Cleveland-Cliffs’ 2017 in Review

Cleveland-Cliffs’ (NYSE:CLF) stock benefited from the stabilization of iron ore prices in the beginning of the year, complementing the success of the company’s debt reduction efforts. Moreover, the improvement in Cleveland-Cliffs’ fortunes mirrored an improvement in the fortunes of the U.S. steel industry over the course of the year. Regulatory intervention by U.S. authorities against unfairly traded steel imports and the stated policies of the new White House administration have boosted the prospects of the domestic steel industry throughout the year. The improved prospects of the domestic steel industry have translated into an improved business environment for Cleveland-Cliffs.

(Source: NASDAQ)

Iron Ore Spot Prices (Source: Y Charts)

Strengthening of Cleveland-Cliffs’ U.S. Operations

Cleveland-Cliffs’ U.S. operations benefited from the favorable business conditions for steelmakers in 2017, with higher demand for iron ore, a raw material used in the production of steel, by the company’s customers driving growth in the shipments of the U.S. Iron Ore division. The company’s 9 months shipment volume was 17% higher compared to the same period last year. In addition, the U.S. Iron Ore division reported a sharp increase in realized prices, in contrast to the decline reported by the Asia Pacific Iron Ore division. Realized prices for the first 9 months of the year from the company’s U.S. operations were 17% higher compared to 2016, thus enabling the company to realize higher revenues. ^[1]

The favorable business environment was attributable to the imposition of anti-dumping duties on steel imports from a number of countries including major exporters to the U.S. such as South Korea and China by the U.S. authorities coupled with the impact of Chinese curtailments on industrial production. China’s cut in steel production has reduced the global steel supply glut to a certain extent and thus lessened the U.S. dependency on cheap Chinese steel imports and boosted the demand environment for domestic iron ore.

Effective Debt Reduction

The aim of the new management of the company has been to effectively reduce its debt in order decrease the interest burden on the company. Cleveland-Cliffs, in its 3rd quarter results, reported net debt of $1.4 billion, a 30% reduction from the prevalent debt level at the end of the third quarter 2016. In addition to that, the company’s 9 months adjusted EBITDA has improved by 92% this year and thus places the company in much better shape to bear its interest and principal burden in the upcoming years. ((Cleveland-Cliffs Q3 10Q, Cliffs Quarterly Results))

The Road Ahead

President Trump is expected to take a tough stance against unfairly traded steels depending on the outcome of the investigations pertaining to Section 232. Moreover, the President has also outlined plans for a $1 trillion overhaul of domestic infrastructure. ^[2] which seems more likely to be realized in 2018 since the tax reform initiative has been realized. This raises the outlook for U.S. steel demand over the next few years, boosting the prospects and stock prices of domestic steel producers. With a more favorable business environment for steel producers expected over the next few years, Cleveland-Cliffs, the largest iron ore supplier to the domestic steel industry, should benefit from the same.

We have $6.23 price estimate for Cleveland-Cliffs which is slightly below the market price.

Have more questions about Cleveland-Cliffs? See the links below.

• A Closer Look At Cleveland-Cliffs $700 Million HBI Plant
• Cleveland-Cliffs Inc Q3 2017 Earnings Review: Sustained Performance of US Operations Drive Earnings

Notes:

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1. Cleveland-Cliffs Q3 10Q, Cliffs Quarterly Results [↩]
2. Trump’s $1 Trillion Promise vs. Congress, Wall Street Journal [↩]