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SG, Virginia, Minnesota is not that far from Northshore. This is a local MN squabble with Cliffs balking at paying high MSB royalties.
Regarding the wish list I posted for items I wanted addressed during today’s conference call, I listened in and heard pretty much all points addressed and more.
Perhaps, the most bullish reference was made when LG called out how the structure of Cliffs renewed contracts has Cliffs expecting 2022 to outperform their record breaking 2021 results in the making. I could go point for point down my list about what was shared, but this LG declaration sums it all up.
SG, the pre earnings report quiet period ends tomorrow…(as you know).
I expect to see:
-good, likely record setting 3Q earnings
-some contextual detail about pricing of steel sold and contracts update status. affirmation of robustness of demand and Cliffs sales.
-projections for 4Q 2021, Cliffs guidance
-progress towards net zero debt goal
-discussion of 2022 financials prospects for Cliffs and the US steel sector in general
-info on green steel priorities progress, status vs. competitors
-infrastructure bill considerations for Cliffs
-maybe, something on China’s role in markets and views about Section 232/tariffs
-details about Cliffs new scrap acquisition and the role of scrap/HBI development for Cliffs going forward
-maybe something about autos sales backlog and recent hype about magnesium feedstock distribution shortages ala China electricity rationing and chip shortage role, impacts on Cliffs
-maybe something about the convertible debt (may get deferred until after 1/15/2022)
-shareholder satisfiers (buybacks, dividends, strategic growth or ???).
@abracky, the discounted cash flow method is giving the same message expressed as the converse of a price target. Previous price target calculations were in the mid $30s while this analysis suggests today’s share price represents a 42% discount.
Near term, I see the high number of call options that would move in the money when pps runs to $35, $40, $50 or ? as offering the most resistance to proper pps valuation for Cliffs. What triggers will help that resistance be overcome? October 22 earnings report news may help solve the problem.
The August Cliffs Investor slide presentation guides 3Q and 4Q EBITDA at$1.8 billion each, based on conservative steel price, HRC projections ($1175 per ton). Considering spot HRC is now running around $1800 per ton and above $1175 through 2022, it seems conservative to project Cliffs EBITDA each quarter in 2022 will meet or exceed those $1.8 billion EBITDA projections for 2021 3Q and 4Q.
Some optimism for share price in 2022 is in order if FCF is figured at 60% of EBITDA or about $1.1 billion a quarter or $4.4 billion for 2022. On a per share basis, that would be about $8.80 EPS in 2022. A PE of 8 would suggest a pps of about $70 could be supported. Wouldn’t that be a nice contrast with the $25 pps setting up for max pain for Friday’s options expiration? Recent analyst projections are only running about half that (mid $30s pps). Thoughts about the math assumptions?
Dndodd, thanks for sharing your observations about the stats trending for Cliffs. I offer a few observations that may be just anecdotal but might explain the “cycle” shifts in pps that you suggest might indicate a 20% pps down cycle may occur within the trading band. Of course, movements up typically get consolidation but…
There has been an uptrend in the pps since the November 2020 announcement of C19 vaccines and the Cliffs announcement in December 2020 about the Cliffs acquisition of AM USA assets. That shifted Cliffs from a product base of mostly iron ore products in January 2020 to mostly vertically integrated steel products and a few million tons per year of iron ore products for sale in December 2020. Pent up consumer demand for steel products has fueled what some refer to as the start of another commodities super cycle.
You may notice there is a coordination in timing of pps retrenchment within a pps trading band with when Cliffs AM acquisition components were cleared into the markets. Half of the acquisition common shares made in payment were placed along with some additional Cliffs treasury shares used to retire some debt in early 2021. The other half of common shares were placed a couple months later. Just recently, Cliffs surprised the markets by clearing out the MT payment preferred shares for cash rather than issuing 58 million common shares for placement. To my knowledge, all the acquisition deal costs for AKS and MT USA assets are now cleared though cash payments or common stock placements, leaving matters such as debt and pension liabilities to be serviced with cash flow guided as set for booking over the next few quarters. Some convertible debt taken out by Cliffs to service costs for their new HBI plant is all that remains for prospective share placements, but those terms give Cliffs the option in 2022 to clear the convertible debt obligation with cash or about 38 million common shares some time in 2022. Since LG decided to clear the preferred shares with cash rather than dilute with 58 million shares, it wouldn’t surprise me if LG looked at the convertible debt in 2022 with an eye to using cash rather than issue 38 million shares, depending on how the Cliffs pps or steel markets are doing. If the 46 million share short position is counting on the convertible debt shares for cover, that pathway now appears tenuous. If 2022 comes along with Cliffs having cash on hand while the short is fully engaged, suppressing the pps, LG might be incented to retire the convertible debt with cash, and so forth.
