Cleveland-Cliffs Inc. (CLF)

Evraz is selling its North American subsidiary

Major Russian steel and mining company Evraz announced on Wednesday the planned sale of its North American business, and began seeking buyers.

Evraz North America describes itself as a leading, vertically integrated producer of engineered steel products for the North American rail, energy, industrial and construction markets. It has steelmaking capacity of 2.3 million tons per year.

For some strange reason, LG possibly had some advanced detail on matters with the Auto industry at large combined with Fed policy regarding the green agenda or reconciliation act were going to be substantial catalysts for the Autos because he was very confident in the Q2 earnings that there will be a reset near October and headwins will soon dissipate over that time. These were definitely the type of opportunities for Autos to help drive adoption at large scale which was why LG repeatedly mentioned EVs and described the EV industry in a commercial like manner because he knew these events would manifest eventually. I myself is shocked that the main components of the reconciliation bill that was rejected 7 months ago is now ratified with selective tweaks to the bill. But as always LG played this well and lead us to here bc there's no way he would describe the EV industry at that length on the earnings call unless he had advanced information that there were things moving in that direction in the background. Well played LG, well played...

Considering Cliffs share price movement since April reporting of financials, I observe there are four interacting dynamics that exhibit some “counterbalancing” opportunities and help explain why the share price dropped by more than half from April peaks at timing of the July financial reporting. And why the share price appears to be starting retracement going into second half of 2022.

1. Cliffs decision to deliver shares instead of cash to clear out that convertible debt Cliffs took on to build the HBI facility. Recall, I was among those suggesting that the convertible shares were giving cover for repeated short cycling suppressing the share price. I now observe that the short interest exhibited as pps was walked down from $34 about aligns with the Cliffs issued converted shares volume moderated by the 7 1/2 million buyback shares in Q1 and Q2. Cash vs. shares for redemption was the tough management call and we now see the outcome from using shares, muddled by other influencing factors.

2. The approximate $900 million reduction in Cliffs long term debt in Q1 and Q2 would have about funded the $1 billion authorized share buyback, but Cliffs outlaid less than $200 million for buybacks through 2Q. The net balance of things suggests the shares issued to retired convertible debt serviced much of the cost to clear out other, higher interest rate debt early— not so much the cash generated by Cliffs operations. Cliffs does appear to have pretty much cleared the cost of acquiring FPT in 2021, in the process, consuming FCF. Cliffs said in the 2Q investor call that they have $2 billion on hand to assign to…. what? Maybe debt reduction and authorized share buybacks or ?

3. Cliffs first half 2022 steel sales were down, maybe 1.5 million tons, vs. 2021. Attribution was to auto customer chip shortages, such that Cliffs is projecting that second half 2022 sales will be more normal (we might guess back above 4 million tons per quarter?). Concurrently, Cliffs 10Q reporting affirms that $ per ton of steel sold in first half 2022 are markedly higher than in 2021, allowing Cliffs more revenue posted in 2022 vs. 2021, despite lower steel sales volume. During the 2Q investor call, Cliffs is telling shareholders they expect steel contract pricing in second half 2022 and going into 2023 to be higher than that posted in both 2021 and first half 2022. Of course, Cliffs steelmaking inputs costs may also be higher, but Cliffs is suggesting FPT scrap efficiencies, half hedging of energy and commodity inputs and increasing demand for EV steel demonstrate Cliffs vertical integration benefits. Cliffs profitability projections going into 2023 are being supported. With all the hype and bluster about the HRC pricing surge, Cliffs contract pricing never allowed full flow through and updates in agreements still appear to be on catch up.

4. External factors like the R-U conflict have severely interrupted Russian, Ukraine and EU steel inputs distribution and global steel production while driving up the cost of energy. Soft China growth demand has exhibited a drop in steel futures pricing, delivering a countervailing influence against R-U conflict influences. It is a wild card projecting when conflict will end, healthy China growth will resume and markets will stabilize with their new normal. Yet, such stabilization could start in late 2022 entering 2023.

Opinions? Is my take on the 2Q reporting on track?

8-10-22 10:35 AM EST

The following is Year To Date performance as of 8-10 @ 10:35 AM EST.

Dow -8.46%

S&P -12.09%

NAS -18.49%

CLF -9.74%

MSB +2.54%

Roger - 1.08%

Use this as a yard stick to compare your overall portfolio performance to the indices.

IMO …... if your performance is better than the indices you have done well.

Just something to think about.