Cleveland-Cliffs forecasts Q2 headline earnings ‘multiple times higher’

U.S.-based integrated steelmaker Cleveland-Cliffs (NYSE: CLF) has signalled to the market it expects to report first-quarter 2023 revenues of about US$5.2 billion after it shipped 4.1 million net tons of steel.

The revenue forecast is slightly below the US$6 billion of first-quarter income recorded last year and dead-on with average analyst estimates for the current period.

The Ohio-based company is North America’s largest flat-rolled steel producer and controls a vast network of mines and shipping lanes on the Great Lakes carrying iron ore and iron ore pellets between mines, smelters, and steel plants.

The company said in its Apr. 11 preliminary Q1 results announcement that its adjusted underlying earnings (EBITDA) were likely to be about US$200 million, “significantly higher” than the US$123 million reported for the previous quarter due to unit cost reductions.

“As we start the second quarter and continue to execute on further cost reductions as planned, we are also enjoying the full benefits of the meaningful price increases Cleveland-Cliffs has implemented for this year, which cover contracts with automotive and non-auto clients, as well as transactional sales,” chairman, president and CEO Lourenco Goncalves said in the statement. “With that, we expect Q2 EBITDA will be multiple times higher than Q1 EBITDA.”

On Apr. 3, the company announced it was increasing its spot market base prices for all carbon hot rolled, cold rolled and coated steel products by a minimum of US$100 per net ton, effective immediately with all new orders. Its minimum base price for hot rolled steel is now US$1,300 per net ton.

The company will announce its full first-quarter 2023 earnings results after the U.S. market closes on Apr. 24.

Debt repayment

Fitch Ratings on Tuesday expressed concern over elevated risk as Cleveland-Cliffs announced that it had priced US$750 million in senior unsecured guaranteed notes due in 2030. The funds generated will repay a portion of borrowings under its asset-based revolving credit facility.

Fitch assigned the notes a rating of ‘BB-‘/’RR4’, meaning Fitch expects “an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists that supports the servicing of financial commitments.”

The rating agency monitors the potential for significantly weaker steel fundamentals resulting in materially lower than forecast free cash flow generation, rising leverage and falling margins as key indicators of downside risk.

Nevertheless, Cleveland-Cliffs maintains good liquidity. As of Dec. 31, 2022, it had US$26 million in cash and cash equivalents and US$2.5 billion available under its US$4.5 billion asset-backed revolving credit facility due in 2025. Cliffs has no material maturities until 2026.

According to the company, the transaction is leverage and interest-expense-neutral, extending the debt maturity profile. It expects to maintain over US$2 billion in pre-payable or callable debt, which it expects will continue to decrease with its free cash flow generation.

In a rating commentary Tuesday, the agency noted that Cleveland-Cliffs had been engaging in significant debt repayment over the past few years. The company benefitted from very high steel prices in 2021-2022, which led to over US$7.8 billion in EBITDA and US$3.3 billion in Fitch-calculated free cash flow over the two years.

Fitch estimates the company used cashflow mainly for debt repayment, paying down roughly US$2 billion from the end of 2020. Further, Cleveland-Cliffs allocated about US$1.25 billion to share repurchases and made a roughly US$780 strategic acquisition.

In Nov. 2021, Cleveland-Cliffs acquired Ferrous Processing and Trading Company (FPT) for about US$780 million, handing it control over one of the largest processors and distributors of prime scrap in the U.S. Its market share represents about 15% of the domestic prime scrap market and would allow it to process about 3 million tons of scrap per year.

At US$18.35 per share, Cleveland-Cliffs is down over 40% in the past 12 months, achieving a low of US$11.83 and a high of $32.72. It has a market capitalization of US$9.5 billion ($12.8 billion).