Of course, LG could always decide to place more shares giving the short cover, but that seems unlikely while there is guidance for Cliffs to bring in lots of cash through sales and considering the Cliffs decision to cash out the preferred shares rather than place common shares. That is the underlying rationale behind why I see the 46 million shares in Cliffs short interest is under increasing pressure to cover. LG’s goal for net zero debt ought to be achieved by mid 2022, setting Cliffs up with earnings sufficient to use cash for new endeavors while resuming the dividend or doing stock buybacks. If the short doesn’t cover when pps is in the $20s, emerging Cliffs financial strength could have the short trying to cover at a much higher pps.
Bottom line is that the drivers for down cycling the pps are being removed, giving headroom for the pps to trend into the $30s and beyond.
Almost here, your investment advice to this board (sell Cliffs to risk hedge against your pandemic fears) seems to be more catering to “sell your shares to help out the 46 million short interest get cover” while Cliffs financial strength is translating shareholder value into the pps. There is a nice article posted today on Seeking Alpha that explains the particulars behind what is going on with Cliffs financials. You may find that information more useful for your Cliffs investing than your off topic media, pandemic coverage.
My observation for Cliffs is that earnings are situated to deliver $1 billion to $3 billion quarterly EBITDAs through 2022, going into 2023 based on HRC futures pricing and scheduled contract updates for Cliffs customers— the SA article spells out the details. That creates upside pps potential for Cliffs far beyond the current trading range in the $20s pps. As you are stepping forward giving advise to investors to sell, you might consider that Cliffs is positioned for a pps doubling if earnings post as Cliffs has guided for financial analysts (refer to Cliffs PRs posted on their web site). This situation, per the CEO, doesn’t reflect the infrastructure bill, which if passes, serves as LG put it, “frosting on the cake”.
Abracky, the curious thing is the spinning of posts as if the commodities sectors like iron and steel are a “pandemic play” vulnerable to another COVID shutdown. In early 2020, tools for fending off the pandemic had to include shut downs while businesses and governments developed tools and practices to deal with the virus. In November 2020, vaccines were announced and in December 2020, Cliffs announced acquisitions that made Cliffs a full, vertically integrated steel company that utilizes most of its own iron ore production.
Consider the 46 million +/- short interest and the pressure mounting on short position backers to cover. LG eliminated the prospect for 58 million shares from MT preferred stock conversion to give short cover. Now all that remains to cover that short are three pathways— hope the convertible debt in 2022 shakes loose 38 million shares rather than getting flipped for cash, bash the message boards with new pandemic fears to shake confidence of investors holding long so sellers can feed the shorts or for the short to prepare for shouldering the costs associated with the shareholder value from the new Cliffs business model coming to fruition.
I-man, the perspective you share fits what I am seeing. There is definitely a bottle neck in procuring consumer goods, while sourcing seeks to catch up with post pandemic reopening. Work performed for catch up does not constitute a booming economy overall, while a few sectors (commodities like steel) are experiencing high demand. Cliffs steel products are in high demand for complex, interactive reasons related to becoming a new, vertically integrated steel company at timing when C19 recovery is gaining momentum. This surge ought to last for years until it coasts into a new normal of healthy domestic steel demand, leaving the new Cliffs significantly undervalued at the current pps.
There is a portion of the work force that appears to be holding off on reentering, even though C19 stimulus and moratoriums are timing out. The gov “gambit” of paying an extra $600 a week unemployment, or a premium replacing $15 per hour for time not worked, appears to have left a lingering expectation that this pay will continue into the working world. That is far from the case in the real world, where employers are instead, automating check out lines, paring down product offerings, reducing hours of operation or closing their businesses as they cannot find workers ready, willing and able at an affordable cost. Consumers are needing to do without while the economy navigates through how these socialist themed premiums can step back down to a sustainable, market based economy.
I know people who want to go back to work but are having trouble because their old job no longer exists and is not situated to come back—ever. Reentery into the work force for many involves applying for jobs they are not well suited to do, for lower pay or for only part time.
PR from Cliffs this morning—“ Cleveland-Cliffs Completes Redemption of All Outstanding Preferred Shares with $1.2 Billion in Cash, Reducing Diluted Share Count by 10%”
Short players just lost a tool.
