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Cleveland-Cliffs Inc (NYSE:CLF)
Q2 2019 Earnings Call
Jul 19, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Mariama, and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs 2019 Second Quarter Conference Call. [Operator Instructions]

The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protection of the Private Securities Litigation Reform Act of 1995.

Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in the reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on the company's website.

Today's conference call is also available and being broadcast at clevelandcliffs.com. At the conclusion of the call, it will be archived on the website and available for replay.

The company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning.

At this time, I would like to introduce Keith Koci, Executive Vice President and Chief Financial Officer.

Keith A. Koci -- Executive Vice President, Chief Financial Officer

Thank you, Mariama, and thanks to everyone joining us this morning. Before getting into the discussion of our second quarter results and outlook. I wanted to briefly highlight the financial transaction we completed earlier in the quarter to improve our balance sheet. Shortly after we reported our last quarter results, we issued $750 million in unsecured notes due in 2027 at a five handle coupon. This new issue allowed us to both retire legacy notes coming due in two years and reduce the size of our largest debt maturity tower in 2025 by $600 billion. With the transaction closed, we have no debt coming due until the year 2024. Also, our previous $1.4 billion maturity tower Tower in 2025 was nearly cut in half and pushed out another two years to 2027.

We accomplished all of this without a material change to our annual debt service expense, even though our balance sheet was already in excellent shape, we are and will always be on the lookout for opportunities like these to make it stronger.

Now to our financial results. For Q2, we reported total company adjusted EBITDA of $249 million, a dramatic increase from $21 million in the first quarter, which is typical for the seasonality of our business as it is today, pre HBI. Our Mining and Pelletizing segment generated $281 million in adjusted EBITDA, an impressive result driven by stronger than expected shipping volumes of 6.2 million long tons as our customers maintained a healthy appetite for pellets throughout the quarter.

For the full year, we were able to maintain our pellet sales forecast of 20 million long tons. Despite some reduction and nominations from one major client, our newly accomplished ability to produce and export meaningful tonnage of DR-grade pellets coupled with better overall pricing in the seaborne market, were enough reasons for us to allow and maintain our forecast. Lourenco will discuss that in more detail later in this call.

The remainder of our expected 2019 shipping volumes will be more back-loaded to the fourth quarter when the mills usually stock up before the annual winter freeze. During the second quarter, we had a six-year high on pellet price realization with an average net back selling price of $113 per long ton. That was driven by the rapid increase of iron ore prices we have seen this year, which was good enough to more than offset the negative effect of falling domestic hot-rolled coil prices throughout the quarter, with HRC index pricing reaching a low of $510 per short ton. During the second quarter, we had to make a sizable negative true up adjustment to revalue pellets sold in prior periods.

Conversely, because our sales contracts utilize full year averages as indices and some contracts have quarter lag provisions, we have not fully benefited from the latest levels of iron ore pricing and our price realizations just yet. As iron ore prices continue to average up and assuming the recent recovery in steel prices continues on its current upward trajectory, we would no longer be subject to negative true ups and can expect even higher selling prices for our pellets in the future.

Our cash costs for the quarter was $67 per long ton, consistent with the guidance we gave last quarter where we expected to be at the high end of our outlook range due primarily to higher royalties and higher profit sharing. As a whole, all other major cost components, including labor, energy, stripping, recoveries and materials have remained consistent with our original forecast. We expect cash costs to remain steady at the Q2 level during the back half of the year. Another positive item for the second quarter was that due to the completion of our Northshore plant upgrade ahead of schedule, we were able to record a small volume of intercompany DR-grade pellets to our Metallics segment. Because of the early completion of the NorthShore project, and coupled with the anticipated ahead of schedule start-up of the Toledo plant, we now plan on transferring more pellets to our facility this year than previously budgeted. We are increasing our DR-grade pellet intercompany sale expectation from 500,000 long tons to 800,000 long tons, all of which to take place in the third quarter. Because these pellets are for intercompany use. Unlike our third party commercial arrangements, these sales are recognized immediately after they are produced instead of when delivered, explaining why all 800,000 long tons will be recognized the sales in the third quarter.

Accounting wise, you can begin to see how the intercompany DR-grade sales are being treated in our financials. The margin we will generate by selling DR-grade pellets to ourselves should be roughly comparable to the industry-high average margin of the rest of our merchant pellets. We record the revenue and cost of goods sold associated with the transfer at the segment level, but these intercompany sales are eliminated from our consolidated results. As such, in this quarter and next quarter, our corporate consolidated revenue and cost of goods sold will be lower than that shown in the Mining and Pelletizing segment, and the eliminated margin on intercompany sales will run through the corporate line item in our segment breakdown of EBITDA.

