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Aug 23, 2021
[2 min Read]
Cliffs dropped 8% yesterday on a sharp decline in iron ore prices. Funny part is that steelmaking is almost their entire source of revenue (Steelmaking: 1.4B Other: 8m). They fuel steelmaking by using iron ore mined from their own mines.
Here's the rub: they only mine 5.5m tons of iron ore annually (which equates to 3.44m in raw steel). Their steelmaking capacity is 23 million tons—meaning they need to purchase the rest of the iron ore elsewhere to make all of their revenues. (steel to iron ore ratio 1:1.6 tons)
Their revenues are focused on construction and the automotive sector INCLUDING retooling facilities—which every company will need to do to produce EVs. And chip shortage will end soon with strong consumers and lots of new vehicles purchased. Not to mention, the trillions of infrastructure spending that will happen in the U.S.—long-term tailwinds for steel prices.
SO, when Cliffs drops because iron ore price decreases—tendies.
I can hear you degenerates snickering in the back, "But what about hot rolled steel prices now?" They went from 1,000 to 1,900 between January and August—now hovering near the highs.
Next, let's visit their current debt levels. They had roughly 5.3b in debt with a plan over the next year to reduce it by 1.4 billion. That hinges on FCF (after CAPEX) hitting roughly 350m per quarter (when steel prices double this is a pretty easy target).
The end result is a 26% reduction in debt over 12 months, which the CEO said he would do. He also told analysts they were an embarrassment to their parents and told them they would kill themselves if they shorted his stock.
Additionally, they've just finished their repurchase program buying back a total of 10% of their total shares—making yours more valuable. Expect more returns to shareholders, debt reductions, eventual dividends, and a robust steel market with infrastructure spending soon underway.