Stelco Holdings Inc

TSX:STLC

Earnings Call Transcript 2021-Q2

[Operator]

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the conference call regarding Stelco's Second Quarter Results for 2021. [Operator Instructions] Mr. Harris, you may begin your conference.

[Trevor Harris, Vice President of Corporate Affairs]

Good morning, everyone, and welcome to Stelco's quarterly earnings conference call. Speaking on the call today to discuss our second quarter results for 2021 will be Alan Kestenbaum, our Executive Chairman and Chief Executive Officer; and Paul Scherzer, our Chief Financial Officer.Yesterday, after the market closed, we issued a press release overviewing Stelco's financial results for the second quarter of 2021. This press release along with the company's financial statements and management's discussion and analysis have been posted on SEDAR and on our Investor Relations website at investors.stelco.com. We have provided a link to the presentation referenced on today's call on our website as well.I'd like to inform everyone that comments made on today's call may contain forward-looking statements, which involve assumptions, which have inherent risks and uncertainties. Actual results may differ materially from the statements made today, so do not place undue reliance upon them. Stelco management disclaims any obligation to update forward-looking statements, except as required by law.With that in mind, I would ask everyone on today's call to read the legal disclaimers on Page 2 of the accompanying earnings presentation and also refer to the risks and assumptions outlined in Stelco's public disclosures, in particular, the second quarter 2021 Management's Discussion and Analysis sections relating to forward-looking information and risks and uncertainties as well as our filings with securities commissions in Canada.The appendix of our presentation and the non-IFRS performance measures and review of non-IFRS measures of our MD&A provide definitions and reconciliations of the non-IFRS measures that we will use today. Please also note that all dollar figures referred to in today's call will be in Canadian dollars, unless otherwise noted. Following today's prepared remarks, Alan and Paul will be taking questions. [Operator Instructions]With that, I would like to turn the call over to Alan.

[Alan Kestenbaum, CEO & Executive Chairman]

Thank you, Trevor, and good morning, everyone. Today, Paul and I would like to share with you some of the details regarding Stelco's second consecutive record-setting quarter. During our first quarter call, we shared with you our collective optimism and offered some guidance regarding the outstanding earnings potential of Stelco for 2021. We are delivering on those expectations. We have worked tirelessly for the last 4 years to build a business that is capable of generating cash and returning value to our shareholders at every stage of the market cycle. Our investments in new technology to diversify our product base and improve the overall efficiency of our business are paying dividends, not only towards our bottom line but to our shareholders as well.As you can see from our results, we are capitalizing on our investments in our operations, maximizing production to our tactical flexibility model and fully capitalizing on the tremendous opportunity presented by the strong and still improving steel market. Just this morning, about an hour ago, the CRU hit yet another record by increasing by $21 per ton to USD 1,884 per net ton for hot-rolled coil. With record revenue in excess of $900 million for the quarter, we have done an exceptional job of translating those gains directly to our bottom line by generating $380 million in adjusted net income and $410 million in adjusted EBITDA.These results, combined with even better performance this current quarter and favorable bookings into Q4 position us well to deliver on the expectations we set. We continue to build momentum and capitalize on improving pricing, strong customer demand in our key end markets, low customer inventories and the low-cost position we have created for our business. But we are not done. We are continuing to find ways to drive down our costs, in part by executing the remaining components of our strategic capital plan that we expect to conclude in the coming months and that will further improve our efficiency, enhance our cost structure and advance us along our path to reduce the carbon emissions.The upgrade of our Lake Erie Works coke battery is continuing and on track to be completed in the fourth quarter of this year. Once complete, it is our expectation that the strategic upgrades made to the coke battery will not only increase our production capability by up to 50,000 net tons of coke but will lower our production costs even further. At the same time, construction of our new 65-megawatt cogeneration facility is well underway and scheduled to be operational in the second quarter of 2022.Our partnership with DTE Energy Services will deliver a state-of-the-art facility that will reduce our electricity costs, enhance our energy reliability and further reduce our carbon footprint. In the current market, Stelco is extremely well positioned to continue our strong financial performance and take full advantage of our operating structure. We have employed a strategy to modernize our primary operations and take full advantage of best-in-class technology from around the world, such as the commissioning of North America's only smart blast furnace.Additionally, as you can see on Page 4 of our earnings presentation, Stelco's implied average cost across all of our products is lower than what our electric arc furnace competitors pay just for scrap, which is, of course, their primary raw material. This demonstrates a sizable cost advantage for Stelco against its EAF steelmaker competitors. With more and more steel makers planning to transition to EAF steelmaking in the coming years, there will continue to be increasing demand pressure on what is a relatively fixed North American scrap market combined with our modernized integrated assets and a reliable and favorably priced long-term supply of key raw materials, we view this as a growing cost advantage for our business.We have now shown that our investments and our strategy are delivering results and have opened the door to sizable future opportunities. We have come a long way in the last 4 years and have established Stelco as not only a low-cost steelmaker in North America, but also as an attractive investment for shareholders. Over the course of this quarter, we have deployed our strategy effectively and have been very successful at translating favorable market opportunities to success on our bottom line by converting 92% of our EBITDA into net income and 75% of our EBITDA into operating free cash flow.As a result, we have replenished and are continuing to build our cash balance. We have paid off our revolver and we have put our business in a position where we can reward our loyal and valued shareholders by implementing the beginning of a capital allocation strategy to doubling our quarterly dividend to $0.20 per share. I am pleased that we are in this position and excited for what the future holds as we work towards completing our strategic capital plan and begin to realize the full potential of the powerful business we have created.With that, I would ask Paul to provide some additional comments regarding our exceptional financial performance this quarter.

