Q3 2019 Earnings Call
Cleveland Cliffs 2018 third quarter conference call.
All lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer session.
Can you remind you that certain comments made on today's call will include pretty predictive statements that are intended to be made as forward looking within the safe Harbor protection of the private Securities Litigation Reform Act of 1995.
Although the company believes that its forward looking statements are based on reasonable assumptions such statements are subject to risks and uncertainties that could cause actual results could differ materially important factors that could cause results to differ materially are set forth in reports on forms 10-K, and 10-Q and news release.
Was released as filed with the FCC.
Which are available on the company's website today's conference call is also available and being broadcast Cleveland cliffs Dot com ask inclusion of the coal it will be archived on the website and available for replay. The company will also discuss results excluding certain special items reconciliation for regulation G. purposes can be found Jimmy.
Earnings release, which was published this morning.
This time I'd like to introduce introduce Keith Cozy, <unk> Executive Vice President and Chief Financial Officer. Please begin.
Thanks, Denise and thanks, everyone for joining us this morning, I'll start the call what some remarks on the quarter before turning it over to Lorenzo for his comments.
Overall Q3 was highlighted by exceptional operating performance and capital spending under control and our H.B. I plant.
Total company adjusted EBITDA was $144 million for the quarter.
Adjusted EBITDA from our mining and Palletizing segment was $183 million on 5.8 million tons of sales volume roughly inline with expectations and with a greater portion of third party sales than anticipated.
Intercompany sales to our Toledo H.B. I plant were 346000 tons that resulted in a $13 million inventory profit elimination.
Which is reflected in the corporate segment.
Our Q3 intercompany sales were lower than previously guided as we diverted a portion of the ore grade pellet tonnage to the seaborne market.
Sales have yet to be recognized due to the additional time needed to complete export transactions.
As you saw in this mornings release, we updated our full year sales volume expectation to 19.5 million long terms to reflect timing and economics on the export sales, we discussed last quarter with some exports likely falling into next year and some held in inventory.
This implies about sixmillion long tons of sales expected in the fourth quarter.
A slight increase in volume from Q3.
And includes the remaining approximately 500000 tons of intercompany sales.
Our Q3 mining and Palletizing price realization of $96 per long ton, though healthy fell below our previous outlook range.
Due primarily to the steep declines in both the pellet premium and domestic steel pricing relative to the last data guidance points use.
There were no significant changes in mix and therefore, the price realization.
Should have been reasonably predictable based on sensitivities, we have provided in the past.
Because pricing in our contracts are based on an annual average rates for the relevant commodity indices pricing reported in prior quarters reflected actuals and estimates at those points in time.
To the extent actual pricing veers from these estimates we always true up what had been recorded in previous periods.
In many cases these true ups are not noticeable.
But in a quarter like this one where the pellet premium fell nearly $30 and the HRC price fell over $100 from their GAAP guidance points, the true up became more sizeable.
Our latest full year revenue guidance range has been updated to reflect current commodity prices and falls generally in line with revenue sensitivities that we have historically provided.
From a cash cost standpoint, our Q3 print of $63 prolonged ton came in 6% lower than last quarter.
This was the result of strong cost performance at the operational level and deferrals of certain major spend items as well as lower revenue linked costs.
We had previously guided to the high end of our range based on elevated revenue projections and the corresponding effect on royalties and profit sharing.
With the lower index pricing.
Along with operational outperformance, we were able to bring costs down this quarter and lower our full year expectation to the middle of our 60 to $67 per ton guidance range.
With this boost from the cost side in spite of all of the pricing related noise, our cash margin on pellet sales for the quarter was a solid 34%.
An industry high number among U.S. producers.
As for Capex.
We spent $160 million into third quarter.
138 million of which was toward our H.B. I plants in Toledo, Ohio.
We have now spent $344 million there this year and we remain ahead of our original startup schedule.
Due to revise timing of certain payments, we have reduced our expected capex spend outlook by $25 million for the current quarter and.
