Cleveland Cliffs Inc (CLF)

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Cleveland-Cliffs: Downside Is The Time To Consider Entry

https://seekingalpha.com/article/4250897-cleveland-cliffs-downside-time-consider-entry

Higher iron ore prices and stabilized steel prices will provide support for Cliffs' pricing and cash flow. During the latest earnings call, Cliffs provided two pricing scenarios: a) $102-107 per ton (IODEX (iron ore) at $76/ton, HRC (hot-rolled coil) steel prices at $694/ton, pellet premiums at $67.50/ton) and b) $111-116/ton (IODEX at $90.5/ton, HRC steel prices at $683/ton, and pellet premiums at $67.50/ton).

Even at an average realized price of $100/ton, assuming production of 19.5 million tons (production of 500,000 will go to the HBI (hot briquetted iron) plant which is currently under construction) and costs of $64/ton, Cliffs will generate $700 million of cash. This cash position will be boosted by a $117 million tax refund due in Q3 2019. On the cost side, the company will spend $525 million on capex ($425 million for HBI plant, $70 million sustaining capex, $40 million Northshore upgrade), $100 million on SG&A and $100 million on cash interest on debt. Thus, even at a year of high spending on growth and with a modest realized price assumption, Cliffs is set to operate fully within its means.

4. The market is completely ignoring the future HBI plant. Analyst estimates actually decrease for 2020, the year when the HBI plant should be completed sometime in the middle of the year.

Cliffs has increased the HBI plant capacity from 1.6 million tons annually to 1.9 million tons - a sign of strong demand. Also, investors should keep in mind that the plant will consume Cliffs' pellets at a rate of 2.8 million tons per year as per the earnings call. These pellets will be taken off the market, a move that, all else equal, should be supportive for the prices of the remaining 17.2 million tons of pellets. Interestingly, Cliffs spoke about the possibility of returning Empire Mine back to life. This could cost $600 million over three years, with potential production of 3.2-3.5 million tons annually. No decision on Empire has been made yet.

5. Valuation of Cliffs remains strange to put it mildly. The stock is trading at less than 7 forward P/E. As usual, Cliffs will need support from actual earnings results to show the market that the company's valuation is too low. I wouldn't put much faith into Q1 earnings report since the first quarter is the weakest for the company and is not representative of the numbers that are achieved later in the year, but Q2 earnings report should showcase the company's cash flow and earnings power.