Cleveland-Cliff’s Focus On North America Could Drive Its Near Term Value

by Trefis Team
Cleveland-Cliffs Inc.
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Cleveland-Cliffs Inc. (NYSE: CLF), the largest producer of iron ore pellets in North America, touched its 52-week high of $12.46 per share recently. The company has benefited from the imposition of 25% tariffs on imported steel by the US government, resulting in a surge of around 50% in its stock price. The steel tariffs have led to a rise in the demand for domestically produced steel, in turn increasing the demand for domestically produced iron-ore (primary raw material used in steel production). Increased demand has translated into higher shipment volume and higher realized revenue per ton for Cliffs, boosting its top-line growth.

We have a $10 price estimate for the company, which is lower than the current market price. The charts have been made using our new, interactive platform. You can modify the key drivers to arrive at your own estimate by clicking for our interactive dashboard on Cleveland-Cliffs Revenue and Price Estimation.

The company has shut down its Australian and Asia-Pacific operations, and sold off its APAC assets as of August 28, 2018. This leaves the company with its North American operations to focus on. The production capacity of Cliffs’ US iron ore operations stood at 27.4 million tons of iron ore pellets in 2017, a substantial portion of total US iron ore production. We expect the division to record 21 million in shipments with an average selling price of $110 per ton, totaling to $2.31 billion revenue in 2018.

In order to support its North American operations, CLF has started the construction of its first HBI (hot-briquetted iron) plant at Toledo, Ohio, to cater to needs of EAF (Electric Arc Furnace) steel market in the great lakes region in Q2’18. The estimated investment in the plant is expected to be roughly $700 million and is slated to be completed by mid-2020. The plant will have an annual capacity of 1.6 million metric tons and is aimed at increasing the company’s reach in the EAF steel market. As per Cliffs estimates, the size of the HBI market is around 3 million metric tons in the great region lakes, which could replace the import market for EAF steel producers and enable them to lower their input costs.

Apart from enhancing its North American operations, Cliffs has recently announced that it intends to redeem its outstanding 5.90% senior notes due March 2020 and 4.80% senior notes due October 2020. The aggregate principal amount outstanding of the notes is approximately $211 million, which the company plans to redeem using its cash on hand. Lower debt obligations will reduce the company’s interest expense, resulting in higher profits. This will enhance the company’s shareholder returns, which will reinforce investor confidence in the company.

In conclusion, CLF’s sole focus on its North American operations, coupled with favorable tariff policies, are expected to lift the company’s profitability as well as value in the near term.


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