Cleveland-Cliffs records Q1 net loss

Cleveland-Cliffs Inc. has reported first-quarter results for the quarter ended March 31, recording a net loss of $53 million, or 14 cents per diluted share, with adjusted net income of $87 million, or 18 cents per diluted share.

The results include charges and losses totaling $202 million primarily related to the indefinite idling of the Cleveland-based company's Weirton, West Virginia, tinplate facility beginning April 11 and loss on extinguishment of debt. This compares to a fourth-quarter 2023 net loss of $139 million, or 31 cents per diluted share, with an adjusted net loss of $25 million, or 5 cents per diluted share.

Its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) totaled $414 million for the quarters, for a 70 percent improvement year over year and a 48 percent increase quarter over quarter.

Cleveland-Cliffs reports it shipped 3.9 million net tons of steel in the quarter and revenue of $5.2 billion compared with $5.1 billion in the last quarter of 2023.

Cliffs' first-quarter 2024 steel product sales volumes of 3.9 million net tons consisted of 32 percent hot-rolled, 31 percent coated, 17 percent cold-rolled, 5 percent plate, 4 percent stainless and electrical and 11 percent other, including slabs and rail.

Steelmaking revenues of $5 billion included $1.6 billion, or 32 percent, of direct sales to the automotive market; $1.4 billion, or 28 percent, of sales to the infrastructure and manufacturing market; $1.4 billion, or 28 percent, of sales to the distributors and converters market; and $606 million, or 12 percent, of sales to steel producers, the company reports.

“Our first quarter results were highlighted by the resiliency of automotive production in the United States, which helped to offset a temporary buyers strike from service centers in January and February,” Cliffs President and CEO Lourenco Goncalves says in comments accompanying the company’s quarterly results. “With more automotive and less service center business, first-quarter mix was richer than originally anticipated, driving both our average selling prices and production costs higher than expected.”

He notes the company’s efforts toward green steel production were recognized during the first quarter when Cliffs became what he describes as “the largest intended recipient of federal grants toward decarbonization in the history of the United States.” He says these investments will go toward two “game-changing projects” with carbon reduction prospects and “robust returns and manageable capital commitments.”

In the conference call, Goncalves described one of those projects: the company’s $1.3 billion investment at its  Middletown, Ohio, facility that will replace its blast furnaces with a direct-reduced iron (DRI) facility and two electrical melting furnaces.

He added that as ferrous scrap grows scarcer, more expensive and more contaminated over time, “we will avoid any increase in our scrap intake, maintaining our ability to serve the highest-quality demand in end markets like the automotive market by using pure iron.”

Stock repurchasing

During the first quarter of this year, the company repurchased 30.4 million common shares of its stock, fully using the remaining balance of $608 million under the previously authorized $1 billion share repurchase program.

The average stock purchase price for the entire program was $18.79 per share. Following the completion of the program, the Cliffs board of directors authorized a new share repurchase program to buy back up to $1.5 billion of its outstanding common shares. Cliffs is not obligated to make any purchases, and the program, which does not have a specific expiration date, can be suspended or discontinued at any time.

Goncalves says Cliffs returned capital to its shareholders at “an aggressive rate” in the quarter.

“Our stock was cheap throughout the quarter and remains so, driving the exhaustion of our previous $1 billion share repurchase authorization and the commencement of another larger one," he says. "Buying our own stock is clearly a better use of capital than any M&A opportunities at current valuations—so that's our primary focus."

On U.S. Steel and M&A more broadly

In the April 23 conference call to review the company’s earnings, Celso Goncalves, executive vice president and chief financial officer, said, “This new buyback program is also supported by the fact that we are no longer compelled to preserve as much dry powder for M&A given the limited number of possible outcomes for U.S. Steel.

"It's now clear that their strategic alternatives review process was only robust and competitive because the company and their financial advisors at Barclays and Goldman Sachs invited foreign buyers, creative consortiums, and companies with no support from the USW [United Steelworkers]. As we explained to U.S. Steel to their advisors and to the entire market early in the process last year, there is no way to close the sale of U.S. Steel without agreement and full support from the USW.

