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March 2007 Presentation

SeverCorr: The Steel Plant of Tomorrow

March 14, 2007

GCVA and ACG held their first joint event on Wednesday, March 14. In the Hilton’s beautiful Hall of Mirrors, Eddie Lehner, Chief Financial Officer of SeverCorr, described how he and a team of five others raised almost $1 billion to build a new steel company amidst industry consolidation.

Eddie started by immediately addressing the question on most people’s minds: "Why would we build a new steel plant with overcapacity in China, spend billions of dollars in capital …?" he asked. "Well, besides the fact that the six of us were unemployed," he continued, to much laughter, "everybody interfaces with the business community in a different way. We felt we could modernize and bring advanced technology and a better delivery system to the industry. We saw increasing demand for high-quality wide flat-rolled steel in the Southern U.S. and believed we could lower operating costs versus those who currently supply the auto market. Our mill will be the most technologically advanced steel mini mill in the world."

Quite a statement, but one which is proving true. Project Finance Magazine reported that SeverCorr was selected as their 2005 Industrial Deal of The Year. Even more importantly, investors agree: SeverCorr has raised $880 million to cover the costs of the project, since it is projected to become not only the most technologically advanced, but also one of the most profitable steel mills in North America.

SeverCorr was formed by six steel industry executives. They saw an increasing demand for high-quality, wide flat-rolled steel in the U.S. With technology from SMS Demag in Germany and Toshiba in Japan added to their expertise, the SeverCorr mill will have much lower operating costs than the integrated mills currently supplying the automotive market. Eddie explains that this combination is what drew investors to the project: "The investment community recognizes that combining an experienced management team with advanced yet proven technology in a growing market will produce strong financial results."

Eddie sees four major reasons for the success of their fundraising. "First, we were experienced management with a proven track record," he said. "Management team members are highly-regarded industry leaders and are recognized for building and operating the world’s first, second, and most technologically advanced flat-rolled mini mills." This was supplemented by construction risk that was satisfactorily mitigated: "Our construction loan will be drawn after all junior capital was funded and the cold mill is operational." In addition, there was a substantial investment by a strategic investor, SeverStal, who committed significant amounts of equity and junior capital to SeverCorr, an integral part of their U.S. expansion plans. And finally, says Eddie, "The project has proven advanced technology capable of producing a high margin product mix with the lowest quartile cost structure."

None of this would have been possible, however, without a large and growing market. Projections for U.S. steel activity in 2007 are 137 million tons of consumption with 104 million tons produced domestically. Of this, domestic flat-rolled steel production is 70 million tolls, with 18 million tons produced in thin/medium cast mini mills. The percent of flat-rolled steel produced by U.S. mini mills is 25%: "That’s a lot," says Eddie, "even if you only have a small percent of the market."

Putting together the entire deal required a great amount of planning and "Skating to where the puck is," as Eddie quoted Wayne Gretsky. Of the 17 million cars produced in North America every year, 4 million are produced in the South. In addition, there are a number of new automotive stampers, service centers and suppliers building facilities in the South. Currently the steel used by Southern automotive producers is being shipped from steel mills in the North and even from Canada, Europe or Japan. "There is a tremendous opportunity to be in the area to serve those companies most cost-effectively."

Eddie describes transportation logistics in the country as "reaching a crossroads. Sound barriers are being erected more and more; residents are saying they don’t like 18-wheelers driving through their area. All methods of transportation must be maximized. Companies now use multi-mode methods, but transportation costs can be out of control – sometimes it’s an additional 20-25% just to get the product there. By locating where the business is, we take advantage of the efficiencies our transportation system can offer."

Knowing they wanted to be in the South, SeverCorr looked in locations in Alabama, Louisiana, Tennessee, and Arkansas. They wanted to be on deep water so it was easy for vessels from Brazil, Russia or Venezuela to reach them. After spending 24 months and investigating 55 sites, Columbus, MS was chosen as the ideal location. It provided an accessible location to customers; low-cost reliable power; access to raw materials; mega site certification; and community support. Eddie says, "There were 3 out of 50 governors in the U.S. that wanted this deal – what if we had stopped after the first 20?" No matter what, he feels, you can’t give up: "You keep going until the money runs out."

Now, SeverCorr is positioned with what Eddie calls the "right partners and the right location to take advantage of at least the 3% annual increase in demand." And with the economies of the world moving to a sustainable renewable model, SeverCorr should be at capacity very quickly: "From the day it opens, SeverCorr will be the largest solid waste recycler in the country," Eddie claims. "If it’s ferrous and a magnet can pick it up, it can end up back in the foundry and be remelted and reused." This gives them a tremendous advantage in a huge industry that continues to grow.

Now, SeverCorr’s team is working toward Fall, 2007, the projected Grand Opening of the plant. "We’ve reached a point in the steel industry’s evolution to make an evolutionary step," said Eddie. That step should land in a few months, when the most technologically advanced mini mill in the country opens for business.