AK Steel Beats, But Iron Ore Still Weighs - TheStreet

AK Steel Beats, But Iron Ore Still Weighs

AK Steel reports surging profit and revenue, easily besting Wall Street's second-quarter targets, but iron-ore costs remain a concern for the company.
Author:
Publish date:

WEST CHESTER, Ohio (TheStreet) -- AK Steel (AKS) - Get Report, its share price socked earlier in the year as the company faced steeply rising raw materials costs, made good with investors, at least for one day, by easily surpassing Wall Street's second-quarter profit and revenue estimates.

AK Steel reported earnings of $26.7 million, or 24 cents a share. Analysts were looking for a per-share earnings of 7 cents, according to Thompson Reuters. A year ago, AK Steel was in the red along with much of the steel industry (losing $47 million, or 43 cents a share) as it idled plants and laid off workers amid a recessionary collapse in steel demand.

Revenue surged by more than 100% to $1.6 billion from a year ago. Shipments reached 1.45 million tons, the most steel it's sold since the third quarter of 2008, AK said, and up 95% from the first quarter of 2009.

In April,

AK Steel warned that it had underestimated

the rising price of iron ore, the most critical steel ingredient, and that these costs would hamper its results in the second quarter.

Because of

drastic changes in the way iron ore is priced on the global market

, AK Steel's own contracts for the feedstock have been in flux. The company buys most of its iron ore from

Cliffs Natural Resources

(CLF) - Get Report

, which uses a formula to arrive at its pricing, part of which involves the global seaborne iron ore price.

AK said it had believed the year-over-year increase would be 30%, which it used to calculate its profit for the first quarter, released in April. The company now assumes that the rise will be 65%, much lower than what some analysts had believed. Mark Parr, with KeyBanc Capital Markets in Cleveland, wrote in a note to clients that his model called for an for iron ore price increase of "roughly 90%."

To account for the discrepancy in the first-quarter, AK said it booked the difference between the 30% and 65% cost increase in the second quarter. Called a "true-up" expense, it amounts to $18 million, AK said. Excluding that sum, the company said it would have earned $37 million, or 34 cents a share.

Earlier this year, the world's three biggest iron ore miners --

Vale

(VALE) - Get Report

,

BHP Billiton

(BHP) - Get Report

and

Rio Tinto

(RTP)

-- forced steelmakers in Asia to move from an annual benchmark system to a short-term quarterly one, tied to the iron-ore spot market.

In morning trading Tuesday, shares of AK Steel were under pressure, changing hands at $14.68, down 3.4% from the previous close. In his note, Parr attributed the weakness to a cloudy third-quarter outlook from AK, which is "below consensus," as well as the company's still-unresolved iron-ore costs for 2010.

Looking ahead, AK Steel said it expects third-quarter shipments to rise by 3% sequentially, but prices to decline by about 5%. "Assuming a 65% increase in the iron ore benchmark price, AK Steel expects to generate an operating profit of approximately $15 per ton for the third quarter," the company said. Parr was estimating $17 a ton

Shares of AK's larger peer

U.S. Steel

(X) - Get Report

were also falling sharply Tuesday after the company reported second-quarter results that

fell short of Wall Street expectations

, posting a surprise net loss.

-- Written by Scott Eden in New York

>>U.S. Steel Misses; Stock Slips

>>Nucor Is Gloomy on Bullish Day

>>Steel Dynamics Outlook Grows Murkier

>>Steel Stocks: How to Play This Bearish Moment

Follow TheStreet.com on

Twitter

and become a fan on

Facebook.

Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.