Back-of-the envelope calculations on CLF’s valuation—before and after a financing transaction:
At the current share price of $11.37, CLF’s enterprise value based on 233M shares outstanding and $1.8B net debt is approximately $4.4B, which equates to about 5.2x estimated 2017 EBITDA of $850M.
For the sake of discussion, let’s say CLF sells 57.5M* shares at $10.00/sh, raising net proceeds (after fees) of about $550M. Then, there will be 291M shares outstanding and $1.25B of net debt.
If the enterprise value after the (hypothetical) share offering above remains at the current value of $4.4B, the share price (by simple arithmetic) would have to decline to $10.80.
However, the improved balance sheet (i.e. lower leverage) resulting from the financing might justify a higher EBITDA multiple for the EV.
Again, for the sake of discussion, say that the improved balance sheet justifies an enterprise value of 6.0x estimated 2017 EBITDA. In that case, the EV would rise to 6x$850M = $5.1B. Subtracting the $1.25B of net debt from the $5.1B EV gives a market capitalization of $3.85B. With 291M shares outstanding, that equates to a share price of $13.20.
In other words, a share offering at a discount to today’s closing price might end up raising the share price rather than lowering it. This depends on the various assumptions above, of course.
The main point is that a financing transaction in the near future—while CLF’s business metrics are strong—may be a good thing for long-term shareholders.
*Assuming full exercise of the 7.5M-share underwriter’s option.
“The efficient-market hypothesis may be
the foremost piece of B.S. ever promulgated
in any area of human knowledge!”
