Cleveland-Cliffs, which owns several Minnesota and Michigan iron ore mines and taconite plants, will buy steelmaker AK Steel in a $1.1 billion stock deal, the companies announced Tuesday morning.
The move allows Cliffs to own AK Steel’s existing blast furnaces and electric arc furnaces, and supply the furnaces with its own iron ore pellets. Cliffs had long sold its pellets to other steelmakers.
That “vertically integrated steel company” model is used by U.S. Steel, which mines taconite and produces iron ore pellets at Keetac in Keewatin and Minntac in Mountain Iron that then supplies its blast furnaces throughout the U.S., and ArcelorMittal, which supplies its Indiana Harbor blast furnaces with pellets from its mines and plants at Hibtac in Hibbing and Minorca in Virginia.
“We’re going to basically replicate what Arcelormittal does out of Hibbing and Minorca and what U.S. Steel does out of Keetac and Minntac,” Cliffs President and CEO Lourenco Goncalves said in a conference call with investors Tuesday morning.
On Minnesota’s Iron Range, Cliffs mines taconite and produces iron ore pellets at Northshore Mining in Babbitt and Silver Bay and United Taconite in Eveleth and Forbes. Cliffs also owns and operates the Tilden mine in Michigan’s Upper Peninsula.
All three companies own stakes in Hibtac, which is managed by ArcelorMittal.
In a letter to Cliffs employees Tuesday, Goncalves said the two companies will operate separately until the merger is completely approved, which is expected to occur in the first half of 2020.
No Cliffs offices or facilities are expected to close after the sale.
"I do not anticipate changes to our existing organization, so it is business as usual for our employees," Goncalves said.
AK Steel, which is based outside Cincinnati, is a significant producer of flat-rolled carbon and stainless and electrical steel products. It supplies much of the automobile industry with steel, which will help ensure a more constant, predictable demand for Cliffs' pellets, Goncalves said. Cliffs will continue to sell pellets to other steel companies.
Both boards have unanimously backed the purchase, but the shareholders will still vote on the sale, Goncalves said.
When the sale is complete, Cliffs shareholders will own 68% of the company’s shares and AK Steel shareholders will own the remaining 32%.
AK Steel will become a wholly-owned subsidiary of Cliffs but will keep its branding and corporate identity, the companies said.
Goncalves will lead the combined company out of its Cleveland headquarters while Roger Newport, CEO and director of AK Steel, will retire.
Newport said AK Steel supported the sale.
"The combination of Cliffs’ iron ore pellet capabilities and our innovative, high-quality steel product development and production is strategically compelling," Newport said in a news release Tuesday morning. "Together, we expect to be able to take advantage of growth opportunities faster and more fully than either company could on its own."
The merger is expected to save $120 million in annual costs through consolidations within the first year, $40 million of which would come from annual public company-related cost savings alone, Cliffs said.
Cliffs' stock fell 10.75% Monday to $7.51 a share while AK Steel's stock increased 4.33% to $3.01 a share.