What To Expect From Cleveland-Cliffs’ Third Quarter Results?

Cleveland-Cliffs Inc. (NYSE: CLF), the largest producer of iron ore pellets in North America, will report its third-quarter earnings on 19th October 2018. The market expects the company to report an EPS (Non-GAAP) of $0.66 in comparison to $0.18 reported a year ago. The consensus estimate for revenue stands at $721 million for the quarter, 3.2% higher on a year-on-year basis. CLF’s 3Q results are likely to benefit from a favorable impact of the tariff imposition on the steel imports in the US, as well as through the discontinuation of its less profitable Asia-Pacific (APAC) operations.

We have a price estimate of $10 per share for the company, which is lower than the current market price. Our detailed shipment volumes and revenue per ton that impact its price estimate have been added to our interactive dashboard – Will CLF’s Current Price Momentum Continue After Q3 Earnings. You can make changes to our assumptions to arrive at your own price estimate for the company.

Key Factors That Impacted CLF’s Stock Price In The Third Quarter 

CLF, after rising around 50% this year, touched a 52-week high of $13.10 last month due to the tariffs imposed on iron and steel imports. The tariffs have proven to be beneficial for Cliffs as it operates five iron ore mines in the US. The steel tariffs have increased the demand for domestically produced steel, increasing the demand for domestically produced iron-ore (primary raw material used in steel production). Increased demand has translated into higher shipment volumes and higher realized revenue per ton for Cliffs. Consequently, we expect Cliffs to remain a prominent beneficiary of the ongoing trade war, having a notable asset exposure in the US.

Although international iron ore prices came under pressure in the third quarter due to the unfavorable trading environment, pricing mechanisms for Cliffs’ US operations are more closely linked to demand-supply dynamics in the US, which remained favorable for the company. Thus, backed by these favorable market developments, Cliffs raised its 2018 North America sales and revenue per ton outlook by 2.5% and 5%, respectively (assuming mid-points) in its last earnings (Q2) release.

Apart from experiencing major expansion in its North American demand in the last two quarters, Cliffs has recently announced its intent 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 in the upcoming quarters, which is likely to reinforce investor confidence in the company.

Further, the company has shut down its less profitable 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. Out of 21 million shipments the company plans to ship in 2018, the company expects 6-6.5 million shipments in the third quarter.

Additionally, to meet the excess demand in North-America (company’s sole operations now), CLF has started the construction of its first HBI (hot-briquetted iron) plant at Toledo, Ohio, to cater to the 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 lakes region, which could replace the import market for EAF steel producers and enable them to lower their input costs.

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