Key Takeaways From Cleveland-Cliffs’ Third Quarter Results

Cleveland-Cliffs Inc. (NYSE: CLF), the largest producer of iron ore pellets in North America, reported its earnings last week. The company posted consolidated revenues of $742 million compared to $597 million in the year-ago quarter, beating the consensus expectations by $20 million. Net income (Non-GAAP) was $438 million, excluding the sale of its Asia-Pacific assets, translating into earnings of $0.64 per share, significantly higher from $0.18 per share recorded in the same quarter of last year. The company reported adjusted EBITDA of $250 million, a 66% rise from last year. CLF’s 3Q results have benefited from a favorable impact of the tariff imposition on the steel imports in the US, as well as due to the discontinuation of its APAC operations.

We have a price estimate of $10 per share for the company, which is largely in line with its current market price. Our detailed shipment volumes and revenue per ton shipment that impact its price estimate have been added to our interactive dashboard – CLF’s Q3 Earnings and FY’18 Expectations. You can make changes to our assumptions to arrive at your own price estimate for the company.

Key Highlights From Q3 

CLF, after rising around 50% this year, touched a 52-week high last month largely due to 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 and is a supplier of highly customized higher grade iron units to steelmakers. The company experienced 6.5 million shipments in Q3, a 10% increase from the sales volume in the quarter a year ago, which is a sizeable portion of US iron ore pellet shipment. The realized revenues per ton came at $105.65 per ton in the third quarter, representing a 17% increase from the prior year period, primarily as a result of increased steel pricing and iron ore pellet premiums. The increase was partially offset by higher freight rates, though.

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 volume and revenue per ton outlook by 2.5% and 5%, respectively (assuming mid-points) in its last earnings (Q2) release and has maintained a favorable outlook in its Q3 release.

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 transaction comes at a cost $238 million, which brings down the adjusted EBITDA to $250 million in this quarter.

Furthermore, the company has reduced the investment expectation for its HBI plant by $25 million due to further development and refined timing of the project spending plans. The investment now stands at $175 million as compared to a previously expected $200 million. The other capital expenditures have been maintained.

FY’18 Outlook

The company expects current strong market conditions to support strong profitability through the next quarter and into 2019. The global supply-demand dynamics have shifted favorably to higher grade iron units producers.

CLF has maintained USIO (US Iron Ore) revenue rates in the range of $105 to $110 per long ton shipment, iron ore pellet shipments of 21 million long tons, and cash cost of goods sold and other expenses at $58-$63 per ton for the fiscal year 2018. The other expenses expectation has been maintained, too. We expect the average realized revenue rate to be $110 per long ton with total 21 million shipments.

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 has experienced 6.5 million shipments in the third quarter.

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