Presentation Overview

1. AKSteel Business + Revenue Breakdown

a. AKSteel is a US Steel producer. About 86% of their revenue comes from the US. AK Steel primarily focuses on the
higher quality value-added steel products. In this market, pricing is extremely important but its not a completely
pure commodity play. Quality is also a factor. 65% of their sales are made on contract.
b. The auto industry is very important to AK Steel. It has grown from about 36% of revenue to 50% of their revenue. In
addition to that, infrastructure and manufacturing (which is driven by housing starts) contributes the next greatest
part of their revenue. <- Macro drivers = Auto + Home sales
2. Steel Macro Backdrop
a. Steel prices have gotten crushed in the past 5 years with the recession (see graphs on presentation). Since then,
steel price has recovered, but the input costs have risen more than steel price which has led to depressed operating
margins
b. Why steel operating margins should go up in the future
i. Recovering Auto Market (especially good for AKS) 11% growth/yr since 2009
ii. Low and declining coal and iron prices
1. Coal prices should remain depressed with natural gas reducing coal demand. Iron prices should
remain low with Australia downturn. Also, over 125 Million of new iron capacity is coming to the
market over H2 2013 (5% of current world production)
iii. Relatively High Capacity Utilization ratios in the steel industry should allow for room in price hikes. Price
was hiked $50 in Q12013 (around 8%), and AKS recently hiked price again by $25, which indicates that at
least the first price hike stuck in the market.
iv. Current dumping lawsuits could lead to price hikes if they go through
3. AKSteel is extremely levered to the steel industry and the general macro economy
a. High fixed cost producer
i. See graph of operating profit vs. shipments (1 m ton change in shipments affects operating profit/ton by
41)
ii. $50 move in steel price affects EBITDA by 40-50%
b. Huge unfunded pension thats primarily invested in equity <- even more leverage to the macro economy
c. Vertical Integration "hedge" projects actually further levers to commodity price
d. Bond Comparables AK Steel trades at 2-3 times the leverage of most of its competitors. Its bonds are priced at a
higher yield, but I dont think this yield is high enough given its extreme leverage liquidity issues. If you look at
presentation p 2, then you can see its capital structure with and without its pension liability. You can see what a
huge difference including the pension has on its leverage.
4. AKS Liquidity concerns
a. AKS currently has liquidity of around 900 million dollars through cash + ABL revolver. Covenant on revolver means
140 m of it not accessible unless its fixed asset coverage ratio goes above 1, so actual liquidity is closer to 740 m.
b. P3 of presentation you can see AKSs financial history. Negative cash flow since 2008, big defined contributions it
needs to make for pension cost + vertical integration project leads to huge amounts of cash burn (see model). If
steel prices dont recover quick enough, then within the next 1-3 years AKS will likely fully tap out its liquidity and
be forced to file.
c. On top of this, the revolver expires in early 2016, so that will need to be renegotiated probably in 2014 or 2015. It
will be at a higher interest rate and lower lending amount (it was originally put in place in 2007).

Investment Thesis: AKS will only become profitable and stay alive if steel price recovers. However, in the time that it takes for
steel price to recover, AKS has a significant risk of running out of liquidity and being forced to file (especially if Steel Price drops).
According to their defined contribution and based on their current liquidity, they can manage just around 2-3 more years of the
status quo. In a reorg or filing scenario, the recovery on the unsecured bonds will be minimal whereas in a bull scenario, the equity
will appreciate in value far greater than the bonds assuming it can get over this liquidity hump. There is an asymmetric payoff
here in buying equity and selling the bonds.

Final Thought: Overall my pitch is that the liquidity risk of the company is underpriced by the bonds and the potential upside in
the company is underpriced in the equity (2:1 ratio bonds:equity).

Short 8 3/8 sr. unsecured bonds (could do via buying 4 yr CDS at 18 points upfront) and long equity at $3.38 in 2:1 ratio.