Finally, once the HBI associated with these pellets is actually sold, you will see this margin really included in our consolidated results and EBITDA. This will have the positive impact of removing some of the seasonality inherent in our pellet business since we will be able to sell HBI throughout the winter. And wrapping up my remarks, less than a year left until the major capital spend on HBI is done. We are just on the brink of our much anticipated overwhelming cash flow generating position. It may be difficult for some to see right now, given we are still in peak capital spending mode on HBI, but in less than 12 months, we'll be looking at a business that is set up to throw off enormous amounts of free cash.

I'd like to stay with our HBI plant completed and in full production, free cash on an annualized basis will be EBITDA minus $220 million. Other than, $100 million of sustaining capital and $120 million of debt service, all the rest of the EBITDA is free cash. Since we will continue to use our NOLs and I have to disperse any cash to pay taxes for the foreseeable future. And we are not even adding to this free cash number, the cash coming from our future AMT refunds, which are real as you all know. Our price levels comparable to what we've seen this year and with HBI layered in, we would expect to generate about an annualized $1 billion in EBITDA, meaning that we would have around $800 million in free cash flow to return-to-shareholders, primarily the stock buybacks and increased dividends.

On that positive note, I will turn it over to Lourenco.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Thank You, Keith. And thanks to everyone for joining us this morning. I'm going to pick up right where I left off in the last quarterly conference call with the same exact message I had last quarter regarding the current and the future situation of supply and demand of iron ore. Welcome to the New Normal get used to the New Normal. There is no short term or medium term solution for the shortages in the Seaborne Iron Ore market with Cleveland-Cliffs profitability closely tied to the iron ore markets. We have a nice future ahead of us. This is exactly what I told you in the last call when the IODEX had just passed the $90 mark on its way up.

At that price level, or is likely above that number, the commodities desks of several financial institutions and other so-called experts, one after the other have closed the iron ore benchmark price at the peak. And here we are today, three months later with the IODEX, more than 35% higher than that at $121.85. So one more time. There is no short-term or medium term solution for the shortages and the seaborne iron ore market. Welcome to the New Normal get used to the New Normal.

Despite our prediction during last quarter's call and despite the iron ore price increasing day after day system, this stock market had no conviction about how much or even if our second quarter results would actually benefit from that. As always, we did not fight the tick, instead, we took advantage of the prevailing skepticism. We increase the size of the share repurchase program and brought back another $130 million worth of Cliffs share during the second quarter, bringing the total amount spent to buy back shares to $300 million since the inception of the program just eight months ago.

Other than HBI there was no better use of our capital, then repurchasing shares, which we did [Technical Issues] average of $10 per share. And now after buying back a total of 10% of our outstanding shares, our long-term shareholders own over 10% more of the Company than they did just a few months ago without having to do a thing, but stay long. Soon enough, when we're through big capital spend and producing HBI nameplate, these will be seen as an absolute no-brainer. As always, I thank very much all the sellers of the shares we bought back. You sold your shares very cheap, again, thanks for your gift to Cliff's shareholders.

Besides the new normal for iron ore prices, we had a view that drives our moves going forward is that the current weakness in the domestic steel market is temporary. Actually, we are already seeing the recently announced the steel price increases sticking. And we have conviction that we have already past the bottom for hot-rolled and steel prices in the United States. As far as domestic steel prices, from now on, the trend is upward. Despite the low HRC price being an important part of the pricing formulas in our contracts, we were able to hit a six-year high in pellet price realizations, thanks to the IODEX performance.

Just as we intended, when we redesigned the new pallet contracts for Cleveland-Cliffs a few years ago. Unlike four or five years ago, we had now much better protected to whether demand reductions related to speed bumps in the domestic steel sector. If you recall, in 2015, we had several of our customers curtailing production at their blast furnaces, and we were forced to idle two of our minds new response. Since then, we have been actively mitigating this situation and taking preventive measures. I guess the possibility of such problem occurring ever again.

First, with the addition of our HBI plants, we have created new demand for almost 3 million long tons of pellets per year. These new demand will, in good times, tighten the market and in bad times, provide us with volumed certain, while paying ourselves at a healthy margin. Second, our new pellet contracts have more take or pay components that minimize nomination reductions, providing us with another layer of protection. Third, we now have more optionality and product flexibility. We can make a standard, fluxed, super flux and DR-grade pellets. We can access both the EAF metallics market or the traditional blast furnace market with quality specs for the full spectrum of needs.

And finally, with the new normal in iron ore pricing, we have the export market as another high margin outlet for our pellets. While we continue to first meet the obligations under our local supply agreements in the event of nomination reductions, we can now sell to buyers overseas and still make decent money. Although the pellet premium hasn't moved much since the beginning of the year, pellets are much more expensive in the seaborne market by virtue of the increased IODEX. Remember, the pellet premium is the sum of the iron ore price with the pellet premium. Just doing simple math on the IODEX and pellet premium and assuming current freight charges to ship out of the Seaway in today's export market.