Based on an April 26 Paribus research note?…
I hope you all had a good 4th of July holiday. 2Q books are now closed, Q3 and 4 contracts pricing is still positioned to incorporate higher HRC pricing. Trading through July 23 Cliffs earnings news will be interesting to watch.
SG, so doesn’t going private require Cliffs to scoop up all shares at a mutually acceptable price? LG isn’t likely to part with funds to buy out common shareholders reflecting emerging value for the new Cliffs and I don’t think I want that. The undervaluing you flag isn’t transparent to all until those quarterly reports are racking up a string of $1 + billion EBITDA. Meanwhile, I still pick up shares when I can at unrealized value pricing.
SG— and then what happens (if going private)? How can that be beneficial for the value of common shares being held long?
SG, after looking at the video you shared about flooding, wait and see makes the most sense to me. I hope the people there are doing OK, as flooding is a big hardship. The “if this, then that” speculation is always with us. Suggesting that 15% of the world’s manufacturing will be interrupted (as the video narrator suggests) due to these heavy rain events seems hyped up and the string of events that would touch US steel manufacturing very speculative. I hope the flood management system failure doesn’t happen and would be surprised if the speculated consequences did. For now, the flood control system there looks like it is being challenged to deliver what it is designed to do while some flooding did/is occurring. Yet, I see world demand for goods and services while emerging from a pandemic driven production curtailment as being where the steel demand and high market pricing story resides. Cliffs is entrenched in the US steel supply infrastructure and that is still needing tariff protections against illegal dumping of foreign steel, at least, for the near term. Just my opinion.
Watts watt, another lament— let’s explore what “post more articles” means. There are copy right rules that restrict how article posting is done. Add to that, articles found are a bit like the blind men describing the part of the elephant they are touching. When I do simple exploring of headlines, the links pop up an ad describing how I need to pay to unblock the content. I am willing to pay for quality article access but my searching crosses paths to dozens of sources and blogs and it is not practical to subscribe to them all. Buying an article is like the old expression, “buying a pig in a poke” such that you don’t know if the value received warrants paying the price—and it usually doesn’t. Ultimately, the old media system where the papers or magazines that carried financial and weather news and were hosted by advertisers selling groceries, shoes, cars, electronic gadgets and the like have mostly disappeared to be replaced by blog spots on pages funded by the likes of investment banks and hedge funds with a self serving interest or through social media that is monitored to assure content reflects some committee’s interpretation of “right thinking”. ..
Cliffs does press releases, paying for them to be posted, but they quickly get smothered by the paid content spin articles, which in my opinion, seek to distort as much as inform. Within all that, investors have seen Cliffs release earnings guidance updates affirming excellent prospects for 2021. Validation comes with audited quarterly earnings reports. Yet, company PRs are buried with analyst projections that are antiquated (pandemic period influenced) or don’t even get it right that Cliffs became an integrated steel company in December 2020.
So how do you navigate your way to quality information to support your investing?
SG, congrats on flipping some profits. I recall we exchanged a bit on such things when the pps was emerging from the $9 to $10 pps range. Perhaps, what is different now is that mostly “the word is out” regarding the Cliffs guidance for $3.5 billion EBITDA at the end of March, updated just a few weeks later to $4 billion guidance. The earlier activity was more reflecting announcement of vaccines ready to launch for broad distribution and enthusiasm about general economic recovery?.
Those Cliffs steel contract quarterly updates will keep refreshing to include the higher HRC pricing, in turn, giving Cliffs opportunity to beat the guidance they released just a month ago. The $1100 per ton HRC average to finish out 2021 that Cliffs used to update their last earnings guidance is now just waiting another Cliffs earnings update explaining how the $1600 near term, $1400 December time frame HRC futures are going to boost the $1100 per ton average earnings math for Cliffs. That earnings update could happen at any time or not at all. Yet the 2Q2021 results due reporting in July will be telling and is just what, nine weeks out? The manipulation in trading companioned by appearance of new posters slamming the stock and the recent Paid article gaming, by my reckoning is very bullish for Cliffs pps prospects. I would not want to be caught without my position in Cliffs when an earnings guidance update is released for the sake of trying to flip a buck or two differential in the share price. I never have been good at market timing my trades.
N4longterm, I copied in a segment from page 9 of the Cliffs 2020 Annual Report that references the Distributor role. The timing for pricing updates and role of HRC price is interesting— 2020 saw HRC averaging at $588 per net ton. And now we see HRC spot pricing over $1500. Futures in 2022 are now posting higher than that $1100 per ton HRC 2021 average CLF applied when figuring their 2021 EBITDA guidance of $4 Billion. No wonder Riley increased their CLF pps target to $33.
