MPI. Industry Update Q Metals Industry. Valuation Opinions & Transaction Advisory.

Transcription

1 Valuation Opinions & Transaction Advisory Industry Update Q Metals Industry

2 Contents 02 Industry Overview Overcapacity, Shifting Demand, Continued Industry Consolidataion 03 In the News Millions of Tons of Metals Stashed in Shadow Warehouses First Conflict Minerals Audits Loom China Still Dominates Rare-Earth Processing Is Greenland the Next Rare Earths Frontier In the Steel Industry its Adapt or Die Alcoa, U.S. Army to Develop World s Largest Single-Piece Aluminum Hull U.S. Steel s $1.8 Billion Writedown: A Tough Economy and a Global Glut CME Group Inc. Plans an Aluminum Futures Contract 04 Key Indicators Metal prices Raw materials prices Steel production and capacity utilization 05 M&A Overview U.S. Activity Highlighted Transactions Industry Trends Recent Transactions 07 Public Market Data Comparable metrics of selected public companies in the Metals Industry 09 About 1

3 Industry Overview This publication focuses on major events, developments and trends happening within the aluminum, steel, specialty metals and service center segments of the Metals Industry. The Metals Industry consists of companies in both growth and mature lifecycle stages. Metals sub-sectors vary from highly fragmented (recyclable material wholesaling), to dominated by a few sizable players (aluminum manufacturing) all of which are constantly faced with internal and external challenges. Presently, the following trends are reshaping the industry: Overcapacity: China s rapid expansion has resulted in overcapacity creating pricing challenges and concerns for aluminum producers. Although benchmark prices increased 2.2 percent in the third quarter they are still well below the July 2008 peak. Shifting Demand: As China s economic growth has decelerated, its demand for commodities has shifted. China s increased consumption of tin and lead for use in electronics and electric-bicycle batteries has resulted in an oversupply of steel. However, global steel prices are expected to remain steady, provided demand continues to increase in other global markets, driven by India and Central and South America. Continued Industry Consolidation: Large metal manufacturers have increasingly turned to vertical integration. Specifically, manufacturing companies have acquired facilities that recycle scrap metal and other materials needed for manufacturing allowing for a reduction in the cost of purchasing scrap metals and opening a potential revenue stream by selling scrap acquired on the open market. As the stock price performance graph below suggests, some segments of the Metals Industry outpaced the S&P 500, while others lagged the major index over the last five years % Quarterly Benchmark Performance* 300.0% Steel Aluminum Diversified Metals Service Centers Scrap Recyclers S&P % 200.0% 150.0% 100.0% % % % +48.8% +41.5% +18.0% 50.0% 0.0% Source: S&P Capital IQ. *Includes selected companies presented on pages 7-8. Chart above is presented on an index basis: Q

4 In the News Analysts and traders say the flow of metal into shadow warehouses already is making prices move in unpredictable ways such as when a large amount of unaccounted-for metal suddenly makes its way onto the market. It's a real concern for anyone in the industry that metal can be sucked away into a nonreporting location with no expectation or date as to when it's going to be available again. (WSJ 12/26) First Conflict Minerals Audits Loom Under the Dodd-Frank financial reforms of 2010, companies must scour their supply chains for metals and minerals such as tin, tantalum, tungsten and gold that are blamed for fueling violence in the Congo region. Companies have to have those results audited and file them with the SEC by the end of May. (WSJ 12/12) When U.S. Rare Earths Inc. begins mining on the border of Montana and Idaho, the U.S. will gain a new domestic, non-chinese source of minerals essential to making electronic devices and weaponry components. But at the moment, there's virtually no place for these minerals to be processed into something useful except China. (WSJ 12/5) Is Greenland the Next Rare Earths Frontier? Experts estimate that a mine in southern Greenland could contain the largest rare earth metals deposit outside China, which currently accounts for some 90% of global production. (AG Metal Miner 10/ 29) Designers, engineers and materials experts are on a mad dash to cut weight from vehicles without compromising safety. In the steel industry, everybody knows they d better do something, they know its adapt or die. (Chicago Business10/28) Alcoa, U.S. Army to develop world s largest single-piece aluminum hull for combat vehicles. The single-piece hull would replace today s assembled hulls and deliver greater strength and durability while also reducing vehicle weight, assembly time and cost (WSJ 10/21) U.S. Steel Corp. declared a surprising $1.8 billion writedown. That s quite a mouthful for a company with a total market cap of around $3.5 billion. The Pittsburgh-based firm offered three reasons, the economy, oversupply and imports. (WSJ 10/21) CME Group Inc. (CME), the world s largest futures exchange, plans an aluminum futures contract in a direct challenge to the London Metal Exchange. The market really wants an alternative, Harriet Hunnable, CME s managing director of metals, said in London today. The aluminum market is a large one and needs a new futures contract. It s a market that today appreciates price transparency. We can deliver that and good liquidity. (Bloomberg 10/8) 3