For the current year, which is now in the 625 to 675 million dollar range.
As we enter into the final phases of major span toward project completion, we remain very comfortable with our liquidity position.
At the end of the third quarter, we had $400 million in cash and.
An untapped 450 million dollar ABL facility.
And a debt maturity profile with nothing due until 2024.
As a result, we were more than comfortable paying a special dividend on top of the regular dividend this month.
We have designed our capital structure to weather volatility.
Even in the midst of a major capital project in a three year low and steel prices. We have returned approximately $325 million to our shareholders. This year.
And as you know we remain on a clear path to strong positive free cash flow generation starting in the middle of next year.
At that time, our free cash flow will be defined as EBITDA minus $220 million on an annualized basis.
That I will turn it over to Lorenzo.
Thanks, Pete and good morning, everyone.
I will start today call your attention to our very important point.
After our very profitable second quarter here at Cleveland cliffs.
Despite the oldest skepticism warranty Ireland's do industry throughout the entire third quarter.
Cleveland cliffs delivered profits again.
In Q3.
Our third quarter numbers, one more time for you.
Adjusted EBITDA was $144 million.
Our net income.
Was $91 million and dollar earnings per diluted share were at 33 cents.
Also last week, we paid all regular quarterly dividends.
Add we added a special dividend on top of debt.
Why am I doing all of this things.
Just to emphasize on obvious thing that's apparently not so obvious.
Regardless of all the noise in our space.
And the overall market.
The one cliffs actually makes money in base dividend.
With that out all the way I will talk about the most exciting event of the third quarter, which occurred on the last day of September when we talk out the 457 foot door at the construction of our H.B. I plant in Toledo, Ohio.
Yeah.
Good those investors will have basket about critical path items and key milestones, we look forward to.
That was it.
When you drive through Toledo.
You will not be able to mr. majestic a structure that our dedicated construction team has direct.
We still have a lot of work to do.
And capital left to deploy but we remain well on track.
Bring Cleveland cliffs into the next generation steelmaking by the first half of next year.
We are currently in different stages of that can it go in commercial negotiations with several of steel companies, who are interested in our hbr.
This companies need metallics and they have been 14 pig iron from mainly Russia.
Grain and Brazil.
Differently from imported steel.
He bought a de gara is not subject to any threed these restrictions yet.
But who knows if that may be the gaze into future.
Given the current and future geopolitical situation.
Remember.
We here at Cleveland Cliffs, we planned in advance.
And we have boots that to be the keys diving and time again.
Also many electric arc furnace steelmakers referred to source source metallics, we doubt longer duration contracts.
Which we are totally fine with.
However, given the uncertainty up new supply and competition from other steelmakers.
Have shown a desire to guarantee volume for longer stretches of time.
We are happy either way.
Whatever works for all client works for Cleveland cliffs.
Long story short.
As far as our commercial arrangements with our H.B. I customers, we are exactly where we intended to be.
Now moving on the quarter.
The more surprising event on the quarter was the unnatural drop in the pellet premium.
Which from August September represented the largest month over month change easterly.
The lower pellet premium affected our view on the economics of certain blended export sales.
For a moment in June July export sales would net us a healthy margin.
Given that both premium drop.
This export sales became less attractive.
As always we once again acted in the best interest of the company and it's the stakeholders and that explains the reduction in our full year volume outlook.
As we have always done we do not choose volume over that.
We prefer value.
We do not sell extra tones that the loss just to be able to use a bigger denominator when calculating cost per Tom as other companies usually do.
Here at Cleveland cliffs, we prefer profits.
Despite a healthy underlying commodity price expressed by our robust IODEX throughout the entire quarter.
The pellet premium tank in Q3.
That was fewer Jeff consequence of commercial incompetence bite the biggest supplier of Dallas Europe .
Let me give you a little background on what happened.
Regardless of the Durnil economic slowdown in China, and then restrictions on unfair trade imposed by section to through June into United States.
The Chinese Muse and its there several gauge container to overproduce steel.
