Cleveland-Cliffs: Misunderstood And Underpriced

Summary

• CLF’s EPS estimates and FCF for the next 12 months obscure the true profitability. Shares trade at low P/E ratios to expected EPS and at 40% of forward FCF yield.
• The company will not only pay no cash taxes for years to come, they expect cash AMT refunds in the next three years.
• The HBI plant is on track to be completed 2 months ahead of schedule in June of 2020. After completion, CLF should see EBITDA of $1B and FCF of $780M.

The shares of Cleveland-Cliffs (NYSE:CLF) have been in decline despite the company being poised to become a free cash flow generating machine in about 12 months’ time. While the company’s FCF is currently reduced due to heavy CapEx for the North Shore plant upgrade and the HBI plant construction, once the HBI plant is operational in less than 12 months, the CapEx will drop and EBITDA will increase. In addition, insiders and especially the CEO keep buying shares and at the same time the company kept repurchasing shares at currently-depressed prices. Not only should the company generate a lot of cash, that cash is likely to be used in shareholder-friendly ways. At an as-guided potential FCF of $780M a year, or $2.73 per share, CLF currently trades at a projected 40% FCF yield.

Boiling the Frogs

Lourenco C. Goncalves, CLF’s CEO, certainly doesn’t mince words. I frankly love his opinionated approach to delivering his message. He was berating analysts for poor math in the past. Here is what he said in the last earnings call:

And 70 million share short, oh my gosh, I have already source of free money from this shorts. It's right there. They probably don't realized, but I continue to boil them like frogs in the pan full of water. It's as low but one day they don't realized that it's not a one pool it’s their death bath.

It is all good fun, but what is the significance? If you listen to the earnings call, you can deduce that the company is focused not only on increasing earnings and cash flows, but on the effective return of capital to shareholders. More specifically, buybacks at the currently-depressed prices, at the expense of short sellers.

As always, we did not fight the take, instead we took advantage of the

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in CLF over the next 72 hours. 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.

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