What To Expect From Cleveland-Cliffs’ Q1 2019 Results?

by Trefis Team
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Cleveland-Cliffs Inc.
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Cleveland-Cliffs (NYSE: CLF) is set to announce its Q1 2019 financial results on April 25, 2019, followed by a conference call with analysts. The company’s top line is expected to shrink considerably as the first quarter is the weakest quarter for the company in terms of revenues, with vessel deliveries not occurring during the winter months because of the closure of the Soo Locks and the Welland Canal. Sales are much higher in the remaining three quarters of the year, as observed in FY 2018. This trend is expected to continue going forward. CLF is expected to see its revenue decline by about 40% (y-o-y basis) in Q1 2019, mainly due to loss of volume and revenue following the sale of the company’s APAC operations in 2018. EPS has followed the same trend as revenues over the last four quarters. Market expectations are for the company to report a loss of -$0.13 per share in Q1 2019 compared to a loss of $0.29 per share in Q1 2018. Earnings for the quarter are likely to remain negative due to lower revenue. However, on a y-o-y basis, earnings are expected to show improvement with the sale of the loss-making APAC business.

We have summarized the key expectations from the announcement in our interactive dashboard – How is Cleveland-Cliffs expected to fare in Q1 2019 and what is the outlook for the full year? In addition, here is more Materials data.

Key Factors Affecting Earnings

Iron Ore Revenue

  • Revenue from iron ore sales remained strong in 2018 due to higher volume and premium pricing.
  • In spite of selling the APAC business in mid-2018, volumes remained high in the last three quarters of the year, driven by healthier customer demand, with two additional customer contracts that did not exist in 2017.
  • Since volume sold is very low in the first quarter due to the annual closure of the Soo Locks limiting shipment on the Great Lakes, and forcing CLF to limit deliveries to rail only, iron ore shipment is expected to be further adversely affected in Q1 2019 due to the loss of volume from APAC.
  • Environmental curbs in China led to premium pricing for CLF’s high-grade ores in 2018. However, in the latter half, prices started declining as steel mills in China started offloading inventories and shedding capacity due to low margins.
  • However, price realization is expected to improve in Q1 2019, in line with the increase in global price of iron ore per ton due to supply constraints, which were exacerbated by cuts in production by Vale due to a major accident at its site in Brazil.

Profitability

  • After making losses in Q1 2018, the company’s margins have sharply and continuously risen throughout 2018.
  • This was mainly due to tax benefits received and lower interest expense following the early repayment of Senior Notes due 2020.
  • Additionally, the sale of the loss-making APAC operations led to a significant fall in cost of sales for most of the year.
  • Though we expect margins to remain negative in Q1 2019 due to very low volume and absence of tax benefits, margins are likely to see an improvement on a year-on-year basis.

Full Year Picture

  • For the full year, we expect revenues to decrease by about 3% to $2.26 billion in 2019 from $2.33 billion in 2018.
  • Lower revenue is likely to be a reflection of loss of volume from the divested APAC business.
  • Though CLF is expected to receive $117 million in tax refunds in Q3 2019, it is still much lower than the benefit of close to $490 million received in 2018, which would in turn translate into lower margins for the year.
  • We expect net income margin to come in at 23.5% in 2019, lower than the previous year, but much better compared to 2016 and 2017, due to the closure of low-margin operations and lower interest outgo.

Trefis has a price estimate of $13 per share for Cleveland-Cliffs’ stock, which is higher than its current market price. We believe that premium pricing for the company’s high-grade ores, along with rising margins, is expected to provide a boost to the stock price in 2019. Additionally, expansion of production capacity from 1.6 million metric tons to 1.9 million metric tons at the new HBI (hot-briquetted iron) plant in Great Lakes and upgradation of its Northshore plant to replace up to 3.5 million long tons of blast furnace pellet production with DR-grade pellet production, is also expected to support growth in the stock price going forward.

 

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