Cleveland-Cliffs would keep Stelco’s management team, continue to use local suppliers and even local charitable contributions
“We will be keeping the Stelco name and legacy, which is, rightfully so, a strong source of Canadian pride,” he said five sentences into a call with analysts on Monday to announce the deal.
He added that Cleveland-Cliffs would keep Stelco’s management team in place, continue to use local suppliers and even increase the company’s local charitable contributions.
It’s one sign that corporate dealmakers are paying close attention to the federal government’s recent announcements that it plans to tighten the scrutiny of foreign takeovers of Canadian mining companies.
Stelco, an integrated steelmaker, is neither a miner nor is steel even on the federal government’s list of critical minerals. But steel is an alloy that the federal government has indicated is critical to the energy transition and electric vehicles, to which it has committed billions of dollars in direct and indirect subsidies.
Critical minerals are eligible for special tax credits and other funding from the government and are loosely defined as minerals with a threatened supply chain, can can be produced in Canada and are essential to economic and national security or the energy transition.
To that point, the first question an analyst asked Goncalves was whether he had any indication of how the federal government would treat the proposed buyout.
“I initiated calls with the Canadian officials at very high levels inside the federal government and the provincial level on the phone yesterday, late afternoon, in the evening, and we’ll continue through the beginning of this week, including meetings in person,” he said. “So, we’re in good shape.”
Under the Investment Canada Act, the Ministry of Innovation, Science and Economic Development must review deals of a certain scale and determine if there is a net benefit for Canada.
Last week, the ministry said in an email it would find a net benefit in “only the most exceptional of circumstances” when it comes to foreign takeovers of important Canadian mining companies engaged in critical minerals.
A spokesperson said the ministry could not provide a comment on the Cleveland-Cliffs-Stelco deal by the time of publication.
The higher threshold for approving large deals for critical minerals companies flowed from what the ministry has described as “geopolitical competition” that makes critical minerals essential “to advanced industrial and defence policy.”
In recent years, the ministry has blocked Chinese-based companies from even investing in junior mining companies that are exploring for critical minerals such as lithium.
For that reason, Cleveland-Cliff’s proposed acquisition of Stelco could provide a test of how his ministry intends to govern foreign capital investments and takeovers, including whether companies in the United States, considered one of Canada’s closest allies, will also face higher scrutiny.
“Canadian government approval is a potential concern given recent headlines,” Alexander Hacking, an analyst at Citigroup Inc., said in a note on Monday, “but we would note that steel is not an official critical mineral and these mills were previously U.S.-owned.”
Stelco was bought by United States Steel Corp. in 2007 and then sold in 2016 to Bedrock Industries Group LLC, which turned it into a publicly traded company in 2017.
On the call with analysts, Goncalves characterized conversations with government officials as “extremely constructive.” He did suggest there could be some layoffs.
“We don’t expect that we’re going to be reducing too many people inside the office, in the headquarters, because Stelco runs a pretty tight ship, and they are very lean,” he said.
Mostly, Goncalves sought to make it clear that he wants to keep Stelco running the way it has because it’s profitable and that there are many synergies between the two companies.
Stelco operates two plants, both in Ontario, and produces 2.6 million tonnes of flat-rolled steel. Cleveland-Cliffs also operates in Ontario, with seven tooling and stamping plants, a processing plant and a trading company located there.
Goncalves said there were cost advantages to buying Stelco, including strong local supply agreements, a favourable currency exchange rate, lower health-care costs and low energy rates in Ontario.
“Cliffs and Stelco have a lot in common,” he said.
His company has been trying to consolidate the North American steel industry and he said he was hoping to close the deal in the fourth quarter.
“It will not be like a one-year saga like other deals in this space,” Goncalves said. “It would be a real M&A deal done among professionals.”