We would be able to enjoy price realizations in the seaborne markets similar to what we currently get from our long term domestic clients. That effectively provides us with another creative alternative source of demand for Cliffs pellets outside of the United States. In fact, over the past months, we saw one of our customers pulling forward planned maintenance into this year and lowering its pallet nomination as a result.

So far, we are offsetting these revisions by sending more pellets to our Toledo facility, which is actually necessary, giving the accelerated start update of the HBI plant. We are also scheduling a few vessels to the export market, including sales of both blast furnace and DR-grade pellets to seaborne customers. As you can see from our consistent cost results, we'll continue to produce these pallets in reliable, safe and environmentally friendly manner and should be able to accommodate revised pellet nominations without complication.

Also, we can always assume that a portion of the demand not being served by disruptive maker is actually being covered by another Cliffs customer as we actually saw some incremental demand from another client. An event our strategic foresight to be ready for new scenarios is the reason why we are heading toward our fifth consecutive year of EBITDA growth. Even with low domestic steel prices offset by a new normal of robust IODEX and the scarcity of pellets in the seaborne market.

We will be even more protected next year in going forward with the addition of HBI to our portfolio, with the conclusion of our Northshore upgrade project in the second quarter and initial production of DR-grade pellets ahead of schedule. We were also able to push the conclusion of our Toledo HBI plant construction to an earlier start-up. With that, we are now aiming to start commercial production of HBI no later than June of 2020 or two months ahead of the original schedule.

At this time, I would like to personally thank and congratulate Craig Filizetti and all involved in the completion of the NorthShore upgrade for their hard -- I'm sorry, Steve Pause and all involved in the Northshore upgrade for their hard work, first, for delivering a DR-grade pellet on spec in the very first batch and second for making possible an earlier start-up into Toledo. On that note, this first quarter was a productive one for us in Toledo. Among other accomplishments, we finished this sticky build portion of the reactor tower, which is currently -- which currently stands 200 feet tall. From now on and over the next few months we will be using the largest crane currently in operation in America to finish the remainder of the tower and to complete the 450 foot tower structure. We're also moving our General Manager of construction in Northshore is Steve Pause to help the General Manager of Toledo Craig Filizetti and I have -- a combination of Batman and Batman taking care of the very end of the construction of Toledo which we are very excited with.

With project's completion and commercial production now left in the year away. We have reached the spot where we have certainty and visibility on total spend. We have always been working with 20% construction contagious expectation, which is the usual standard for a project of this size. Now that we have clarity on completion, we are pleased to report that we only need to allocate about 13% as contingency. The primary items making up this allocation are additional infrastructure and additional soil stability work necessary to facilitate a bigger and more automated plant than originally planned and, most important, the extra labor costs driven by the advanced construction schedule.

After allocating the contingency and assuming a busheling scrap price environment going forward consistent with the last two years the final IRR of the project calculates at a very good number of 26%. Private equity would queue for a 26% internal rate of return. That's our number. The rewards of our HBI plant are not just financial. Those that closely follow the industry are well aware that the transition from blast furnaces to EAFs further enhances our already Pristine Environmental and emissions profile in the United States.

The steel is present in virtually everyday. Despite several centuries of effort, the world has yet to identify a viable replacement for steel while producing and consuming steel at a pace that continues to accelerate. However, I made this point before and I would do it again. The world needs more steel, but the world also needs less pollution. I really hope that the current move we have been seeing in the capital markets toward environmental, social and governance compliance to be real. If that proves to be the case in the not so distant future, only ESG compliance companies like Cleveland-Cliffs in countries like the United States will deserve the allocation of capital from sensible investors.

When that happens, China and others to making countries like India will not be able to continue to pollute the world environment as they do now almost completely unchecked. Particularly in our space, once clean steelmaking is finally embraced worldwide, the future will be high grade iron units. Many higher-iron-content ore pellets and metallics. This is what Cleveland-Cliffs is about. And any initiative we explore in the future will be centered on this core products, predicated by what we feel is an undeniable trends. Wrapping up, we are already benefiting from the new normal with a shortage in the iron ore market, particularly for pallets. And soon enough we should benefit from the next trend and overdue push to environmentally friendly steel making worldwide.

With that, I'll turn the call back over to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Lucas Pipes with B. Riley FBR. Your line is open.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey, good morning, everyone, and congratulations on another very good quarter.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Thanks, Lucas. Good morning.

Lucas Pipes -- B. Riley FBR -- Analyst

Good morning. Lorenzo, I first wanted to ask on the CapEx side. So there were a couple of moving pieces you mentioned the lower contingency of 13 % versus the 20% previously. But then you increase this year. Well, I mean, the way I understood it maintaining the total CapEx guidance for the project. Could you just kind of walk us through it? What are we expect? What should we expect? What 2020 in terms of capital spending? And where would we see the benefit of the lower contingency? Thank you.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Okay, Lucas. Thanks. Lucas, the budget continues to be $830 million, and we are actually giving a few good news -- we're delivering a few number of good news regarding the project. First, we are now less than a year away from a conclusion. With that, with the fact that we anticipate at least two months, the conclusion of the projects and start-up of the plan. It's time to allocate conditions based on our best estimate at this point, we don't need the entire 20% that we have been working with since the beginning of the project only 13%. So if you calculate the number, it would be something like $110 million on top of the $830 million that we're talking out.