5 Key Indicators Metal Prices During the Past 12 Months 115 Indexed Return Steel Aluminum Copper Raw Material Prices During the Past 12 Months Indexed Return Crude Oil Coal Natural Gas Production (mt) (millions) 1, , , , , Steel Production vs. Capacity Utilization Capacity Utilization (%) Global Steel Production U.S. Steel Capacity Utilization Sources: S&P Capital IQ and Bloomberg. 4

6 M&A Overview U.S. Activity In the fourth quarter, total U.S. volume and deal count were down approximately 5% and 9%, respectively, from Q Despite slight improvements in Q3, deal activity pulled back slightly. Overall, the U.S. M&A market is still relatively quiet compared to pre-recessionary levels. In recent quarters, growth in deal count has exceeded volume indicating a much more active middle market and smaller deal sizes. It also suggests that buyers are still hesitant to pull the trigger on larger deals. Within the metals industry, eighteen deals were announced in the fourth quarter of 2013, bringing the total deal count for the year to 52. Overall, total volume decreased but remained in the range exhibited in the prior two years (2011 and 2012). Deal-making continues as industry players turn to consolidation as a means to improve financial strength, shorten logistics and supply chains, and boost capacity utilization. Multinational firms are expanding into global markets as the trend towards globalization strengthens across all industries. Cross-border acquisitions of U.S. targets in the metals industry have increased due to weakness in theu.s. dollar. Highlighted Transactions ArcelorMittal Acquires Alabama Steel Plant from German ThyssenKrupp AG The acquisition was led by a joint venture owned by Arcelor Mittaland Japan s Nippon Steel & Sumitomo MetalCorp. ThyssenKrupp spent $5 billion to build the Alabama plant three years ago, which supplies steel to the automotive industry in the southeastern U.S. ArcelorMittal hopes the acquisition will increase capacity and shorten the logistics chain, improving results. Enterprise Value: $1.55 billion. Commercial Metals Divests Howell Metal Company to Mueller Industries Unit Howell Metal operates as a copper tube mill in New Market, Virginia and was acquired by Mueller s subsidiary, Mueller Copper Tube Products, Inc. The divestiture allows Commercial Metals to continue its commitment to stockholders of focusing efforts on the core operations of the company. Enterprise Value: $58.5 million. 5

7 M&A Overview (Continued) Industry Trends As shown below, total deal activity in 2013 lagged total deal count and volume observed in The 52 announced deals observed in our subset in 2013 accounted for a 48% drop from deal value was driven by several mega-deals and only decreased by 10% year-over-year. Median M&A EBITDA Multiples Median EBITDA Multiple Avg. EBITDA 15.9x 10.9x 8.8x 8.8x 6.2x 6.5x 6.4x N/A $40.0 $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $0.0 $36.2 $23.6 Industry M&A Activity (Announced Transactions) $13.0 Volume ($bn) $4.4 $1.6 Deal Count $5.6 $6.0 $ Recent Transactions Announced Date Buyer Target Target Description 12/23/2013 Fitzroy Resources Ltd. Premier Coking Coal Limited Premier Coking Coal Limited engages in exploration and development of coking coal. 12/17/2013 Silver Predator Corp. Springer Mining Company And Nevada Royalty Corp. Springer Mining Company And Nevada Royalty Corp. represents the combined operations of Springer Mining Company And Nevada Royalty Corp. in their sale to Silver Predator Corp. Springer Mining Company owns and operates mineral mining properties and is based 12/12/2013 Prophet Equity LLC Keywell L.L.C. Keywell L.L.C. processes stainless steel, high temperature alloys, and titanium scrap metals. 11/29/2013 ArcelorMittal; Nippon Steel & Sumitomo Metal Corporation ThyssenKrupp Steel USA, LLC ThyssenKrupp Steel USA, LLC manufactures and sells coiled carbon steel bands as hot rolled and substrate for cold rolled and coated products in North America/the NAFTA market. 11/25/2013 H2O Innovation Inc. Piedmont Pacific Corporation Piedmont Pacific Corporation provides stainless steel couplings for wet and corrosive environments. 11/18/2013 Highland Copper Company Inc. Copper Range Company, White Pine Copper Project in Copper Range Company, White Pine Copper Project in Keweenaw Peninsula, Northern Michigan comprises copper mining project. Keweenaw Peninsula, Northern 11/18/2013 SRS International Holdings Inc. Empire Die Casting Co., Inc. Empire Die Casting Co., Inc., a die-casting manufacturer, offers engineered aluminum and zinc die castings. 10/31/2013 Triangle Capital Corporation Buckingham SRC, Inc. Buckingham SRC, Inc., doing business as SRC Worldwide, engages in manufacturing and marketing magnesium fluxes and magnesium chloride. 10/30/2013 Black Range Minerals Limited Uranium One Inc., Shootaring Uranium One Inc., Shootaring Canyon Mill And Related Assets comprises a uranium mill Canyon Mill And Related Assets which provides mining to finishing yellowcake uranium and 250,000 lbs of uranium covering an area of approximately 77,000 acres. 10/17/2013 Mueller Copper Tube Products, Inc. Howell Metal Company Howell Metal Company manufactures copper water tubes, and air conditioning and refrigeration tubing in straight lengths and coils. 10/7/2013 RBC Bearings Inc. Turbine Components Incorporated Source: S&P Capital IQ. Turbine Components Incorporated manufactures and repairs components. 6

