Steel Dynamics, Inc. (STLD - Free Report) has entered into a definitive agreement to purchase 100% of the equity interest of Zimmer, S.A. de C.V. The move is part of the company’s raw material procurement strategy to support its new Texas flat roll steel mill.
Based in Monterrey, Mexico, Zimmer operates a nonferrous and ferrous scrap metals recycling business. The company’s operations consist of six scrap processing facilities, which are strategically positioned near high-volume industrial scrap sources across the Central and Northern Mexico. It also operates a number of third-party scrap processing locations. The combined facilities annually ship around 500,000 gross tons of scrap. They have an annual processing capability of roughly 2 million gross tons.
Through the Zimmer acquisition, Steel Dynamics will be able to strengthen its Southwest U.S. and Mexico growth strategy. The addition of Zimmer in the company’s portfolio along with its existing metals recycling presence in Mexico will expand commercial presence in the region. It also strengthens the raw material supply strategy, which will enable cost-effective ferrous scrap procurement for its flat roll steel facility in Texas. Currently, the Texas steel mill facility is under construction and slated to start operations mid-year 2021.
The deal is expected to be funded fully with available cash. Notably, Steel Dynamics ended 2019 with cash and cash equivalents of $1,381.5 million, up nearly 67% year over year.
Shares of Steel Dynamics have lost 28.1% in the past year compared with the industry’s 33.4% decline.
In fourth-quarter 2019 earnings call, Steel Dynamics stated that the North American steel consumption will experience modest growth in 2020. This is likely to be supported by the end of steel inventory destocking and further steel import reductions. The company expects the recent trade actions to further lower unfairly traded steel imports into the United States.
The company also announced upbeat views on its Sinton, TX-based flat roll steel mill project and the related long-term value it will create through its value-added products as well as geographic diversification.
Zacks Rank & Key Picks
Steel Dynamics currently carries a Zacks Rank #3 (Hold).
Few better-ranked stocks in the basic materials space are Daqo New Energy Corp (DQ - Free Report) , Sibanye Gold Limited (SBSW - Free Report) and Impala Platinum Holdings Limited (IMPUY - Free Report) , each currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Daqo New Energy has an expected long-term earnings growth rate of 29%. The company’s shares have surged 70.7% in the past year.
Sibanye has an expected long-term earnings growth rate of 20.4%. Its shares have returned 108.2% in the past year.
Impala Platinum has an expected long-term earnings growth rate of 26.5%. The company’s shares have surged 108.7% in the past year.
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