Steel and Metals Sector
Metal Strategies regularly conducts valuations of steel and metals sector businesses, PP&E assets and inventories. We conduct these valuations on several levels:
- Fair Market Value (using GAAP accounting standards)
- Replacement Value
- Distress Value (operating)
- Extra Distress and Liquidation Value (closed)
Fair Market Value
Fair Market Value construes a sale in an orderly fashion in conditions not under duress, i.e. bankruptcy. As such real estate is valued on comparables while and equipment may be valued as a depreciated asset or otherwise. Fair Market valuation, also referred to as (a) Guideline Public company method and (b) Guideline Comparable Transaction method. These methods are all aspects of Fair Market Valuation and all involve determining the price that would be received for a business or asset in an orderly transaction for the entire business or selected individual plants and major financial components (PP&E, inventory, receivables).
Metal Strategies uses one or all of the following three approaches in our fair market valuation work depending on each individual situation and circumstances:
- Cost approach (often referred to as “public company method” using GAAP accounting principles and guidelines and based on acquisition price of assets, depreciation, and other issues such as current assets, intangible assets, goodwill, etc., but all on a fair market value
- Market approach based on market “comparables” (i.e., recent M&A transactions in the marketplace as well as recent green-field and brown-field installation cost.
For each of these, one ideally needs to fully understand the important factors such as the following shown in the list below:
- Understanding the underlying true value of the business from an industry expertise basis
- Understanding and incorporating market trends in pricing, raw materials and both demand and supply (new entrants)
- Understanding and incorporating changing technologies and well as proprietary technologies held by the company all related risks around those complex issues.
Metal Strategies will offer advice as needed and within reason to LGI and its chosen professional accounting firm regarding that firm’s work in the assessing of the capital cost needed to replace an existing OCTG processing and manufacturing plant, such as that operating by Tejas, on a green-field or brown-field basis. This accounting firm’s valuation work should account for any changes in technology, economy of scale and other related factors since the original plant was built and be based on recent relevant industry transactions and construction costs. The valuation level is important for several reasons including the following: (a) it shows and appreciation or depreciation in asset value due to age, outdating technology, lay-out and material flow issues; (b) it is used to determine adequacy of fire damage or insurance coverage and damage claims.
Distress and Liquidation Value (operating and closed)
Metal Strategies also has significant experience in distress valuation, i.e., the value that a rational investor would pay for a business or assets in an ongoing operating state (can include partly idled), but that are in some degree of financial distress implying a less than orderly sale.
Metal Strategies also has significant experience in liquidation value that a rational investor would pay for a business or assets in a closed and/or liquidated state, relying on our significant recent actual experience in the market. We could comment on the number and business form (strategic domestic, strategic foreign, financial. speculator, liquidator, etc.) of potential buyers.
Other Related Valuation Areas
In addition, Metal Strategies is oftern called upon to conduct specific valuation work in the following related areas:
- Inventory including spare parts, motors, transformers
- Plant Property and Equipment Valuation
Inventories are often a critical component of a business valuation and can often be quite significant – both in absolute dollar value and relative to the book value of assets. Our experience is that it is not unusual for sellers to be intentionally or unintentionally over-stating the value, quantity and condition or quality of inventory includes spares.
A typical scope in our inventory valuation includes, but is not necessarily limited to:
- Raw materials and other feed stock materials
- Spares (motors, drives, etc.) and parts
- Finished goods
We accomplish this task with an actual physical walk-through of all storage and staging areas of all plants as well as a comparison with purchase and inventory documentation. This ideally requires a company such as Metal Strategies with detailed knowledge of steel products and spare parts and ability to recognize and differentiate good and poor quality items, in good or poor condition, and the related impact on price and value.
In related due diligence projects, Metal Strategies would also work on general inventory issues, considering the following, among other factors:
- Adequacy of inventory volume relative to average shipments
- Adequacy of inventory quality relative to average order requirement
- Inventory turnover rate and related inventory efficiency and productivity measures
- Analysis or inventory lead times (order to delivery)
- Share of inventory matched to finished product orders vs. share on general stocking (i.e., exposed to mark-to-market market valuation risk
- Inventory by source and related supplier concentration and risk
- Inventory handling, storage and staging and overall adequacy of inventory-related process flow
Used Plant and Equipment
Metal Strategies recognizes that there is an active domestic and global market for used industrial machinery and equipment and that auction records are easily obtainable showing comparables for both.
- Values in these used equipment markets depend on conditions in those markets. For example, if the mining or construction sectors are soft, there is less demand and more excess equipment available at more competitive prices.
Also, machine tools vary by specialization. Some widely used but average or common models bring small recoveries. Others, however can for example, represent a rare but desired item and, despite its age may, bring a good return at auction and value well.