On base to surpassed 1 billion metric tons due to year end up almost 10% from last year.
With the U.S. out a rich.
<expletive> fastest you produced in China.
Need a new dumping ground and their best option at this time was Europe .
Diversion of Chinese steel into Europe directly or truth surrogates.
As well as a generally weak European economic environment have negatively affected the European steel makers, we charted the largest consumers of seaborne iron ore pellets.
The biggest supplier of pellets to Europe is volley.
And they historically sign annual contract with this deal makers. We then negotiate that dealt with Brean, that's set for the entire year.
And that number flows into an index called Atlantic Basie pellet brief.
That brings us to the June bed commercial moves made by volley.
First.
In light of the weakness in the European market and the inability of this June deals to be profitable in such environments.
There appears to make us better value for relief and volley conceded.
Specifically volley abandoned contracts that were assigned to corporate an entire year.
And cut them off to give it is for the break.
Which that impacted the Atlantic Basin index.
The other bed move from volley came earlier actually late last year.
Prior to Roma deal.
Rather than just continued their practice of negotiating our flat premium that incorporate that both the quality of the belt as well as its Iraq War content based on the 62% IRA IODEX.
Well, we decided to start using the 65% I don't want that index.
That's not the IODEX.
Next the steel mills reacted against the change because why are the 62% IODEX is affected by our war produced by all three majors Rio Tinto volley in VHP. This 65% is essentially a volley index.
Mainly supported by volume operations in Brazil.
Well the move to the 65% backfired badly on volleys fees.
This volume promoted the change.
The differential between the 65% index and the IODEX has collapsed from $30 last year.
$6 currently a massive draw up directly impacting the calculation of the Atlantic Basin premium.
While we know that you cannot control what others too.
This type of irrational behavior is hard to predict.
As it amounts to a self inflicted warrant.
Said another way.
What volley has done negatively affected not only itself.
But also all other bella merchants and should not be ignored or overlooked.
This is all being said degrade the differential component of the pellet premium gives us confidence that we should start to see a record India Atlantic Index soon.
At the differential recovers the pellet premium will directly rickover along with it.
A six dollar grades differential is absurd.
And all it tells us that China actually does not care about the environment.
If premiums for 65% or do not require over that's basically I'm not emission from the Chinese that they are happy to continue to well look they environment with reckless abandon.
You do the help the members of the press.
If we show Fieger's from the business and academic sectors.
And public officials at all levels and both parties actually talk about pollution made in China.
Oh, Fortunately as we have seen in several current events.
So far no one.
And that includes Apple, Google General Motors, or even if the enemy eight is actually willing to risk losing exposure to that 1.4 billion person market.
With that China continues to get a free bass dupilumab the world and destroyed jobs everywhere why are they grow their own middle class and destroys hours.
Luckily blips is U.S. focused company.
And we do not care about of Andy an enemy country off the United States.
One thats actively making our planet a worst pleased to leave.
We really hope that big screen levels off we'll move showing China will one day retreated seriously instead of being real fully ignored by big corporations and their short term Brock driven CEO .
By grieving universities collective weitian from an already episodes of the enormous and growing number of Chinese students.
And by Coward foreign governments, unable or unwilling to protect their seats is I guess economic aggression and job destruction.
More than anything we believe that the absolute levels of pollution, China should become a decision making point on the investment piece off the E F G driven institutional investors.
We actually believe that these investors might play a major role going forward.
Renault apart, we at Cleveland Cleveland Cliffs, we continue to educate these SG driven institutional investors regarding the completely different the environmental impact of iron and steel, making it easier United States and everywhere else.
Particularly in China.
Our quarterly results were also affected by weak domestic steel pricing.
HRC is now below the 500 per short ton Mark.
A lot of this just has to do with global conditions. The World is Joe produces a lot of part D officially Jeep skew leased the with pollution subsidies in currency multi location.
We obviously, China as the main culprit.
While the current lawyers to price in marketplace puts more pressure on blast furnaces, then all E apps known of the integrated company supplied by cliffs have idled and importance.
