Cleveland Cliffs
Overview
Founded in 1847, Cleveland-Cliffs Inc. (CLF) is the largest and oldest independent iron ore mining company in the United States. Cleveland Cliffs is a major supplier of iron ore pellets to the North American steel industry from its mines and pellet plants located in Michigan and Minnesota. Additionally, the company operate an iron ore mining complex in Western Australia. By 2020, the company expect to be the sole producer of HBI in the Great Lakes region with the development of its first production plant in Toledo, Ohio. Driven by the core values of safety, social, environmental and capital stewardship, its employees endeavor to provide all stakeholders with operating and financial transparency.
The key driver of its business is demand for steelmaking raw materials from U.S. steelmakers. During the first two months of 2018, the U.S. produced approximately 13 million metric tons of crude steel, or about 5% of total global crude steel production, which is in line with the same period in 2017. U.S. total steel capacity utilization was approximately 75% in the first two months of 2018, consistent with the same period in 2017. Additionally, in the first two months of 2018, China produced approximately 137 million metric tons of crude steel, or about 49% of total global crude steel production. These figures represent an approximate 6% increase in Chinese crude steel production when compared to the same period in 2017. Through the first two months of 2018, global crude steel production increased about 4% compared to the same period in 2017. 1
The Platts 62% Price decreased 13% to an average price of $74 per metric ton for the three months ended March 31, 2018, compared to the same period in 2017. Volatility in the iron ore price impacts its realized revenue rates at each of its segments to varying extents, but its revenue realizations are not fully correlated. Pricing mechanisms in its U.S. Iron Ore contracts reference this metric, but its prices are somewhat protected from the volatility given that it is just one of many of the inputs used in contract pricing formulas. Asia Pacific Iron Ore revenue rates do not see a full correlation to the Platts 62% Price due to the discounts on the lower iron content of the ore sold there.
The company recognize the volatility of iron ore supply-demand dynamics and that changes in behaviors of the major iron ore producers and/or Chinese steelmakers could either lift or put pressure on iron ore prices in the near term. The company also continue to observe vastly improved demand for higher grade iron ore products, typically those of benchmark grade (62% iron content) and above, as Chinese mills put more emphasis on the productive and environmentally friendly nature of these ores. Assuming the margins at Chinese mills remain strong and the government continues to crack down on pollution, the company believe that the mills will favor benchmark quality ore, placing additional pricing pressure on lower quality ore.
This flight to quality has also manifested itself in increased pellet premiums during the first three months of 2018. The Atlantic Basin pellet premium, another important pricing factor in its U.S. Iron Ore contracts, averaged $58 per metric ton for the first three months of 2018, a 28% increase compared to the same period in 2017. The company believe this market will remain tight during 2018, especially with recent labor disputes at a major pelletizing operation in Eastern Canada. The company believe this scarcity will support these multi-year high premiums for pellet products.
The price for domestic hot-rolled coil steel, which is an important attribute in the calculation of supplemental revenue in one of its customer's supply agreement, averaged $757 per net ton for the first three months of 2018, 20% higher than the same period last year. The price of steel was impacted positively in the first quarter by healthy U.S. manufacturing activity, limited imports, and inflation on major steel input costs. Furthermore, during the quarter the U.S. Department of Commerce recommended restrictions on imported steel and aluminum under Section 232 of the Trade Expansion Act of 1962, as amended, on the basis of national security. In response to this recommendation, the President ultimately instituted a 25% tariff on steel imports into the United States, with exemptions for certain allies. Because the United States is the largest importer of steel in the world, the company believe these tariffs should not only alleviate some national security concerns, but also keep the prices for domestic hot-rolled coil steel elevated above historical averages for as long as the tariffs remain in place. As such, the company remain positive on its outlook for the domestic steel market.
For the three months ended March 31, 2018 and 2017, its consolidated revenues were $239.0 million and $461.6 million, respectively, with net loss from continuing operations per diluted share of $0.29 and $0.11, respectively. Despite having significantly lower sales volume at its U.S. Iron Ore segment, sales margin increased for the segment during the quarter when compared to the same period in 2017. However, total sales margin decreased by $99.9 million in the three months ended March 31, 2018 when compared to the same period in 2017, due to its Asia Pacific Iron Ore segment which realized lower revenue rates, lower sales volumes and incurred certain charges as a result of its current mine plan, which anticipates the closure of the Asia Pacific Iron Ore mining operations by June 30, 2018.