“Distributors and Converters Market
“Virtually all of the grades of steel we produce are sold to the steel distributors and converters market. This market generally represents downstream steel service centers, who source various types of steel from us and fabricate it according to their customers' needs. Our steel is typically sold to this market on a spot basis or under short-term contracts linked to steel pricing indices. Demand and pricing for this market can be highly dependent on a variety of factors outside our control, including global and domestic commodity steel production capacity, the relative health of countries’ economies and whether they are consuming or exporting excess steel capacity, the provisions of international trade agreements and fluctuations in international currencies and, therefore, are subject to market changes in steel prices.
“The price for domestic HRC, which is an important attribute in the profitability of this end market, averaged $588 per net ton for the year ended December 31, 2020, 2% lower than the prior year. The price of HRC was negatively impacted by lower demand related to the COVID-19 pandemic, and hit a low point of $438 per net ton on April 30, 2020. However, as the industry recovered and supply-demand dynamics improved, the price rebounded dramatically, rising to a peak of $1,030 per net ton by December 31, 2020 and reaching all time-highs early in 2021. The improved pricing environment should bolster profitability for this end market during 2021.“
N4longterm, I wonder how much of that $6000 to $40,000 increase for the same truckload of building material is defining the dimensions of a commodities bubble or presenting the risk factors for a future crypto currency world exhibiting inflation through prospective displacement of the dollar? My Zillow monthly update spotted over a 10% increase for the value of my home today, which is nice until I recognize it cancels out much of the valuation math when one realizes you need to live somewhere. Philosophy aside, it appears that Cliffs is entrenched to deliver a pps response reflecting a long lasting commodities bubble that should see Cliffs emerge with well balanced debt while providing shareholders with pps appreciation that meets or exceeds the resource driven scarcity component in the US COVID recovery economy. As an investor, that seems a good place to be. That is, investing in a company that employs 25,000 people across multiple states while supplying core materials for infrastructure development is easier for me to relate to than acquiring the rights to a precious metal commodity that sits in a vault some place. Finished steel pricing has more than doubled where gold has been—marketed as a safe haven? My view is that proper Cliffs valuation is far from being realized and is just getting revved up.
N4longterm, yes, I did ask for it. Thanks so much for answering, as your response provides more insights.
Some feedback? Your sheet of steel pricing example sounds much like what could have been said about the lumber industry, plywood, strand board. That gives a parallel for steel pricing with other building and fabrication materials. Will the vertically integrated Cliffs, steel behave different for soft landing post commodities price surge?
It also sounds like your distribution company provides buffering for steel end users that delays the full brunt of pending price increases and a buffer against short term spot price variability. Yet, with recent surges in steel futures being so large, it would seem that distributors will be needing to pass costs directly through to survive. Yes?
N4Longterm, will you do a brief education thing to explain the distributors role as they interact with steel companies likes Cliffs and the ultimate customer? I ask in context of understanding how the upsurge in steel pricing, supply constraints and high product demand is viewed from a distributors perspective. Is the distributor functioning as an agent for the buyer, the seller or a bit of both? Does the distributor have much say in contracting terms for orders between supplier and the ultimate customer? TIA
TFL, those HRC steel futures prices show pricing above $1250 per ton finishing 2021. Yet, the Cliffs guidance for $4 billion EBITDA was based on a $1100 per ton average working into contracts for the rest of 2021. Very nice for Cliffs prospects going into 2022.
I still need to vote my proxy. The outcome is likely already decided but I still plan to vote for the management ask. That gives LG and his crew lucrative compensation as a carrot and authorized shares that supports shareholders expectations for Cliffs to achieve great things in 2021 and beyond.
I am anticipating that the second half of common shares given in payment to MT will post at a pps in the mid $20s or higher and the preferred issue will either see dividends or conversion to common with pps in the $30s. Cliffs falling short from that expectation will be disappointing considering how the current steel/commodities super cycle should support a CLF pps in the $40s+. Of course, CLF can bungle their execution and flood shares prematurely with untimely placements such that pps doesn’t deliver for longs—or on CLF potential. At least we can expect MT to be weighing in to see their payment posts as high a share price as can be supported. Maybe, MT will decide to just hold their CLF common shares payment and enjoy the ride into 2021 delivery on new Cliffs potential.