[Paul D. Scherzer, Chief Financial Officer]

Thanks, Alan, and good morning, everyone. Throughout the second quarter, we remain focused on capitalizing on the opportunities presented by the market and not only increased our shipment level slightly but successfully converted extremely favorable pricing directly to our bottom line. While our average selling price increased by 35% from the first quarter, we delivered more than a 200% improvement in net income and $410 million of adjusted EBITDA, a 122% improvement over the first quarter.Of course, these figures are in part a result of the continued escalation in pricing through the period, but equally a result of our ability to maintain our low-cost position and fully capitalize on the opportunities presented to us. As noted in our presentation, our implied average cost across our entire product mix remained constant during the quarter as a result of our employees' collective determination to operate our facilities efficiently and at a high level of productivity.This focus on reducing costs and maximizing margins has contributed greatly to the success of our business through the first half of 2021 and remains a focus area for our entire management team. When we compare our level of success to that of our reporting peers, it becomes even more evident that our success is driven by more than record price levels. Our adjusted EBITDA margin of 45% is about 20 percentage points higher than the average margin reported by our flat rolled peers. Our comparative success is not an accident. It is a result of a focused and deliberate effort to be a low-cost producer and to drive market opportunities right down to the bottom line where our shareholders obtain the greatest benefit.As Alan noted, our performance has put us in a position to be able to double our quarterly dividend and also has allowed us to further strengthen our balance sheet. During the quarter, we paid down in full the revolving portion of our asset-based loan, continue to use internally generated funds for the final stages of our major capital plan, and ended the quarter with $247 million of available cash, a balance that has grown significantly since quarter end and continues to grow weekly.This notable improvement in our cash position and the overall increase in our liquidity positions us well to fund our capital expenditures plan through operations, and to explore and evaluate various capital allocation alternatives, one of which is the increased dividend announced today. As we have noted in the past, our management team is fully aligned with the interest of our shareholders, and we will continue to monitor the market and listen to advice of leading experts and will make decisions in this regard at the appropriate time.We are pleased with the full benefits of blast furnace upgrade and other strategic investments are being realized and increases in our production levels are translating into increased shipments in 2021. Our first 2 full quarters since completing the blast furnace project have seen consistent levels of shipments with the second quarter coming in at 679,000 tons, up modestly from the first quarter. Going forward, we expect third quarter volumes to remain in line with our strong shipping levels of the quarter we recently completed.We continue to monitor developments with respect to the COVID pandemic and the ongoing recovery. We are pleased with our company's ability to respond and the resilience of our employees throughout this challenging period and hope that we can continue to take significant strides forward in collaboration with our customers as we collectively participate in the ongoing economic recovery.Overall, the second quarter is built upon the success we achieved in Q1, and we are excited to have been able to once again deliver record results and to be able to translate that success into heightened dividends for our shareholders. Going forward, we will stay true to our strategy, our principles and our values regardless of pricing levels or the state of the market. We will maintain a strong balance sheet, we will utilize our tactical flexibility model to pursue the highest possible margins across all product lines, and we will deploy our capital in a responsible manner that benefits all of our shareholders. These are the tools that have contributed to our success, and we will not deviate from them. By staying true to these commitments and taking full advantage of market opportunities as they arise, I am confident that we will continue to deliver successful outcomes.Thank you for taking the time today to join our call.

