Cliffs Confident its “Ahead of the Curve”

Cleveland Cliffs CEO Lourenco Goncalves is looking forward to the completion of the company’s HBI pellet plant in Toledo, Ohio. The project is on time and under budget and construction has begun on the 400-foot tower that will be completed by the end of 2019. Startup of HBI production is anticipated in mid-2020.

The company plans to take 500,000 long tons of its 3.5 million ton production of DR-grade pellets off the market in 2019 to build inventory for the HBI facility. The HBI production will serve EAF furnaces in the Great Lakes area and produce 1.6 million long tons annually. The project is funded entirely by Cliffs.

Goncalves is confident that the market is right for HBI with the trend toward minimills with EAFs and the degradation of prime scrap quality. “So, I am their salvation. Our HBI will save the minimills in terms of their growth strategies,” he said.

Cleveland Cliffs is expecting USIO revenue in the range of $105 to $110 per long ton for the fourth quarter, based on the assumption that iron ore prices, steel prices and pellet premiums will stay at their respective year-to-date averages for the remainder of 2018. The forecast was unaffected by the year-to-date average increase in hot-rolled coil steel prices, which were offset by higher freight rates.

Full-year sales volume is forecast at 21 million long tons and production volume 20 million long tons. (Note: Long tons are 2,240 pounds vs. short tons at 2,000 pounds.)

Goncalves said Section 232 measures are benefiting steel industries throughout the world by increasing steel prices and stopping the dumping of Chinese steel. “We recovered our leadership in the world in the steel business. Thanks to President Trump. Thanks for his courageous actions supporting the resurgence of manufacturing in the United States of America,” said Goncalves. “By doing that, we stood up against the bully China. So China is in deep trouble right now, because their plan fell apart. Their plan was predicated on the United States never reacting and allowing our economy to be decimated by their actions–no more!”

Commenting on the U.S. steel industry, Goncalves said, “In the domestic steel market, thanks to a still very underappreciated tax reform implemented in the United States, which is supporting high economic growth and full employment in our country, healthy steel demand is a reality in nearly every single subsector.”

Regarding global iron ore prices, Goncalves expects the current $58 per ton pellet premium to increase next year supported by the need for higher iron content that is better environmentally. “[Negotiators] that sell pellets in Europe need to be careful not to get to the point that they will kill the clients. Pellets are scarce and they need pellets, but they can’t just say, ‘Let’s do like the Chinese, let’s buy from Fortescue, let’s pollute this thing.’ That’s not going to happen.

“If the negotiators are very incompetent it will be $70 per ton. If they are moderately competent, it will be $80. And if they can gauge how much the clients can pay before they die, it will be something between $80 and $100. Anything above $100 will be a little too much. That’s just my opinion at this point,” Goncalves said.

Cliffs negotiated a new four-year contract with the United Steelworkers ahead of the scheduled deadline. Workers will receive a raise of 14.6 percent spread across the next four years. The impact to Cliffs over the length of the contract is equivalent to a cost of $1 per ton or less than $80 million. 

Goncalves has been in conversations with the gubernatorial candidates for Minnesota and is confident that they understand the company’s interest in the Nashwauk region of the Iron Range. “With the vast amount of land we control within the entire Nashwauk iron strip, it’s only possible to develop a real economically viable project in Nashwauk if Cliffs is running the project,” said Goncalves. “Other than a couple of irrelevant local politicians and the lame duck governor and his departing crew, everyone else in Minnesota understands the reality of things in the Iron Range related to Nashwauk. I have no worries on that front. We are in good shape.”

Cleveland Cliffs reported revenues of $742 million for the third quarter compared to $597 million in Q3 2017. Net income was $438 million compared to $53 million in the prior year’s third quarter. EBITDA of $250 million jumped 66 percent.

Sales volume was 6.5 million tons in the quarter. Cliffs expects to ship the remainder of its 21 million long ton yearly sales outlook in Q4 as mills stock up for the winter.

Cliffs has nearly $900 million of cash in hand as of the end of the third quarter and, with confidence in the HBI project and continued debt reduction, the company is returning cash to shareholders as a $0.20 recurring annual dividend.

“As we begin to wrap up the year, we expect current strong market conditions to support our strong profitability through the next quarter and into 2019. Our long-term forecast of predictable and consistent cash flow generation, as well as the great progress we continue to make on the HBI project, gave us the comfort to implement a healthy quarterly dividend,” said Goncalves. “It has now become abundantly clear to the market in general that global supply-demand dynamics have shifted favorably towards producers of high-grade iron units. We at Cleveland-Cliffs were ahead of the curve on identifying the trend and will continue to center and expand our proven strategy around this premise.”