Free cash flow and working capital release
Cleveland-Cliffs’s (CLF) CFO Tim Flanagan mentioned during the Q2 2018 earnings call that the company is expected to generate $400 million of free cash flow (or FCF) in the second half of 2018. As CLF enters the heavier half of shipping, it will work to finish inventory that it built in the first half of this year. As a result, the favorable working capital release will lead the company to generate ~$400 million of FCF in the second half of the year after all expenditures, including capital expenditure on its HBI (hot-briquetted iron) plant.
CLF recorded $2 million in income tax benefits in Q2 2018 related to the reversal for uncertain tax positions. In addition, the company also gets unlimited deductibility for its net operating loss (or NOL) position. That puts the company in a very favorable tax position. For the foreseeable future, it expects to be a 0% taxpayer both on a cash and effective rate basis in nearly all net income scenarios.
Starting in Q3 2018, it will start receiving cash refunds related to the alternative minimum tax (or AMT) credits, which will amount to ~$10 million with ~$110 million in 2019 and another $110 million cumulatively over the next three years.
Strong FCF position
Flanagan said these refunds, along with CLF’s current and expected strong FCF-generating ability, “put us in a phenomenal position to not only bring our net debt below $1 billion but also to allow us to return meaningful capital to our shareholders over the coming years.” CLF’s CEO said in the company’s board meeting that he is planning to start making proposals on how and when to start returning cash to shareholders.
Since CLF has exited the Asia-Pacific iron ore business, there will be no negative impact from that unit going forward, which should leave the company with a strong FCF position.
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