Cleveland-Cliffs Reveals Details Of Australian Business Closure

Summary

• Cliffs expects to close Australian operations by June 30, 2018.
• The estimated cash expenditures are $120 million-$140 million.
• The key question is whether the company will be able to fully mitigate the negative impact by selling various items in its Australian operations.

Cleveland-Cliffs (NYSE:CLF) has recently published an 8-K filing where it revealed the details of its exit from Australian operations. The company has previously warned that it would shut down its Australian operations this year, but now we can see an exact timetable and company’s estimates of the exit costs.

Cleveland-Cliffs announced that it will close Australian operations by June 30, 2018. Total costs of the closure are estimated at $140 million-$170 million. Included in this estimate are contract termination costs ($60 million-$70 million), employee severance obligations and other closure-related costs ($30 million-$40 million) and non-cash asset impairments and write-offs ($50 million-$60 million). Speaking about the impact on cash, Cliffs estimates future cash expenditures of $120 million-$140 million, as they include certain capital lease liabilities that were previously recorded on the balance sheet.

Here’s what is important for those interested in Cliffs’ shares. The company will spend about $130 million of cash to exit the Australian business. Meanwhile, Cliffs will be selling everything it could sell from these operations. During the latest earnings call, the company stated that the exit would be “pain free” due to mitigation strategies. What “pain free” means numbers-wise is unclear at this point, and I hope to hear more details during the upcoming first-quarter earnings call, which is scheduled for April 20.

The timing of the announcement is no coincidence. As per the latest annual report, the company had supply agreements with steel producers in China which expired in March 2018. Also, supply agreements with customers in Japan expired in March 2018. Obviously, Cliffs decided not to renew these commitments due to hefty discount to IODEX prices for Australian lower-quality ore.

In my opinion, the impact of this speedy exit will ultimately be positive for Cliffs' shares. The reason for this is that the company shares have often been punished on bad days for iron ore because it was viewed as an “iron ore miner”, while it is de-facto a pellet producer focused on the domestic U.S. market. The main driver for pellet pricing is the health of the domestic steel industry rather than IODEX price fluctuations. Once the Australian segment is gone, the market will part with illusion that IODEX price fluctuations are the key catalyst for Cliffs’ performance.

Fundamentally, the exit from Australia was inevitable so I don’t expect any major reaction from the stock market following the news. The first quarter is the weakest quarter for Cliffs, so the upcoming quarterly report will not look great. However, the guidance for the rest of the year is much more important. Earnings estimates for Cliffs keep climbing up (as opposed to the company’s stock which stays at the low end of the current range), so if guidance confirms that estimates are going into the right direction, the stock will have material upside. At current prices, Cliffs is valued at less than 7 forward P/E, which, given the solid dynamics of the domestic prices, is ridiculously cheap:

Source: steelbenchmarker.com

It’s hard to tell when the market finally turns its eye to the company’s positive fundamentals and focuses on the cheap valuation. The stock is currently trading at a local $6.50-$8.00 range, and I will repeat once again that Cliffs' shares are historically better bought on pullbacks rather than on breakouts. Stay tuned, the Q1 report is coming soon.

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Analyst’s 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.