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Canadian Steel Prettier Than Gold?

By Rich Smith
January 13, 2005

You know the world has turned upside down when investors are more interested in buying glorified iron ore than shiny 24-karat gold. But that's exactly what's going on up north of the border these days.

Last month, we commented extensively on the story of two South African gold mining companies, Harmony (NYSE: HMY) and Gold Fields Limited (NYSE: GFI), and their complex mating dance that included Harmony shooing off a rival for its intended's affections -- Canada's Iamgold (AMEX: IAG). Harmony ultimately won the right to woo Gold Fields sans competition when Gold Fields shareholders rejected a proposed merger between Gold Fields' international assets and Iamgold. So perhaps Canadian gold doesn't glitter quite as brightly as one might think.

Today's story, though, involves a set of international suitors courting a Canadian steel company -- Canada's largest, in fact: the bankrupt concern Stelco (OTC BB: SLOAF). And here, there's a lot of interest. In an illustration of just how quickly things can change in a cyclical industry like steel, it was only about a year ago that Stelco filed for bankruptcy after enduring several quarters of crippling losses. Now officially bankrupt, Stelco is again rolling in profits as the price of steel soars across the globe.

So, take cheap assets and add to that incredible profits to be earned from those assets, and you've got yourself one heck of an equation for attracting purchase offers. To date, Stelco has a good half-dozen companies interested in buying it out of bankruptcy, ranging from one of the biggest names in the business, U.S. Steel (NYSE: X), to recently created steel giant Mittal (NYSE: MT) to dark horse Severstal to local favorite Algoma Steel.

According to a report published on CBS MarketWatch earlier today, Canadian bankruptcy authorities are not inclined to accept bids of anything less than $750 million for Stelco. And in fact, my back-of-the-envelope calculation suggests that a bid of at least $1.2 billion looks likely. (Stelco sold more than $2 billion in steel in 2003, when steel prices were much lower than they are today. Assume the company managed to sell about twice that amount in 2004 due to the price increases, then value the company at the usual price-to-sales ranges for steel companies -- between 0.3 and 0.8 -- and Stelco looks to be worth somewhere between $1.2 billion to $3.2 billion.)

Severstal has tried once already to buy out Stelco for a reported $1 billion bid and been rebuffed. A new round of bids is due in to the bankruptcy court by the end of the month, although an extension until mid-February has been requested. Either way, we should know pretty soon just how much more Canadian steel is worth than Canadian gold.

Read all about the great Canadian/South African gold rush in:

Fool contributor Rich Smith has no interest in any company mentioned in this article.