SG Nice video, thanks for sharing.
Consider how the timeline in that video analysis runs across the pre LG CEO Cliffs, the LG team entry and the December closure of the MT USA acquisition deal that makes the new Cliffs primarily an integrated steel company. The commodities up cycle is a common thread when focusing on the iron ore producer part of Cliffs. The integrated steel company part places an amplifier on the new Cliffs going forward as HRC pricing opens up wider profit margins for the steel sector. Nice to see that there is a positive alignment like that for Cliffs.
My my my...
From the CLF press release today—
“The Company’s forecast includes the following expectations:
First-quarter 2021 adjusted EBITDA* of approximately $500 million
Second-quarter 2021 adjusted EBITDA* of approximately $1.2 billion
Full-year 2021 adjusted EBITDA* of approximately $3.5 billion
The full-year expectation is based on current contractual business and the assumption that the US HRC price averages $975 per net ton for the remainder of the year.”
Consider that $975 per ton HRC average is conservative relative to recent spot pricing around $1300 per ton.
Then consider 1/2 billion shares and a forward PE ratio of 8, then compare to Nucor, who enjoys a higher PE.
16 million tons for 2021 into $3.5 billion EBITDA suggests a margin around $220 per ton, conservatively estimated.
My my my...
SG, I observe there are some “elephant in the room” issues in play when retail investors seek to navigate through market investments that have me thinking I don’t see enough big picture to be complaining to FINRA about China manipulation of CLF trading through hedge funds. To be clear, I observe the start of a commodities super cycle and emergence from the pandemic situating CLF for great earnings after years of malaise and CLF emergence from the brink of bankruptcy. But CLF is still weeks or months away from showing that their management team have “delivered the goods” that can support the prospective doubling of the current pps that may be enjoyed by all investors. We need look no further than CLF management enriching themselves by flipping most of their performance incentive shares when trading briefly peaked above $18.50, pretty much putting and end to the anticipatory pps run up into what we hope will be a stand out 1Q2021 earnings report. Today, we see what is likely simple maneuvering of pps for “max pain” minimization of payout for stock options that expire is enough to push CLF back into its “wait and see” trading mode.
There are multiple other blind retail investor touch points with that elephant that need to be considered that go no further than Cleveland for getting clarity. 20 million extra shares placed- maybe 9 million more. 40 million MT acquisition shares placed, maybe more released in June. A billion in debt restructured and $100s of millions in pandemic related high interest debt paid off early. An ask for 600 million more authorized shares. A requested executive compensation bundle that leaves me, at least, a bit put off until I see justifying results. What other discoveries await before LG’s team actually delivers on substance?
SG, for now, I am focusing on what CLF is preparing to lay out on the table with 1Q 2021 financial reporting. Plus the proxy vote before us.
SG, the DTCC pending action you mentioned is most interesting. There was a WSJ article that mentioned it, but pretty much not in the news. I am watching for more context about what and when.
Chine flooding is a tragedy regardless of market implications. I don’t know how big a deal it amounts to, big picture, long term. We have had major Mississippi flooding events that brought high local/regional hardship, but fairly quick recovery from a national perspective. It seems China events should be like that... I offer my best wishes for a quick recovery for those being affected.
Is the DTCC action for real? Might that mean that short interest will get updated more often then the current bimonthly with a long lag time? That alone would be a big gift from the WSB community.
Was the pps dip and recovery today done to accommodate LG’s purchase (lower entry price) or was the pps rebound reflecting market reaction to an insider trade when shorts were getting too feisty? This gets circular in thinking but much of trading seems to be acquisition timing friendly these last couple months. It doesn’t matter if the result has LG’s team delivering great earnings for Q1 that gets properly reflected in the share price. Than all get to eat...
Koci bought 15,000 shares this morning, but he didn’t time the low for the day as well as LG did for his 100,000 shares.
SG, past 1Q reporting has been running in late April. The consolidation of the financial records from the December finalization of the AM assets acquisition ought to carry momentum for timely reporting. Will Cliffs declare they want another month for new accounting catch up? Perhaps, but I don’t see justification is as sound as the time added for 4Q reporting. We shall see.
A positive this morning is that LG bought 100,000 shares of common stock today (3/5). An excerpt: “The price reported in column four is a weighted average price. These shares were purchased in multiple transactions at prices ranging from $13.12 to $13.19, inclusive.” When LG and his senior exec team sold their performance incentive option shares around $18.70, that started the pps decline from the recent peak. Let’s see if this “insider buy” helps establish a trough from which pps rebounds leading into 1Q results reporting. Perhaps, it won’t, but at least the CEO is communicating that recent pps is a value entry point to build up his holdings to over 4.3 million shares of common stock.