[Trevor Harris, Vice President of Corporate Affairs]

Thank you, Alan and Paul. That concludes our prepared remarks for this morning. And I would now like to turn the call back over to the operator for questions and answers. Operator?

[Operator]

[Operator Instructions] Your first question comes from David Gagliano, BMO.

[David Francis Gagliano, Co]

Well, on pricing, obviously, a very good quarter. But when we look at index pricing and things like that, it does, at least in my view and it's in your slide deck as well, suggest there's quite a bit more upside as we go through the second half of the year. So my first question is, any reason realized prices should not be over CAD 2,000 by the fourth quarter?

[Alan Kestenbaum, CEO & Executive Chairman]

Yes, David, this is Alan. If you look at how we've been tracking, for the year, always because demand is good and the lead times are long and we're running about 3 months -- selling basically 3 months before the quarter and selling when you look back roughly close to the index, so the answer to your question is no. There is no reason why we shouldn't see that. The current CRU is $1,864, you multiply that by 1.25 and you're over CAD 2,000. So no, there's no reason why that shouldn't be realized.

[David Francis Gagliano, Co]

Okay. That's helpful. And then just one of the bigger questions is what are you going to do with that big pile of cash? I know last quarter, there was more commentary about shareholder returns with a bit more of an emphasis on buybacks. I'm wondering if you could share additional thoughts and details on how investors should be expecting or what investors should be expecting as we move through the next 6 months with that pile of cash?

[Alan Kestenbaum, CEO & Executive Chairman]

Yes. Consistent with what we said at the last call, we expected to start building up a lot of cash. We are building up a lot of cash, continuing to do so, expect to build more cash. What we said at that time was we expected to be able to outline what we're going to do with that. This is a monumental opportunity for us to have some meaningful things that should impact share price in a very positive way. And so I think we said last time that we would have some news on that towards the -- during the third quarter and the latter part of that quarter and consistent with the time that we outlined last quarter, we expect to be in a position to make an announcement when we have an announcement to be made.Just to remind everybody, we'll benefit from a better share price based on the performance. We continue to consider the shares to be not at a price -- at the right price. And what our plan is, is to hopefully say something before the end of this quarter. And the management of this team -- the management of this company is collectively probably the biggest shareholder in this company and no one is more motivated than us, and we expect to be able to do the right thing for all shareholders, including the management shareholders as well. And so like I said last quarter, let's hang on to your hats, and we'll have, hopefully, something here in the next few weeks.

[David Francis Gagliano, Co]

Okay. Just a quick follow-up on that. As you assess the opportunities out there and considering the implied valuation of Stelco shares, can you prioritize the plans for the cash in terms of between its -- whether it's buying back stock or inorganic investments or organic investments, what would likely pecking order be?

[Alan Kestenbaum, CEO & Executive Chairman]

Look, I think probably at this point, the inorganic investments are probably not top of our list. We believe we've got -- just look at our margins this quarter. I mean what could we buy that would enhance those margins? I don't know of it. So maybe put that one off the list for now. And we certainly can't get more specific at this point, except to say that whatever we do, we want to do it in a big way and do it in a way that will be meaningful, and we'll make announcements as and when we're prepared to do it.

[Operator]

Your next question comes from David Ocampo, Cormark Securities.

[David Ocampo, Analyst of Institutional Equity Research]

Maybe I could follow up a little bit on David's line of questions there. And when I think about your cash balance and it's building up here, is there a minimum cash balance that you're comfortable with so we can sort of get a sense on what that capital distribution could look like?

