Although investors are still concerned about Cleveland-Cliffs’ (CLF) debt, it’s come a long way with respect to its debt levels. Following the company’s change in management in 2014 and its focus on debt reduction as the utmost priority, investors’ concerns have been allayed somewhat.
The company ended 4Q17 with net debt of $1.3 billion, its lowest level in the last six years. Its net debt at the end of 4Q16 was $1.8 billion. During 2017, the company reduced its average cost of debt from 6.8% to 5.0%.
Liquidity position is comfortable
Cliffs’ cash and cash equivalents have also improved significantly. At the end of 2017, its cash balances totaled $1.0 billion compared to just $323 million at the end of 2016. It generated $182 million in cash during the year, which mostly went toward its acquisition of the remaining minority interest in both the Tilden and Empire mines.
Cliffs’ maturity profile has also improved significantly. Most of this debt has either been retired or pushed back an additional five years with lower interest rates.
As per the consensus estimates compiled by Thomson Reuters, Cliffs’ net debt is expected to fall 2.5% in 2018 compared to 2017.
Net debt-to-forward EBITDA ratio
A company’s net debt-to-forward EBITDA (earnings before interest, tax, depreciation, and amortization) ratio reflects the number of years it would take to completely pay off its debt with only its EBITDA.
Cleveland-Cliffs has made improvements on both fronts. Its EBITDA has improved while its debt has reduced, which has significantly improved its net debt-to-forward EBITDA ratio. As per analysts’ consensus, its ratio should improve to 2.0x at the end of 2018 compared to 2.5x at the end of 2017 and 5.20x at the end of 2016. Investors should note that CLF has come a long way in reducing its financial leverage. Its net debt-to-forward EBITDA ratio was 9.0x at the end of 2015.