Thinking about Q1 results prospects, the 4Q 2020 filings indicated an average net steel sale price of $880 applied to just under 2 million tonnes sold. LG also said pricing reflected about 70% of that sales price weighting in contracts pricing at lower, pandemic influenced steel prices. LG also said the lower contracts pricing residual influence will be around 40% for Q1 and further improving for Q2. The 1Q sales target of 4 million tonnes is about double the 4Q 2020 sales, suggesting much of that 30% improved exposure to higher steel spot market pricing is from blending in half of 1Q sales (e.g. reflecting posted sales doubling). Further, spot on HRC pricing is running about $400 per tonne higher than the $880 per tonne 4Q average. Doing some ratio math with these numbers gives a hint about increased Cliffs earnings for 1Q reporting vs. 4Q 2020. The share count for EPS estimation ought to be just over 1/2 billion shares until MT places their remaining CLF shares given in payment for the MT USA assets acquisition. Close enough for “back of envelope” math projections.
Do you see info that would suggest the numbers summarized above are correct/incorrect? Otherwise, running ratios and numbers paints a rosey outlook for Cliffs that should be able to be confirmed within about 7 weeks through Q1 reporting. Even if Cliffs steel sales are lower than 4 million tonnes in the 1Q, the average sales price improvement alone looks bullish.
Another CLF analyst price target upgrade is out today, posted by SA- an excerpt-
“Cleveland-Cliffs (NYSE:CLF) +1.8% pre-market as GLJ Research upgrades shares to Buy from Hold with a $22 price target, where analyst Gordon Johnson cites strength in steel prices and earnings momentum.”
What I find interesting is that Cliffs and MT recently placed their combined 60 million new shares at a low $16s pps, just to find the SP midcap 400 entry rebalancing before March 1 briefly dropped the pps into the low $13s. Did I buy more shares during the price dip? Yep, but in the low $16s. Those ETF funds enjoyed a lower pps entry for their rebalancing. I never have been good at achieving optimal market timing, but I had not anticipated the rebalancing affecting the pps as it did.
That said, the recent 4Q 2020 8K financial info released by Cliffs indicated their average 4Q steel sale price per tonne was in the mid $800s for their just under 2 million tonnes of steel sold. An 8K excerpt-
“Average net selling price per net ton of steel products $ 880”
Now steel market pricing has moved into the $1000 to $1200 range and is situated to weigh in heavier for Cliffs sales while Cliffs is saying they are on track to sell 4 million tonnes of steel posting for Q1 2021. That market situation suggests the GLJ Research price target upgrade is still on the conservative side. There is that additional 38 or so million shares held by MT that can be placed, but perhaps, that placement will post when results are delivering on those $20+ pps price targets? The additional MT shares should be reflected in the analyst estimates. So is there a pps surprise to the good side in the queue for Cliffs? The 1Q 2021 results ought to be reported in less than two months, at which time 2Q price projections should have market data to examine.
CLF is going though some major funds rebalancing in conjunction with financial reporting of pandemic influenced 4Q and 2020 annual results. Plus “max pain” for options payoff is positioning for minimum payout to option holders expiring Feb 26. Millions of shares are being reconciled leading into March 1, including ETF index fund rebalancing as Cliffs shifts from the S&P small cap to mid cap 400, MT sells 40 million common shares they were issued as part of Cliffs AM USA acquisition plus the “opportunized” additional sale of 20 to 29 million shares of common stock to pay off the 35% portion of the 9.8% ? interest note Cliffs took out during the pandemic to hedge against pandemic driven cash flow needs.
If that isn’t enough to cause pressure on Cliffs trading, yesterday’s Cliffs call had LG sharing how 4Q 2020 earnings reflected about 70% of steel sales being affected by automaker long term contracts locking in lower, pandemic influenced pricing (+/- $450 per tonne) rather than the $1200+ per tonne market price for steel. The good news is that LG says that the lower priced auto industry contracts now carry about 40% of 1Q 2021 steel sales. Also, Cliffs steel sales of just under 2 million tons move to an estimated 4 million tons in 1Q 2021. That is double the sales at a much higher average sale price per tonne. LG says margins and sales are set to further improve for 2Q 2021 and beyond. On top of all that, Cliffs replaced about $1 billion of secured debt with unsecured debt at interest rates under 5% with a revised 8 to 10 year payback.
