Cleveland Cliffs Inc (CLF)

[chmcnfunds]

Bullish SA article may be powering the action:

Cleveland-Cliffs: Recent Debt Offerings Are Signs Of Growth

Dec. 12, 2017 10:30 AM ET| About: Cleveland-Cliffs, Inc. (CLF)
Vladimir Zernov

(5,319 followers)

Summary
I discuss the recent debt offerings and their pricing.

The conversion price of convertible senior notes seems low to me, but interest rates on both issues are ok.

Cliffs buys former Essar property, preparing for future growth.

As the majority of readers know well, Cleveland-Cliffs (CLF) has recently announced offerings of $400 million senior secured notes due 2024 and $275 million of convertible senior notes due 2025. Convertible notes received the most attention as they potentially mean dilution for common Cliffs’ shareholders. Not surprisingly, Cliffs’ shares got initially hit on the news. However, the stock started to rebound as the market digested the news and also as Cliffs’ shares attracted buyers at the very strong support level in the whereabouts of $6.

(click link below for info

First, let’s start with the convertible notes due 2025. These notes received an interest rate of 1.50% and the conversion price of $8.17 per share. In my opinion, the conversion price is low and guarantees dilution in the future. Should underwriters exercise their over-allotment option in full, current Cliffs shareholders will be diluted by 13%. However, I do not expect that holders of convertible bonds will convert them into equity immediately after the price exceeds $8.17 per share, so any dilution is likely postponed to 2019 and beyond. Therefore, I see no reason to change my earnings expectations for the next year. Neither does the Street: analysts have kept next year's earnings estimates flat for quite some time:

(click link below for info


Source: Yahoo Finance

The $400 million of senior secured notes due 2024 received an interest rate of 4.875%. This is a major improvement compared to the company’s previous offerings, which is reflecting Cliffs’ increased financial strength. Back in summer, Cliffs offered $575 million of senior guaranteed notes which received an interest rate of 5.75%. After the two offerings, Cliffs’ debt will look like this:

(click link below for info


Some investors will argue that increasing debt is not a good thing to do. However, Cliffs is transitioning for a company battling for survival into a growth-focused company and some leverage is unavoidable. Importantly, the company won’t have big debt maturities until late 2024, so it will have almost 7 years to improve its position.

Cliffs has previously stated that it intended to use the proceeds from the offerings to finance a substantial portion of its hot briquetted iron (HBI) capital project. However, the recent news show that there may be more things in play. The company has just stated that it completed an acquisition of certain real estate interests in Itasca County in Minnesota, which were previously leased by Essar Steel Minnesota. Cliffs’ CEO, Lourenco Goncalves, commented: “We are enthused about the acquisition of this property, which came into play after Chippewa failed to follow through on its obligation to obtain financing and a bankruptcy exit for Mesabi Metallics by October 31. Despite several botched attempts by others, it is now the time for Cleveland-Cliffs to sit at the table with other responsible parties and develop a realistic solution for this site”.

Some time will pass before the market starts valuing Cliffs as a growth company rather than an iron ore miner in battle for survival. However, the trend of the business is to the upside and the stock will ultimately follow. The support that Cliffs’ shares received after the offerings’ news confirm once again that the bottom was previously set at $5.60. Should stock fall lower than $5.60 for whatever reason, I’d consider the bullish thesis busted. Should the bullish scenario continue to slowly develop, the conversion price of $8.17 will serve as the first important upside target.

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Disclosure: I am/we are long CLF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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https://seekingalpha.com/article/4131309-cleveland-cliffs-recent-debt-offerings-signs-growth

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