What happened

Shares of iron ore miner and steelmaker Cleveland-Cliffs (NYSE:CLF) rose 29% in October, according to data from S&P Global Market Intelligence. The company reported earnings later in the month, but much of the gains were the result of optimism in the wake of the announced acquisition of the U.S. assets of the steelmaker ArcelorMittal (NYSE:MT), which came at the tail-end of September.

a steel worker in protective gear works with molten steel.

Image source: Getty Images.

So what

On Sept. 28, Cleveland-Cliffs announced it would be buying the U.S. operations of ArcelorMittal for an equity value of $1.4 billion and an enterprise value of $3.3 billion. The deal was made up of cash, shares, and nonvoting preferred stock. Acquiring ArcelorMittal USA will bring another steelmaker under Cleveland-Cliffs, which purchased automobile-focused AK Steel back in March.

The new acquisition will transform Cleveland-Cliffs into America's leading steelmaker, with all the benefits that come with more scale and vertical integration. After the announcement, most analysts were bullish on the transaction, sending shares up before the company's third-quarter earnings report.

In the third quarter, Cleveland-Cliffs reported a slight miss on revenue expectations and a beat on profit expectations. But shares shot up on the announcement, since the U.S. auto sector seems to be experiencing a sharp recovery amid the pandemic.

CEO Lourenco Goncalves said: "As we continue to fulfill orders for our automotive customers at a remarkably healthy pace, with our facilities back to normalized operating rates and with current pricing, we would expect further sequential improvement in our adjusted EBITDA performance in the fourth quarter. This takes into account increased shipments from both our steel & manufacturing and mining & pelletizing segments, as well as an expected sharp reduction in idle costs."

Now what

The U.S. steel industry has been in a slump for two years. During that time, Cleveland-Cliffs, which this time last year was just an iron ore producer, scooped up two large steel companies in a very bold move to transform the company -- and, really, the U.S. steel industry.

If the U.S. auto industry continues to recover and the government continues to implement "Buy American" initiatives, those acquisitions at a low point in the cycle could wind up being brilliant chess moves. But if the steel industry remains in a slump, the company will continue to struggle to generate substantial profits.

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