Say what you want about Cleveland-Cliffs (NYSE: CLF) CEO Lourenco Goncalves and his brusque, audacious claims about the iron ore and steel industry, but he has delivered on many of the things he promised when he took over the fledgling iron ore producer. The company's finances and business strategy look better than they have in years , and there are some modest tailwinds that could help boost the business.
As you might imagine, management is quite optimistic about Cleveland-Cliffs' future. Here are a few quotes from its most recent conference call that highlight some of the benefits headed its way in 2018 and beyond.
No taxes for quite some time
After taking several years of heavy losses while it repaired its business, Cleveland-Cliffs built up a considerable amount of tax losses it could use to offset future profits. However, it wasn't completely exempt from paying taxes then as it had to pay the Alternative Minimum Tax. With the passage of the most recent tax laws, though, that is no longer the case. According to CFO Tim Flanagan, the tax changes mean that Cleveland-Cliffs' tax obligations are negligible for years to come.
Now, having that much in carry-forward losses means that the company lost that much money, so it's not entirely good news. That said, it's clearly on a more profitable track than it once was, and those carry-forward losses will help make this last push toward profitability that much easier.
Gotta keep growing
One of the most decisive moves Cleveland-Cliffs made when Goncalves took the helm was to trim the business down to its core iron ore business and use its U.S. operations as a cash engine to repair its balance sheet. That has worked thus far, but for years the company hasn't invested much in new production. That can go on for only so long because, like any other extractable resource, the life of a mine is finite.
More recently, however, Cleveland-Cliffs has gone on the offensive by acquiring land for potential new mines as well as taking larger equity stakes in its existing mines. In his prepared remarks, Goncalves highlighted some of the acquisitions it has made in recent months.
Buying ArcelorMittal 's and U.S. Steel 's stakes in these mines should enable Cleveland-Cliffs to boost its own iron ore production capacity to 20 million tons for 2018, most of which it has mostly contracted out to buyers. While its acquisition in Minnesota is currently in the court system because of the bankruptcy of a prior owner, the company has some other options if this one falls through.
Pulling out of the Asian market
For the past few quarters, the writing was on the wall that Cleveland-Cliffs' Asia-Pacific iron ore operations were running on borrowed time. The iron ore quality at the facility was deteriorating and its largest customers, Chinese steel mills, have been shifting their buying toward higher-grade ores to reduce energy consumption and pollution -- as Goncalves explained:
As part of the mine closure, Cleveland-Cliffs will have to resolve some of its transportation contracts as well as cover its mine reclamation costs. According to Flanagan, these costs should be negligible to Cleveland-Cliffs' bottom line as it will be able to use inventory and some contracted production left in place to cover its obligations.
Expanding the business by itself
Cleveland-Cliffs is about to break ground on a transformative project: its Hot Briquetted Iron (HBI) facility in Toledo, Ohio. This facility will produce a higher-quality feedstock to use in electric arc furnaces rather than the conventional blast furnaces that have been its customers for more than a century.
When the company's financials looked questionable, there was a lot of talk about bringing in partners to partially fund the new project. It appears, though, that may not necessarily be the case anymore as Goncalves mentioned that Cliffs has the money in place to fund the entire facility on its own if needed.
This doesn't mean the company will go it alone, but it can if it so decides. Getting all the funding itself allows management to speed up the timetable. Also, it gives management better bargaining power with potential partners because it can now negotiate from a stronger position. All in all, this puts Cleveland-Cliffs in the driver's seat.
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Tyler Crowe owns shares of Cleveland-Cliffs. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
