Q4 2019 Earnings Call
I'd like to welcome everyone to Cleveland Cliffs, 2019 fourth quarter and full year conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward looking.
Within the Safe Harbor protections 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 to differ materially.
Important factors that could cause results to differ materially set forth in reports on forms 10-K, and 10-Q and the news release files with the FCC, which are available on the company website.
Today's conference call is also available.
And being broadcast Cleveland Dash cliffs Dot com.
At the conclusion of the call it will be archived on the website and available for replay the company will also discuss results.
Excluding certain special items reconciliation for regular.
Regulation G purposes can be found in the earnings release, which was published this morning at this time would like to introduce Lorenzo Gonzales, Chairman, President and Chief Executive Officer.
They have Christina.
Morning, everyone.
I appreciate all joining on what should be our last call.
Standalone <unk> company.
After the quality of our acquisition all Vacates deal.
Please will be a steel and Iraq War company.
We are very excited when this unique transaction.
And looking forward to walk the benefits that we've gone with controlling the our or failing and H.B. I feedstock.
As well as these new products, including Brightroll coils of stainless and Cobbling deal.
Highly engineered manufactured parts for the automotive industry.
Over the past several weeks, we have come away captivated by de ONTAP importation. That's clearly exists for in case you assets.
I'm very impressed by the quality of the people on the ground.
The opportunity ahead of us is actually bigger than what we foresee infusion.
Before I laid out why am I wish started with an update of where we stand with regards to our goals the timeline.
As you can probably got a which is called being moved up by one week.
We are progressing remarkably well on all of our necessary checkpoints to close the transaction. Thanks to a great combined effort from Bose.
Glimpse at AK Steel's transaction teams.
As well as our outside Counsel Jones day.
We received regulatory approval from the United States on January 22nd.
I need approval on February 12.
And expects to receive Mexican approval by February 27.
In addition.
Our S. Four registration statement when effective on February four.
Allowing us to set our special shareholder meeting date of March stand, we know transaction closed following soon thereafter on March 13.
Our dealings with AK steel over the last several weeks gave us the conviction that Cleveland cliffs, and AK steel haven't outlawed in call.
And our bullshit very different from the data companies and the vast majority of companies out there.
Similarly to clips eight games do you have not saved money by skipping necessary madness.
That would over time, maybe equipment and product a lot worse.
Not the games with blips, not Nick easily day Casey.
Oh, so both 8-K interleaves relied on the North America market.
She was thrive when this strong economy you currently have ever we'll continue to have here in the United States.
[noise] differently from the vast majority the Companys these days.
Our business is do not depend on China.
With that we see show up in case you.
We don't want blips becomes the most relevant supplier of skew to the automotive industry and you and I just dates for me integrated from Iraq War on the ground <unk> auto parts as a tier one supplier of finished parts used India Assembly line.
Of the cabin car manufacturers.
The pro forma numbers show that even before we account for synergies and cost cutting actions.
The new cliffs command the highest EBITDA margin.
I'm always do companies in North America, and that includes all integrated meals and Oh, Yeah, you steelmakers.
Last but not at least.
On day, one we are resulting for good day AK steel balance sheet issue.
With that we'll be running a company with a four year window off no maturities and managing the business fraud position or financial strength.
AK steel serves the high end markets that for a first ability prices.
With the biggest concentration automotive share among all the steel mills in our industry.
He is relatively stable revenue stream.
Does not mirror its cost structure, which varies a lot more particularly due to the variations we did the price OVARA War.
By marrying our two businesses, we can mitigate these intra year volatility with a combination of stable costs and prices, while providing the new company with a level off margin predictability, that's not uncommon in the metals and mining world.
Yeah.
There are two other U.S. integrates into steel makers, who control totally or partially.
There are more supply.
But neither have this same level penetration in the automotive market.
And Dave Bowls have a lot more exposure to bought steel prices.
The rationale for the deal was explained in our announcement on December Threerd 2019.
Upon the completion of our acquisition of AK steel.
Commodity end uses that investors use as a proxy for English performance will be a lot less inflation.
As our revenues will be far more in our control.
We understand that yeah, Muse continue to grab market share from this so-called high cost blast furnace producers.
This being said drifting all we integrate into steel producers as if they were all the same is not I would simplification.
In fact, there is a massive disparity among different integrated meals.
Also as far as he asks are concerned.
Some serious technological limitations exist in the types of steel that each here, yes, you can or is willing to produce.
The vast majority of the sophisticated this do products that AK steel supplies are not just something any steel mill is capable of Mickey.
That's one of the important.
