Cleveland-Cliffs’ Q1 2018 Earnings Review: Share Price Rises With Enhanced North America Outlook

Cleveland-Cliffs (NYSE: CLF) reported its first-quarter results on April 20. The company reported better than expected revenue for Q1, however, EPS was lower than market estimates largely as a result of unusual mine closure expenses with respect to its Asia Pacific (APAC) operations. However, despite the earnings miss, investors favored the stock due to its enhanced 2018 outlook which led to a surge in its stock price. Cliffs’ reported an EPS of $-0.29 and a revenue of $239 million in Q1 2018 vs an EPS and revenue of  $-0.11 and $462 million a year ago.

Cliffs’ Q1 sales volume from its U.S. operations were almost 50% lower year-on-year (y-o-y) largely reflecting the company’s change in its revenue recognition standard. However, a significant increase in iron ore prices had enabled the company to increase its sales margin and its adj-EBITDA despite the decline in its volume. Higher revenue per ton was significantly driven by a favorable environment for steel in the U.S., further supported by “higher pellet premium and a favorable customer mix.” Sales price per ton for U.S. operations increased by 32% y-o-y and consequently sales margin and adj-EBITDA was up by 26% and 20% y-o-y, respectively. These results reflect the increasing strength of its U.S. operations and the potential turnaround for Cliffs’ operations in the current year.

 Cliffs’ APAC operations weighed on results in Q1 as anticipated. Apart from the fact that both sales volume and revenue per ton were down by greater than 40% y-o-y, additional closure expense resulted in a negative EBITDA of $39.6 million for the division in Q1. Cliffs had recently revealed its plan to close its APAC operations by June 30th, 2018, reflecting the increasing unfavorable business prospect prevalent for its APAC division in the seaborne iron ore market. The expected closure would result in a significant amount of closure expenses, however, the company established that the APAC division will be reported as a discontinued operation from the next quarter onward and thus its results no longer will be a part of the company’s continuing operations.

Furthermore, based on the recent favorable developments in the U.S. market, the company has increased its sales and revenue guidance for full-year 2018. The company now expects its full-year sales volume to be 20.5 million long tons compared to 20 million long tons guided in the previous quarter. Additionally, revenue per ton is expected to range between $102-$107 per ton, a 5% increase from its initial guidance (assuming mid-points), given that full-year iron ore prices, steel prices, and pellet premiums will average at the current year-to-date (YTD) average. The management also reiterated its confidence on increased EBITDA and cash-flows for the company in 2018 based on these developments. Thus, per the updated outlook, we have a revised fair price estimate for Cliffs’ to $7.60. You can make changes to our assumptions in our interactive dashboard by modifying our key estimates.

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