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CLF – Market expectations are for Uniform ROA to fade, and management may be concerned about free cash flow, HBI, and the automotive industry

December 10, 2020

  • Cleveland-Cliffs Inc. (CLF:USA) currently trades below recent averages relative to UAFRS-based (Uniform) assets, with a 2.0x Uniform P/B. At these levels, the market has bearish expectations for the firm, and management may be concerned about free cash flow, HBI’s advantages, and automotive demand
  • Specifically, management may lack confidence in their ability to generate positive free cash flow in H2, improve their capital structure, and mitigate margin declines. In addition, they may be exaggerating the advantages of their HBI product, the progress of the HPI production ramp up, and their focus on reducing leverage. Moreover, management may have concerns about the sustainability of recovering automotive demand, their ability to conduct asset sales, and the impact of sourcing materials only in the U.S. Furthermore, they may lack confidence in their ability to build inventory, continue serving their automotive clients, and compete with the ArcelorMittal acquisition. Finally, management may be concerned about their joint venture with Nippon Steel, purchasing currently shut down blast furnaces, and their maintenance costs