A.K. Steel CEO's actions could spell more trouble for Magnetation

The struggling Iron Range got more bad news this week after a key Magnetation LLC investor and customer signaled that it may go elsewhere for its long-term iron ore needs.

A.K. Steel, which owns 49.9 percent of Grand Rapids, Minn.-based Magnetation, also announced it was writing off in full its $256.3 million investment in Magnetation by taking an impairment charge against the first quarter.

That sour message was communicated by A.K. Steel CEO and President James Wainscott this week during a conference call with Wall Street analysts.

A.K. Steel said it worries that Magnetation cannot recover from a historic pricing slump that has shaved 60 percent off global iron-ore prices in the last year.

That slump is forcing U.S. Steel to idle two plants on the Iron Range this spring that will lay off 1,100 workers. It also forced Magnetation to idle its Plant One ore processing plant in Keewatin in March. Now, more operations appear to be at risk.

Wainscott said the depressed marketplace was making "life extremely difficult for Magnetation" and has prompted unsolicited bids from Magnetation competitors. Magnetation, which harvests iron ore fragments from old-mine waste tailings into concentrated pellets, primarily sells to longtime partner A.K. Steel. A.K. Steel feeds Magnetation's pellets into its blast furnaces in Ohio and Kentucky and converts the iron into steel.

"We expect to continue to receive pellets from Magnetation LLC in the short term," Wainscott said. But "as for the longer term, it's certainly possible that the challenges facing Magnetation could, and let me emphasize 'could,' result in a temporary or permanent disruption in their supply chain of iron ore pellets to our company."

In a phone interview Thursday, Griffin Moe, Magnetation's business development coordinator, said that A.K. Steel "remains our customer and we continue to work closely with them." He added that Magnetation is "focused on finding different financing initiatives."

In a statement, Magnetation President Matt Lehtinen said that his company had recently hired the Blackstone Group as a financial adviser and Davis Polk & Wardwell as legal adviser "to assist us in evaluating alternatives to improve liquidity and improve our capital structure. We continue to work on these initiatives."

Magnetation's Keewatin plant had 41 hourly workers and eight salaried workers before it was idled four weeks ago. About 18 of those workers were let go, while the rest either quit for other jobs or were moved to Magnetation's facilities in Coleraine, Bovey and Grand Rapids, or to its new $375 million plant in Reynolds, Ind., Larry Lehtinen said.

Dan Snidarich, area representative for the International Union of Operating Engineers Local 49 in Virginia, Minn., said that regional workers and suppliers are concerned about Magnetation's situation.

Likewise, members of the United Steelworkers Local 49 have been concerned about the future of both Magnetation and the other seven iron-ore pellet makers on the Iron Range.

Cliffs CEO Lourenco Goncalves on Wednesday said his company was closing the Empire taconite plant and mine in Michigan and indicated he wants to make more investments in Minnesota, creating a "direct reduced iron" facility that can make a higher grade of iron ore pellet for electric arc furnaces and steel mini-mills across the Midwest. Right now, Minnesota only produces taconite, which has a lower percentage of iron that can only feed traditional blast furnaces.

Yet Goncalves admitted to analysts that his company has not yet allocated any funds for a "direct-reduced-iron" project in Minnesota.

Mark Phillips, commissioner of the Iron Range Resources and Rehabilitation Board, said such a plan has a long way to go before the company finalizes any plans, which have not been fully communicated with state officials, he said.