[Alan Kestenbaum, CEO & Executive Chairman]

Well, look, we always like to keep a certain -- our goal is to keep our balance sheet debt free. We think that, that sets us apart from most of our competition that have built their businesses with a lot of debt and are saddled with a lot of legacy liabilities. So in our case, although our legacy liabilities are not on the balance sheet, in a sense of obligation, we have no exposure whatsoever to any actuarial changes or anything like that. And the same with debt, we try and keep our debt very, very low. We -- that served us well during COVID.We had a situation where during COVID, and that's in the middle of COVID, when everyone was hanging on to every dollar, we were able to go and spend $150 million on our blast furnace, and we were also able to do the Minntac agreement. So that served us well to act at a time when the market looked like was falling apart. So our strategy is to stay highly liquid to take advantage of opportunities when they arise, and so we look at cash the same. Our preference is to have no debt, to stay unique, keep enough cash on hand to be able to act decisively and in big ways during markets and opportunities that present themselves.Having said that, our expectations are based on the earnings and the pricing and everything else that we're going to generate significantly more cash than what we think we need to keep on the balance sheet, and our plans are to use that for something that would be helpful in making the share price reach a value that -- where we think it belongs to be.

[David Ocampo, Analyst of Institutional Equity Research]

Yes, that's very helpful. And then my next question is on the cost structure here. With the coke battery largely finished here and the cogen coming online in Q2, can you provide us with an update on how much your cost structure can be reduced on a per ton basis?

[Alan Kestenbaum, CEO & Executive Chairman]

Yes. We think there's another roughly, between the 2 of them, a $15 a ton or something like that. I know that sounds like a ridiculously small number. And when recap the week, CRU is going up by $20 to $40. But I think that's one of the beauties of the culture at Stelco. We continue to focus in every department on things that we can control. And these 2 projects were announced at a time when steel prices were considerably lower than where they are today, but we still continue to go with that.And I think that's one of the beauties of this company. The fact that it sounds like it doesn't move the needle in almost $1,900 price environment. But I think that's the beauty of this company. Our sales guys are out doing what they can do on their side, our purchasing people looking to save every single nickel on that side, and our operations people are looking to save every single nickel they can on the production side.And so that's -- I think here's how much we say, which is great. We're already in a leading position there, as you can see from our margins. But also on top of it, you really get to see the culture of the company, which is to literally chase nickels because that's what this business is about ultimately in the long term.

[Operator]

Your next question comes from Alex Jackson, RBC.

[Alexander Jackson, Assistant Vice President]

I'm just curious on the land package, I know you guys have given updates previously. I'm just curious if there's any updates now in terms of the severance, and when we might get an update on that in terms of potential disposition?

[Alan Kestenbaum, CEO & Executive Chairman]

Sure. The only update on that is that we continue to work with the city. We've had some very productive conversations. They remain very interested in seeing the site of Hamilton. Those of you who have been there know that when you cross that bridge, from Burlington, the very first thing you see is our plant and that land. And that's something that's both in our interest and the city interest to get done. The discussions are constructive and continue to move along those paths and very confident that we'll be able to get what we need in order to move forward with our plans for the land.The good news is that while it's taken a lot of time and more time than what we needed, this land just continues to increase in value. A lot of people have demonstrated interest in this. Just in general, the interest rate environment being lower, cap rates having dropped and the incredible appetite for the very perfect uses for this land, which include studios, data centers, last mile delivery centers, distribution warehouses. I mean it's exactly what this land could be used for in a very profitable way.And so with cap rates dropping, ample liquidity, the longer this takes, the more valuable the land takes. And at the same time, we're moving forward with those discussions with the city, and they're definitely much more frequent and much more productive and continuing to make progress along the lines of what we had said last quarter.

[Alexander Jackson, Assistant Vice President]

And just 1 other one. In terms of the ship tons, the breakdown between HRC coated and cold-rolled, I was curious if you expect to see any sort of change in that breakdown and if there's potential upside in terms of your realized pricing?

