Cleveland-Cliffs (NYSE: CLF) is an American commodity company, founded in 1847. North America's largest producer of flat products and iron ore pellets.
About company
The main activity of the company until 2020 was the extraction of iron ore, but last year after, how Cleveland-Cliffs acquired the steel capacity of other companies and completed the construction of its own plant in Toledo, it has been repurposed to become a vertically integrated, high value-added steel enterprise.
M&A-transactions. 13 March 2020 Cleveland-Cliffs closes merger with AK Steel, during which the latter was valued at $3 billion, which is equivalent to EV / Adjusted EBITDA LTM = 5,6. Acquired assets: seven steelmaking and processing plants, two by-product coke plants, three pipe factories and ten tooling and stamping factories.
9 December 2020 Cleveland-Cliffs acquired the assets of ArcelorMittal USA for $ 3.3 billion, including debt. Under the agreement, the company in question received the following facilities: six steel plants, eight enterprises for the processing of semi-finished steel products, two iron ore mining and granulating enterprises, as well as three enterprises for the production of coal and coke. The deal went through at a low valuation: EV / EBITDA less 5, and adjusted EBITDA for 2018 and 2019 of the acquired company was $700 million.
Assets. The company owns more than 40 production facilities in the USA, which consist of the following groups of assets:
- Corporate Offices - Headquarters, regional offices and research and innovation center.
- Steel-making facilities. These include five working iron ore mines, located in Minnesota and Michigan, with a total production capacity of 28 million tons, one closed object, coal mine and more 20 steel production, factories and enterprises.
- Precision Partners subsidiary assets - three hot and cold formed steel components manufacturing facilities.
- Pipe factories - two enterprises.
Income structure. The business of the company consists of two divisions. First, steelmaking, this main segment is more than 97% in overall results. Second - the rest of the business, it includes the production of pipes and components from hot and cold forged steel.
Cleveland-Cliffs' key clients span four industries: Automotive industry, infrastructure and production, distributors and processors and other steel companies. The main buyers of the company's steel products are automakers, their share in 2020 was 45%. But in 2021, the automotive industry is facing a global semiconductor shortage., and demand from them has decreased, because of which the company had to redirect certain volumes to the spot market, where prices continue to be at record highs.
The structure of product sales in 2 quarter of 2021, billion dollars
| Revenue | Share in overall results | |
|---|---|---|
| Hot rolled steel | 1,485 | 29% |
| cold rolled steel | 0,773 | 16% |
| Coated steel | 1,379 | 27% |
| Stainless and electrical steel | 0,397 | 8% |
| Steel sheet | 0,321 | 6% |
| Other steel products | 0,345 | 7% |
| iron products | 0,155 | 3% |
| Rest | 0,067 | 1% |
| Pipes and components made of hot and cold forged steel | 0,123 | 3% |
Sales structure by industry in 2 quarter of 2021, billion dollars
| Revenue | Share in overall results | |
|---|---|---|
| Automotive industry | 1,130 | 22% |
| Infrastructure and production | 1,312 | 26% |
| Distributors and processors | 1,948 | 39% |
| Metallurgical enterprises | 0,532 | 10,5% |
| Automotive industry | 0,096 | 2% |
| Infrastructure and production | 0,011 | 0,2% |
| Distributors and processors | 0,016 | 0,3% |
Dividends. On the phone M&A-deals and a high leverage, the company has paid almost no dividends for the past five years.
Cleveland-Cliffs development strategy
The guide highlights the following points.
Optimization of steelmaking activities. In 2021, management is busy integrating ArcelorMittal USA facilities into the overall Cleveland-Cliffs system after, how they were bought at the end of 2020. The main areas of work of the board of directors are the improvement of logistics and procurement, as well as product quality and waste disposal. In return, the company expects, that it will increase its production capacity and reduce costs. Synergistic effect, according to management forecasts, will be $ 150 million.
Maximizing commercial processes. After completing M&A-transactions company has become a full cycle company, which controls all stages of steel production. This is why management believes, that Cleveland-Cliffs will be able to meet the needs of customers in different markets and according to different quality specifications of their products.
Entering new markets. Through the acquisition of assets from ArcelorMittal USA, AK Steel and the commissioning of the plant in Toledo, the company began to produce high-quality steel products with unique properties, e.g. HBI with fewer impurities.
Management considers, that society needs to expand its customer base in the fast-growing electric vehicle market – as demand increases, automakers will need better steel products, which Cleveland-Cliffs will be able to supply, and establish a reputation as the company with the widest range of steel products in North America.
Improving financial stability. Considering the cyclical nature of the steel business, management strives for a stable financial position, to easily resist price cuts or any other negative moments. Therefore, the current priority of Cleveland-Cliffs in the distribution of free cash flow will be to reduce the debt burden, rather than paying dividends and buyback.
Increased ESG scores. After the transformation, management reaffirms its commitment to environmentally responsible business conduct. Cleveland-Cliffs announced its 2030 forecast to reduce greenhouse gas emissions by 25% compared to 2017 levels.
Current results
When analyzing the financial performance of Cleveland-Cliffs, it is worth considering, that it was an iron ore mining company until the end of 2019, and since 2020 has become the leading steel manufacturing enterprise.
Cleveland-Cliffs profitability vs. benchmarks
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|---|
| Cleveland-Cliffs | 100 | 532,28 | 456,32 | 486,71 | 548,04 | 972,55 |
| S&P 500 | 100 | 111,93 | 136,33 | 130,35 | 171,38 | 202,9 |
| S&P Small Cap 600 | 100 | 126,46 | 143,09 | 130,9 | 160,66 | 178,72 |
| S&P Metals and Mining | 100 | 205,09 | 247,36 | 181,17 | 207,8 | 240,98 |
Arguments for
Strong current environment. Steel prices in the US are now hitting all records and are near their highs in recent 10 years - 2000 $. Against this background, shareholders of metallurgical companies should also expect record financial results for their companies..
Evaluation. According to the forecast of Cleveland-Cliffs management, adjusted EBITDA of $5.5 billion in 2021. Considering the company's current value of $15.6 billion, we get, that the American steel giant is trading on an EV/EBITDA multiple 2021 = 2,8.
Low debt burden. Indicator "Net debt / Adj.. EBITDA "is now at its lowest values for the last 5 years, its value for 2021 is 0,96. Net debt of the company as of 30 September 2021 is $ 5.308 billion, adjusted EBITDA 2021 = $ 5.5 billion, according to management forecast.
Arguments against
Risk of lower steel prices. For the past ten years, steel prices have been in the region 700 $, and now almost in 3 times higher than these values - about 2000 $.
Low dividend yield. Over the past five years, Cleveland-Cliffs has paid a total of 0,38 $, that at the current share price - 20,65 $ - would bring shareholders a dividend yield at the level 1,8%.
What's the bottom line?
Cleveland-Cliffs is one of the biggest players in the American steel sector, which is now even cheaper than Russian representatives of this industry. North American company will be able to quickly zero its debt burden, which will lead to an increase in its capitalization, if steel prices hold at current levels for some time. However, if steel prices correct to average, then Cleveland-Cliffs could be even cheaper.
