CLF - Cliffs Natural Resources

[Liberty]

Hitting 52 week lows, basically fallen off a cliff (pun intended). PE around 5.

 

Unless you believe iron ore is dead for a long time, this could be a great bargain. Company doesn't have too much debt, nice margins.

 

I haven't dug super deep into them, and I don't own any, but they're on my watchlist.

[Liberty]

I still don't own CLF and don't plan to because there are other things I like more currently, but they're still on my second tier watchlist, and they just hit new lows.

 

If you don't believe the world will end and don't believe China will slow down below the point at which iron ore starts to fall in price dramatically, this seems like a pretty good company to own for the long-term.  P/E at 4.28 right now, dividend yield 5.2%.

[AzCactus]

Hi Liberty,

 

Obviously lots has happened since your 2012 post.  The price of iron ore, managerial changes and obviously the stock price.  I was wondering if anyone in the forum is now long and had any thoughts about CLF looking 2 or 3 years down the road. 

[Williams406]

Hi Liberty,

 

Obviously lots has happened since your 2012 post.  The price of iron ore, managerial changes and obviously the stock price.  I was wondering if anyone in the forum is now long and had any thoughts about CLF looking 2 or 3 years down the road.

 

Dshachory,

 

I don't know if you're familiar with Altius, but in the investment ideas section, there is a lively if beleaguered group maintaining a stiff upper lip at present discussing iron ore with occasional comments on Cliffs' eastern Canadian properties, Bloom Lake and Wabush.

[ItsAValueTrap]

Cliffs turned into a circus thanks to activist investors.  I think that Gary Halverson was a fine CEO; they should not have fired him.  The CEO before him was awful.

 

The new CEO Goncalves has been behaving inappropriately:

http://www.businessinsider.com/cliffs-natural-ceo-calls-out-wells-fargo-analyst-2014-10

 

They may be pissing away money into the Bloom Lake mine.  I think they should have shut it down rather than lose money operating it.  It's totally ridiculous to mine at a loss.

[Liberty]

Hi Liberty,

 

Obviously lots has happened since your 2012 post.  The price of iron ore, managerial changes and obviously the stock price.  I was wondering if anyone in the forum is now long and had any thoughts about CLF looking 2 or 3 years down the road.

 

I wouldn't touch CLF with a ten-foot pole. Maybe there's a way to make money with it, I have no idea, but since 2012 I've learned that commodities and capex-heavy businesses weren't for me.

[DanielGMask]

"Analyst Outlines Why Cliffs May Be Worth Only $1" http://247wallst.com/commodities-metals/2014/12/17/analyst-outlines-why-cliffs-may-be-worth-only-1/

[anony208]

So anybody long on CLF yet?

[Gregmal]

https://seekingalpha.com/article/4256779-cleveland-cliffs-inc-clf-ceo-lourenco-goncalves-q1-2019-results-earnings-call-transcript?part=single

 

Lorenzo is the freakin man. Total Outsiders CEO

 

Just one of the few great pieces here:

"Lourenco Goncalves

 

Look, we are not going to talk about second HBI plant until we have the first HBI plan up and running and IRR accomplished and money in the bank. Remember, capital allocation is an exercise of optionality. At this point in time, the best IRR that I can get in this company is not building our second HBI plant, is buying back my stock. It's obvious that, if the market continues to deny value to our equity, the market in the stock exchange every day, I'm going to continue to buy back stock. And the domestic US market will starve for metallics.

 

They will beg for me to build a second HBI plant and the second HBI plant is not going to happen. Because it's -- again, it's an exercise of optionality and allocation of capital. Our second best use of capital right now would be paydown debt. And we proved that every quarter, it’s not just speech. Remember, we bought $124 million of stock in Q1, and we bought back $10 million of debt. So it's hard for me to tell you that buying back debt and buying back stock is at par, they're not. Buying back stock is a lot more rewarding for the company right now than buying back bonds.