And the effect that we're spending more this year than we previously anticipate this is very easy to understand. We are spending money this year that we're supposed to spend only next year. So things that were in January or February of next year and now in December, November, October of this year. So we need to bring up -- this expenses up front because we are ahead of schedule. So that's the difference in 2019 CapEx. And as far as 2020 EBITDA balance, though quality -- the $830 million plus, the contingency -- as the number for completion, no matter if you do a little more in 2019 or a little less in 2020, we're still doing the same thing. So that's the entire story.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. Okay. That's helpful. Thank you for that. And then the 26% IRR, does that include any of the benefit that you would capture on the Mining and Pelletizing side? So you mentioned you're going to tighten the pellet market as well. And then I see opportunity for higher prices when you sell intercompany versus some of the contracts you have out there. Would that benefit be captured in the 26% IRR?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Yeah, thanks for asking the clarification. And the answer is no. We are considering the 26% -- we are calculating the 26% IRR after being for the DR-grade pellets that you are delivering from NorthShore to Toledo at market price. If you include the benefit of the production of DR-grade pellet [Indecipherable] and you account for the DR-grade pellet cost. The IRR would be way above 30%. But that would be disingenuous, Lucas, because we also spend $91 million or $92 million at NorthShore to create that capability. So I don't have from the top of my head, the IRR combined, including those projects. But I assume that you'll be in the low 30s -- 30%, 31%. But then I need to add the CapEx that was spent there as well. So I'm just staying with the CapEx of Toledo and I'm considering the price of feedstock pay that market price that not at cost includes profit.

Lucas Pipes -- B. Riley FBR -- Analyst

Perfect. Got it. Got it. Okay. That's very helpful. I will turn it over for now and continue it. Best of luck. Thank you.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Thanks, Lucas.

Operator

Your next question comes from Alan Spence with Jefferies. Your line is open.

Alan Spence -- Jefferies -- Analyst

Good morning, and thanks for taking my questions. First on CapEx, I'm wondering how quickly after you reach commercial production you think you can get that to reach and kind of nameplate capacity?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Good morning, Alan. Nameplate will be targets for 2021. 2020, will be the year that we're going to finish the plant. We are going to do a lot of trials with declines that to continue to discuss with. The clients will progressively fell in love with -- fall in love with the product, we know that, that will happen. That will be the first part of the step. The second step, they'll get rid of the pig iron from Russia, pig iron from Ukraine, these -- exotic countries that are enemies of the United States by and large, like Russia. So we can't wait to take these guys out of their market very quickly. So that's the route we're going to do and that's the work we're going to do in 2020. And we've planned to do all that during 2020 to a point that when we hit January 1, 2021, we'll be in nameplate pace already. So you should consider that 2019 will be whatever it will be, and 2021 will be nameplate.

Alan Spence -- Jefferies -- Analyst

Okay. Understood. Thank you. And more near-term, obviously a very strong set of sales volumes for this quarter. And I think Keith made the comments earlier about kind of being, the remainder of the year, a little bit more back half, back-end weighted. How should we think about sales volumes in Q3 versus Q4?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

We are expecting Q3 volume at $5.5 million or more. In the Q4 -- something above $6 million, let's call between 6 million and 6.2 million. So these are the numbers and that is all but you are not adding up to 20 million because we -- at the same talking that we are expecting the number just mention to you in Q3. Weather is staying the way, weather it is right now, we should do better than that. And Q4 is always an unknown because we never know when winter will hit. I think that the biggest points to consider right now, Alan, if you allow me, is that any dramatic drop of nomination that the clients put on us right now, by the way, abundantly clear, full disclosure so far, no dramatic decline in the nominations, only a decrease in nominations from one client partially offset for another -- by another client that increases their nomination. So far, so good. But the biggest change with this company right now from the client's perspective is that they start dropping the nomination, right now, when the sun is up in the sky and the weather is good and the lakes are actually that we have so much water in the lakes that we can load the boats above and beyond what was a draft line before. And we're really taking advantage of that because we have a depth in the lakes that are favoring transportation. Dropping nomination right now can be a suicidal move because I'm going to start moving pellets into Toledo, I'm going to start moving pellets to Quebec City to export and we'll comply with all nomination arrangements and all commitments that we have with the declines. I'm just not going to be as fast as in the best to go back when they have a change of mind. So they might need to wait and that is the problem.

I don't know if you follow the complete convoluted explanation, but I'm just showing you that at this point where a lot more protected against fluctuations in nomination we did the context, but the clients are more exposed and they need to take that into consideration when making their decisions on change in nominations.

