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

Cleveland-Cliffs Inc. (NYSE: CLF), the largest producer of iron ore pellets in North America, will report its fourth-quarter and full-year 2018 results on February 8, 2019. The market expects the company to report an EPS (Non-GAAP) of $0.62 for the quarter. Revenue is expected to be $746 million in Q4 2018 as against $601 million in Q4 2017. For the full year 2018, the consensus estimate for revenue stands at $2.42 billion and that for EPS at $2.14, in comparison to $2.33 billion and $0.43, respectively, in 2017.

We have a price estimate of $10.28 per share for the company, which is higher than its current market price. You can view our interactive dashboard – How Will Cleveland-Cliffs End 2018? – and make changes to our assumptions to arrive at your own price estimate for the company.

CLF’s volume from the North American Iron Ore operations is expected to see a healthy growth of 12.5% to 21.0 million tons, from 18.7 million tons in 2017. After achieving sales volume of 6.5 million tons in Q3 2018, shipments are expected to pick up even further in the last quarter of the year as mills will stock up ahead of winter. Though there was a decline in international iron ore prices in mid-2018, CLF’s operations are more closely linked to demand-supply dynamics within the US, which remained favorable for the company. Thus, we expect the revenue per ton to rise to $112.90 due to favorable price mix, increased demand from domestic steel companies, and higher premium for high grade iron ore pellets. Higher shipments and prices would likely lead to a 27% rise in revenue from North American operations.

CLF sold almost all the assets of its APAC operations to Mineral Resources Limited due to decreasing prices for lower grade ore and the quality of its remaining reserves. APAC segment results appear as discontinued operations in the financial statements of the company. Thus, 100% of the company’s revenue is now contributed by its North American Iron Ore segment. The sale of its loss-making APAC operations and other cost reduction measures adopted by CLF, would lead to an increase in margins for the company.  Additionally, in October 2018, CLF redeemed all its outstanding Senior Notes due 2020, the principal balance of which was $211 million. This redemption would reduce the interest expense and provide a further uptick to the company’s margin. Net Income margin is projected to rise significantly to ~30% in 2018 (31.7% for the first 3 quarters of 2018) from 15.7% in 2017.

By 2020, CLF expects to be the sole producer of HBI (hot-briquetted iron) in the Great Lakes region with the development of its first production plant at Toledo, Ohio. Cliffs is the dominant player and sole supplier of merchant iron units to integrated blast furnace clients in the Great Lakes. The Toledo HBI plant will extend the company’s market reach towards EAF (electric arc furnace) steelmakers. The Toledo plant, which has a nominal capacity to produce 1.6 million metric tons of HBI per year, will likely begin commercial production by mid-2020. The company expects to spend about $700 million for this project. CLF is also upgrading its Northshore plant to replace up to 3.5 million long tons of blast furnace pellet production with DR-grade pellet production, which would likely be used in the company’s Toledo plant later. These new projects are expected to provide a bright outlook for the company and higher returns to investors.

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