 

HBI next, while we have one in the making. And you know well Curt, I like shortages. It's good to start with a shortage. So HBI number 1 is reality, we are gearing up to start to deliver great pellets to Toledo. But we are not in a hurry to build HBI number two."

[Spekulatius]

Lorenzo does a lot of smack talk that’s for sure. Rubs me the wrong way, I have heard this before - it reminds me a bit of the former CEO of TWI. Lorenzo has performed better, I admit as much.

CLF is a high cost producer though and their cost forecast conforms this. 70$/ton of ore is high cost. CLF will benefit from shortage caused by the Vale disaster, but this is a commodity industry and they will adjust. Nucor for example can use a lot of scrap input. Steel tariffs may not be permanent either and if customer get squeezed, so will get CLF. This could go either way, imo. If I were to make a bet in this sector, I would bet on Nucor.

[Pelagic]

Lorenzo does a lot of smack talk that’s for sure. Rubs me the wrong way, I have heard this before - it reminds me a bit of the former CEO of TWI. Lorenzo has performed better, I admit as much.

CLF is a high cost producer though and their cost forecast conforms this. 70$/ton of ore is high cost. CLF will benefit from shortage caused by the Vale disaster, but this is a commodity industry and they will adjust. Nucor for example can use a lot of scrap input. Steel tariffs may not be permanent either and if customer get squeezed, so will get CLF. This could go either way, imo. If I were to make a bet in this sector, I would bet on Nucor.

 

Laurenco does make the point that CLF produces a pellet product that is of a higher quality than the ore produced by Vale/BHP etc. so cost/ton may not be an apples to apples comparison.

 

Cliffs was labeled a high cost producer of iron ore, despite of actually producing a manufactured product called pellet, all while maintaining the highest safety and environmental standards in the entire industry. Meanwhile, Vale, Rio Tinto, BHP and Fortescue all rated to see who could get the lowest C1 cost number, as if that was their most important indication of success.

 

 

[Gregmal]

I've trimmed an outsized position a bit on the recent move over $11, but this is still very much a core position with tremendous long term potential. Lourenco continues to be a monster.

 

https://seekingalpha.com/article/4276128-cleveland-cliffs-inc-clf-ceo-lourenco-goncalves-q2-2019-results-earnings-call-transcript?part=single

 

 

Lourenco Goncalves

 

"Well, not today. I can say, never. We are always looking for opportunities. But these opportunities are far – few and far between. It's very difficult to exceed the returns of that and share purchased at this point. Remember, we made [indiscernible] decision to buyback stock. That was our – I explained that before I started. So we are always analyzing this M&A things, M&A possibilities. We are always going to analyze against alternative use of capital. We're not going to grow just be bigger. I'm comfortable with the size. I'm comfortable with what I'm doing. I'm comfortable with my industrial basis and I'm more than super excited about the fact that very soon we are going to be producing HBI.

 

So I don't need size to feel better. I feel very good the way we are. And I feel even better if I start returning money for the shareholders in a more massive way. We're returning a lot, $300 million. I will research analyst calls today the buyback the buyback of another company much bigger than us. They acquired back $127 million. He called that a strong execution. I did not even know that buying stock was execution. But execution for me is operating and selling stock. But anyway if $127 million for debt huge company is strong execution, 134 is a miraculous execution.

 

So we are returning a lot of money for their shareholders on that. Our dividend increased 20%. It's some may say, try to dismiss our dividend. They are only $0.05, they are just $0.06, well, and $10 that was the prevailing stock price and stock corrected, finally correct to a number that is too very low, but it’s a lot better than 10. Our use is 2.4%. So yes. So how many companies in our space delivers 2.4% huge on dividend. And this is growing. This will continue to growth. This money belongs to the shareholders. And especially the company like ours, with zero chance of having a balance sheet problem or like we had five years ago, risk of bankrupts and things like that. And 70 million share short, oh my gosh, I have already source of free money from this shorts. It's right there. They probably don't realized, but I continue to boil them like frogs in the pan full of water. It's as low but one day they don't realized that it's not a one pool it’s their death bath."

