CLF: Cleveland Cliff

Steel company. commodity cycle, etc. They recently purchased Arcelor Mittal USA operations and the leading prime scrap (which is generated by manufacturing activity, i.e., some of the metal used in manufacturing becomes scrap and it in turn goes back into manufacturing) company.

They are carrying about $5B debt. If the current pricing continues for a year (we don’t know it will), they will be basically completely debt free. And they will be generating Free Cash Flow of 35% to 40% of their market cap.

They are biggest steel suppliers to Auto industry and their legacy supply contracts are coming for renewal. Which should set them up with a significant higher price baked into their near-term contracts. Even if the current steel price declines they should be generating FCF in excess of $2 to $3 B in variety of scenarios.

What commodity will do is beyond my skill. Also, steel is a global commodity, and China is a big producer. In the past, China has dumped steel in US for loss, because they produced too much. So that is another x-factor. US FED interest rate hike may impact global recovery, which in turn can impact global prices.

Once they bring the debt below 1x of EBITDA they may put the excess cash into buyback. There are various scenario’s in which the share price will be much higher than today’s close of $17. On Jan 5th it was trading $24 and it closed today at $17. So expect lots of volatility. Those who can stomach volatility, a small 1% or 2% position can return a quick 20% to 30%.

I have in the past bought around $20 and sold at $25 multiple times last year, and currently sold significantly underwater Feb $20 put, and my $17.5 covered call expired leaving some shares. MY total exposure is still < 1%. So my views may be biased.

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Thanks Kingran. A good find. Hard to believe a company with a fwd PE of 3. The infrastructure bill should add to demand in the next few years. However, if import tariffs are reduced it might affect prices. US and UK are currently negotiating on tariffs.

Steel names are sharply lower across the board, a day after Stelco Holdings (OTCPK:STZHF -3.8%) CEO Alan Kestenbaum warned of “significant oversupply and significant shrinkage of demand” affecting the industry.

Jim Lebenthal, chief equity strategist at Cerity Partners, is out defending Cleveland-Cliffs on CNBC, saying the stock will “beat the S&P 500 mightily over the next year, but with that sort of return volatility comes.”

“There are about to be massive share buybacks because they are almost done deleveraging the balance sheet,” Lebenthal says about the company.

https://seekingalpha.com/news/3790415-steel-producers-plunge…

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Hard to believe a company with a fwd PE of 3

Classic cyclical multiple. Cyclical companies have low PE on peak cycle and high PE at the bottom of cycles. I don’t put much weight on PE.

What I focus is their free cash flow generation. My biggest worry is will they use all these cash flows on M&A? Will they ever reward shareholders? How much debt they are going to pay down? If they paydown too much debt then they are preparing the balance sheet for empire building. The CEO’s kid is CFO, so there is a real risk that they are focused on empire building for the Junior.

There are about to be massive share buybacks because they are almost done deleveraging the balance sheet

I saw the video, his confidence is great. Here is the reality.

If you go back to 2009 and looked at HRC steel prices, they ranged between $400 to $900, the average is about $550. After dropping to $450 pandemic low, the prices rose to $1915 in August. And it is has come down to $1400.

Now, the estimates for 22, 23 are assuming the price stays above $900. If it drops to $700, the profitability is severely eroded.

The reason I am posting this is to make sure anyone invests here understands the commodity nature of the business, commodities have cycles, what management does on up cycle is important, and lastly how elevated current prices are. The current prices are more than twice of the last decade average, and almost twice of the next decade forecast.

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Nucor (NUE) is, of course, the cream of the crop. Outperforms many of the fancy stocks. Impressive business. Kinda late in the cycle to buy it, but if it drops more, could be worth a look.

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CLF announced earnings today morning. Results are below consensus, revenue, EPS, EBITDA, all. Pricing is little bit softer and the company pulled ahead the maintenance (which takes downtime and expensive) because of their main auto customers are right now suffering supply chain issues (chip shortage).

Guidance is in-line and the company announced $1 billion share repurchase.

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CLF is moving up like Oil. Wow. I picked up some around $18, they are almost 50% higher in 7 or 8 trading days. I want to take profits, but, hey let it run. May be my beer money is covered for the year.

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Nice call ----

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I had no idea they are going to make such a strong move. I was actually hoping for $20 to $22 move. Better be lucky. Anyways, rest of my portfolio is losing so much money, these gains are nothing.

Eventually the commodity cycle broke. After hitting $34 in early April, CLF steadily declined to $15 yesterday, and in pre-market showing $.5 gain. I think the price has fallen so much, may be time to trade this stock now. I think CLF has locked in contracts with Auto manufacturers and will still be profitable at these steel price. Also, auto demand is still there and will be okay even in recession. For me these cyclicals will be a very small position.

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CLF has earnings this Friday. The steel prices have come down very sharply post Russia-Ukraine war high’s and that is reflected in the share price. Will steel bottom here or can go even further? What are company’s expectation on EBITDA and cash generation? The stock is pretty cheap on EV/EBITDA, EPS. It will be interesting to see what they have to say.

Pretty much I closed all my positions, including the puts I sold last week. After earnings I will look into this. Thought tempted to write some $14 or $13 puts.

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The story remains same. In the next 6 quarter they can generate $7 to $8 per share free cash flow. That’s on a stock price of $15.5. The company is buys paying down debt, doing cap-ex investment, buying a scarp business, etc with the cash they generated in the last 18 months.

outside of net profits, their inventory is $5.7B, the inventory build up is due to variety of factors, but they will reduce the inventory, and convert it into cash, in coming quarter. This alone is expected to release $2 B, they can reduce as much as $2.5 B, I am not sure they will get that aggressive.

They will continue to pay down debt, buy debt in open market, but at some point some cash is going to go towards buying back shares. Especially if the share price stays at these level. Of course it will be lumpy, but expect at least $1 B buyback in the next 6 quarters and $2 B debt reduction. If they cannot reduce debt that much, then buybacks will be higher.

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