One of them more fears about yes, taking all blast furnace market share at once.
Totally unrealistic.
While some less if we if he is an efficient blast furnaces have already shut down.
The best in class ones are survived.
Andrew we were actually you stay in place for several years.
There is not even and lots of high quality scrap and metallic's to allow for yes to match the tonnage and quality levels that the best integrated steel mills.
Currently produce and sell through high end applications.
It's always goes unnoticed, even taken for granted but this has been another fantastic year for Cleveland cliffs operations.
I think the main reason why there's so much focus on pricing and commodities from clips investors is because they know that our operations operators never give them anything bad the talk about.
Every month water in year, we produce high quality ballots in a safe responsible and environmentally friendly manner.
When was the last time, we missed the production targets or had a major cost blow out.
I had a major operational incident, or even a mine or what.
It just does a habit.
Because we have the best operations in the mining business.
This level of expertise is stability and consistency at the operational level.
Allows us to remain steadfast in our strategy.
Which hasn't changed since I came to blips five years ago.
We are emphasizing our competitive strength.
In the differentiated Americans to market.
Our strategy is geared towards the two unique characteristics of the U.S. is to industry.
One.
Now a blast furnaces are 100% fed wood pellets, we are the only once that have that they die world.
And Joe that a majority of this June produced in our country uses the electric arc furnace route.
No not fine and you majors to producing economy, we either of these characteristics throughout the entire world.
Which is why you will not find any companies like glimpse into world.
We are perfectly fit to thrive in this distinct business environment.
Yes do industry.
For a long time, we have been supplying a blast furnace market with pellets made in USA.
And going forward, but the majority share electric arc furnaces to Monday or grow their share. They also need I steady source of metallics feedstock, mainly in USA, which we assume bringing to the great lakes wins, our first of a kind.
Hi plant.
Wrapping up.
We understand cyclicality.
And we embrace volatility.
During the last several years, we have taken care of our balance sheet.
I have positioned ourselves to withstand the inevitable bad times.
At this point, we are a dividend being company and that Capex driving growing enterprise.
Five years ago, Nobody would think that.
That would be even remotely possible.
Except of course us.
We knew we could do it.
And we have done.
Now when I, just panic, we see opportunity.
Actually several different opportunities.
We have seen display all before and can embrace this cycles, rather than panicking and changing strategy like others, usually do.
And because cycles right things down and Dan up.
They started before H.B. I plant in the first half of next year, we will happen when things will be had the up in this cycle.
With all of that vantage that have laid out equals the hour rock solid operations, our unique positioning the industry in the history of taking advantage of cyclicality, we at Cleveland cliffs have a lot to be excited about.
I'll now turn the call over to the news for the quest.
Thank you, ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad well pause for just a moment to Kotalik you many roster.
[noise]. Your first question comes from Lucas pipes with B. Riley FBR. Your line is open.
Hey, good morning, everyone.
When you look good.
<unk> Lorenzo obviously, there's been a lot of volatility on the pricing front.
Okay.
Yes.
IODEX you alluded to all three of them.
Hi.
Got you look a.
Look I guess your view of what do you want to know.
Get here you.
No sorry about that.
To that needs, it just me or or or if youre also hearing that on and off.
Oh, sorry about that to ask the question.
Lorenzo Yes, good question is that spot prices.
Do you have a sense for where the realized prices come and thank you very much.
Brent Lucas, we provided that and it's going in our in our press release, if spot where to hold up for the rest of the year. We provided a range of 97 to one or two.
So that that's where we would end up in 2019 and that includes any.
True up that would would be recorded in Q4 so.
That's that's what would happen.
And and in terms of if we jump into 2020.
And the current spot prices persist, yeah, what you'd be able to provide a range of pricing given the current economic.
Prices for the Atlantic pellet premium HRC prices and ER and IODEX.
Look.
First of all Lucas.
We will also provide sensitivity but.
Keep in mind, we are now at a time entities.
