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How Long Will Cleveland Cliffs Continue to Buy Back Stock?

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Significant turnaround

Since the new management took over Cleveland-Cliffs (CLF) in August 2014, the company has turned around for the better. The debt concerns have been taken care of and the negative equity value finally turned to a positive $424 million at the end of 2018. The company started generating excess cash, which has been deployed towards paying down debt and returning value to shareholders.

During its third-quarter results, the company announced it would proceed with a dividend of $0.20 per year, which it expects it can maintain at any point in the cycle. CLF also announced a share buyback program in the fourth quarter of 2018.

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Stock buyback

CLF’s CEO, Lourenco Goncalves, mentioned during the Q4 conference call, “The share repurchase program was put in place for one simple reason. Our shares were and still are ridiculously cheap. So far we have bought approximately $5.4 million of CLF shares at prices as low as $7.48 and not higher than $9.25. Even at the asset base closing price of $10.90 using our cash to repurchase shares is our value accretive use of capital.”

The company still has a lot of ammunition left from the $200 million repurchase program and it plans to keep on buying back its stock until “the real value” of the company is reflected in the price.

Factors leading to the upside

Goncalves listed several factors that would lead to an upside to earnings or stock price or both:

  • The company expects renegotiations on 35% of sales volume contracts, which will come up for renewal soon.
  • Steel mill capacity utilization remains strong, reflecting strong demand.
  • The full impact of Vale’s (VALE) disaster is still not known, but it certainly represents upside to premiums.
  • The domino effect from supply shrinkage due to the Vale disaster to favorably impact steel prices in the US (SPY) (DIA).

CLF is not alone in announcing buybacks. Due to tariff windfall, many other US steelmakers have also announced similar measures. U.S. Steel (X) announced a $300 million share buyback program during its third-quarter earnings release. Nucor (NUE) and Steel Dynamics (STLD) also announced share buyback programs earlier in 2018. Both of these companies are also investing in organic growth.

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