Alan Spence -- Jefferies -- Analyst

That's very clear. And just a quick clarification, the Q3 number, is that inclusive of the 800,000 tons you'll sell internally?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Yes, sure. Yes.

Alan Spence -- Jefferies -- Analyst

Okay.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Because physically, we need to use the same fleet, the same port, the same handling equipment. So yes, that's correct.

Alan Spence -- Jefferies -- Analyst

Okay. Thank you very much.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Your next question comes from Matthew Fields with Bank of America. Your line is open.

Matthew Fields -- Bank of America -- Analyst

Hey, Lourenco. Hey, Keith. Congratulations again on the progress on the Toledo.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Thank you very much.

Matthew Fields -- Bank of America -- Analyst

Just want to ask about -- jump all over -- I'm sorry, but so you're exporting a few pallets, both sort of regular pallets and DR-grade pallets out of Quebec City. What's your sort of net back math on getting that to Europe?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

That's very similar to the current up to freight. The current in the domestic market. If we -- pricing is factored into the range. So we -- because of the current favorable conditions to export price wise, we can net back more or less the same thing even we were paying extra freight.

Matthew Fields -- Bank of America -- Analyst

So if iron ore is give or take $120 million, the pellet premiums give or take $65 million or $70 million and your freight is x, netting back to you, you're getting about $110 million or $112 million on your net back for realizations.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Yeah. We -- the range that we provided the -- stands regardless of selling everything dramatically or selling a portion exports.

Matthew Fields -- Bank of America -- Analyst

Okay. Great. Thank you. And then, you mentioned that your capital allocation is kind of going to be once we're at nameplate in 2021 and beyond. Capital allocation will be primarily for dividends and share buybacks. Does that mean kind of the current debt value -- your current level of debt, which is, you know, $2.2 billion roughly? Is that the right level of debt for Cliffs going forward once Toledo is up and running? Or do you want to see it a little higher or a little lower?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Okay. This thing of a right level of debt is very tricky. And in the past, when we had to really clean up the balance sheet and do things that put the target of $1 billion, which we kind of got to because, I got to $1.3 billion, but I spent $300 million buying out my partners two of the operations and buying land in Nashwauk, if you recall that, Matt. And now we also spend another $300 million with share buyback. So it's a moving target. The fact of the matter is, we are extremely [Indecipherable] Keith Koci was explaining. We're extremely comfortable at this point because as soon as we have HBI up and running our EBITDA minus $220 million is free cash. And what we do with free cash in a Company like Cliffs? You'll give it back to the shelves through share buybacks, through increased dividends, through a special dividend. So that's what we're are happy to hear. We are not going to spend more than $100 million in CapEx a year after we have HBI done and up and running. And remember, HBI needs a -- the HBI plant needs a lot less CapEx than a concentrating pelletizing pallet plants in the mine. So it's a different animal as far as maintenance CapEx. So $100 million a year is actually rich, but let's consider $100 million. And then we have the $120 million in interest expense that's pretty much it and toward the foreseeable future. Remember, we don't have anything to address until 2024. So EBITDA minus $220 million, that's the money that we have available to pretty much give back to the shareholders every year.

Matthew Fields -- Bank of America -- Analyst

And there's no M&A or other expansion plans that you'd allocate cash to on the top of mind.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

But not today. I can't say never. We are always looking for opportunities, but these opportunities are far -- few and far between. It's very difficult to exceed the returns of that and share repurchase at this point. Remember, we made an economical decision to buy back stock. That was our -- I explained that before I started. So we are always analyzing this M&A thing, M&A possibilities. We are always analyzing against alternative uses of capital, once ready to grow just to be bigger. I'm comfortable with the size, I'm comfortable with what I'm doing, I'm comfortable with my industrial basis and I'm more than comfortable, I'm super excited about the fact that very soon we're going to be producing HBI.

So I don't need size to feel better. I feel very good the way we are, and I feel even better, if I start to returning money to the shareholders in a more massive way. We are returning a lot, $300 million. One research analyst called today the buyback of another company much bigger than us, they acquired back $127 million. He called that strong execution. I did not even know that buying back stock was in execution. But execution for me is operating and selling stock. But anyway, if $127 million for that huge company is strong execution, $134 million is miraculous execution. So we are returning a lot of money to their shareholders on that. Our dividend increased 20%, it's 21% some may say -- try to dismiss our dividend, saying, it's only $0.05 -- it's just $0.06, [Phonetic] well, it's at $10, that was the prevailing stock price until the stock corrected -- finally corrected to a number that is still very little, but it's a lot better than $10.

Our yield is 2.4%. So, yeah, how many companies in our space delivers 2.4% yield on dividends? And this is growing. This will continue to grow. This money belongs to the shareholders, with our long shareholders, and especially the company like ours with zero chance of having a balance sheet problem or like we had five years ago, risk of bankruptcy and things like that and 70 million shares short, Oh, my gosh, I have a ready source of free money from these shorts. It's right there. They probably don't realize, but I continue to boil them like frogs in the pan full of water. It's as low, but one day they'll realize that it's not a warm, it's their death bed.

