The New Production Plant Makes Cleveland-Cliffs Undervalued

Summary

• Cleveland-Cliffs is expected to have the first production plant of Hot Briquetted Iron in the Great Lakes region.
• Not every trader will know about the new asset and its valuation. The traders with information about the future FCF will have an edge over the rest.
• I studied the prices of HBI and concluded that $300 per metric ton is fair, which makes a revenue of ~$480 million in 2024.
• In my view, if the company can hit an EBITDA of more than $1 billion, the implied share price could even touch the level of $10.41.
• As traders get to know about the new plant, the share price will gradually creep up to cross the $9 mark. It is a magnificent buying opportunity.

Introduction

I believe that the EBITDA from the new Hot Briquetted Iron (HBI) production plant will push Cleveland-Cliffs' (NYSE:CLF) share price from $7 to more than $9. A conservative DCF model reveals that the new plant would bring, at full capacity, $150 million EBITDA per year. That’s not all. Using a terminal EV/EBITDA multiple of 5.5x-7x, I got an implied share price ranging from $9.99 to $10.41. In most of my case scenarios, the company is undervalued at the current stock price.

Why Valuing The New HBI Plant Is Important?

Cleveland-Cliffs Inc. is said to be the oldest independent iron ore mining company in the United States. It’s well-known by most traders as the company has been operating since 1847.

What people could not know is that by 2020, Cleveland-Cliffs is expected to have the first production plant of Hot Briquetted Iron in the Great Lakes region. The company is currently building the plant and expects to generate the first HBI sales in 2020 and 2021. In my opinion, the assessment of the EBITDA will provide valuable information. Not every trader will know about the new asset and its valuation. The traders with information about the future FCF will have an edge over the rest.

I have taken into account all the company’s assets to get an objective share price. The company has two operating segments: the Mining and Pelletizing segment, and the Metallics segment. The first segment is composed of one iron ore mine in Michigan and three iron ore mines in Minnesota. The Metallics segment consists of the HBI production plant.

Most sophisticated traders will say that I should value each of Cleveland-Cliffs’ mines. That’s fair enough. However, I will not do so. I am more interested in the value of the HBI production plant. Besides, market analysts and Cleveland-Cliffs don’t offer sales and EBITDA

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.