uploads///FCF Estimates

Factors That Could Cause an Upside to CLF’s Free Cash Flow in 2017


Dec. 4 2020, Updated 10:53 a.m. ET

Free cash flow

Historically, Cleveland-Cliffs’ (CLF) debt has exceeded its earning ability, leaving almost no room for growth. This was one of the major concerns for its investors. Moreover, it had accumulated a lot of debt over the years.

Therefore, it became essential for the company to generate internal cash flow to repay its debt. In this context, let’s discuss Cleveland-Cliffs’ ability to generate FCF (free cash flow).

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FCF generation accelerating

Cleveland-Cliffs’ management noted during its 4Q16 earnings call that it is expecting to generate FCF of $550 million in 2017. After that, however, the company has downgraded its EBITDA[1. earnings before interest, tax, depreciation, and amortization] guidance for 2017 twice.

Before the company’s release of its 1Q17 results, analysts were expecting FCF of ~$500 million for 2017. After a double downgrade by CLF, analysts have also pared back their earnings estimates.

Analysts expect Cleveland-Cliffs to generate $346 million in FCF for 2017. Investors should note that this is still higher than the actual FCF of $234 million reported in 2016.

Is there more upside ahead?

As we’ve previously noted, one of the biggest catalysts for Cleveland-Cliffs (CLF) and its peers’ earnings lies in the import restriction into the US. A favorable outcome could encourage analysts to increase their earnings estimates, leading to a potential upside to the company’s free cash flow.

In our view, Cleveland-Cliffs’ debt maturities are still comfortable, with major debt repayments now pushed to 2025. Among its peers (XME), BHP (BHP) (BBL) and Rio Tinto (RIO) have relatively comfortable maturity profiles while Vale SA (VALE) could face some pressure on this front if iron ore prices remain low.


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