So, this is another step in the Cliffs' turnaround plan. The company is wasting no time. Just a few weeks ago, Cliffs signed a 10-year contract with ArcelorMittal (NYSE: MT), which was followed by a contract with U.S. Steel Canada. As a result, Cliffs increased its full-year production and sales guidance by 500,000 tons.
The company's shares rallied and were up 213% year to date before the S-1 filing. The good performance of the company's shares provided the opportunity to sell shares at a decent price. Here's my take on the news.
The exact price per share has not been specified in the filed prospectus. However, it will most likely be between $4.50 and $5.50, the recent trading range of Cliffs shares. In order to raise $300 million, the company will have to issue between 54 million and 67 million shares. The resulting dilution for existing shareholders will be 30%-37%.
Among other stocks that I follow and trade, I've recently seen two share offerings which did not result in short-term punishment of the companies' shares. The first one was Kinross Gold's (NYSE: KGC) $250 million share offering. In Kinross Gold's case, investors' rush to gold supported shares which now trade significantly higher than the offering price. This example is different from Cliffs' situation so I won't use it as a guide.
The more interesting example is Ensco's (NYSE: ESV) share offering which led to a 25% dilution of existing shareholders. Ensco's case is much closer to Cliffs as Ensco is an offshore driller and the current market situation in offshore drilling is very challenging. Ensco's share offering was warmly welcomed by the market as increased liquidity outweighed the dilution.
I highlighted two cases where the share offering did not put pressure on the company's share price, but, nevertheless, I don't think that this will be the case for Cliffs. The resulting dilution will be simply too big to avoid it in the short term. A number of positive catalysts fueled the recent rally in the company's shares, but no rally comes without a pullback and the catalyst for the pullback has finally arrived. I expect short-term pressure on Cliffs' shares as a result of the offering.
Speaking about longer-term perspectives, the offering is very timely. In the prospectus, the company stated that it intended to use the proceeds of the offering for general purposes and to repay 2018 notes.
By buying 2018 notes, the company will deal with the nearest debt maturity and the next one will not come until 2020. The company will have time to accumulate resources and continue to work on reducing its debt load, which is now the sole major problem for Cliffs and the main hope for those who are bearish on the company.
In my view, the strongest part of Cliffs' bull thesis is the management team. Lourenco Goncalves has shown his ability to pull the rabbit out of the hat multiple times. The share offering is another step in the Cliffs' turnaround plan, which will deal with the biggest problem - the debt load. I think that the timing for the offering is near perfect and that the offering is a positive catalyst in the longer term, although I expect that shares will be under some near-term pressure due to profit taking and increased short-selling of the stock.
Disclosure: I am/we are long CLF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.