Back before Casablanca and LG, CLF's debt was over $3 billion and their interest payments were less than $100 million per year. Now we are close to $1.5 billion in debt and we are talking about getting interest payments below $160 million!
This is what I have been talking about all along, the game for LG is to restore CLF's credit rating though solid earnings and then we can see a dramatic drop in the interest rates.
With solid earnings, CLF should be able to obtain financing at 5% interest which would put their interest expense at $75 million a year on $1.5 billion of debt.
With the huge move up over the last few months, people are quick to sell or short. Seen this happen many times in heavily shorted stocks I have played in the past. Again, we have not yet seen a true short squeeze in CLF.
For example the 2020 second lien note have a rate of 7.75% and yet CLF paid 15.55 percent. Look at page 14 of the last 10Q.
Look at the original bond offerings and the "fixed" interest rates, then look at the 10Q interest rates... there must be a clause that pushes the rates up.
Interest $180 million - with paying down debt further and positive interest rate changes, this could go down drastically.
When debt hits $1.5 billion, interest rate reductions and current earnings will allow CLF to hit $2 a share.
It is all about earnings. Paying down debt and getting an interest rate reduction, CLF can add 50 cents a share to earnings alone. On top of US and Asia Pacific earnings we can easily get to $2 a share. At 16 times earnings, then we are talking $32 a share to start with. Future earnings can easily exceed $3 a share and it will get to $50 a share.
Once CLF's debt is down to $1.5 billion, their interest rates will decline and their annual interest expense will be closer to $80 million.
With the reduction of debt and upgrades, CLF should see a good reduction of their interest rates on the remaining debt and their savings will be much more than $15m.
What I care about is total profit, truth is interest expense will go down and therefore profit will go up. I also care about the balance sheet and liabilities will go down with the influx of cash and the overall reduction of debt.
Most of the outstanding debt is in those 2040 bonds, I am ok with a 35% discount. Then even if it is trading at 101 to 100, the reduction in debt and interest improves the balance sheet and future income statement. Furthermore, debt reduction should increase their credit rating that will result in interest rate reductions!
Try looking at the whole balance sheet. When CLF takes in cash from the issuing of new shares, their cash will increase by the same amount they sold... no change. Now if they take that cash and buy back bonds at a 50% discount to face value, for every dollar they take in from the sale of stock, they reduce their debt by $2 and reduce their interest expense in the future. As a result, their balance sheet is greatly improved and their future earnings will increase. Exactly what is wrong with this?
You too, I have a 18,000 pound excavator parked in my front yard that I can play with and move rocks the size of VW Bugs. Sometimes we just never grow up!
Hate to see it below $60. The construction market is continuing to grow at a record pace and will put more pressure on prices to move up.