Cycle that we have hot rolled coil in United States at the.
Rock bottom.
Log prices Nucor.
Already released results and.
It was abundantly clear that they see.
Prices.
Starting to go up and we expect others to read to read that as the release results in the next few days and I explained today.
Ability, that's evolving implemented with developing with thats not being correct as we speak and.
The IODEX continues to be very strong.
Remember a few years ago.
Let's say 2015 2016, if were to follow where they come once is that we're seeing that prices will be in 2019 that we would be below a a $40 maybe below $30. We are one at 87, and we have been above 94 alone won't.
Time, a in above accounted for awhile. So we are in good shape.
So as things get back to normal I can't give me say the improve the got back to normal as far as onboard price Impella dreams I'm going to be in good shape into both win but we're not there yet we we.
Yes.
Ask you set we are we going to school.
Do you want to since since it was it had the right thoughtful not yet.
Oh, Okay I appreciate that and then a just a follow up question on the Atlantic how it premium the rents I very much appreciated your perspective on what happened in what are the price lower.
But just in terms of what it could be a catalyst to reset prices higher what what are your thoughts on that.
When do you see that playing out thank you very much.
Yes, the main capital risk at this point is the improvement of the price of the the 65% I don't want.
Remember volley replaced by their own making.
This diet the IODEX.
With the 65% or at least they were working on that.
When robot deal heat.
Started our own the October burglary October November December and part of January the timeframe was wasted with a value tried to convince their clients throughout the entire world that now.
The Gulf is not changing I am just changing from that the 60 truth of the 65% very smart because 62% they don't control, but 65%. They believe that they did because they're the only one produced five in a book so that backfired badly that route is make this mistakes remember value now.
We'll be neutral bed operation operators it a bunch of route.
I have no clue, what they're doing.
So we knew we were subject to do that and everybody you hit and then west Panic and do you know what happened with price up to panic not all meals.
Buckets on death disability contests, and then they came back and forth bogged down, but now things are going back to normal the 65% is back to a normal differentiation between itself and this is 62% diode exit that to be the most important.
Vector to fix the bell upstream, but now the pellet premium that a glass.
Makes public.
Falling to Atlanta based on.
A number engineered back from the 65%.
Pellet premium blows the the.
The this is 5% I don't want that Bliss, if the actual build premium that was fixed in the best or now really helped lead to based on the the contracts that were renegotiated really the clients and then they recomplete they what's called a plant.
These belt, but the 65% going up will a forced the Atlantic is built to bring it to go up and Thats What X, we expect to have to various.
That's very helpful. I appreciate all your color Lorenz on T. My best of luck. Thank you.
Thanks, so much.
Our next question comes from Curt Woodworth with Credit Suisse. Your line is open.
Thanks, Good morning, keeping Lorenzo.
What do you court.
So the renzo in terms of sort of the decision to lock of vessel capacity and kinda offset some of the deferrals you were saying can you give us a sense of what you're.
Export volume was three to your expectation for Q and can you quantify the amount of deferrals that.
You saw and did those just get pushed out into 2020 or how does that work.
Yeah I looked at the fixed for the question because that do help me qualities a clarify one very important point.
We.
We.
Reduced our yearly forecast from Nttwenty billion Dawn.
819.5 million tones.
So by 500000 phone based on the 500000 tons that we're pleased with 42, three and we didnt.
And we did not because we did the.
Reduction in the downstream that we saw in the marketplace.
I have already discussed a lot during this call.
The export business that we're planning to two big care off in Q3, we're no longer profitable for us. So the answer is we missed the export by 500000 tons into three and we are maintaining everything that we planted for Q4, which is a has been.
Correct to rise by underlying nominations by our domestic.
Customers not being affected by anything so we did not have any reduction ordinary reductions in nominations.
In <unk> related to Q4, we were good for Q4 four to 500000 phones, where the we're not exported in Q3 as we were we reasonably plant.
Okay. That's helpful. And then when you look at your contract structure.
