Ord Minnett Research Recommendation: BlueScope Steel (ASX:BSL)
Ord Minnett has undertaken a review of the Phase 2 expansion at BlueScope Steel’s North Star operation. The US$700m, 850,000tpa expansion is on track for commissioning in the first half of CY22. North Star is set to grow output by 64% from 2.1Mtpa to 3.5Mtpa following the expansion.
Management noted another 500,000tpa expansion project was possible. The design work has not yet commenced, but we believe the returns look solid. The key bottleneck at the site will shift from the casters to the hot strip mill when the asset is running at 3.0Mtpa. We estimate around 1.5 years of feasibility studies and approvals for the project, along with a construction timeframe of 1.5 years.
At spot prices, we calculate the 500,000t expansion would add $420m to earnings before interest and tax (EBIT), highlighting the operating leverage. It would also add about $0.80 per share to our valuation.
Based on a strong US demand outlook, we expect management could approve the project in the first half of CY23, for commissioning in the first half of CY25.
BlueScope doesn’t disclose greenhouse emissions by asset. As a rule of thumb, however, North Star’s electric arc furnace production route has an emissions intensity of around 0.5t of carbon dioxide (CO2) per tonne of steel, materially lower than Port Kembla’s blast furnace route of around 2.0t of CO2 per tonne of steel. Expanding North Star should therefore lower BlueScope’s overall emissions intensity.
Our FY22 EBIT forecast of $2.07bn sits 33% above consensus. At spot prices, EBIT rises to $3.8bn. There are likely to be significant consensus upgrades as US hot rolled coil prices remain at all-time highs. We maintain our Buy recommendation and our $26.00 target price.
Walter Watson
RESEARCH EDITOR
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.