Matthew Fields -- Bank of America -- Analyst

Fair enough. One last one for me, please. Just bigger picture you know, when IODEX kind of a 120, like you said in the pellet premium, up to $67.5. Our European steel makers really, really paying, you know, $185, $190 a ton for pellets? Are they demanding concessions? At what point do they start to really push back or even sort of idle blast furnaces?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Look, I don't have an answer for you on that. I haven't sold pellets to any European steelmaker in a long time. So I don't know but -- and actually, the export opportunities that we're envisioning right now are not even in Europe. I believe honestly, Matt that Europe is the next playground for China. They like a lot of -- they love free trade. They are the free traders. So they believe that tariffs should not exist to protect their domestic markets against the dead players like China and others. So now that we have protection here in United States, the Chinese steel that continues to grow and continues to increase the Chinese output needs a home. And apparently, they're finding a home in Europe right place because they love free trade. So I'm enjoying seeing Chinese steel going to Europe. So I don't know the answer to your question.

Matthew Fields -- Bank of America -- Analyst

Okay. Thanks very much and congratulations again.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

All right. Thanks, Matt.

Operator

Your next question comes from Scott Schier with Clarksons. Your line is open.

Scott Schier -- Clarksons -- Analyst

Good morning, everyone, and congratulations on a very strong quarter. Lorenzo, could you talk a little bit more about your outlook for the pellet premium going forward. We've seen such a compression, the quality spread recently. I'd be interested to hear your thoughts on when this flow return to a more normal level?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Yeah, look, that's a very good question. Look, you should never lose track to the fact that -- the pellet price is not the pellet premium. The pellet price is the sum of the IODEX with the -- or the sum of the price of ore no matter if it's IODEX 62% or the benchmark price were 65% plus the pellet premium. The way we envision here in our quarter for this 62% plus correction for iron content plus pallet premium, that's a price. So if the IODEX appreciated from $90 to $121.85, let's call it $120 just to facilitate my calculation so appreciate $30. The pellet premium directly could go down $30 and I'm stood at the same spot. And of course, the pellet premium doesn't go down $30, the pellet premiums went down $3 buck. So plus $3, minus $3, it's a plus $27. So we're good. So it's not a pellet premium thing and people get really stuck into the details of how the prices are calculated, and these and that, at the end of the day, other than China, all is faking, all is lying, all is pretending, all is polluting everybody else that's by pellets, they're paying a lot more for pellets because they must comply with the environmental regulations that do not allow them to use crap as feedstock. Like here in United States, like in Canada and few other countries like Japan, like in others. So they pay more. Did I answer your question.

Scott Schier -- Clarksons -- Analyst

Yes. That was very helpful. Thank you. Just to follow that up on iron ore pricing in general. Do you expect supply/demand conditions to ease from here and pricing to move lower? Or do you see the $120-ton level as the New Normal?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Yeah, there have been -- quality is doing normal for some time. I am surprised that I'm still kind of the only one that makes my life really easy because -- I just need to execute that quarterly to what I say. And I have been executing the -- our quality to what I say. So look, -- go back four months, five months, we are in July right now. So go back four months. At that time, either [Phonetic] any steel maker in the world should have a moment of reckoning and say, oh my gosh, iron ore pricing are going up, and my steel prices are not great.

Then find a way to increase the steel prices. Final, this you make a -- they preferred to get stuck with that thing of, I control what I can control, I don't control, what I cannot control. Okay, so now in Q2, you are going to enjoy your own inability to see reality. And going forward, welcome to the New Normal. Get used to the New Normal. We are not going to do any Amazon prime date. We're going to continue to charge full price for the pellets. So if you don't increase your prices, you're going to be squeezed. That's my message to my clients and to their clients of other iron ore miners, because they don't talk to their clients like that. There are a lot more politically correct than me. But anyway, that's a different conversation.

Scott Schier -- Clarksons -- Analyst

Great. Thank you very much, Lorenzo. Good luck going forward.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Thank you very much.

Operator

Your next question comes from Nick Jarmoszuk with Stifel. Your line is open.

Nick Jarmoszuk -- Stifel -- Analyst

Hi. Good morning, Lorenzo, Keith. A question [Speech Overlap] with the Northshore project, what is the DR pallet production capacity now?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

$3.5 million long tons per year.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. And all of that will be consumed by the Toledo plant?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

No, the Toledo plant is $1.9 million metric tons a year. And we need at that for something like $2.7 million, $2.8 million long tons of pellets taking you into consideration. So you always have. If you produce a NorthShore at the capacity with the great pellets who will always have like $700,00 to $800,000 tons a year of DR-grade pellets that we plan to sell to select clients, that we have ongoing relationships.

