Cleveland-Cliffs Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Cleveland-Cliffs is a North American steel producer, serving primarily the automotive industry but also other sectors with various steel products. They aim to be the leading supplier of high quality steel.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Cleveland-Cliffs is a vertically integrated steel producer, controlling most of the stages of the steelmaking process. This ranges from mining iron ore to producing finished steel products. The company is primarily focused on the North American market, especially the United States, and they have a mix of products catering to different industries. Here’s a breakdown of their business segments:

  • Steelmaking: This segment involves the production of various steel products, including hot-rolled, cold-rolled, and coated steel, as well as slabs. They mainly serve the automotive industry but also sell to infrastructure and manufacturing markets.
    • Hot-Rolled, Cold-Rolled, Coated: Flat-rolled steel that’s used in applications where specific strength, durability, or surface finish is needed.
    • Plate: Steel plates are flat, rectangular pieces used in construction, heavy equipment, and other structural applications.
    • Slab and Other Steel Products: A slab is a semi-finished form, while other products can include custom steel and specialty metals.
  • Iron Ore Mining: This segment encompasses the company’s mining operations to produce iron ore, a primary raw material for steelmaking, located in Michigan and Minnesota.

Trends in the Industry:

  • The steel industry has seen significant volatility due to economic cycles and global events.
  • The automotive sector, which is a key market for CLF, has been particularly volatile, affected by the transition to electric vehicles.
  • The shift in the automotive market toward electrical vehicles puts pressure on the margins.

  • Global steel prices are influenced heavily by raw material costs (iron ore, energy, scrap) and also affected by global geopolitical uncertainty and supply chain disruptions.

  • Margins and Competitive Landscape:
    • Margins are largely tied to the cost of raw materials and their selling prices. As a fully integrated business, CLF is trying to mitigate this risk as they control some of their supply chain.
    • The steel industry has become more consolidated which may have pricing power to the largest companies.
    • The sector has become more competitive, with the emergence of new technologies for steel manufacturing and a need to adapt to climate change.

  • Steel producers, especially in developed markets, are vulnerable to imports and foreign competition that offer lower costs.

  • What Makes CLF Unique
    • Vertical Integration: The company’s control over iron ore supply provides some stability and cost efficiency that other steel producers may lack.
    • A Focus on Automotive: The company’s focus on high-quality steel for the auto industry sets them apart from some competitors, because the automotive industry has very stringent specifications for the steel they use.
  • Recent Concerns/Controversies:
  • The company has had some issues with supply and demand imbalances due to the COVID-19 pandemic as well as various global economic shocks.
  • There were talks about the future of the ABL plant being uncertain (later secured with a new extension).
  • They incurred a $500 million charge in connection to the closure of the AK Steel acquisition.
  • The management has mentioned volatility in steel prices, primarily driven by uncertainty of supply and demand.

Financial Analysis

Let’s delve into CLF’s financial health and performance, especially using their 10-Q report ending September 30th, 2024.

Income Statement Analysis:

  • Revenues: For the first nine months of 2024, revenues reached $10.8 billion, a 11% decrease compared to $12.2 billion for the same period in 2023. This shows a decline in the company’s top line, mostly influenced by volatile demand for steel.
  • Cost of Goods Sold: There was a substantial decrease in the cost of goods sold from $10.7 billion to $9.8 billion during the first nine months in 2024 compared to 2023, mainly caused by lower prices for raw materials.
  • Adjusted EBITDA: Adjusted EBITDA was a negative -$34 million compared to 2023, driven by a significant decline in margins and prices.
  • Net Loss Attributable to Cliff’s Stockholders: The company reported a net loss of -$267 million for the first nine months of 2024 compared to a profit of $834 million in the prior year. This represents a large reversal in profitability, mainly caused by low selling prices and lower market demand.

  • Earnings per share: The net loss translates to a negative -$0.64 loss per share.

  • Balance Sheet:
  • Total Assets: As of September 30, 2024, total assets stood at $16.8 billion which was stable compared to December 31, 2023 (17.1Billion)
  • Total Liabilities: Total liabilities were $9.7 billion compared to $10.07 billion at Dec 31, 2023. The company had been reducing its liabilities.
  • Shareholders Equity: Shareholders’ equity is $7.1 billion compared to $7.03 billion in Dec 31, 2023. Indicating some level of stability.
  • Debt: The net debt came to about $4.3 billion, slightly less than the end of last year.

  • Cash and Cash Equivalents: Cash and cash equivalents stood at $39 million, significantly low for a company that size.

  • Cash Flows:
  • Operating activities generated $1.87 billion in cash, an increase compared to $709 million during the same period in 2023, reflecting strong performance.
  • Investing activities led to cash outflows of $1.35 billion, mainly stemming from capital expenditure for plant and equipment upgrades.
  • Financing activities resulted in a net cash outflow of $299 million, with debt repayment as the major contributing factor.
  • The cash and cash equivalents totaled $31 million at the end of September 30, 2024.

Recent Financial Concerns and Management Comments

  • The company has reported weak earnings for the last three quarters because of low prices and lower market demand and the cost of goods. The company is struggling to keep costs down while prices remain low, resulting in poor margins.
  • They have a high debt burden and must make efforts to balance that.
  • They are confident that they can improve profitability through cost cuts and price increases as market conditions become more favorable. They are targeting higher volumes to reduce per unit costs.
  • The company also is focused on improving efficiency and production by investing in technology and new equipment.

Moat Analysis:

  • Width and Durability of Moat:
    • CLF has a Narrow Moat because of it’s integrated structure with mines and steelmaking operations. This gives some advantages against competitors, however, this is also a fairly well known and replicated business method.

  • They have a fairly loyal customer base in the automotive industry, but the contracts are not iron-clad, and customers could jump to the competition when prices are more attractive. * Their strong presence in the Great Lakes region allows access to local manufacturing hubs, and limits competition, which can be considered a low-level moat.

  • Risks
    • Highly Competitive Landscape: The steel industry is prone to fluctuations in prices and demand, resulting in volatile revenues and profits.
    • Technological Disruption: New technology like the electric arc furnaces are becoming more efficient and can be a disrupter in the industry.
    • Global Economic and Geopolitical Issues: Factors that are completely beyond company control can affect operations and the prices of products (Russia/Ukraine war, trade disputes).
  • Business Resilience
    • The company has been around for a long time and has survived a number of different economic conditions.
    • Management has taken steps to implement efficient cost management which could potentially cushion the downside.
    • The company’s operations are focused mostly in the US which gives them a domestic market base.

Understandability and Balance Sheet Health Ratings

  • Understandability:
    • Rating: 2 / 5
    • Although the core business of extracting iron ore and making steel is fairly easy to understand, the financial complexities associated with this business and the debt/capital structure of the company can make things confusing for the average investor. The various ways they produce steel and manage inventory as well as the nuances of the economic situation with different supply/demand and price dynamics makes the business complicated.
  • Balance Sheet Health:
  • Rating: 3 / 5
  • While CLF has a decent asset base, its debt levels are still quite high. The company also has minimal cash and cash equivalents. This leads to concerns about their liquidity and solvency which need to be followed closely. Their ability to service debt is impacted by the volatility of profits that stem from their business. The asset base, although substantial, may be affected by a significant market downturn.

In summary, CLF is a company with an integrated structure that gives some level of edge in the steel industry. However, volatility is a threat and the business model isn’t extremely defensible, thus it has only a narrow moat. The company has potential given their presence in the automotive sector, but investors need to closely track its operations and financial health.