Cleveland-Cliffs: First Look At Q4 Results

About: Cleveland-Cliffs, Inc. (CLF)
by: Vladimir Zernov

Cliffs reports Q4 earnings way above estimates due to a release of a $461 million tax valuation allowance.

While realized prices dropped in Q4 due to weaker steel prices, current market data suggests improvement in Q1.

HBI project capacity is increased from 1.6 million tons to 1.9 million tons due to higher demand.

Strong liquidity and robust cash generation should further support the current upside in Cliffs' shares.

Cleveland-Cliffs (CLF) has just reported its Q4 results. The stock has recently been on a move, first supported by attractive valuation and then boosted by Vale (VALE) problems. In this environment, the Q4 results are especially interesting since they can either confirm the current upside trend or put some pressure on the stock. Without further ado, let's look at the numbers.

Cliffs reported revenue of $693.3 million and GAAP earnings of $609.5 million, or $2.03 per share. The earnings number was heavily affected by a $461 million release of a tax valuation allowance in the U.S. Cliffs expects to generate substantial taxable income and will utilize its deferred tax assets. Thus, while Cliffs believes that its effective tax rate for 2019 will be about 10%, the cash payments for taxes will be zero as the company will be using the deferred tax assets.

The decrease in steel price impacted the price of Cliffs' production. The company recorded revenue of $99.42 per ton in Q4 vs. $105.65 in Q3. At the same time, cash costs increased to $65.43/ton from $62.54/ton in Q3. However, the recent improvement in iron ore prices is expected to provide support to Cliffs' realized price: the company will get $102-107 per ton based on the iron ore prices of $76/ton, steel prices of $694/ton, and pellet premiums of $67.50/ton (averages for January). With current iron ore prices, Cliffs' realized price may jump to $111-116 per ton, although it remains to be seen whether they will hold, or iron ore majors will step in and compensate for the lost production from Vale.

Having generated $478.5 million of operating cash flow in 2018, Cliffs finished the year in good shape, with $823 million of cash on the balance sheet and $2.1 billion of long-term debt. Such material cash flow generation, solid cash cushion and $117 million in cash tax refunds that will be received in Q3 2019 put the company in a position to easily dedicate $425 million toward the HBI (hot briquetted iron) project in Toledo. Also, the company is increasing the productive capacity of the project from 1.6 million tons to 1.9 million tons, a sign of good demand for the product.

In my opinion, the report will help Cliffs continue the upside trend. While the steel prices have fallen in Q4, the company's realized prices did not fell that much and Cliffs still delivered solid cash flow, a sign of strength. The current quarter is set to be good for Cliffs with stable pellet premiums and a rally in iron ore prices. The HBI project is enlarged, highlighting the demand for this growth investment.

The company's liquidity position is very strong - Cliffs does not need a penny of outside financing to complete the HBI project given the cash cushion and solid cash generation. With Cliffs as a stock, it is always difficult to forecast the exact market reaction. However, this report should help the market realize that Cliffs is in a very solid position as a company and that wild downside swings that happened to the stock previously are not justified at all.

Needless to say, I remain bullish on Cliffs.

If you like my work, don't forget to click on the big orange "Follow" button at the top of the screen and hit the "Like" button at the bottom of this article.

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.

Additional disclosure: I may trade any of the above-mentioned stocks.