For next year can you give us a sense. If you know if demand does say what is the level of.
I guess volume banning parameters that that companies can can choose <unk>.
You know if there's like a 1 million ton contractors as it like a 10% banning in terms of what the take or take or pay could look like just to get a sense of the sensitivity. Thank you. Yeah look we don't go as you move quarter to don't go in a contract by contract.
Things are with.
Outsiders and grew the research analysts.
But I would like to emphasize a few points that are very board.
No one of our best when its customers I.
Blast furnaces.
And then he gave you should know Ashland, there was two years ago.
Recent the recent.
Fast, including the entire year more even more important green did less what than.
No one of all back less when its questions idled in blood.
Certain contracts have meaningful.
Others don't and are we going to need additional billet sales to lead the next year at approximately 1.5 million.
Long term so.
That's pretty much you get to a whack work until the other thing that's very important too heavy mine is that for next year. We have one thing that we never had before I wouldn't have you have read optionality.
We will have a above and beyond.
Do you agree does that we're using you for our own plant in Toledo, we're going to have the opportunity to sell and we call. This sales exports, but you know our main clients is a new green tree that too big and we plan to continue to sell do you agree builds.
What type of premium do you get from New York Red Palace.
Well the did you have read belt commands a premium that's is slightly higher than the Atlantic is spelled Belpre and so you can use that number is already.
Great. Thanks, Saflex number as well okay. Thank you again.
Your next question comes from Alan stance with Jefferies. Your line is open.
Thank you good morning, guys.
Good morning out.
A couple of questions first on the cash cost the guidance for mid point 62 to 67 range given the impact from royalties and profit sharing.
Which of your two provided ASCII ranges is out one based on.
I will outline how have peace responding to this one.
Yeah, It's really it's really based on neither of those as more of an internal view that we don't necessarily historically share, but you know you can kind of.
Use the sensitivities in kind of gauge, where where it's going but oh, it's neither of the two ranges that we put out there.
Okay. Thank you and in terms of the true ups that we that happened in Q3. It sounds like that was just on the pellet premiums and HRC.
In a downside scenario, where would benchmark IODEX need to go before that triggers a negative true up.
That Keith.
Yeah I mean.
The year to date averages 95 spot as currently 86. So so you know if it stays below the year to date average of 95 throughout the Q4, you'll see a little bit you'll see a bit of a true up there in Q4.
Okay and last one for me.
Once H.B. I starts up mid next year, how are you thinking about capital allocation, obviously with the contribution from each <unk> capex falling away free cash flow will be significantly higher you mentioned debt maturities are well pushed out how do you consider by docs first dividends adopt.
Well first of all got back to go back to normal we'll go back to the historical levels, which are here in this company. We all is considered between three and dollars in three more than 50 cents per Tong So if true.
On slide by $20 million for sake of Ah.
Heavy on number that's easy to deal with it will be for mining both eyes will be 16, 17 million tones of Capex and another.
30 meat on the dollar for continuous than the number will be less than $100 million on an ongoing basis.
And the other question was about dividends, we will continue to to pay dividends and we will we blend to increase dividends as soon as we no longer have to.
Spend money on Hbr.
Okay, I guess I assume by docs, we'll be opportunistic as they might be relevant.
Well come by bets.
Our another way to return.
Vetted to the shareholders remember to a true up to five years that had to fix the company. We had to issue stock we had no option we had to issue stock.
Certain periods of time in order to take advantage of.
Opportunities in the capital markets.
And we did so the main reason why I went all the way through buyback was is going to to restore the share count there was a regional before we had to a mixture.
Section that the clearly degrees the share count so direct checkout back from the 270 million shares were happy with that I don't believe that we're going to be prioritizing buybacks. We have went to prioritize or did it.
We like what we did we did because it was the right thing to do it that the right time shareholders were always support research alleys are only support but there was it the rationale behind wish account not because we believe that's the best weak returning money to the shareholders. The best way to returning money to the show.
With that.
