Q1 earnings will be marginal at best, I am hoping for a positive number. Remember, Q1 is the quarter where CLF builds inventory to carry them through the rest of the year and that steel companies are using their stockpiles they built to carry them through the frozen weather. The cost to build that inventory is booked in Q1 and CLF won't get revenue until that inventory is sold. LG needs to reassure the markets about this inventory management. But the highlight of the quarter should be focused on debt reduction and I would like to see $50 million or more each quarter of debt reduction from cash to show how strong their income statement is. $50 million per quarter should be easy to hit just from the elimination of the dividend and their tax benefit payments.
As Vip pointed out, you really need to look at CLF's core product, specialized iron ore pellets where value added premiums takes away the impact of the drop in seaborne iron ore prices. CLF will not return to $100 a share, but based on current pellet pricing and margins, there is no reason that CLF can make $3 a share and be selling at $40 a share once the dust settles.
With CLF's established US mines, low production cost and low transportation expenses, there is no way material can be imported for less or anyone can develop a new local mine for less.
Your historical price of CLF was based on iron ore selling for $20 a ton, it didn't break $30 until May 2005. Really, your comparison to the past is totally incomplete. Many miners expanded during this period and CLF made the same mistake. However, they are working through it and is managing to reduce debt levels at a rapid pace under the current low iron ore prices. Any increase in iron ore prices will only accelerate the debt reduction. Any decrease in iron ore prices will have a minimum impact as the current savings of reduced interest expense and tax benefits from writing down assets can continue to service and pay down debt.
Essar extended their contract with CLF past 2016. Bottom line, ESSAR cannot compete with CLF on price as their cost will be more than what they can buy pellets from CLF. Magnetation is another process that uses iron ore tailings that is much more expensive than what CLF is selling pellets for. You have to realize that Essar bought that land during the peak years for iron ore and have been hit at every turn with cost over runs to the point they had to shut it down and get more financing to continue.
Again, the price CLF will settle in at will be at 12 to 18 times earnings and I see earnings growing in the US through converting some of the scrap based mills, which is 60% of US production, to DRI pellets.
Currently, if debt was down to $1 billion, CLF's USIO would generate $3 a year in net profits.
We are seeing a lot of activity with the TSLA plant up in Sparks with construction picking up from Carson City to Dayton as highway 50 gives you easy access to the industrial park. When complete, that industrial park will be one of the largest in the world. Industrial rents have increased so much up in Reno, many are locating down in the Carson Valley.
We moved here to get away from the crowds and it looks like that is going to be short term.
CLF has addressed debt by taking action. Since LG has taken control, CLF will have reduced their net debt by $800 million in the last 8 months after Q1 results come in. All of this with only one coal mine being sold. With the BL bankruptcy, they have eliminated $600 million in future liabilities. With the impairment charges, they will see cash each year from tax advantage payments that will average $150 million a year.
Given all of this, CLF could easily trim their net debt down to $1.5 billion without selling a single asset by the end of 2015. Sell off the two coal mines and debt could be down to $1 billion.
But the key here is in this current environment of low iron ore prices, CLF has managed to reduce their debt! Think about it, many of the miners are increasing debt to replace cash they are losing every quarter. That action by CLF should tell you that debt is not a problem.
On this case, I share your opinion, we just don't have all the information behind the deal. I also share lishe's opinion on Fortescue, they should have done what CLF did with BL and stop their expansion with the current market change. Unfortunately they need revenue to pay the debt they have taken on and just needs to ship more and more iron ore. Maybe iron ore prices will go back up over $100 and all of this will be a distant memory.
And you know more about CLF's assets than LG does? However, on the other side, I just wish LG would come out and explain his actions so that we can take all this speculation off the table.
True asset value is what the company can earn off those assets. Book value of the assets is based on what they paid for them and are adjusted down with impairment charges. The one thing to remember, is the IRS does not allow a company to increase the book value of the the assets for the simple reason that they don't want a company to increase the total write off beyond what the company paid for it. I would rather make $500 million on $2 billion worth of assets than to make the same amount on $5 billion worth of assets.
US Steel has their own problems as they have locked in their price they pay for iron ore based on their established cost through their own mines. They have lost all price advantage at the current iron ore prices.
So far this year, steel production in the US is running about 5% less than last year with most of the decline coming from the energy sector. And imports have picked up 30% which means steel usage in the US is still expanding. Steel companies have the local advantage, they just need to adjust the way they do business here. US Steel and MT need to rethink their iron ore business and concentrate on reducing steel cost. Nucor and other scrap based mills need to rethink their supply chain. The business is here and buyers want their products, just not at the price they need to sell it for.
It will be all about earnings and cutting interest expense in half. Getting debt down to $1.5 billion will add 50 cents onto earnings, a company based on US iron ore can easily generate $2 a share, that gets CLF to $2.50 a share in earnings which puts the price at $30 a share at 12 times earnings. I too hated to see them sell their Chromite holdings for $20 million, but LG could be right about the area ever being developed. And if it is, pollution from chromite mining could get very expensive as First Nations extorts more and more from the miners. Because of First Nations and environmentalist, Canada may never be a low cost mineral provider.
There is a better future in DRI pellets in the US than chromite out of Canada.
What I like about CLF over all the other miners is that CLF is dealing with a value added product in iron ore pellets, not just digging material out of the earth and selling it.
Yes you are, I am more interested in GAAP and non GAAP numbers. I have never really figured out the current love affair with EBITDA other than it is the latest buzz word on CNBC. For my business, I keep it simple, how much cash do I have in my pocket at the end of the day.
Nevada… almost always sunny. On the cuts in US steel production, AISI provides you all the information. As a builder, I can tell you $50 more a ton for structural steel will make me move to imports. I would rather see cost reductions in domestic steel production rather than raising prices for imported steel. These scrap based steel mills have alternatives to reduce their cost now.
On the income statement you have interest expense and other income. The gains off of buying back bonds at a discount to face value will be realized as other income that offsets interest expense. This could have a major impact on earnings moving forward as CLF continues to pay down debt with asset sales.
The biggest cuts in production is coming from the South and West where the steel producers are scrap based. How can the compete with scrap costing $300 a ton and iron ore at $60? And with 60% of steel production in the US being scrap based, you can easily see where they have lost any competitive edge of being local.
It is too bad that LG was not invited to testify, he could have told Congress that expanding the use of DRI pellets could give steel producers in the US a competitive edge again.
Not really, just no news on BL, not even Investissment Quebec is talking. There is so many possibilities from many directions… coal, Asia Pacific and Canada! LG is using available resources to buy back bonds ahead of this news as he knows that when the news breaks, the price of those bonds will skyrocket. Stock takes a beating in the short term!