AK Steel Holding Corporation (NYSE:AKS) On Iron Ore Derivatives


AK Steel Holding Corporation (NYSE:AKS) routinely utilizes iron ore derivatives to lessen the volatility in the cost of its iron ore deals. Historically, the iron ore derivatives qualified for hedge accounting, indicating that losses and gains on derivatives were shown in the firm’s financial report in the same period.

Starting in Q3 2016, the firm’s iron ore derivatives are not entitled for hedge accounting treatment. Hence, adjustments to spot these derivatives to fair value for each period are identified immediately in the firm’s financial report, versus being recorded in the months that iron ore purchases impact earnings.

The buzz

In Q2 2017, the fair value of AK Steel’s iron ore derivatives dropped due to a decline in the market price of iron ore, which led in the firm recording mark-to-market losses of $8.4 million for the quarter. The firm recorded net M2M gains of $7.9 million in its financial results for the six months closed June 30, 2017.

Discounted in the financial report for Q2 2017 were gains of $8.9 million from iron ore derivative contracts that were settled during this period. These gains were recognized in previous periods as an outcome of those hedges no longer entitling for hedge accounting treatment. For the initial six months of 2017, the firm recorded gains of $20.3 million from iron ore derivative contracts excluded in the financial report during that period.

Effective June 30, 2017, AK Steel finalized a deal to acquire Precision Partners Holding Company valued at $360 million. Precision Partners is a major North American automotive market entity that offers engineering, die design, tooling and cold and hot stamped steel components. The firm is based in Ontario, and has over 1,000 employees, including around 300 engineers and proficient tool makers, across as many as 8 plants in Alabama, Ontario and Kentucky. In July, the company received U.S. antitrust approval for the transaction.