the sustainable beverage packaging, automotive, and common alloy industrial markets with many of these customers already buying steel products from the company.
This investment doesn't come without risks as it is a new business line for the company in a market where others are adding capacity as well and the company's estimated profitability is higher than those currently achieved by competitors serving similar end markets. However, we view it as credit positive since it will be funded by Steel Dynamics' available cash balance and internally generated cash flow and will grow its long-term cash generating potential. The company expects this investment to result in about $650 million - $700 million of through cycle EBITDA as it benefits from lower energy, transportation and labor costs, better yields, a lack of legacy costs and synergies with its OmniSource metals recycling operation which is the largest nonferrous metals recycler in North America.
This investment will diversify Steel Dynamics end markets and product offerings and expand the products sold to existing customers while capitalizing on the domestic shortage and expected growth in demand for flat rolled aluminum products. It also provides a natural hedge against market share losses for steel versus aluminum and ties into the company's core competencies of building and operating melting, casting and rolling facilities. In addition, it enhances vertical integration by consuming recycled aluminum scrap that is currently collected by OmniSource in addition to the steel scrap consumed by its steel operations. The company is also attempting to somewhat de-risk this investment by making a cash payment of $25 million to Unity Aluminum and providing a 5.6% equity stake in the rolling mill to have access to that company's aluminum industry knowledge and expertise, previously completed engineering & design work and other assets.
This investment will not have an impact on Steel Dynamic Baa3 senior unsecured rating which already considers its low financial leverage, high interest coverage and excellent liquidity profile. It also incorporates its diversified and high value-added product mix and demonstrated ability to perform well through various industry cycles given its low-cost steel mini mill operating structure and the integrated nature of its business model. The company's credit profile also reflects its exposure to steel price volatility and cyclical end markets as well as the risks related to the start-up and market integration of the new aluminum flat rolled mill and its new 3-million-ton capacity steel mill in Sinton, Texas.
We anticipate Steel Dynamics will generate moderately improved operating results in 2022 based on its record high first quarter performance, the spike in hot rolled coil prices in early Q2, its robust fabrication backlog with record high volumes and prices and the benefit of increased capacity and value-added capabilities. This will be somewhat tempered by weaker spot hot rolled coil prices versus the prior year beginning in May 2022. However, we anticipate the company will produce record high earnings in 2022 with adjusted EBITDA in the range of $5.5 billion - $6.0 billion versus $4.6 billion in 2021.
Free cash flow should surge to a record high level in 2022 and be well above the $1 billion previous high achieved in years 2018 and 2021 even though the company continues to invest in additional value-added capabilities and will commence investment in the aluminum flat rolled mill and recycling centers as working capital becomes a source of cash. We anticipate the company will continue to return some of that cash to shareholders in the form of dividends and share repurchases.
If Steel Dynamics generates around $5.5 billion of adjusted EBITDA and utilizes all of its free cash to fund shareholder returns and does not repay any of its debt prior to maturity, then its leverage ratio will decline to about 0.6x and its interest coverage will rise to around 45x. While these metrics will be very strong for the company's Baa3 senior unsecured rating, they are expected to materially weaken when steel prices return to a more sustainable level but should remain supportive of its rating. Steel Dynamics upside ratings potential is constrained by the volatility of steel prices and its reliance on cyclical end markets. Nevertheless, if the company successfully ramps up its new Sinton, Texas mill and integrates it into the market while metal spreads remain at an elevated historical level, then an upgrade of the company's ratings could be considered.
Headquartered in Fort Wayne, Indiana, Steel Dynamics, Inc. manufactures steel through its domestic electric arc furnace (EAF) mini mills, which have an estimated annual steelmaking capacity of about 14 million tons (9.4 million tons of flat rolled and 4.45 million tons of long rolled products). The company also provides value added processing and has 4.7 million tons of annual flat roll galvanizing and 1.5 million tons of painting capacity and operates steel fabrication facilities, which manufacture trusses, girders, joists, and decking. In addition, it is among the largest scrap processors in the United States and owns two iron-making facilities (Iron Dynamics and its idled Minnesota operations which includes its 85% owned Mesabi Nugget). Revenues for the twelve months ended March 31, 2022 were $20.4 billion.
This publication does not announce a credit rating action.
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Michael Corelli, CFA Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
Karen Nickerson Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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