With all that in play, I presume that next week will bring Cliffs trading into its “new normal” business situation.
So what about the financial detail I was watching for from yesterday’s earnings call? I am still digesting the info. A general observation is that improved Cliffs earnings from high steel demand and higher market pricing only lightly touched the 4Q 2020 earnings but is well along to benefitting 1Q 2021 and beyond, as LG described. I also observe that 4Q 2020 received a lot of MT acquisition one time costs that should now be reconciled going into 2021.
What is a good pps projection reflecting what we heard from the cc detail? I think much higher than is being reflected in today’s, pre index fund balancing trading. MT got about $16.11 for their 40 million shares, per yesterday’s filings, much higher than today’s trading price. Index funds will be locking in their rebalancing reflecting today’s pricing, but then would want to see Cliffs pps rise going forward. Prospects look bullish to me for 2021. Other thoughts?
$4 pps was a great entry point. Congratulations. When pandemic, markets over reaction occurred and dropped the pps below $4, many were facing financial hardship, unsure of their health and jobs future. I picked up a few shares at $4.50 and held onto the shares I picked up at higher pps, but was wondering if I was going to need those funds to help family weather through this pandemic. Thankfully not.
That post election pps plateau between $8 and $9 was another good CLF entry point. The announcement that there were two vaccines imminent for deployment caught me by surprise and was a game changer for many stocks, including Cliffs. IMO, the pandemic risks had over played shorting of stocks and the short covering began in earnest in mid November. 51 million shares short is still a lot, but the index balancing and new issue shares are going to blur such things going into 1Q 2021 reporting in April. Chasing of share price became the norm until LG and the Cliffs management team decided to sell their performance award options a few weeks ago, IMO triggering what has been the multi year high. If the earnings report tomorrow shows LG’s team bonus was justified, we might see that $18.75 +/-pps perform like a speed bump on the way into the mid 20s pps. I hope CLF doesn’t disappoint. There is a larger crowd watching now, with many new entrants with, I presume, high expectations, near term and through this commodities super cycle.
.
I wonder how long LG and the investment community has known that Cliffs was positioned to join the Midcap 400 index? Criteria for index entry were firmly planted after the December 2020 MT acquisition deal closure so index entry was likely part of the math. I presume the ETFs that trade the index will create net new demand for shares but I don’t know that. LG issuing new shares while MT sells about half of their acquisition deal shares feeds into this index fund rebalancing preparation. Also Cliffs pps is continuing to see a rebound after share price was artificially? dropped down during the pandemic. Now domestic and global demand for steel is surging. Quite a story playing out here and continuing into 2021.
Let’s address what we might get information wise during the CLF earnings call on 2/25.
First, confirmation of profitability under the new Cliffs business mode. What sort of forward PE ratio will be supported? What earnings growth?. The challenge for CLF communication is that there will only be three weeks of “steel company” post MT USA acquisition included in the 4Q 2020 reporting. I am interested in seeing how that “tip of the iceberg” of future Cliffs financials will translate to improved earnings in CY 2021. That means Cliffs needs to spell out how it’s internal supply of iron ore/pellets translates into standout good profit margins as steel prices have risen due to higher domestic and worldwide market demand. Ambiguity will likely translate to pessimism in analyst projections. LG needs to clearly spell things out to support realization of unrecognized shareholder value.
Second, what is the standing of acquired Cliffs steel production from AKS and MT? That is, what can produce to serve steel customer demand particulars? What needs to be revamped or upgraded to serve short or longer term customer needs, etc. will significant new internal investment be needed or is most capacity good to go?
Third, how will energy prices impact Cliffs production costs while “Build Back Better” and Green New Deal policies get impacted? Will there be net increased steel sales as a result of new policies? Improved profitability or a drag on profit margins? Impacts from recent storms include increased energy pricing. How well is Cliffs doing with managing those impacts?
Fourth, what is the long term demand projection for Cliffs steel products? That is, what is that metals super cycle expected to mean for Cliffs? What annual steel production does Cliffs project delivering over the next few years?
Finally, what will cash from net earnings be applied towards? Can investors expect to benefit via dividends, share buy backs (like MT announced) or ?