It is by means of a dividend that is so far is a very robust a regular dividend and every now and then when the cash is available in the winter conditions support and ER.
A special dividend, so we want to be more into the dividend side with the regular dividends and special dividends.
Okay. That's perfect. Thank you very much guys.
Thanks Alan.
Your next question comes from Matthew Fields with Bank of America Merrill Lynch. Your line is open.
Hey, everyone I'm quite a matter.
Feeling strongly about the pricing environment getting better in terms of steel and the premium.
But in the keys that sort of steel prices in the U.S. don't improve dramatically, where do you feel comfortable with your balance sheet.
Like what's the overall debt level, where you feel comfortable being able to continue to pay dividends and sort of operators.
Even grow the dividend like what's the what's the overall at that level, where you feel comfortable to weather down cycles.
Well first of all as far as debt levels were comfortable right now because.
We.
Just debt levels like our debt is totally under control.
And even more important we have more maturities.
Until 2024, so we are in a the position that we put ourselves there. So very few companies can say that I have no maturities for the next five years, that's clips and we did that will ourselves. That's a very first thing so that for us at this point is just the interest into.
Thrust for us is $120 million.
So.
Things need to be really bad for us would be concerned about that at this point, because we're not going to be not even close to that level as we prove it that in Q3, we know how to do with this type of a.
Volatile pricing environment. One other thing is that if we think about.
Huh.
Really bad scenarios first price and staying in place.
So many companies will go down so earlier, then Cleveland cliffs, because they haven't done what we have done that.
They did this situation will correct itself just by means of these natural selection. If you will do the weaker would go away and is stronger will survive, making for a is more than a number of players in a in our marketplace that hasn't changed in terms of.
So we should be in great shape, but that this is just a theoretical exercise that's not how things work.
You are starting to see some movement.
Among boards and.
Retirement of Ceos in the traditional companies buying newbies and a unit we're excited to see any color around and ER.
LG like step a lot I have been.
During my career on seeing other spending.
And making by moves so stay tuned.
As prices go up if rates don't go up then you feel like a playground for a year.
Speaking of traditional companies buying newbies, which I assume you're referring to.
Steel Big River Love to get your thoughts on that transaction and the potential implications of.
Have you estill potentially shutting down a couple of their older mills and being even longer on the pellet side.
Hi, Matt.
So bright anything is you'll be leaving that I'm going to two to two express my opinion on that transaction you My only school, but I can only wish to the players over there good luck, but they will need a lot.
Alright fair enough.
Thanks very much.
Thank you Matt.
I can ask a question. Please press star. One then your telephone keypad. Your next question comes from Seth Rosenfeld with Exane. Your line is open.
Good morning.
What is that.
A couple of questions first on your cost base and then moving on H.B. I. Please on Cas cost, obviously pretty significant reduction Q over Q.
Which benefited your results in the quarter can you just comment on the impact of deferred maintenance and contributing to that reduction.
Stena bulk stuff works, we expect to sort of swing back <unk> spend in the coming quarters.
And then secondly on H.B. I. Please.
Sure your updated thoughts on pricing methodology I think.
The prices based on some combination of prime scrap pig iron HRC.
Given the progress, we're making with customers what do you think now is most likely pricing methodology.
With your past guidance.
<unk> three times more profitable than traditional palletizing is that still realistic target for us.
Yeah look let me start from the front the Sequans village B. I press present methodology you already described the methodology as far as what we have released in terms of both information. So there's no change on that and we're going to be referring pig iron.
Delivered to the great lakes as well as a busheling scrap is up to two main parameters that will be used in our pricing calculation and they're gonna have to leave that to leave at that as far the deferred maintenance Oh, we have de sensory anymore or no more numerical.
I just want to do to know set than everybody else into school that we don't defer maintenance to the point of a boutique equipment. That's risk we have proven that in 2015 2016, when things are a lot uglier than they are right now right now they are actually very upbeat.
So we might move things here and there, but that's normal course of business and done things that we don't do in November late November or December we're doing Gerry on the full year, so Keith and stuff yeah. The impact the impacts that was about 50 cents on a standard cost for 2019.