[Alan Kestenbaum, CEO & Executive Chairman]

Yes. I mean what we do -- I think, again, another distinguishing part of this company's strategy is what we call tactical flexibility. And tactical flexibility is our ability to shift from one product to the next very quickly, be present in all markets, be able to shift production in each of those and maximize profitability. So I would say 2 things. One, if you look at the average sales price, it comes out to $1,292, which is a hair over $1,000 a ton for all products, whereas the current market price for CRU now is $1,880.So there's clearly enormous upside between what was booked in Q2, which was probably sold at the end of 2020 and early 2021. So back in those days when the market price was lower, that's what you're seeing reflected in the current quarter. Right now, with the CRU having gone up, you can see what would be realized if we were to sell product today, also into Q4.So yes, enormous upside to the current earnings based on the mark-to-market. Specifically, $1,092, we don't break down the price of all products, but obviously, the HRC portion of that was lower. And if you add USD 800, that's almost CAD 1,000, on top of that, you can pretty much mark-to-market where our earnings profile would be if we sold things today as compared to what we did in -- that was reported this quarter simply by doing that math. So there's upside in 2 respects. One, the CRU was higher, market is much higher, obviously, and then on top of that, probably some further price appreciation on downstream value-added products as well.

[Operator]

Your next question comes from Tristan Gresser, Exane BNP Paribas.

[Tristan Gresser, Research Analyst]

The first one maybe on working capital. Can you give us a sense of what you would expect in Q3 and maybe in H2, given that you see pricing, higher prices following stable volumes. What are your expectations there?

[Paul D. Scherzer, Chief Financial Officer]

Yes. Tristan, it's Paul. So for working capital, I mean, as you know, as we go through the year, raw materials inventory increases a little bit heading into the winter season. The rest of our inventory should be relatively static. So the change you're going to see is really on the receivable. And the way I think about that is when you look at really our ASP in the last month of the quarter versus our ASP in the last month of the prior quarter, that's when you should get something approximating our change in receivables because as we said, we're expecting shipments to be about level. So it's really going to be kind of the exit ASP because we sell on 30-day terms typically. So not to be too precise on it, but you're going to see a pretty significant uptick this quarter with selling prices, given what's been going on with CRE over the last few months.

[Tristan Gresser, Research Analyst]

All right. That's -- so it could be higher than Q2 then, if I understand you correctly?

[Paul D. Scherzer, Chief Financial Officer]

At this point, I'd be shocked if it wasn't a fair bit higher.

[Tristan Gresser, Research Analyst]

All right. That's helpful. My second question is a bit more on decarbonization. I mean 2 of your closest peers have announced getting funding to build the EAF and DRI plants to cut their carbon emissions. And I was just wondering, when you look at capital allocation, it's decarbonization at all on the agenda. If you had any discussion with the Canadian government for any investment there? And do you see any risk, I mean, competitive risk to 2 competitors that can offer lower carbon steel as well? So yes, your thoughts on that would be appreciated.

[Alan Kestenbaum, CEO & Executive Chairman]

Sure. First off, let me say the following. Canada has the lowest output per ton of carbon of any country in entire world. So when we start with Canada, Canada starts from a position of already being the lowest cost emitter of carbon. Secondly, absolutely, every steel company that's out there today knows that carbon reduction is something that people want to see, and we are working on our own plan. It will be different than what you've seen from the other competitors, and we think we'll be better. We also think that if we can do it without government funding it's better because the government funding is a loan. It's not a grant. You got to pay it back. And consistent with our policy of keeping a clean balance sheet, taking debt from the government is not our preferred approach. That doesn't mean we won't do it, if it becomes the best source of financing. But at the moment, we are certainly moving along -- we have an existing pathway of carbon reduction. It's certainly high in our agenda, and we want to make sure we do things smart and efficiently consistent with our capital program and consistent with our approach to our balance sheet.

[Operator]

Your next question comes from Michael Doumet, Scotiabank.

[Michael Doumet, Analyst]

I guess maybe more of a curiosity question on hedges. Certainly, up to this point, HRC surprised essentially everybody to the upside. But when I look at the futures curve, I see an opportunity for Stelco to essentially lock up strong free cash flow potential into 2022. And while I can't say where HRC prices would go, I would say that your share prices or your share price is -- pricing in HRC well below the futures curve. So with that context, I mean, why not go out there, lock up some hedges, secure higher free cash flow and commit to more buybacks?