 

and

 

"We are extremely comfortable at this point because as soon as we have HBI up and running, our EBITDA minus $220 million is free cash. And what we do with the free cash in a company like Cliffs? You give it back to the shareholder through share buyback, through increased dividends, through special dividends. So that's what we're heading to here. We are not going to spend more than $100 million in cut backs a year after we have HBI done and up and running. And remember HBI needs –the HBI plant needs a lot less CapEx and are concentrating pelletizing pellets in the mind. So it’s a different anymore as far as maintenance CapEx."

[Gregmal]

Dividend plus 4c special announced today, as has been previously alluded to on the calls. Market of course didn't care and sent this back to 2017 levels. Added a bit here today.

 

Great older article of the God of Steel

 

http://investigations.debtwire.com/savior-ceo-how-heavy-metal-frontman-lourenco-goncalves-ditched-retirement-to-bring-cliffs-natural-resources-back-from-the-brink/

[Spekulatius]

Dividend plus 4c special announced today, as has been previously alluded to on the calls. Market of course didn't care and sent this back to 2017 levels. Added a bit here today.

 

Great older article of the God of Steel

 

http://investigations.debtwire.com/savior-ceo-how-heavy-metal-frontman-lourenco-goncalves-ditched-retirement-to-bring-cliffs-natural-resources-back-from-the-brink/

 

It’s probably not the dividend (which imo is too small to matter) - the blast furnace steel producers are absolutely getting wrecked (maybe from high iron ore prices, see US Steel or Stelco) while the electro steel/minimill player like Nucor or Steel Dynamics (which are using scrap as input) are doing better. I think there are some secular trends at work.

[Gregmal]

Yea I agree the dividend isn't really relevant, just one of the few noted data points from today. Although ironically, again, agreeing its not relevant, at 3.5%(not including any special dividends), its like double what plenty of people are getting to park their asses in bonds....all because they can't stomach volatility... amusing to me.

[Gregmal]

https://seekingalpha.com/article/4290821-cleveland-cliffs-inc-clf-ceo-lourenco-goncalves-annual-credit-suisse-basic-materials?part=single

 

I wish there were more CEO's like LG.

[Spekulatius]

https://seekingalpha.com/article/4290821-cleveland-cliffs-inc-clf-ceo-lourenco-goncalves-annual-credit-suisse-basic-materials?part=single

 

I wish there were more CEO's like LG.

 

He is a gambler. Odd deal:

http://s1.q4cdn.com/345331386/files/doc_presentations/2019/Cliffs-AK-Steel-Investor-Presentation.pdf

[Gregmal]

Ugh. I have a long standing hatred of AKS. This is totally the type of move that can destroy a company.

 

Rationale actually seems pretty simple IMO. There were contract negotiations and my guess is AKS was playing hardball so LG decided to buy them. This will either be brilliant or a major bust. Not surprised at all at the market reaction.

[Spekulatius]

Ugh. I have a long standing hatred of AKS. This is totally the type of move that can destroy a company.

 

Rationale actually seems pretty simple IMO. There were contract negotiations and my guess is AKS was playing hardball so LG decided to buy them. This will either be brilliant or a major bust. Not surprised at all at the market reaction.

 

I have occasionally looked at AKS and it seems like a structurally challenged business to me. I guess CLF wanted to squeeze them on pellet (their input) prices after the Vale disaster, but they had to push back because they have trouble to stay afloat as is. It looks like. A bad acquisition to me and the $120M in synergies for a $3B EV purchase seems too small.

[Gregmal]

Lots of insider buying at Cliff's since the deal.

