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MANAGEMENT'S DISCUSSION Ferrous Metallics CAL, a venture in Trinidad and Tobago, completed construction
in April, 1999 of a facility designed to produce premium
quality HBI to be marketed to the steel industry.
The HBI facility has produced sufficient reduced iron
to demonstrate that the Circored® process technology
will yield a product that meets the quality specifications
that were established, including high metalization
rates. However, sustained levels of briquette production
could not be achieved, and in May, 2000, start-up
activities were temporarily suspended in order to
evaluate plant reliability and make modifications
to portions of the plant. The plant was restarted
on July 1, 2000 to test the functionality and reliability
of the initial modifications and to gain additional
operating experience. Results of this five-week test
were positive. Although a small quantity of commercial
grade briquettes was produced, replacing the discharge
system was necessary to improve material flow and
obtain consistent feed of HBI to the briquetting machines.
The modifications are targeted for completion in the
first quarter of 2001. On November 20, 2000, a subsidiary of the
Company and Lurgi Metallurgie GmbH (“Lurgi”)
completed the acquisition of LTV’s
46.5 percent interest in CAL for $2 million
(Company share – $1.7 million) and
additional future payments, that could
total $30 million through 2020 dependent
on CAL’s production, sales volume
and price realizations. LTV announced
its decision to withdraw its financial
support for CAL on July 28, 2000. Upon
acquisition, the Company’s ownership
in CAL increased to 86.9 percent (previously
46.5 percent). The Company has consolidated
CAL for financial reporting purposes since
the acquisition. Subsequent to LTV’s withdrawal of
financial support for CAL, it was estimated
that $45 million of additional investment
(of which $16.6 million has been invested
through December 31, 2000) would be required
for CAL to attain sustained production
and generate positive cash flow, consisting
of capital expenditures of $15 million,
working capital of $15 million and cash
startup costs of $15 million. Lurgi has
agreed to fund a disproportionate share
of the capital expenditures through in
kind contribution of the new discharge
system, which increases its ownership.
As a result, the Company’s ownership
in CAL at December 31, 2000 decreased
to 84.4 percent. If the full $45 million
is required, the Company’s additional
investment will be $33 million (of which
$11.6 million has been funded at December
31, 2000), and the Company will own approximately
82.4 percent of CAL. The primary business risk faced by the Company in ferrous metallics is the as yet undemonstrated capability of the Trinidad facility to produce a sustained quantity of commercial grade HBI at a cost level necessary to achieve profitable operations given the market for HBI. |