8 Public Market Data (1) Company 12/31/ Week Enterprise EV/EBITDA EBITDA Margin Market Cap/Earnings Consensus Growth (4) Close (2) High Low Value (EV) (3) LTM NFY LTM NFY LTM NFY EBITDA EPS Steel Producers AK Steel Holding Corporation , x 8.6x 6.2% 6.0% NM NM 40.3% NA ArcelorMittal x 6.7x 3.3% 7.3% 29.4x 9.8x 14.1% NM Northwest Pipe Co x 11.0x 8.7% 9.4% NM 50.2x 18.5% 29.4% Nucor Corporation , x 10.2x 8.2% 9.3% 34.8x 25.6x 29.5% 50.6% Steel Dynamics Inc , x 8.4% 9.6% 22.9x 15.1x 32.9% 49.7% Synalloy Corporation x 8.4x 3.1% 9.7% 75.8x NA 51.5% 68.9% United States Steel Corp , x 5.7x 4.6% 7.4% NM 17.8x 35.0% NA Universal Stainless & Alloy Products Inc x 10.6x 6.1% 15.4% NM 33.2x 84.3% NA Median 11.6x 8.5x 6.1% 9.3% 32.1x 21.7x 34.0% 50.2% Aluminum Producers Alcoa Inc , x 7.2x 11.1% 13.2% NM 35.1x 20.3% 60.5% Century Aluminum Co , x 5.2x 0.9% 10.9% NM 8.7x NA NA Kaiser Aluminum Corporation , x 7.6x 15.5% 13.1% 12.5x 17.0x 7.3% 13.7% Noranda Aluminum Holding Corp x 7.6x 6.1% 7.8% NM NM 29.2% NA Median 9.2x 7.4x 8.6% 12.0% 12.5x 17.0x 20.3% 37.1% Median EBITDA Multiples - Steel Producers Median EBITDA Multiples - Aluminum Producers x 13.4x 11.6x 8.7x 7.5x 6.6x 3.4x x 9.5x 8.6x 9.2x 6.4x 6.7x 5.7x Average of Medians (9.4x) Average of Medians (7.7x) 7

9 Public Market Data (1) Company 12/31/ Week Enterprise EV/EBITDA EBITDA Margin Market Cap/Earnings Consensus Growth (4) Close (2) High Low Value (EV) (3) LTM NFY LTM NFY LTM NFY EBITDA EPS Specialty Metals Producers Allegheny Technologies Inc , x 15.4x 4.1% 8.0% 25.0x NM 73.4% NA Carpenter Technology Corp , x 8.6x 14.9% 17.7% 23.9x 18.9x 15.9% 29.3% Globe Specialty Metals, Inc , x 8.6x 5.4% 18.0% NM 19.0x 33.5% 52.6% Haynes International, Inc x 26.5x 7.1% 5.0% NM 147.8x 25.3% 27.9% Horsehead Holding Corp , x 17.7x 6.8% 11.9% NM NM 133.6% NA Materion Corporation x 7.5x 6.3% 8.2% 32.3x 17.4x 27.0% 44.2% RTI International Metals, Inc , x 9.3x 15.6% NM 74.3x 32.8x 11.1% 40.3% Median 18.6x 9.3x 6.8% 10.1% 28.6x 19.0x 27.0% 40.3% Service Centers A. M. Castle & Co x 75.1x 2.0% 0.7% NM NM 62.5% NA Friedman Industries, Incorporated x NA 4.8% NM 22.5x NA NA NA Olympic Steel Inc x 10.4x 3.3% 3.4% NM 21.8x 25.7% 93.8% Reliance Steel & Aluminum Co , x 8.8x 8.2% 8.6% NM 14.9x 15.5% 18.5% Worthington Industries, Inc , x 9.7x 8.6% 10.2% 19.6x 14.5x 14.2% 3.7% Median 12.2x 10.1x 4.8% 6.0% 21.0x 14.9x 20.6% 18.5% Median EBITDA Multiples - Specialty Metals Producers Median EBITDA Multiples - Service Centers x 18.6x x 7.4x 2.9x 9.0x 9.2x 6.5x 3.9x 7.6x 12.1x 9.4x 12.2x Average of Medians (11.7x) Average of Medians (8.6x) 8