“We discussed publicly in August that the USW has de facto veto power in the outcome of this process, but U.S. Steel denied it. Back then, Cliffs was right, and U.S. Steel was wrong.”

Celso Goncalves said U.S Steel continues to be wrong and Cliffs right, noting, “There's no denying reality anymore. The USW has said from the very beginning that they would not endorse any other buyer, only Cleveland-Cliffs. Union leaders do not go back on their word.

“And now after President Biden has clearly expressed his position unequivocally against foreign ownership of U.S. Steel, the list of real buyers for the company is even more evidently a party of one. Cliffs is the only union-friendly American solution for U.S. Steel.”

Celso Goncalves added that the Nippon deal is “dead” and other buyers won’t be able to close on the purchase of U.S. Steel’s union assets.

“In terms of value, the inflated bids resulting from the blind auction process that included unrealistic buyers don't represent a meaningful proxy for real valuation and neither do the stand-alone price targets coming from research firms pandering to the arts," he said. "A company is only worth what a real buyer or investor is willing to pay for it and everything else is just an opinion.

“The last time that real steel industry investors owned U.S. Steel, the stock was valued at $22.72,” he continued. “The valuation reset lower is far from over. We will have to reassess everything, including value, once we have the chance to reengage in M&A due diligence, as everything we saw last year is now stale.”

Celso Goncalves acknowledged that it is not assured that U.S. Steel would want to sell to the company should the Nipon deal be blocked.

During the conference call, Lourenco Goncalves said, “The Biden administration has different ways to terminate the Nippon transaction and we believe that will be done sooner rather than later. Before the President of the United States had expressed his clear position, we attempted to offer a solution to Nippon Steel, where we would acquire the union-represented assets of U.S. Steel and Nippon would keep the assets they wanted in the first place, the nonunion Big River steel facility. Nippon did not accept that.”

He added that Nippon says it values the U.S. Steel blast furnaces because it can apply its Japanese technology to them, saying, “This talking point on technology is complete hogwash.

“There is nothing special about the Japanese blast furnace technology. We are far ahead of them on everything blast furnace-related. The use of iron ore pellets and [our] own sinter, direct reduction, the charging of HBI in blast furnaces, the injection of natural gas and hydrogen, we already have all that in the United States at Cleveland-Cliffs, and they do not have any of that in Japan. Their so-called superior technology is not even remotely based on facts.”

“As of the end of 2023, we outperformed our prior net debt target level of $3 billion, but the rating agencies gave us no credit for the massive debt reduction last year and kept our ratings unchanged,” Celso Goncalves said. “If the agencies are just going to keep our ratings where they are now, we might as well give ourselves the flexibility to buy back more stock,” he continued, noting that that is a “much better use of capital than any M&A opportunities at current valuations.

“Obviously, any M&A that we do will come with meaningful EBITDA contribution, significant synergy realization and increased scale that will be viewed by the rating agencies and bond investors as a credit positive. For the avoidance of doubt, we are not currently performing due diligence on any M&A opportunity that would prohibit us from buying back stock today. And even if the U.S. Steel situation were to resurface at some point in the future, we would need to refresh our due diligence at that point and reset valuation expectations from current levels.”

Outlook

Cliffs has maintained its previously guided expectations for the full-year 2024, including steel shipment volumes of 16.5 million net tons; year-over-year steel unit cost reductions of approximately $30 per net ton, corresponding to an approximate $500 million adjusted EBITDA benefit compared with 2023; and capital expenditures of $675 million to $725 million.

“Looking forward, we expect to benefit in Q2 from the lower costs under our guidance, which we have maintained,” Lourenco Goncalves says in a statement accompanying the company’s earnings report. “Our largest end market, the automotive sector, is expected to remain strong. Orders from our service center customers have started to increase, with spot pricing also on the upswing. We are fortunate to have such a remarkable partnership with our workforce, and we will navigate this world of abundant opportunities together with our union partners.”