Nick Jarmoszuk -- Stifel -- Analyst

Okay.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

We are not going to supply anyone that will produce HBI to compete against us. So that's not going to happen. I am going to supply someone that will put -- I already told Midrex and Tenova and to know. Go sell in another territory. Because right here in the United States, you have a problem. I'm not going to supply any DR-grade pellets to anyone in the Midwest. So it's not going to happen. But I will supply other companies like in the past, we supplied Nucor in Trinidad, we supplied ArcelorMittal in Canada, so these are the ones. So we are looking for -- always looking for. Always looking for long term partnerships that could be good for us like North Africa, Middle East place like that. Things that are basically -- we're left in the range with the problems that happen in Brazil. So there's an opportunity there, right now.

Nick Jarmoszuk -- Stifel -- Analyst

Understood. Okay. And with the tones that -- the companies are exported. Can you give us what the volumes are between regular blast furnace pellet? And if there any HBI pellets in there as well?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

We don't have this breakdown just yet because we just started moving pellets to Quebec City and we started moving DR-grade. So at this point, we haven't moved any blast furnace pellets just yet, just DR-grade. So we'll see. Look, if there is no cancellations and no reduction in nomination going forward, that would stop and redirected the pellets to the domestic market. Domestic market, that will always be my first priority. But we are just preparing ourselves to the events, that nomination cuts will come, and then I will not come here and say, keep quiet. I can only control what I can control." No, I can control stocks like that. I can control what they would do, but I can't control what I need to do depending on what they do. Well, that's called the strategy and execution. We do that a lot here.

Nick Jarmoszuk -- Stifel -- Analyst

As of today, what are you expecting the export volumes to be?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

As of today, 300,000 tons. But if you ask me tomorrow, I might say 500,000. One week could be 100,000 or 1 million. I don't know yet.

Nick Jarmoszuk -- Stifel -- Analyst

As these pellets are transported from like superiors through the Locks and through Quebec City. Are they damaged? Is the quality degraded any from all the handling or no?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Pellets don't like handling. So every time you unload a pellet and you load it again, you generate fines who create issues. So pellets don't like to be moved from point A to point B and then loaded again. That's not a thing that we like to do, but that's actually the nature of the beast. All these pellets that move in this seaborne market, they move a lot. I will give you an example. A Brazilian producer will produce pellets that the minute they arrive, they move the pellets to the Port, and then load them on a vessel. Then the vessel go through seaborne, and then it will get to the Port in China and unloaded and put in a storage at the Port. And then someone will grab that pallet and move it a closer storage to the New, then it will be sold from New. So how many times this pellet was loaded and unloaded, generating fines and generating problem. So ours will not be different. But the good thing is that our pellets are high quality, so they resist a lot more to this type of deterioration. But you're right, the pellets in general don't like that.

Nick Jarmoszuk -- Stifel -- Analyst

And then last question on the AMT refund? Could you remind us what the refund schedule is over the next several years?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

I'll let Keith to answer that Nick.

Keith A. Koci -- Executive Vice President, Chief Financial Officer

We've got another $117 million coming and it's broken out over the next three years. So you can see like $58 million will come in 2020 and then following after that, we have got like $28 million each year after that. So --

Nick Jarmoszuk -- Stifel -- Analyst

Okay. That's the balance of it?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Right. That's correct.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. That's all I had. Thank you.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Thanks, Nick.

Operator

Your next question comes from Sean Wondrack with Deutsche Bank. Your line is open.

Sean Wondrack -- Deutsche Bank -- Analyst

Hi, there, nice quarter and I was impressed to see that you've accelerated timeline on the HBI plant. Just a couple for me this morning, you mentioned earlier something about having not fully benefited from the iron ore price realization. Can you just clarify what you mean by that?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Yes, look, each contract is different, each contract with a different clients is different. For example, there's one client that has a lag in their contract. So this client hasn't seen any huge price increase because he is still being charged based on the price of iron ore back in March, April, May. So very soon he will be paying April, May and June and so on and so forth. So -- and that's one client that has this lag. So all things considered, things will continue to improve for us and we believe that as the steel price to recover. We should also have help from that. So that's how --

Sean Wondrack -- Deutsche Bank -- Analyst

Great. And the steel price recovery that should help offset even if there is a little bit of weakening in the iron ore price, just given where steel prices are. Just quick question --

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

[Speech Overlap] Hold on, are you expecting weakness in iron ore prices?

Sean Wondrack -- Deutsche Bank -- Analyst

No, I'm not saying that. I'm just saying that as an investor, when you're thinking about it, coming off this very low steel price, should only provide new additional upside -- basically, price --

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

But you said that, that could offset weaker ore prices and it would be very comfortable for me to just agree with you, but I have to call you out on that because I spent -- I have been spending a lot of time in these calls, explaining why there is no weakness ahead in iron ore prices. But, you know, people disagree. That's why we buy cheap stock in the marketplace. Deutsche Bank -- I haven't checked the commodity deck of Deutsche Bank these days, but do you know the price deck of your bank?