10 Public Market Data (1) Company 12/31/ Week Enterprise EV/EBITDA EBITDA Margin Market Cap/Earnings Consensus Growth (4) Close (2) High Low Value (EV) (3) LTM NFY LTM NFY LTM NFY EBITDA EPS Scrap Recyclers Commercial Metals Company , x 9.4x 4.9% 5.2% 32.4x 22.9x 13.0% 32.4% Metalico Inc x 3.4% 4.0% NM NM 26.8% NA Schnitzer Steel Industries, Inc , x 3.1% 4.1% NM 198.6x 19.7% NA Sims Metal Management Limited , x 7.7x 0.9% 4.2% NM 18.5x 26.2% NM Median 13.6x 9.5x 3.3% 4.2% 32.4x 22.9x 23.0% 32.4% Median EBITDA Multiples - Scrap Recyclers x 13.6x 11.4x 9.3x 8.4x 7.3x 5.2x Average of Medians (10.9x) Notes: (1) Source: As reported by S&P Capital IQ. (2) Reported in local currency. (3) In millions of local currency. (4) Represents two-year analyst estimates. Definitions: Enterprise Value defined by S&P Capital IQ as market cap. + total debt + preferred equity + total minority interest cash and equivalents LTM latest twelve months. EBITDA adjusted earnings before interest, taxes, depreciation and amortization. NFY next fiscal year. EPS earnings per share. NA not available, NM not meaningful. 9

11 About is a full service valuation and investment banking firm serving both private and publicly held companies. Since 1939, has prepared thousands of valuations in a wide variety of industries and for many purposes. Our valuation and investment banking practices are national in scope, with clients in every state. We have significant experience providing advisory services to Boards and management teams on topics such as shareholder liquidity options and the valuation implications of various strategic initiatives. Our valuation services can be broadly categorized into Corporate, Transaction Advisory, Financial Reporting, Litigation Support and Tax-Based applications. For additional information pertaining to or S and our valuation and advisory services, visit DISCLAIMERS: The information provided in this publication is only general in nature. It has been prepared without taking into account any specific objectives, financial circumstances or needs. Accordingly, disclaims any and all guarantees, undertakings and warranties, expressed or implied, and shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or actual, incidental, consequential or any other loss or damage) arising out of or in connection with any use or reliance upon the information or advice contained within this publication. The viewer must accept sole responsibility associated with the use of the material in this publication, irrespective of the purpose for which such use or results are applied. This material should not be viewed as advice or recommendations. This information is not intended to, and should not, form a primary basis for any investment, valuation or other decisions. is not acting as a fiduciary, an expert or advisor in any capacity whatsoever in providing the information set forth herein. The information set forth herein may not be relied upon and is not a substitute for competent legal and financial advice. The viewer of this material is cautioned and advised to consult with his or her own legal and financial counsel in evaluating the information provided herein. The information provided in this publication is based on public information. makes every effort to use reliable and comprehensive information, but makes no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the information provided herein and shall not have liability for any damages of any kind relating to any reliance on such data. Further, the information set forth herein is continuously subject to change and may fluctuate. has no obligation to update the information set forth herein or to advise the viewer when opinions or information may change. Investment banking and transaction advisory services are provided by Securities, Inc., member FINRA/SIPC. Persons affiliated with Securities, Inc. are registered representatives of and securities are offered through Securities, Inc. This publication is not a solicitation or offer to buy or sell securities. The information contained in this publication was prepared for information purposes only and was not intended or written to be used as investmentor tax advice or as a recommendation to buy or sell securities. Contacts For This Report: Daniel M. Kerrigan, CFA Managing Director (609) dkerrigan@mpival.com Constance E. Young Assistant Vice President (609) cyoung@mpival.com Princeton Headquarters: 101 Poor Farm Road Princeton, NJ (609) Princeton New York Chicago Boston Atlanta Hartford Orlando 10