This do industry in countries with meaningful automotive manufacturing power, such as Japan, Germany, France, and South Korea is completely dominated by blast furnaces.
Just blast furnaces are operated by a handful of well run in properly capitalized companies, such as Nippon steel Arcelormittal and Portugal.
Among a few others.
Aimed a world of highly sophisticated excuse for the automotive industry.
Well operate and integrated Muse prevail by a large Marty.
Automotive and blast furnaces goods blast furnace I mean.
Go together.
There's a small group of high end steel producers in the world that have all three necessary strengths to be part of new select group.
One.
The technological capability.
True the our R&D resources.
And three the staying power awfully strong balance sheet.
While the legacy AK steel has only two of the three.
The new Cleveland cliffs, we will have all three strengths and therefore belongs Hindus very select group of steel makers.
The importance of AK steel as a well established supplier of Delta motive industry is even more relevant at this time.
When we approach are very interesting inflection point in the North America market for cars and trucks.
We find ourselves into very early moments of a transformational change from the use of combustion engines in passenger vehicles to that off entered powered cars and trucks.
Right now electrical electric vehicles, you still make up a very small percentage of cars on the road with Tesla being a star and an undeniable reality as the first company to show up readiness and a market for each piece.
However.
As several other car manufacturers catch up with the market.
And get ready to introduce new models off electric vehicles over the next few years.
To close in our favorite favorable American market supported by low interest rates and full employment.
Vertically integrated and downstream oriented clips AK steel will benefit from the trends.
Well AK Steel's unique technical expertise, we are the best position company the supply what's needed for this change of the fleet from traditional combustion engines two weeks.
AK steel produce the most sophisticated products, including engineered parts to the automotive industry as a tier one supplier and highly automated facilities operated by precision partners and several strategic located plants in the west.
Canada and Mexico.
Going forward, we'll leverage and increase our downstream businesses and 8-K, two and precision partners will be core to our business into our commercial strategy.
We added Cleveland cliffs, our broad driven.
And we have proved our good commercial execution through very successful contract renegotiations with our pellet clients.
Some key this surprising the outsiders with our ability to succeed.
By improving the utilization of our unique our energy resources.
I am more commercially focused way.
The new play of CK.
And we'll provide the advances juice allusions needed by the car manufacturers to produce OLED vehicles for the mass market.
This car manufacturers are well established long term clients of AK steel.
And some of them have contacted us at Cleveland cliffs during the last several weeks to express their support to our transaction and their willingness to do business with a stronger entity as a combined cliffs AK steel will be.
With the balance sheet relief, we will provide for this standalone AK steel.
These rare window of opportunity in the market for cars and trucks can and will be export to our benefit.
That of course or never happen and Cleveland cliffs, and AK steel stayed put as two separate companies.
These example, just scratching the surface off what we are prepared to do as a combined entity, while achieving and maintaining a strong financial profile for a well capitalized cliffs AK steel.
We have already executed a successful exchange offer that strips that relevant covenants draw AK steel bonds, providing us with a great deal of uniformity and flexibility in our capital structure.
We have also arranged and put in place.
Q2 billion dollars asset based loan for the combined entity.
Our new EMEA will provide us with substantial liquidity and with an easy way to pay down debt weekly and with no prepayment penalty.
Last but not least subjected to market and other customary conditions in the near term will be refinancing eight case 2020 and 2023 bonds.
With all that at closing on March 13, the new combined company should have a much stronger financial profile. The current AK steel, including the nice and comfortable no mature into window going forward for eight years that we currently.
Joining as a standalone Cleveland cliffs.
I will be able to going to much more details once the deal schools, including our operational plans synergy achievement progress and footprint optimization initiatives.
And then our combined teams will continue plenty and setting the stage four hour takeover on day one.
For now our mining and Pelletizing business remained steady and reliable as always.
One of the other benefits update keys to transaction is that we now control our own destiny Windoor pellet supply and have picked up a lot of optionality as a supplier of iron ore products.
We have roughly 85% of pellets order book secured through 2026.
For the remaining 15% of gold production, we have several options, we can either extent third party contracts.
Okay, great pellets or leveraged AK steel blast furnace footprint to sale merchant be guy.
We will only make that decision later.
And we'll do it in a way that allow us to maximize the profitability. We enjoy from the unique position we have in the iron ore pellets and HP markets.
This flexibility with our balance was made possible primarily because of the construction of our Hbr plan.
Within a few months, we'll be producing and selling hot Briquetted dock.
As I confirmed right now.
We will start up our HB plant in June of 2020.
