Обзор Cleveland-Cliffs: American metallurgist, which costs less than three EBITDA

Обзор Cleveland-Cliffs: американский металлург, который стоит дешевле трех EBITDA

Cleveland-Cliffs (NYSE: CLF) Is an American raw materials 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 steel capacity from other companies and completed construction of its own plant in Toledo, it redesigned and developed into a vertically integrated high value-added steel plant.

M&A-transactions. 13 March 2020 Cleveland-Cliffs closed a 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 objects: 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 score: 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:

  1. Corporate Offices - Headquarters, regional offices and research and innovation center.
  2. Steel-making facilities. These include five operating 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.
  3. Precision Partners subsidiary assets - three hot and cold formed steel components manufacturing facilities.
  4. Pipe factories - two factories.

Обзор Cleveland-Cliffs: американский металлург, который стоит дешевле трех EBITDA

Income structure. The business of the company consists of two divisions. The first is 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 formed steel.

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Cleveland-Cliffs' main customers span four industries: Automotive industry, infrastructure and production, distributors and processors and other metallurgical companies. The main buyer of the company's steel products are car manufacturers, their share in 2020 was 45%. But in 2021, the automotive industry faces a global semiconductor shortage., and the demand on their part decreased, due to which the company had to redirect certain volumes to the spot market, prices at which continue to remain at an all-time high.

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%
Hot and cold formed steel pipes and components 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. Against the background of M&A-transactions and high debt burden, the company has practically not paid dividends for the last 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 to improve 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 turned into 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 in accordance with the different quality specifications of their products.

Entering new markets. Through the acquisition of assets from ArcelorMittal USA, AK Steel and the commissioning of the Toledo plant, the company began to produce high quality steel products with unique properties, e.g. HBI with less impurities.

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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 confirm the company's reputation with the broadest range of steel products in North America.

Improving financial stability. Considering the cyclical nature of the steel business, management strives for a strong 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, not paying dividends and buyback.

Increased ESG scores. Following the transformation, management reaffirms its commitment to environmentally responsible business conduct. Cleveland-Cliffs announced its 2030 forecast to reduce greenhouse gas emissions by 25% from 2017 levels..

Current results

When analyzing the financial performance of Cleveland-Cliffs, it is worth considering, that she was an iron ore mining company until the end of 2019, and since 2020 has become a leading steel producer.

Обзор Cleveland-Cliffs: американский металлург, который стоит дешевле трех EBITDA

Обзор Cleveland-Cliffs: американский металлург, который стоит дешевле трех EBITDA

Обзор Cleveland-Cliffs: американский металлург, который стоит дешевле трех EBITDA

Cleveland-Cliffs performance versus 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 of their companies..

Evaluation. According to the forecast of Cleveland-Cliffs management, Adjusted EBITDA to be earned at $ 5.5 billion in 2021. Given the company's current value of $ 15.6 billion, we get, that the American steel giant is trading at 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 - 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.

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Arguments against

Steel price decline risk. 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 is the bottom line

Cleveland-Cliffs is one of the largest 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 the current level for some time. However, if steel prices adjust to averages, then Cleveland-Cliffs can be even cheaper.

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