Cleveland-Cliffs Climbs After Credit Suisse Gives Double Upgrade

Shares of iron ore producer Cleveland-Cliffs (CLF) are trading higher after some positive analyst commentary from research firm Credit Suisse out earlier.

UPGRADE: Credit Suisse analyst Curt Woodworth double upgraded Cleveland-Cliffs to Outperform from Underperform and raised his price target for the shares to $9 from $5. The analyst is optimistic about the prospects of U.S. hot-rolled coil, or HRC, remaining “strong in 2018.” Woodworth sees strong accretion from the HBI project with the move away from less profitable pellet contracts towards high margin DR pellet based HBI. He also sees tax reform driving $250M in cash refunds through 2022.

RECENT EARNINGS: In January, the company it recorded net income of $371M, or $1.28 per diluted share for fiscal 2017, compared to net income of $199M or 87c per diluted share, recorded in the prior year. As an asterisk to the year’s net income gain, Cleveland-Cliffs said it realized a $246M net income boost related to the repeal of the Alternative Minimum Tax. Sales and net income for Q4 were lower than last year due to customers’ “appetite for pellets during the first nine months of the year and a customer nomination reduction previously announced, which occurred late in the third quarter,” said the company on its earnings call.

ACCRETIVE HBI VENTURE: On the company’s Q4 earnings call, Chief Executive Officer Lourenco Goncalves noted the positive prospects of HBI, commenting that “The ability for Cliffs to produce DR-grade pellets is what makes our venture in HBI so value-accretive. And this unique quality is why we are the only company who could feasibly develop HBI production in the region. With the Northshore upgrade, by 2020, Cleveland-Cliffs will have three very effective EBITDA-generating businesses: Blast furnace pellets, DR-grade pellets and HBI. I have every faith that we have the right people in place at each project to get us to where we need to be. For the time being, we have a sold-out U.S. pellet business that just added additional capacity, stable and well-run operations and an environment for iron ore, domestic steel and pellet premiums that should generate us a lot of cash.”