Some of that will will go into the first quarter or you know, who your average 2020, but but not not the full impact of the 50 cents.
Thank you very much it's just a follow up with regards H.B. I liken plus please given that you have given the guidance in the past a free for three times more profitable is that still reasonable target for us.
Yeah look a we are now in a very strange woman for prices to <unk> reference other prices.
For a normal range of prices, yes for this artificially.
Squeezed pricing back not really.
But that is because we know that this pricing is not going to stay I will keep my my previous guidance, because things who recovered from a more normalized levels.
Great. Thank you very much.
Thanks Seth.
Your next question comes from Brian globally with Barclays. Your line is open.
Hey, good morning, guys.
Good morning, Brad.
Good morning runs on maybe as a bit of a follow up to Matt's question earlier and appreciate you know that you're making this investment in to lead to reduce some of your exposure exposure excuse me to the blast furnaces and the cyclicality. There as you mentioned in your press release, but do you mind, maybe giving us some sense for how you see this you know shifting steel marketplace.
Playing out for the blast furnaces, obviously, there you know there's still consuming over three quarters of your pellets, even even once Toledo comes online. So maybe just some strategic sense for her and sort of how do you see that market evolving as all this new capacity in the EPS is coming on mining and sort of where to the older burn you know furnaces sort of live longer term.
German and how does that impact you guys. Thanks.
Yeah look at this investment in Toledo.
Came at a time that we here at Cleveland cliffs identified the trend of yes, you started to not only continuing to grow but starting to tap into the.
ER share of a business that was destroyed historically captive blast furnace producer integrated steel producers. So we identified the trend to do make the move we made the move and we're happy to move but we also know that these things take time to materialize.
So it sounds like all they announced the investments we will all startup and on the same day now that's not do it happens or not all will be a finished on time. We also know that and some will be cancelled as we have already heard a few or walk.
Looking back their own mistake.
So we know it's got me with no. This is a trend that do continue to play out but we also know that it takes time some of the blast furnace producers.
More than others are extremely resilient and extremely competitive.
Good day that two of those resilient and embedded for one arcelormittal and AK steel. They are the number one and number two clients of Cleveland cliffs. So we're seeing a lot more volatility and the part of the business that's outside.
The Cleveland Cliffs course, that's also good thing so we'll wait to see a lot of replacement of yeah.
Yes, replacing blast furnace going forward, but not necessarily drawn the blast furnace business that is now a under the.
Control of the fluent goods glass, that's how we see and we are proud that to be part of their competitiveness. So we work with them to make their blast furnace better that they're big armband, there's do better and that they do all the rest.
So that's how it works. So this is a trend that to continue right. But this is not something that we're going to expedite anything so and then the next follow up question be so I can come with more after H.B. I one yeah.
We will come with something will come with something after H.B. I, one would be H.B. I took would be something else, but we are going to continue to follow the trend. We are going to continue to evolve Cleveland cliffs to adapt to up an American steel market and I will continue to produce steel so.
So my premise is United States will continue to produce do five years from now 10 years from now 20 years from now and we want this will be rightside.
To supply, there's still more Americans to market five years thrown out 10 years from now 10 years from now exactly as we are right now we are right sizes for the market that exists right now.
That's great. Thanks, Yeah, you you answered my follow up question I was going to ask if you put any thoughts on when you might make a decision on doing something in the future and I appreciate it could be years out. So thanks for the time Lorenzo.
Thanks, Brad.
I'll take one more question, then who will be done.
I guess, okay alright, okay.
Well find is telling me here that times up and he can throw this thing so take all very good appreciate.
It was a tough water we showed that we do well even tough quarters Q4 should be a the beginning of a trend going up and we I look forward to speak with you guys are early into doesn't win.
Because so much and have a great Thanksgiving Christmas.
And though we will survive in the hope that type of you will because some will not by now.
This concludes today's conference call you may now disconnect.