It is the reason CLF continued to build cash or build inventories over the last couple years. Q1 and Q2 took a loss, but yet they built an additional $300 million in inventories, but no one even looked at that or did the company explain it.
On Pinnacle, it is their oldest mine and they have shut it down in the past when coal prices dropped. I have no idea why, maybe it is the grade of coal.
On impairments, it is a strategy the IRS allows a company to accelerate their amortization charges to generate cash through reduced tax when cash is needed to get through a difficult economic situation. So you really need to look at the reason for these charges as a business strategy.
Simple, one time cash charge offs and non cash impairments. Remember those impairment charges? They took a big hit to earnings at the time, but the IRS will not allow a company to take the whole write off in that tax year and they won't let them take a NOL, the company has to amortize those charges going forward. So those charges reduce taxable earnings going forward.
All of these charges reduce their bottom line, however does not affect their ability to generate cash. But the shorts pile on the bottom line numbers and CLF management just sits around and does nothing to fully explain their business. It appears that Casablanca is no better than the past group of idiots.
I have forecast earnings in the past and have been really close on revenue and cost of production, but i have been blown out of the water with the charges to earnings the company comes up with.
But really, $25 for DD & A is way above the normal $5 a ton. Examine that and you will find the real reason for the losses.
If your shares are borrowed, you cannot vote those shares and you do not get paid a dividend directly from the company, the dividend comes from the short that borrowed your shares. So technically, you don't own those shares.
Technically the person that allowed a short to borrow their shares no longer owns them but holds a obligation that the short will replace those shares. In reality, the act of shorting and naked shorting create shares and skews the volume to the sell side. For me "Counterfeiting Stock 2.0" explains it best.
When you look at CLF's basic business, they are very profitable. Where they lose it and always blow my estimates out of the water is their write downs and charges. I understand that many of these write downs are non cash charges that reduce taxes and actually put more cash in their pockets, but hit against earnings give shorts a topic to attack the company.
This quarter I am sticking with my 50 cent gain, but will be happy with 16 cents.
"In the week ending September 20, 2014, domestic raw steel production was 1,891,000 net tons while the capability utilization rate was 78.6 percent. Production was 1,875,000 net tons in the week ending September 20, 2013, while the capability utilization then was 78.3 percent. The current week production represents a 0.9 percent increase from the same period in the previous year. Production for the week ending September 20, 2014 is up 0.5 percent from the previous week ending September 13, 2014 when production was 1,882,000 net tons and the rate of capability utilization was 78.2 percent."
will make or break earnings. Weak sales in Q1 and Q2 due to weather killed total profits. Looks like Q3 is going to double US ore sales, what we need is for CLF to come out and confirm strong US sales ahead of earnings. Current Great Lakes shipments and US steel production point to 8 million tons for Q3.
The only thing you are missing is their income tax benefit. When they took those impairment charges, the IRS allows them to increase their amortization charges into the future. Those amortization charges take money off their income and reduce their taxes. It is that reduction in taxes that allows them to post a tax benefit that offsets those increased charges to earnings. I expect to see a $30 to $40 million tax benefit in Q3.
I have missed with CLF taking charges against earnings so I figure in Q3 they should earn $50 million.
The major wild card is a reduction in inventories from $680 million to a normal $350 million. They have paid all the cost to produce this inventory in Q1 and Q2 so when they sell it, CLF will see a large influx of cash.
Bottom line, look at Great Lakes iron ore shipments… CLF accounts for 50% of that amount. Look at CLF's iron ore contracts in the US and then simply add the numbers.
I am not much of a chart person, stay with income statement and balance sheet. But it is good to have another view that confirms my findings. If their any failures, it is the failure of management, the old and new ones, to communicate these points to the media and stop the short attack.
You might want to ignore Robert, the sheep dip and Bob (smickersmack)… they are one of the same.
Everyone is hung up on this compensation package. Morally it is not right, but the total amount is not really that much and there isn't a thing anyone can do about it. What really needs to be done is CLF needs to reduce their inventory levels to $300 million, that will give them more than 10 times the cash they are spending on severance packages. It is 1.5 times more than they are spending on stock buybacks and probably equal to the offer they had on the table for Wabush.
CLF should be able produce and ship 6 million tons in the US without spending a dime on overtime. They should be able to draw down inventories and ship 8 million tons without spending a dime on overtime and hold their cost of production down to under $60.
What people don't realize is that their cost of sales was high in Q1 and Q2 because they paid to produce inventory they did not ship. Plus their cost of production include amortization charges from the impairments they took earlier. Those charges increase their cost and then you see a tax benefit on the income statement that offset that charge as added income. The IRS designed this goodwill charge just for this situation to allow companies to generate cash during economic downturns in their business.
Shorts are making you get hung up on a compensation package that does not impact the bottom line that much to divert attention away from factors that shows how CLF will survive this downturn in iron ore.
I owned LVS during their fight with shorts and the buyback was really close to the bottom and LVS was close to bankruptcy but the CEO made a major purchase of shares which caused the shorts to cover. CLF does not need to sell assets to buy back shares, they are sitting on $680 million in inventories when their normal inventory levels are $350 million. They need to bring that level down and it will inject $330 million of cash into the business since that inventory has already been expensed out.
Looking at their income statement, CLF has a high depreciation, depletion and amortization rate due to the impairment charges they took earlier which the IRS allows companies to amortize those cost into the future. This gives the company positive cash for continuing operations. They really don't need to sell any assets to pay for any of this.
I would like to see Gonclaves come out and do an earnings and cash estimates for Q3. I am hoping we see a major draw down in inventories, it would be nice if he at least addressed that.
Based on Great Lakes iron ore shipping, I came up with CLF shipping 8 million tons in Q3 and leaves just 8 million tons in Q4 to meet their expectations. I have a feeling that with the problems steel mills experienced last winter, they will purchase more ore heading into the winter months. CLF's profit on US ore should be $29 a ton which is a profit of a little over $200 million on US iron ore. They should see a profit of $30 million on Asia Pacific, $50 million loss on coal and $30 million loss on Canadian iron ore. That leave them with a net profit of $150 million, however they will have write offs of $100 million with the proxy fight, severance and mine closure expenses. So I give them a chance to make $50 million. What will be interesting is their increase in cash which if they trim their inventories down to a normal $350 million, CLF could build $450 million in cash.