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Cliffs’ US Realized Prices Have Ample Upside in 2017. Here’s Why

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Nov. 20 2020, Updated 5:10 p.m. ET

US realized prices

Cliffs Natural Resources (CLF) expects to operate its mines at full capacity going forward, and this should lead realized prices to assume more significance in predicting revenues. With one variable (volumes) being more or less fixed, the change in realized prices will drive the top-line for the company.

Cliffs’s realized revenue for its US Iron Ore or USIO segment depends on the demand for iron ore pellets from its customers. The customer mix, industrial commodity (DBC) prices, freight rates, energy prices (USO), production costs, and hot rolled band steel prices are some of the other factors influencing Cliffs’ realized revenues.

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Realized revenues gain

Cliffs Natural Resources’ average realized prices were 0.5% lower YoY (year-over-year) in 4Q16 at $73.8 per ton. Prices have, however, gained 0.5% sequentially. Prices during the quarter gained from higher iron ore and steel prices, two of the most important components of its contract pricing formulas.

Cliffs’ CEO, however, mentioned during the 4Q16 call that due to the full-year lag and the customer-realized or fixed-price nature of certain contracts, the full benefit of strong prices will be reflected in the realized prices next quarter.

US steel prices saw a significant recovery after Trump’s election, and spot HRC (hot rolled coil) prices reached $540 per ton in November. Steel prices continued their uptrend in December, and spot HRC prices ended 2016 close to $600 per ton. The earnings of US steelmakers such as AK Steel (AKS), Nucor (NUE), U.S. Steel (X), and ArcelorMittal (MT) are sensitive to steel prices. These impact the contract prices for Cliffs Natural Resources.

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Realized revenue guidance

Previously, the company’s management gave its realized price guidance based on a set of assumptions for seaborne iron ore prices and HRC steel prices. But now the company has changed that to give the guidance of EBITDA (earnings before interest, tax, depreciation, and amortization).

CEO Lorenco Goncalves mentioned during the conference call that if the current market prices persist, realized prices will improve substantially this year. The company is guiding for an EBITDA of $850 million for 2017, based on the January 2017 actual average iron ore price of $81 per ton and HRC price average of $618 per ton. This compares to a guidance of $500 million of EBITDA based on $60 per ton of iron ore prices and $600 per ton of HRC prices.

Cliffs’ new guidance of $850 million of EBITDA is more than double that of its actual EBITDA in 2016.

Forward expectations

Goncalves mentioned during the 4Q16 conference call that even the $850 million EBITDA guidance is very conservative guidance at this time, stating: “Given all of the factors mentioned above, we expect that iron ore and steel pricing averages for January should be at least sustained throughout the year, if not improved.”

Now let’s discuss Cliffs Natural Resources’ Asia-Pacific division.

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