[Alan Kestenbaum, CEO & Executive Chairman]

Well, in terms of the first part of your question on the hedging, we think the forward curve is just way too low. We're looking at $1,884 today for prices and next year, the average is, if you look at the market, as you're saying, it's fairly healthy on historical terms, in terms of I think it averages out to $1,250 or something for the year next year, that's U.S. dollars. But that's 35% lower than the current market. And we think that prices are going to go higher, it stays stronger. There's a lot of things going on in the market. I don't think that people really understand. I think we're going to see prices continue to go up. If we do decide to hedge later on, it's not something I'm planning on doing now. But I think it's a long, long way down from where we are today to what the forward curve presents, and I think we're better off not hedging.

[Michael Doumet, Analyst]

Interesting comments. And I guess, I mean, based on those comments, you don't see steel pricing normalizing at any point through 2022. Is that fair? And I guess, if that is fair, I mean, at what point do you expect steel pricing to normalize maybe a little bit more thoroughly?

[Alan Kestenbaum, CEO & Executive Chairman]

Well, I mean, I think the first question is what's normal. We think that the things are changing. The previous question that came in was about decarbonization. There's been a big shift to EAF production. EAF production is based on scrap. Scrap already is short, it's going to get shorter as people transition to EAF production as more EAF production comes on. And so that means that scrap goes higher, steel prices stay higher and normal becomes a newly defined term. I don't know if it's going to be $1,800, $2,000 or it's going to be $1,500 or $1,400, but I don't think the days of steel prices where they were are relevant anymore. We've built this business around this thesis.It's not something new. I've been talking about this for 3 years. What's -- how cost is going to go up, how the market is moving. What I did not realize at the time was the incredible movement of China and other overseas countries moving into EAF production. There is, just so people understand, 2 billion tons of steel production, it's 200 million tons roughly of scrap availability for that market. So the market is rapidly moving to more and more EAF production for good reason. A lot of it having to do with decarbonization. And that trend will not change. And I think the squeeze on scrap continues to go up.Today, we're looking at Busheling futures that are over $700 a ton. And these guys in the EAF need to make $250 on top of that. So you're looking at -- is $1,000 the new normal? I don't know what the new normal is. But I don't think the old pricing what you're saying historical norms are relevant anymore. And so I think we need to get people accustomed to what things actually cost in terms of steel production, in terms of return on capital, companies need to get both, return on capital and cover their variable costs.And so we think we're entering into a new period of time. I'm not sitting here saying the current pricing is normal. I don't want to say that. I'm certainly enjoying it. But I don't think that the lows are going to be anything like what they used to look like. And I think that the world needs to get used to it.And in fact, when we talk to our customers, whether they're auto customers, pipe customers, other customers, they acknowledge us, and they've had no problems passing this downstream to their customers as well. So I think this is something that's very, very important to understand. And I believe, it also goes back to the hedging question, like what is the right price. And we think we're really, really well positioned to enjoy exceptional profits for many years based on how we see the market develop.And I think it feels great to be able to say, "Look, we kind of called this a few years ago, took a lot of guts to make the investments that we made, both in terms of raw materials into the blast furnace at a time where everything looked like, the world was coming to a bleak end about a year ago." But we had confidence in what we had -- what we decided would be the right business plan and thesis on the market that we developed 2 or 3 years ago, and now it's playing out.And I think it's too early to decide what is the new normal price. I can make all kinds of cases, I could be right, I could be wrong. But so far, we've called it right. And we just think we need to let time play out. It's a long, long way away where we get into a place where we're not going to make exceptional profits from the pricing today. Even looking at the curve, we would make a tremendous amount of money next year as the prior caller suggested, but we just don't know where the new normal settles out.And the market is saying continue to be short, inventory to lean. We have an infrastructure bill coming. All forget, this is all in the context of an auto production that is restrained from the chip shortage, wait until that loosens up. So who knows where this goes, and we're just going to continue to ride it for now and enjoy the ride, but continue to, like I said before, save nickels wherever we can and really look to deploy our capital in a way to really maximize and get our company valued the right way.

