By W.S. Garcia , Fort Wayne Business Journal

FORT WAYNE — On the heels of a record earnings year and second-best quarter ever, Fort Wayne-based Steel Dynamics Inc. again has hinted at expanding production at its Columbia City mini-mill.

“We likely will launch a project in … ’06, and likely may actually announce it at Columbia City later this year,” president and CEO Keith Busse told a group of investors at a Goldman Sachs conference in New York this month. “The expansion at Columbia City would be a $150 million project.”

Busse told the Greater Fort Wayne Business Weekly afterward that expansion plans are preliminary. He declined to detail them beyond saying they would not involve production of structural steel or high-value bar and could add as many as 100 jobs at the facility.

“It’s too early,” he said. It is the second time in a month that Busse has suggested plans for Columbia City expansion; he mentioned it in passing with analysts in February when the company announced record 2004 earnings. For the sixth-largest steel producer in the nation, the Columbia City project is one of the few expansions being considered for the next two years. Busse said production capacity at existing Steel Dynamics plants in Butler, Pittsboro, Jeffersonville and Columbia City leaves plenty of room for growth.

“You never know when you might end up with an acquisition opportunity,” Busse told investors. “But we have none of those going into our picture at this time. We’re probably going to throw off a lot of cash in ’05 and ’06. There are not a lot of growth projects on the horizon right now.”

The Columbia City mill was opened in 2002, a $315 million project. It shipped 734,000 tons of structural beams in 2004.

The expansion could further Steel Dynamics’ stated goal of diversifying its product mix to include more high-value and finished steel products, including bar, rail, painted steel and galvanized steel.

The company will need success in those areas — plus some luck in keeping steel prices high and scrap costs moderate — if it hopes to continue the rapid earnings growth Steel Dynamics saw in 2004. Steel Dynamics’ earnings have gone through the roof in the past three quarters, with increases of 76 percent, 1,018 percent and 958 percent. It has overcome the steel industry’s up-and-down nature to persevere in a U.S. steel market that many analysts believe has finally found its legs, surviving years of lower-priced imports, high labor costs and inefficiencies.

Yet last week, the company showed just how volatile the world of steel is when it revised its first quarter earnings estimate downward, to a range of $1.10 to $1.20 per share. Steel Dynamics blamed continuing soft demand, higher-than-expected scrap costs and an unplanned production outage that curtailed shipments. The announced led investors to quickly shave away 8.5 percent of the company’s market value.

Steel Dynamics is part of a new breed of relatively new mini-mill companies that are posting strong numbers and generally attracting a lot of attention on Wall Street. Shares of the company’s stock were recently added by 16 top fund managers, according to Investor’s Business Daily. The publication put the investment by those funds at $62 million in the latest reporting period.

“It’s a growth story that has been doubted by some,” Busse said. Analysts and investors “saw this company with all these balls juggled in the air. We caught all the balls and they are all making money. People are becoming believers.”

The result has been a steady rise in its stock price since a slump in 2003. Shares peaked at a 52-week high on Feb. 25 at $46.40 and closed March 14 at $40.57.

“I think it is a growth company in a steel company’s clothing,” said Aldo Mazzoferro, steel industry analyst at Goldman Sachs in New York, in introducing Steel Dynamics at its investor conference.

Other analysts recognize Steel Dynamics’ strong performance but still rate its stock at neutral or hold because of other concerns about the market sector, including international demand, the specter of new imports and scrap metal prices. When Steel Dynamics missed fourth quarter projections because of higher scrap and other operating costs, the market punished the company with a quick drop in price.

“Steel Dynamics has solid prospects in our view but tends to be more volatile than (its) peers,” wrote Timna Tanners, a steel analyst for UBS, in a note to investors two weeks ago. “High steel prices will attract greater steel production globally and low-cost producers will eventually pressure prices lower to gain market share when demand slows. We do not believe it is truly ‘different this time,’ over the long term.”

According to NASDAQ, analysts’ consensus on Steel Dynamic’s rating is just above “hold.”

