Cleveland Cliffs ($CLF) — Quick Value (7/19/21)

Quick Value

Cleveland-Cliffs Inc ($CLF)

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There is quite a bit going on here so this is going to be a quick synopsis / summary of notes on the situation…

Cliffs is a natural resources company that was previously in the business of making iron pellets used as a feedstock for blast furnaces in the steel making process — they primarily sold to big steelmakers like AK Steel. I say “previously” because in 2020, they went on a hunting spree and acquired AK Steel and the US steel operations from Arcelor Mittal to become a vertically integrated steel maker.

The steel making industry consists of large blast furnaces (US Steel, AK Steel, etc.) and electric arc furnaces (EAF) used by the mini-mills like Nucor and Steel Dynamics. EAF is less capital intensive and has been taking share from blast furnaces for many years.

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…that should catch us up to today…

  • Cliffs has an aggressive and controversial CEO (Lourenco Goncalves) making big changes in the industry
  • In 2020 — completed acquisition of AK Steel for $3bn and Arcelor Mittal USA for $3.3bn — these added $535m and $700m in 2019-level EBITDA…
  • Cliffs holds a potential competitive advantage in controlling a key feedstock for the steelmaking process
  • Steel prices are up significantly over past year — prices are near $1800/ton vs. historically in the ~$600-700/ton neighborhood
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  • Leading to robust financial performance in 2021 — and raising questions about the sustainability of performance into 2022 and beyond
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  • Management is using all cash flow to repay debt from the 2 latest acquisitions — they intend to be debt-free at some point in the next 1-3 years (no specific timetable given)
  • 2021 guidance calls for $5bn in EBITDA — nothing close in company history compares…

CLF 2021 EBITDA guidance

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There are about 500m shares outstanding and a $20 share price for a $10bn market cap. There’s about $5.7bn in net debt as of Q1 2021 and that ignores any pension liabilities or preferred stock outstanding. Call it a $16bn enterprise value.

Following Q1 results, management raised 2021 EBITDA guidance from $4bn to $5bn. This is under an assumption of $1175/ton pricing for the remainder of the year. They realized ~$900/ton in Q1 and $880/ton in 2020 (pro-forma for the latest acquisitions).

If 2021 results hold, then this is trading at ~3.2x EV/EBITDA. Estimates don’t think that’s a possibility… 2022/2023 EBITDA estimates look like $3.4bn and $2.3bn…

Best of breed competitor Nucor ($NUE) is staring at a similar drop-off from 2021 to 2023 but that stock is currently trading at >8x 2023 estimates vs. less than 7x for Cliffs… Both Nucor and Steel Dynamics ($STLD) carry very little leverage. Could be an interesting dynamic if Cliffs does the same…