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Cliffs shares in the red after disappointing quarter, weaker outlook

The boss of US iron ore major Cleveland-Cliffs, Lourenco Goncalves, expects 2020 to be a “transformational” year for the company, starting with closing the US$1.1 billion acquisition of AK Steel, and gathering steam by June with the start-up of the hot briquetted iron facility in Toledo, both aimed to better equip the company to serve the premium market.
Cliffs shares in the red after disappointing quarter, weaker outlook Cliffs shares in the red after disappointing quarter, weaker outlook Cliffs shares in the red after disappointing quarter, weaker outlook Cliffs shares in the red after disappointing quarter, weaker outlook Cliffs shares in the red after disappointing quarter, weaker outlook

Cleveland-Cliffs CEO Lourenco Goncalves expects 2020 to be the "most transformational year in the company's history"

Speaking during the company's December-quarter earnings call Thursday, Goncalves said 2020 would be a transformational year for the 173-year-old company.

Goncalves is excited about the AK Steel acquisition, since it will add fully integrated capacity to the company's production portfolio. That company mainly serves the automotive market, providing materials required for electric vehicle production.

"With AK's unique technical expertise, we are the best positioned company to supply what's needed for this change of the fleet, from traditional engines to EVs," Goncalves said.

"Cleveland-Cliffs has spent more than $1 billion to develop a new use for taconite iron ore from Minnesota's Iron Range. The HBI capability will replace imported pig iron from Russia and Ukraine," he said.

December-quarter earnings fell 1c short of analyst expectations, coming in at $63.2 million, or 23c per share, down from earnings of $609.5 million, or $1.98 per share, a year earlier.

Mining and pelletising revenues for the most recent period fell 17.5% to $534 million.

The company reported EBITDA of $111 million in the quarter, down 41% year-on-year.

Goncalves said reduced consumer demand caused quarterly sales volumes to drop 10% year-on-year to 5.84 million long tons, and the sales margin to contracted 23% to $23.73/lt. Improved costs at $63.62/lt helped offset some of the lost sales.

For 2019, Cliffs reported profit of $293 million, down from $1.1 billion in the prior year.

For 2020, Cliffs expects to generate $550-$575 million  of adjusted EBITDA, not including the pending acquisition of AK Steel. The adjusted EBITDA metric came in at $525 million in 2019 and $766 million in 2018.

Cliffs expects 2020 capital spending of $350-$400 million, including the remaining spending toward completion of the Toledo HBI production plant, sustaining capital and capitalised interest.

Jefferies Equity Research analysts said the EBITDA outlook was materially ahead of internal and consensus estimates, plus 14% and 28%, respectively, noting it was predicated on higher required spot prices.

"While the iron ore price assumption is modestly below current spot prices, we would highlight spot pricing for HRC and pellet premium below the FY20 averages assumed in the $550-575m scenario. Relative to JefE the delta on the pricing side is primarily pellet premium ($50/t vs $34/t JefE) and second iron ore ($90/t vs $85/t). We believe the larger delta to cons is a function of more bearish iron ore forecasts," the analyst said.

Cliffs shares (NYSE:CLF) closed 5.39% lower on Thursday at $7.19, taking the stock's one-year decline to 36%. Cliffs has a current market capitalisation of $2 billion.