Cleveland-Cliffs (NYSE: CLF) is an iron ore mining company. It supplies iron ore pellets to the North American steel industry from mines and pellet plants located in Michigan and Minnesota.
It operates through the following segments: Mining & Pelletizing, and Metallics. The Mining & Pelletizing segment owns operational iron ore mines and an indefinitely idled mine. The Metallics segment constructed an HBI production plant in Toledo, Ohio. The company was founded in 1847 and is headquartered in Cleveland, Ohio.
I am neutral on CLF stock. The company has turned profitable in the first nine months of 2021 after reporting a net loss in FY 2020, and while its valuation seems attractive, there are a few concerns now such as a large amount of debt. Check Top Analysts and how to create your Smart Portfolio of stocks.
Cleveland-Cliffs Business News
On December 1, 2021, Cleveland-Cliffs announced “that it has instructed the trustee to provide notice of redemption for all remaining $294 million of its 1.50% Convertible Senior Notes due 2025. The redemption will take place on January 18, 2022.”
On November 18, 2021, the completion of the acquisition of Ferrous Processing and Trading Company was announced.
On November 3, 2021, Cleveland-Cliffs announced a partnership with the U.S. Department of Energy (DOE) as part of the Better Climate Challenge initiative, a new government-sponsored effort challenging organizations to set ambitious, portfolio-wide GHG emission reduction goals.
It was stated that the “DOE will provide technical assistance and opportunities to learn and share actionable best practices for carbon reduction.”
Q3 2021 Financial Results
The company reported a very strong Q3 2021 with GAAP EPS of $2.33 (beat by $0.09) and revenue of $6 billion (beat by $370.29 million). CLF stock earnings have been very volatile as of Q4 2019.
Adjusted EBITDA reported was approximately $1.9 billion and free cash flow generated was $1.3 billion.
Year-over-year, the firm reported operating income of $1.649 billion compared to $38 million in the same period a year ago, and net income of $1.274 billion versus ($10 million) in Q3 2020.
Fundamentals – Risks
Shares of the vertically integrated steel producer have a Piotroski F-Score of 7, indicating a very healthy situation, but the gross margin has been in long-term decline. The average rate of decline per year is 7.8%.
Cleveland-Cliffs has been issuing new debt. Over the past three years, it issued $1.8 billion of debt. In FY 2020 the debt/equity was 2.67, and as per the latest quarter, it has declined to 1.34.
The large debt level in FY 2020 was responsible for the company reporting a net loss due to an interest expense of $238 million. The stock price is now close to a five-year high.
One of the main problems with Cleveland-Cliffs is its operating efficiency. Its cash conversion cycle increased to 128.08 days in FY 2020 with a TTM figure of 81.13 days.
Over the period 2017-20 inventory turnover, fixed asset turnover, and asset turnover all declined to signal lower operating efficiency. These numbers have all ticked up higher on a TTM basis, though.
In general, I am concerned about whether the transformation in the first nine months of 2021 turning to profitability is sustainable.
Valuation
CLF stock is trading at a mixed valuation. It is attractive based on its P/E ratio (5.7x) compared to the U.S. Metals and Mining industry average (8.9x) but it is relatively overvalued based on its P/B Ratio (2.8x) compared to the U.S. Metals and Mining industry average (2.1x).
Wall Street’s Take
Cleveland-Cliffs has a Moderate Buy consensus based on three Buys and three Holds. The average Cleveland-Cliffs price target of $29.26 represents 28.5% upside potential.
Cleveland-Cliffs has made an impressive turnaround in the first nine months of 2021 after reporting a net loss in FY 2020. The stock seems attractive but it lacks consistent growth and has unstable key financial metrics which cause great uncertainty.
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