Turning a profit — quickly

Steel Dynamics began its life in 1994, building a $514 million mini-mill for flat-rolled steel at Butler, northeast of Fort Wayne in DeKalb County. City, county, and state officials joined Indiana Michgian Power in providing a financial incentives package that secured the plant in Butler instead of a location in Ohio. Busse and his fellow founders were veterans of the U.S. steel industry, running Nucor Steel Corp.’s extremely profitable mill in Crawfordsville.

“Given that there were 50 primary steel producers in 1996, a fragmented industry, and we were the smallest at that time, I don’t think we ever envisioned the magnitude of our success,” Busse said. “Our good fortune and the misfortune of others has left us with only 20 or so entities making steel in this country.”

Steel Dynamics’ first steel shipped from Butler in January 1996, and by November of that year, the company was profitable and was taken public.

Since then, Steel Dynamics has taken a steady course of diversifying its product mix by building some new mills and purchasing existing facilities at bargain basement prices, including one from bankruptcy court. Steel Dynamics bought the former GalvPro plant in Jeffersonville for $19 million and restarted it in 2003, producing light galvanized steel products. The former Qualitech mill in Pittsboro, northeast of Indianapolis, came next at the deep discount of $45 million (the mill was built by its former owners at a price of more than $300 million.) By 2004, Pittsboro was producing SBQ, light structural steel and rebar after investing $75 million in upgrades.

The Columbia City mill is an exception to those bargain buys, a from-scratch greenfields facility that produces structural steel and supplies one-third of the nation’s railroad rails. Columbia City has excess furnace capacity, leading Busse’s management team to consider expanding the plant’s finishing capabilities.

All that profitable expansion came at a time when American steel producers were dropping like flies; 47, by one account, filed for the protection of bankruptcy court during Steel Dynamic’s growth spurt.

For the most part, Busse sees 2005 and 2006 as years to maximize output at his existing plants. In 2004, Steel Dynamic shipped 3.4 million tons of steel last year; he projects a 10 percent increase in 2005, to 3.8 million tons. Existing capacity tops out at 4.2 million tons.

Interest from overseas?

In an industry that remains volatile despite its recent consolidations, rising efficiencies and increasing international demand driven by China’s infrastructure boom, maxing out existing capabilities is probably a pretty smart move. Given that Steel Dynamics had 1,200-1,400 employees and 2004 sales of $2.1 billion, Busse got an astonishing $1.5 million in profits from each of his non-union workers. Today, Steel Dynamics’ workforce stands at 1,620.

The company rewarded its work force with a special performance bonus that, along with charitable contributions totaling $1.5 million, cost the company about 5 cents a share in earnings, contributing to its falling short of analysts’ expectations.

That doesn’t bother Busse, although he remains perturbed about why his company’s shares trade at only 7-8 times earnings when he figures it ought to be higher — in the range of 10-12.

But Steel Dynamic’s performance is not lost on steel analysts – and the world’s largest steel producers – in Europe. Earlier this month, Business Week’s international edition reported that No. 2 steel producer Arcelor is on the hunt for North American steelmakers in its competition with the No. 1 producer, owned by Lakshmi Mittal, who recently gobbled up U.S.-based International Steel Group Inc. Business Week put Steel Dynamics on the list of possible acquisitions for Arcelor.

Steel Dynamics officials call that report highly speculative and inaccurate. Fredrick Warner, manager of investor relations, said the company has not received any interest in being acquired. Steel Dynamics remains closely held by its management team and founders and likely would not be receptive to takeover attempts. “If anybody was trying to acquire Steel Dynamics other than on a friendly basis, they would have a hard time,” Warner said.

Perhaps more galling was the magazine’s assessment that Steel Dynamics was in a category of “North American players analysts consider too small to succeed solo.”

Busse said he envisions growing Steel Dynamics to a 7-million-ton company, giving it enough heft to be among a handful of U.S. producers expected to survive intact over the next 5-10 years. He also said he believes that strong steel sector results in 2005 will convince those who remain skeptical on Wall Street.

“A lot of people that invest in this industry … wonder if these kinds of results are sustainable for the industry or sustainable for Steel Dynamics,” Busse told investors at Goldman Sachs on March 11. “I will tell you they are sustainable.”