And expects to generate healthy EBITDA and healthy free cash flow from our two hid operation is due in 2002 in.
We also expect to achieve our nameplate 1.9 million metric tons of H.B. I in 2021, which will be the first for calendar year of operation off our Toledo plant.
In advance of or a startup.
That can you go and commercial activities are well underway.
And our new electric arc furnace clients.
Hi, 3% Carbone content grips HP.
Differentiated premium product.
Several steps up both the low cost, which b. I am here I come only produce.
In fact, our H.B. I is a direct replacement for imported peak.
Also very importantly, our Toledo plan is exclusively supplied with uniform pellets feedstock for a single source our Northshore mine.
Which is a defining vector to allow for a stable operation and a very on with genius product.
With that I'm pleased to inform data based on actual ongoing commercial activity.
Let me I will be sold not only in our natural market within the Great Lakes, Indiana, Ohio can tacky, Illinois, among other states, but also to Alaska point us plants located in states partner sauce, such as Mississippi.
And Arkansas.
Between the two leverage H.B. I plan and the upgrade of the Northshore mine to produce great belts.
We will cliffs has spent more than $1 billion to develop a new use for taconite Our award from the Minnesota Iron range.
This meaningful investment has generated more than 150, new full time high paying jobs in Toledo.
And brought our very relevant economic benefits to both Minnesota and or higher.
Including approximately 1650 construction jobs in both states during the last couple of years.
We are very excited that we are just a few months away growing stacking, replacing Russian Andrew cranium pig iron with our made in USA hbr.
To the benefit of our new.
Clients.
Our employees, our shareholders and the economy of Toledo and northwest, Ohio.
On that note I'd like to invite our CFO. Please go see to discuss our fourth quarter and full year 2019 results.
Thanks, Lorenzo and good morning, everyone listening today.
Cliffs concluded 29 team with fourth quarter, adjusted EBITDA of $111 million and full year adjusted EBITDA of $525 million.
This represented an industry best 28% EBITDA margin, even after dealing with precipitous drops in both steel pricing and pellet premiums during the year.
Most notably our cash flow generated from operations continues on a positive upward six year trend.
Net cash from operating activities was $563 million in 2019 compared to $478 million last year and our highest since 2013.
Our mining and Palletizing segment's quarterly EBITDA of $153 million was driven by 5.8 million long tons of shipments, including 400000 tons of intercompany sales. This put us at 19.4 million long tons of sales for the full year roughly in line with our previous guidance.
Our pellet price realization of $90 per long ton in the fourth quarter was negatively affected by the volatility and hot rolled steel prices and pellet premiums that we saw during the back half of the year.
That caused us to record an unfavorable revenue true up adjustment in the fourth quarter.
The true up was primarily a function of having to revalue our entire year sales at the full year averages for HRC pellet premium and IODEX negatively impacting our Q4 rate.
After all that our full year revenue rate was $100 per long ton, which came at the midpoint of the spot price guiding range that we provided last quarter.
Cash costs for the fourth quarter was $64 per long ton, which also put us right in the midpoint of our full year guidance range of 60 450 prolong ton.
As for Capex, we're now through our peak year spend of $656 million and expect to see roughly half that amount in 2020, as we wrap up the construction of the H.B. I plants in Toledo.
And the finance side, we are grateful to end, such a heavy spending year, maintaining a healthy liquidity position, including 350 million in cash and an untapped revolver.
With a reduction in capital spend cash needs in 2020 will be much lighter.
Along with reduced H.B. I construction costs, we will no longer have the $45 million minority interest payment that we were contracted to pay in each of the last three years.
And finally, we still have our steady flow of tax refunds, continuing with another $60 million expected in the middle of this year.
And to refunds of 30 million.
In each of the next two years.
In 2020, we expect to sell between 20, and 20.5 million long tons of pellets, including approximately 1.5 million long tons of D.R. grade pellets to be delivered to our H.B. I plant.
Due to the additional pellet tonnage produced last year that is currently in inventory. We also have flexibility to increase beyond that sales amount in 2020 should demand warrant.
For full year guidance on a cliffs standalone basis, we've provided an expected 2020, adjusted EBITDA range of $550 million to $575 million.
In order to maintain consistency we have used roughly the same forecast in pricing assumptions that has been put forth in other publicly filed documents using analysis that was developed last November.
I would also flag that as HRC prices have come down our revenue rates have become slightly less sensitive to movements in iron ore prices and pellet premiums due to the nature of our pricing formulas.
Both our revenue sensitivities and our EBITDA guidance range will not be relevant after we complete the acquisition of AK steel and as such we will be de emphasized by us going forward.