Other thoughts?
abracky, interesting that the Dow Jones article about MT discloses the pricing basis for the 40 million shares. Plugging into the numbers, the gross basis was $16.29 per share. I had been wondering how the CLF common shares delivered to MT in exchange for the North American assets sale to Cliffs would be handled. Now we know. The preliminary BOA prospectus for Cliffs shares had not yet shown pricing and it is unclear about whether shares are going to be parsed out for sales or sold in bundles to arranged buyers or ? Investors knew that MT had common shares they could sell at any time, so there is no surprise there seeing MT selling a little over half. The 20 million tack on of shares by Cliffs with maybe another 9 million surprised me, considering the earnings call is just a couple weeks out now. The use for the funds described makes sense. The timing... hmmm.
Cliffs restructuring a billion in debt for lower interest rates and pushing due date timing out for 8 to 10 years makes sense, since it will save Cliffs a lot of interest expense. I posted earlier about how that 4q 2020 earnings report and investors call can give Cliffs the opportunity to make their case for higher earnings for Cliffs in CY 2021, even though only three weeks in December 2020 will be reflecting financials for the whole Cliffs operation under its new structure. I will be disappointed if Cliffs drops the ball by being too cryptic about their new financial structure. We shall see. I observe Cliffs should have a good story to tell during their earnings call.
SG the article you linked was June 2020. Is flood risk status current?
Section 232 Steel tariffs were upheld by Court today when the legal challenge was tossed.
An interesting Cliffs reporting dynamic relative to FINRA short interest reporting requirements— The 4Q 2020 Cliffs earnings call on February 25 is the day after FINRA requires short interest reporting for what settled on February 12. That means that short interest action by hedge funds can have restructured itself a dozen times between short interest reporting and the earnings report that would help affirm underlying pps valuation. In my view, this age of computerized data management should support accelerating the reporting of short interest to investors. Perhaps, three business days after settlement is now easily supported? That would give banks time to clear payments etc.
Cut and pasted schedule from FINRA site:
2021 Short Interest Reporting Dates
Settlement Date Due Date1 Exchange Receipt Date
——
January 15
(Friday)
January 20 – 6 p.m.
(Wednesday)
January 27
(Wednesday)
——-
January 29
(Friday)
February 2 – 6 p.m.
(Tuesday)
February 9
(Tuesday)
——
February 12
(Friday)
February 17 – 6 p.m.
(Wednesday)
February 24
(Wednesday)
——
February 26
(Friday)
March 2 – 6 p.m.
(Tuesday)
March 9
(Tuesday)
——
March 15
(Monday)
March 17 – 6 p.m.
(Wednesday)
March 24
(Wednesday)
——
March 31
(Wednesday)
April 5 – 6 p.m.
(Monday)
April 12
(Monday)
——
April 15
(Thursday)
April 19 – 6 p.m.
(Monday)
April 26
(Monday)
——
April 30
(Friday)
May 4 – 6 p.m.
(Tuesday)
May 11
(Tuesday)
——
May 14
(Friday)
May 18 – 6 p.m.
(Tuesday)
May 25
(Tuesday)
——
May 28
(Friday)
June 2 – 6 p.m.
(Wednesday)
June 9
(Wednesday)
——
June 15
(Tuesday)
June 17 – 6 p.m.
(Thursday)
June 24
(Thursday)
——
June 30
(Wednesday)
July 2 – 6 p.m.
(Friday)
July 12
(Monday)
——
July 15
(Thursday)
July 19 – 6 p.m.
(Monday)
July 26
(Monday)
——
July 30
(Friday)
August 3 – 6 p.m.
(Tuesday)
August 10
(Tuesday)
——
August 13
(Friday)
August 17– 6 p.m.
(Tuesday)
August 24
(Tuesday)
——
August 31
(Tuesday)
September 2 – 6 p.m.
(Thursday)
September 10
(Friday)
——
September 15
(Wednesday)
September 17 – 6 p.m.
(Friday)
September 24
(Friday)
——
September 30
(Thursday)
October 4 – 6 p.m.
(Monday)
October 11
(Monday)
——
October 15
(Friday)
October 19 – 6 p.m.
(Tuesday)
October 26
(Tuesday)
——
October 29
(Friday)
November 2 – 6 p.m.
(Tuesday)
November 9
(Tuesday)
——
November 152
(Monday)
November 17 – 6 p.m.
(Wednesday)
November 24
(Wednesday)
——
November 30
(Tuesday)
December 2 – 6 p.m.
(Thursday)
December 9
(Thursday)
——
December 15
(Wednesday)
December 17 – 6 p.m.
(Friday)
December 27
(Monday)
——
December 31
(Friday)
January 4 – 6 p.m.
(Tuesday)
January 11
(Tuesday)
——