First Quarter 2018 Recent Developments
On April 6, 2018, the company committed to a course of action expected to lead to the permanent closure of the Asia Pacific Iron Ore mining operations and expect its final Asia Pacific Iron Ore shipment to occur by June 30, 2018. Factors considered in this decision include increasingly discounted prices for lower-iron-content ore, the quality of the remaining iron ore reserves at Asia Pacific Iron Ore and the lack of a commercially reasonable offer from a qualified buyer. Upon the completion of shipping activity, expected in the second quarter of 2018, this business will be treated as a discontinued operation and no longer included in continuing business results.
The company estimate total costs that will be incurred in connection with the closure of the Asia Pacific Iron Ore mining operations of approximately $140 to $170 million. This amount does not include previously accrued asset retirement obligations, release of cumulative translation adjustments or any proceeds the company expect to receive from asset sales, such as rail cars, mobile equipment and the ore handling facility. The expected costs of implementing this closure primarily consist of potential contract termination costs in the range of $60 to $70 million; employee severance obligations, demobilization and other closure-related costs of $30 to $40 million; and non-cash asset impairments and write-offs of $50 to $60 million. The company expect that the majority of these charges will be recorded in the first half of 2018. Of the total charges expected to be incurred, the company anticipate future cash expenditures of approximately $120 to $140 million, including certain capital lease liabilities previously recorded. This range of cash expenditures also excludes any proceeds the company may receive from asset sales and other mitigation strategies, to the extent successful.
During the first quarter of 2018, the company amended and restated its senior secured ABL Facility, extending its maturity to the earlier of February 28, 2023 or 60 days prior to the maturity of certain other material debt, and introducing several improvements from the previous facility, which was put into place in March 2015. The changes were introduced in alignment with its vastly improved financial condition since the initial facility was adopted, while continuing to provide it with the financial flexibility needed to operate its business and execute its strategic initiatives. In the amended and restated ABL Facility, the overall size of the credit facility was reduced from $550 million to $450 million and borrowing costs and unused commitment fees were also reduced.
During March 2018, the company entered into a restructuring term sheet with the Bloom Lake Group and the Wabush Group, which documents the proposed terms of a plan of compromise or arrangement in the CCAA proceedings (the “Proposed Plan”) to be sponsored by it as negotiated between it and the Monitor. This Proposed Plan requires both creditor and court approval.
Under the terms of this Proposed Plan, the company and certain of its wholly owned subsidiaries have agreed to forego the benefit of any distributions or payments the company may be entitled to receive as creditors of the Bloom Lake Group and the Wabush Group and to also make a C$5.0 million cash contribution to the Bloom Lake Group and the Wabush Group for distribution to other creditors. It is important to note that the Proposed Plan, as currently drafted, will not resolve certain employee claims which have been raised outside of the CCAA proceedings against it and certain of its affiliates and which will be addressed separately.
If this Proposed Plan is approved by a majority of the creditors of both the Bloom Lake Group and the Wabush Group, and is also approved by the court in the CCAA proceedings, and is implemented in accordance with its terms, then the Proposed Plan will resolve all of its claims against the Bloom Lake Group and the Wabush Group and all claims by the Bloom Lake Group, the Wabush Group and their respective creditors against it, except as noted above. The net financial impact of the Proposed Plan is materially consistent with amounts previously recorded in its financial statements.
However, if the creditors and the court do not approve the Proposed Plan, it is reasonably possible that future changes to its estimates and the ultimate amount paid on any claims could be material to its results of discontinued operations in future periods. Cleveland Cliffs is not able to reasonably estimate such impact because there would be significant factual and legal issues to be resolved if the Proposed Plan is not approved. The company will vigorously defend any claims if the Proposed Plan is not approved and implemented in accordance with its terms.
The motion to authorize the Bloom Lake Group and the Wabush Group to file the Proposed Plan and to schedule meetings of the creditors of the Bloom Lake Group and the Wabush Group to consider and vote to approve or reject the Proposed Plan was approved by the court on April 20, 2018.