[Operator]

Your next question comes from Curt Woodworth, Credit Suisse.

[Curtis Rogers Woodworth, Director & Senior Analyst]

Alan, I wonder if you could talk to kind of longer-term capital spending plans for the company. Do you see scope for any more modular type investments, be it value-add finishing lines? Anything ancillary to that?

[Alan Kestenbaum, CEO & Executive Chairman]

Yes. We certainly do. We're looking at a whole bunch of things right now. But I want to tell you how we measure capital versus how I think other people measure capital. Someone may say, "Hey, I could make -- and I want to see this just as an example, I can make galvanized steel for X and I can sell it for Y." We look at it as what are we actually getting for the marginal operations, right? There's yield loss and, of course, yield loss grows as the market goes higher because if you're losing the same tons of a higher price when you're -- when you make that calculation, because you're in a higher market. So as the prices go up, the spread between HRC and other downstream products has to get bigger. It can't stay the same.And we measure the capital returns on that marginal improvement taking into account yield loss. So -- and then we have 30% return on invested capital that is an internal threshold that we have. So we're very, very disciplined in that. Having said that, we are focused on the number of opportunities that we think are -- could have a meaningful impact to the company's revenue and profits, and we're focused on that. And that's what we do all day. It's too easy to sit and make steel for what we make it and to sell it into the market, that's obviously easy. I mean what we do, this management team is constantly looking for ways to, on one hand, cut cost, but on the other hand, look to increase revenues, increase profits, and we're continuing to do that.

[Curtis Rogers Woodworth, Director & Senior Analyst]

Okay. What would be -- can you give any rough guidance on 2022 CapEx at this point?

[Alan Kestenbaum, CEO & Executive Chairman]

Yes. I think we've said before that our big capital plan is over this year. We've, I think, invested $700 million, $800 million into this facility since I bought this company in the middle of 2017. We're going to go into maintenance mode next year, $85 million. That's the guidance I can give. If we do decide to do any special projects, that would be in addition to that, and we'll make those announcements as they come. But for now, I think you can put in the maintenance number.

[Curtis Rogers Woodworth, Director & Senior Analyst]

Okay. I mean do you think it's likely you're going to add more downstream finishing value-add processing in the next 1 to 2 years?

[Alan Kestenbaum, CEO & Executive Chairman]

I mean we pretty much have the full suite what we need right now. I mean we're able to meet the customers' most stringent demands. So I don't see anything that's compelling us to do that right now. I don't rule it out, if the right opportunity comes around. But right now, as you can see, we're having no problem selling all the steel we need to produce at industry-leading margins. And so whatever we would do would have to be even more compelling, more profitable. I don't see anything specifically on the downstream side right now that is compelling enough to beat the returns we're doing right now.

[Curtis Rogers Woodworth, Director & Senior Analyst]

And are you contemplating adding an electric arc at some point in the future?

[Alan Kestenbaum, CEO & Executive Chairman]

Well, I mean, look, we're -- we'll make announcements on investments when and if we do. But I think you can tell from our other comments that we've made so far today, the electric arc business is challenged because of its raw material supply. We consider that to be an opportunity for Stelco. So if we would go in that direction, certainly wouldn't be of, "Hey, let's go short scrap." It would be something that would be more well planned and more specific about, "Okay, we can go build an electric arc furnace, but what the heck are we putting in it, and make sure that we cover that, too." So I think we'll be very thoughtful about what we do. We don't rule anything out, but we try and do things a little differently here than everybody else.

[Curtis Rogers Woodworth, Director & Senior Analyst]

Would it make sense to maybe convert Hamilton to a pig iron facility to feed into an electric arc or do you -- I know in the past, you said you don't have any plans to be a merchant pig iron producer, but could that be something that could occur?

[Alan Kestenbaum, CEO & Executive Chairman]

Look, to make pig iron, you need more iron ore. And that's got its own constraints, so. All right, guys, we're over time here. So first of all, I want to just thank everybody for your participation today, and we've got a lot of great things going. And we're always happy to meet our investors through meetings, and I'm sure love the input, love the support and looking forward to more great times ahead. Thank you very much.

[Operator]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.