Sean Wondrack -- Deutsche Bank -- Analyst

I'm not even 100% sure, but. Excuse me, Lourenco, I don't think the price of iron ore is going down. That's not what I'm trying to say here.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Okay. All right. We are on the same page.

Sean Wondrack -- Deutsche Bank -- Analyst

I apologize. I was confusing.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

No, no need to apologize.

Sean Wondrack -- Deutsche Bank -- Analyst

Okay, cool. The freight advantage when you think about supplying new customers around the Midwest with HBI. Could you just, big picture, what does your freight advantage of supplying them versus Russia or Venezuela or any of these other countries that have been shipping DRI or pig iron to those kinds as of now?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Look, let's take -- depends on -- advantages varies with the client. But let's take one that's really easy to understand. North Star BlueScope. North Star BlueScope will be a big why of our HBI. We are in Toledo, Ohio. They are in Delta, Ohio. They will be receiving our HBI continuously by truck. So they will not have to carry any inventory on their site because we have delivered pretty much just in time. And the only freight that they will pay is truck freight. If they were buying from Russia, the material they have to be transported from point of production to Port in Russia, then loaded in a vessel, then sail to the United States, unloaded in Quebec City and then -- or New Orleans and then loaded in a vessel to bring them to the site, that would be a barge up the Mississippi or a train from Ports to Delta, Ohio. And you keep adding these things or compare with the freight truck. So it's huge freight advantage.

Sean Wondrack -- Deutsche Bank -- Analyst

Great.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

And our plan is to share this advantage with the client, not to give it away, but to share with the client. So the client will not have to pay their humongous freight to bring pig iron from exotic places. And on the other hand, we are not going to give entire advantage. We share a lot with the client. So we are going to be very price competitive. We're going to be very quality competitive. Our HBI is not the HBI of the past, it's not HBI -- historical HBI. It has a lot more mechanical resistance. It has 3% carbon content which very close to pig iron. So it'll be like pig iron just better and it will have -- a logistics advantage that is second to none.

And as far as quality, one thing that we're going to have, we're going to have HBI being produced from iron ore -- from one mine, that's the Babbitt Mine and the one pellet plant, that's the NorthShore plant. So all the foretasted are of NorthShore will be producing DR-grade pellets or Toledo. So that's the type of narrow quality that we are [Indecipherable] looking for. So the operators of the EAFs will have something as far as feedstock that they don't know yet. As soon as they start receiving material for trial they will become excited. The same way the operators of blast furnace are always excited about our blast furnace pellets.

Sean Wondrack -- Deutsche Bank -- Analyst

Great. Thank you for that explanation. That's very helpful. And then my last question, just -- you know, you're coming into a position of strength like you've never seen before -- the guiding to roughly $1 billion of EBITDA against cash needs of only $220 million. You're basically going to have cash to do whatever you want in terms of dividends, share buybacks, debt reduction. You know, given that kind of backdrop and the lack of supply, security for iron ore in the U.S., are you worried about cliffs as a company becoming an acquisition candidate? And have you seen any kind of M&A interest toward Cliffs over the past few months?

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Look, we are for sale in the stock exchange every day, and our price, our stock price has been absurdly low for an extended period of time. In the meantime, there was that could theoretically balance sheet wise could make a move and make up an offer to buy Cliffs. They were all involved in -- what I used to call the Brazilian, Australian Championship of the stupidity. They are very interesting being the low cost producer of the world. And now they have paid the price for that, instead of seeing looking into buying a company like Cliffs, they are concerned about fixing the disaster that was made first by Samarco and then by Vale. They are also coping with a few problems at the port in five and lots of stuff that all a consequence of a cost cutting environment that I have been throughout the five years explaining mining business is not a cost based business. It's a different ballgames' value use, it's margin. It's using money to maintain your facilities and mines. So focus on cost is important, but can't be the main focus. So the answer to you is no. So despite the opportunity they're the ones that could buy Cliffs, they are not going to pay their price, that I would demand to sell the Company, because they are busy in taking care of their own problems at this point.

Sean Wondrack -- Deutsche Bank -- Analyst

Great. That makes sense. Thank you very much for all the clarity there and good luck next quarter.

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Thanks a lot. And with that, we are going to turn the call back to the operator to wrap up. And I appreciate the interest and we will keep in touch. Thanks a lot.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Keith A. Koci -- Executive Vice President, Chief Financial Officer

Lourenco Goncalves -- Chairman, President, and Chief Executive Officer

Lucas Pipes -- B. Riley FBR -- Analyst

Alan Spence -- Jefferies -- Analyst

Matthew Fields -- Bank of America -- Analyst

Scott Schier -- Clarksons -- Analyst

Nick Jarmoszuk -- Stifel -- Analyst

Sean Wondrack -- Deutsche Bank -- Analyst

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