What happened
Shares of steelmaker Cleveland-Cliffs rose 49.5% in 2021, according to data from S&P Global Market Intelligence.
Cleveland-Cliffs entered 2021 as a transformed company. Beginning 2020 as a domestic iron ore miner, Cleveland-Cliffs subsequently acquired steelmakers AK Steel in early 2020 and ArcelorMittal USA in late 2020. Management essentially transformed the company from a supplier of iron ore pellets prior to the pandemic to a fully integrated steelmaker coming out of it.
Those acquisitions look like savvy moves today, as the company benefited tremendously from soaring steel prices amid global shortages and booming demand from the auto sector last year.
Image source: Getty Images.
So what
Due to the efficacy of COVID vaccines, U.S. hot-rolled coil steel (HRC) skyrocketed from around $700 per ton in November 2020 to almost $2,000 per ton in September 2021, before retreating to a little over $1,400 per ton today.
On the recent conference call with analysts, CEO Lourenco Goncalves said about 55% of Cleveland-Cliffs' business is linked to spot prices, with the rest coming from fixed-rate contracts. Those spot price contracts sent Cleveland's financial results soaring last year.
For perspective, look at what a difference a year makes in commodities, with the huge operating leverage Cleveland Cliffs generates during an up-cycle.
|
Cleveland-Cliffs (CLF +3.32%) |
Q3 2020 |
Q3 2021 |
|---|---|---|
|
Revenue |
$1,646 |
$6,004 |
|
Adjusted EBITDA |
$126 |
$1,933 |
Data source: Cleveland-Cliffs third quarter presentation. All dollar figures are in millions. Chart by author.
Cleveland Cliffs made more in EBITDA last quarter than it did in revenue in the year-ago quarter! This year's windfall has enabled Cleveland-Cliffs to buy back preferred stock on its balance sheet and put itself on very firm financial footing after two difficult years in 2019 and 2020.
Now what
Even after large gains in 2021, Cleveland Cliffs' stock only trades around 5.5 times trailing earnings and a stunningly low 3.8 times 2022 earnings estimates. While some may think that is astoundingly cheap -- and it might be -- investors should also know we are definitely at or near the top of a commodity cycle. Based on the HRC futures, steel buyers expect prices to continue to fall to between $900 and $1,000 per ton later this year.
Still, Cleveland Cliffs may be able to weather this price deflation better than some might think. The other 45% of its business that isn't linked to spot prices will be able to renew at higher contract prices, since those contracts were negotiated prior to the run-up in steel prices last year. And $1,000 per ton is still far higher than HRC prices were not only during the 2020 pandemic but even during the industrial recession in 2019. In fact, even just prior to the pandemic, HRC prices were below $500 per ton.
In addition, Cleveland Cliffs just made another acquisition, buying the Ferrous Processing and Trading Company (FPT) in November. FPT is a leading processor of prime scrap, which is a key feedstock in steel production that is becoming increasingly scarce. That acquisition should boost profits even further in 2022 and beyond.
It's always difficult to navigate the cycles of commodity companies like Cleveland-Cliffs, which tend to look cheap at cyclical peaks and expensive at cyclical bottoms. However, if auto demand doesn't fall off a cliff, and with the Infrastructure Investment and Jobs Act infrastructure bill kicking in this year, Cleveland Cliffs' financial results could hold up nicely, even if they don't reach the heights of the 2021 boom year.
