Nucor is currently in quandary should it invest in SMSs new CSP technology that

promise its escape from saturating or shrinking market of making low end
structural products (re-bar/wire rod) into the low end flat-sheet market. The latter
required large economies of scale, and due to huge excess capacity (60%
utilization rate) would cast doubts in the Nucors strategic shift. Nonetheless, CSP
entitles Nucor to enter the new market with minimum efficient scale and at low
marginal cost of production. This article will assess financial risks associated with
CSP, if Nucor choose to become first adopter.

Firstly, If Nucor modernized its Minimill by adapting CSP technology, then, as

mentioned in the exhibit 12A, there is significant construction costs savings (if
operated in 90% capacity) both in terms of making HR sheet (47.67%) or CR sheet
(33.3%) as compared to adapting modernized integrated mill. Further, in terms of
production of flat-rolled product such as HR sheet (exhibit 12B), CSP will bring cost
per ton savings of 13.95% and 25% as compared to modernized and unmodernized
mill, respectively. Moreover, profit contribution per ton for HR sheet (similar trend
for CR sheet) would be $81.5 per ton as compared to $64.5 and $25 for
modernized and un-modernized mills, respectively. Thus both adaptation costs and
profit contribution seems significant due to CSPs introduction in Nucors current
assets.

Secondly, Nucor has already confirmed its 51% joint venture with Yamato Kogyo to
produce wide-flange beams (minimill based market), which is projected to cost
$89.25 M. Combining both CSP and joint venture, Nucor would need $410 M over
three years, and with $185 M cash, it has to raise $225 M. Current, long term debt
is $42.15 M, so with the concurrent projects, the debt would raise to $267.15 M.
Now, Nucors market cap is $795.58 M (21.31 M shares & 37.65 avg. stock price),
so with new funding it would have reasonable debt ratio of 0.336.

Lastly, it is imperative to understand CSP in terms of NPV stand-point. As, $410

investment include joint venture and $30 M of operation cost, separating that, the
total CSP project investment comes out to be $320.75 M ($70.25 M/1 st yr; $220.25
M/2nd yr; $30.25 M/3rd yr). The projected cash flow (CF) for 10 years (life line of CSP
tech) comes out to be $78 M/yr (eg. for HR = 0.5 M ton times profit contribution of
$81.5/ton & same cal for CR), neglecting that if competitors copy CSP then this
would reduce CF. The NPV of the project is $113.9 M (at discount rate of 9.41% &
expected +CF from 3rd yr. onwards).

With lack of full-scale proof and life span of 10 years, establishing a nascent CSP
technology could be a risky decision. Further, not owning the rights for CSP would
lead unobstructed market adoption. Financially, Nucor have never raised this much
of debt at single time in its heritage so far, however, after discount, the CSP would
only cost $90 M. The major cost is attached to build new plant which, even if CSP
failed to bring above mentioned cost advantage or CF, could be used to make
current products, and in the case it has suggested that Nucor would try to make its
payments to SMS contingent on performance clauses, further lowering financial
risks.

Nucor always invested in new technologies that helped it in leading industry-wide

learning curve, and with positive NPV, investment on CSP could be financial risky
bet yet logical one going forward.