 

Also, Mesabi just filed for arbitration against Cliff's subsidiary Northshore Mining. The subject matter likely relates to how they've been recognizing the DR Grade pellets being stored for HBI. It also explains the somewhat increased expenses incurred by the trust the last few Qs. So, the amount in question isn't really material for Cliff's but can sizably bolster future MSB payouts, which have already been rolling in around 90c even with the poor IO market conditions. We should get another 85-90c or so announced in January and Im anticipating something at least around 90c again in April. But these now become the FLOOR for whats received. Arbitration rulings could lift that, and reading the tea leaves, my guess is if the issue relates to when payments are recognized, Mesabi is saying it should be paid now, vs Northshore saying later(as in Q1/2) we will get a major increase anyway. Or LG could just do his thing and offer to buy Mesabi...

[Moht]

I think the calculus of this deal is really quite simple. The Toledo HBI plant cost over $800M. The next logical step was greenfielding Toledo #2 (or HBI #2 as LG said on a recent conference call).

 

Instead of greenfielding a new HBI plant, they purchased AKS and got their (recently shut-down) Ashland, Kentucky plant that can make Pig Iron with CLF's pellets. I'm not entirely clear how they'll physically move the pellets to Ashland, as it's pretty far from the mines...but I suspect you can float them down the Ohio River. But again, I'm not sure.

 

The reason to make HBI and Pig Iron is to feed the EAF's. EAF's have relied on pig iron from unreliable countries (Russia, etc) and the low hanging fruit of scrap metal in the US has long been picked.

 

And yes, I'm echoing LG because I think he's completely correct. They are going up the value chain - which doesn't necessarily mean producing steel long term. Instead, I think they'll be positioned as the key provider of feedstock (HBI and Pig Iron) for electric arc furnaces, not a commodity steel manufacturer. But time will tell. LG and CFO Keith Coci, who he worked with at Metals USA, will probably start shopping some AK Steel assets once the deal closes. We shall see. Lourenco created a ton of value at Metals USA, and I suspect he's going to do it again at Cliff's.

 

Disclosure: Long

[Spekulatius]

I am not sure what advantage CLF has venturing downstream. AKS was slowly going out of business. Now when CLF goes downstream, they will have to compete with the likes of Nucor and Steel Dynamics - good luck with that.

 

Perhaps they felt they needed to do that or their ore /pellets would have no where to go, since Nucor and Steel Dynamics etc. use scrap rather than Ore or pellets.

[Gregmal]

Yea Im in between here.

 

One, I do like LG and this is a combo jockey bet for me. I really wish this was the same type of setup just in another sector...I hate commodity type businesses and all the variables one needs to account for with them. But CLF has/had tremendous FCF, a large DTA, and somewhat of a pure play aspect to it. At least prior to the AKS deal. So I loved everything, other than these being an IO company who's end market is like 70% auto. But there were things that balanced that out for me. Over time, the cash flow should crush the debt and a repurchase would have been able to significantly cut the share count. The large short interest would also be rocket fuel.

 

Then IO came back down to earth.

 

LG is a great leader and stand up man, but I also happened to notice some inconsistencies and probably things Id consider outright lies which I dont like.

 

Now, taking on AKS, a company I ve always disliked, changed the thesis a bit for me. Yes, if it is a jockey bet, and a move like this is pure LG; you cant be that shocked by it. But I also think talking about an EBITDA ratio that relies on TTM, which was likely encompassing significantly higher prices than you'll realize NTM, is misleading and potentially hazardous. I cant even count how many well intentioned acquisitions Ive seen completely fuck up companies. So that changes my risk tolerance here and although it still could very well be a savvy move, I'm not really looking to be rocking a 5%+ position if there are that many things than can go wrong.

 

I am still long a reasonable position though, currently ~4%.

[ratiman]

The two biggest iron ore companies in the US - US Steel and CLF - have recently acquired steel companies. I'm not sure if it's just a coincidence or not. Although the CLF deal was with stock and the X deal with cash, both were essentially levering up. 

[Gregmal]

CLF assumed a large amount of debt and pension liabilities with AKS.