Cleveland Cliffs Stock is a Steel Play

Steel producer Cleveland Cliffs NYSE: CLF stock has been down trending in recent weeks despite record top-line growth and global steel demand post-pandemic. A continued pullback can provide prudent investors with a bargain entry opportunity especially ahead of the infrastructure bill. The global demand for steel continues to be relentless despite China’s curbs and Russia restricting exports of ferrous materials like pig iron driving up prices. The Company is negotiating higher-priced contracts to meet the demand in addition to addressing the needs of decarbonization. The Company is also the largest steel provider to the U.S. automotive industry which is facing unprecedented demand only stalled by the chip shortage and supply chain issues. The Company is addressing COVID-19 vaccinations by providing its workers a $3,000 individual cash bonus for sites that exceed 85% vaccination levels. Prudent investors seeking a bargain entry can watch for opportunistic pullbacks in shares of Cleveland Cliffs for exposure.  

Q2 FY 2021 Earnings Release

On Jul. 22, 2021, Cleveland Cliffs released its fiscal second-quarter 2021 results for the quarter ending June 2021. The Company reported an earnings-per-share (EPS) profit of $1.46 excluding non-recurring items versus consensus analyst estimates for $1.51, a (-$0.05) miss. The Company recorded a net loss of (-$108 million) or (-$0.31) per diluted share in the same quarter in 2020. Revenues rose 358% year-over-year (YoY) to $5.04 billion beating analyst estimates for $4.95 billion. This excluded charges of $0.13 per diluted share or $77 million. The Company expects Q3 2021 adjusted EBITDA of $1.8 billion and free cash flow of $1.4 billion. Cleveland Cliffs CEO Lourenco Goncalves commented, “In the second quarter of 2021 we achieved all-time quarterly records in revenue, net income, and adjusted EBITDA. The numbers unequivocally confirm our efficiency in operating the new footprint, resulting from the integration of the two major steel companies acquired in 2020 as a single and indivisible mining and steel company. They also demonstrate our flawless execution in ramping up our state-of-the-art Direct Reduction plant in Toledo to the current level of production above nominal capacity.”

CEO Comments

CEO Goncalves continued, “This quarter was also a clear illustration of our raw material cost and quality advantage over others in the industry, particularly the ones fully dependent on scarce prime scrap and dirty pig iron imported from polluting countries. The decision we made four years ago to invest $1 billion in our Direct Reduction plant has been proven to be not only right, but also perfectly timed. Our internal use of HBI has minimized our reliance on prime scrap in our BOFs and EAFs, as well as enhanced productivity and reduced emissions in our blast furnaces as demonstrated by our actual CO₂ emissions figures.” He concluded, ““Our team has done a remarkable job in meeting the demand for steel we have been experiencing over the past six months, overcoming the impact of the automotive chip shortage as well as limited rail and truck availability. Steel demand remains excellent and, as we continue to negotiate our contract businesses with several clients in different sectors, it is progressively translating into substantially higher contract prices later this year and into 2022. Ultimately, we are set for a monumental debt reduction during the back half of this year, and the achievement of zero net debt in 2022."”

Conference Call Takeaways

CEO Goncalves summed it up, “The seamless and complete integration of both AK Steel and ArcelorMittal USA into Cleveland-Cliffs has generated a new and very efficient business model geared toward value creation. Demand for steel is very strong across all sectors, and strong demand supports strong prices. Q4 2020 was supposed to be the peak for steel prices, then Q1 2021, and then again in Q2. Well, we are in Q3 and the reality is demand is relentless. Most of our customers are experiencing record profits and learning that higher prices are good for pretty much everyone in the supply chain. Actually, some of the customers who were complaining earlier this year about rising steel prices then turned around and decided to accept the reality. They cut deals with Cleveland-Cliffs at that time and are now just plain happy. Others probably will be unhappy for a long time. Also, as new electric arc furnace capacity continues to be brought to operation in the United States and abroad, the notion that prime scrap is precious metal will be better understood. Iron ore fundamentals are strong as well, keeping the price of pig iron imported by the mini views elevated and also pushing up the pricing of steel offered by foreign sources. Russia is restricting exports of ferrous materials including pig iron, of which they are the largest exporter of, to the United States. China continues to say that they want to cut emissions, which they can do by either cutting steel production to reduce sinter usage or using more scrap or both. With all that, the trend on the price of prime scrap is also upward.”

CLF Opportunistic Pullback Levels

Using the rifle charts on the monthly and weekly time frames provide a broader view of the price action playing field for CLF stock. The weekly rifle chart broke down as the 5-period moving average (MA) at 21.85 has crossed over the 15-period MA at $22.61 down.  The weekly stochastic has a mini inverse pup with lower weekly Bollinger Bands (BBs) at $16.68. The $18.77 is a key Fibonacci (fib) level  support. The daily rifle chart formed an inverse pup breakdown as bounces have deflected off the daily 5-period MA falling at $20.21 as the daily stochastic crossed back down at the 30-band. The weekly market structure high (MSH) triggered a sell signals on the breakdown below $23.86. The daily market structure low (MSL) buy triggers on a breakout back up through $21.36. The daily lower BBs sit at $17.60. Prudent investors opportunistic pullback levels at the $19.44 fib, $18.77 fib, $17.86 fib, $17.21 fib, $16.93 fib, and the $15.84 fib level. The upside trajectories range from the $22.32 fib to the $27.82 fib.