September 21, 2014 / 2:33 PM / 3 years ago

U.S. Steel filing throws fate of Hamilton, Ontario assets into question

TORONTO (Reuters) - U.S. Steel Corp’s move to seek creditor protection for its Canadian operations throws into question the fate of the more than a century old steel operations in Hamilton, Ontario.

U.S. Steel acquired the Canadian operations - including the Hamilton assets and the newer Lake Erie facilities in Nanticoke, Ontario - through its acquisition of Stelco Inc in 2007. The Canadian operation was soon bleeding red ink, however, as demand for steel declined following the financial crisis.

Much of the Canadian operation’s value is seen residing in Lake Erie, with years of job cutbacks, environmental liabilities and the weight of a massive retiree base weighing on the worth of the Hamilton assets.

People familiar with the situation told Reuters that U.S. Steel had sought to restructure its Canadian operation this summer, before it sought creditor protection in Canada earlier this week. One plan included the parent company acquiring the Lake Erie facilities but divesting itself the Hamilton assets.

After those plans failed to pan out, some industry watchers think U.S. Steel’s move to seek creditor protection may just be the longer road toward the same end game.

“The creditor protection filing by U.S. Steel seems almost like a bit of leverage play,” said a Canadian lawyer, who asked not to be named as it was against his firm’s policy to comment publicly on such matters.

U.S. Steel spokesman Trevor Harris said on Friday the court-supervised process will facilitate a dialogue with stakeholders and could lead to asset sales.

“The restructuring may include a consensual restructuring involving the relevant stakeholders and, potentially, a sales process to solicit interest in purchasing all or a part of the business,” he said.

CLEAN UP COSTS, PENSIONS

Lawyers say any potential buyers of the Canadian assets will do so only if they are able to strike a deal with the union and secure some favorable assurances from the government around both clean-up waivers and pension funding rules.

The significant environmental clean-up costs expected at Hamilton are the result of operations that date back over a century. The vast majority of the retiree base also comes from the storied operations in that city.

The Canadian operation overall has a pension fund deficit of more than $750 million - amplified by the long history and numerous layoffs in the last decade. The U.S. Steel retiree base in Canada now outstrips its active employee base 6 to 1, with the company employing just over 2,300, but its pension plans supporting over 14,000 retirees.

“It is very unlikely in these circumstances that any buyer comes in and says we will assume all of U.S. Steel Canada’s obligations as they stand,” said another lawyer, who asked not to be named as he is not authorized to comment publicly on this matter. “Any going concern offers will be conditional on a buyer striking a deal with the union and government.”

Still, industry watchers said that if U.S. Steel opts to put all the assets on the market, there are interested buyers.

“There are people who will buy the worst garbage out there - this would be a lot better,” said veteran metals analyst Charles Bradford. He pointed to billionaire Wilbur Ross, who specializes in distressed assets, as an example of the sort of buyer who could look at the U.S. Steel assets in Canada.

Bradford said Hamilton’s finishing facilities would be a tougher sell than Lake Erie, which is among the youngest traditional mills in North America even though it started up in 1980. That said, he noted that its Hamilton arm has historically had a good reputation with automotive customers.

Another industry source closely following the situation said U.S. Steel’s original plan to keep the Lake Erie assets and cut ties with the Hamilton assets suggests the company could have a potential buyer in mind, noting that ArcelorMittal’s unit Dofasco with operations in the area could be interested in some of the Hamilton assets.

ArcelorMittal could not immediately be reached for comment.

Editing by Jeffrey Hodgson and G Crosse

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