Nevertheless, we are still Standalone business I should note that we're now at a point, where the Atlantic pellet premium sits below the cost of pellet conversion for most players in this market.
And we've already seen supply begin to come out of the market.
On top of that currently the Chinese pellet premium is actually higher than the Atlantic.
A pretty rare occurrence and often a signal that the Atlantic premium is too low and likely to rise.
For the first quarter 2020, as always we are in the middle of restricted shipping on the great lakes, forcing us to limit most deliveries to rail only.
Q1 should represent only 3% to 5% of our full year revenues on a cliff stand alone basis.
Assuming we close on our expected date of March 13th.
Our next quarter's results would reflect a case results only for those last 18 days of the month.
So we may see a small prorated influence from me phase earnings during Q1, but would not see the full benefit of their earnings in our results until the second quarter.
With that I will turn to Lorenzo for his final remarks.
Thanks Pete.
Both the upcoming completion of the AK steel acquisition.
And that will lead to take the plant coming online.
2020 will be the most transformational year.
In our 173 year history.
We are very excited to welcome our new customers Nucor.
David J., Joseph Steel dynamics, Omnisource Big River steel.
Nor Subu school.
And several others.
Lisa clients as they acquired a massive tonnage or hbr for the burden of electric arc furnaces.
In the meantime will need our shareholder support.
To make the acquisition of AK steel by Cleveland cliffs.
Reality.
So those with shareholders of record as of January 30, Onest listening on todays call you should have already received the necessary materials to both for this transaction.
Your vote is necessary.
And I appreciate your support.
As you know I'm, a big shareholder of Cleveland plus myself.
One of that has bought several million dollars worth of CLS stock in the open market and never sold a single share except for upset indexes before this year's become mine.
You speaking as a shareholder and to all of our shareholders.
We believe the acquisition opaque casteel.
Under my guidance.
With the leadership of by management team and we the addition of key players from the AK steel management team.
Is that optimal path to maximize the value offer CLS shares.
If you have any questions about the rationale for the deal or how to vote.
Just feel free to reach out to us using their contact information provided in your materials or on our website.
One more time your vote is important.
And I look forward to receive youre affirmative vote.
Our before March Stan.
With that I'll turn it back to Christina to direct Q1.
Thank you at this time, if he would like to ask a question. Please press Star then one on your telephone keypad that star one on your telephone keypad to ask a question.
First question comes from Lucas pipes from B. Riley FBR. Your line is open.
Hey, good morning, everybody.
Well, congratulations Lorenzo and team on the continued progress on H.B. I and moving so quickly on completing the acquisition.
Acquisition.
Lorenzo I wanted to start out with some higher level of questions.
So first on on eight Ks you mentioned, the long term strategy and the commercial opportunities there, but other pieces.
The eight Ks portfolio that might be less relevant that could be candidates for monetization any any any thoughts on that would be appreciated and then reading through the S for.
It appears this.
Marriage started with the data about Ashland and I don't I don't think you mentioned Ashland in your prepared remarks could you maybe update us on the thoughts on that asset and then then lastly, I appreciate your comments regarding the revolution in your prepared remarks.
Folks don't typically think about steel in the context of the kind of what are your thoughts there what what what product.
Feed into that market and transition specifically.
And what do you think the impact will be two to eight ks longer term there so.
I appreciate all the color on those kind of three questions.
Okay. Lucas that's a lot of our look through to show, but let's try to too to get it done first of all their thoughts on assets well be very careful in terms of what they can and I cannot talk about because there are few.
Things in the.
And the M&A revelation that some 30 the law in terms of gone jumping provisions that I I am not a chunk of the company yet so we're working on preparing our plan and of course, we have plant.
But in a general way without being specific on anything.
The assets that we're not going to be part of the core and our song.
They're not going to be part of the core well be monetized, we did that with eclipse that was a lot more difficult a lot more complicated a lot more specific in terms of.
Potential buyers with AK, we have a few things that.
Actually varies receiving reverse inquiries in terms of adult sold is the anything they're coming year and they are calling in and making proposals on doing deals and doing that we listen to everybody and we're taking our own plan.
Two paper and add on day, one will start to execute so you should expect that non core assets will be taken care off and monetize to divest of our ability.
That's the part as part of that.
Look we were developing a market for age.
We are doing extremely well, we'll wait until we're done now we are we believed that our commercial efforts and our tech go effort.
Came to fruition, we're very pleased I gave names of clients that are going to be buying massive tonnage of HDR on us and.
I did up by the way I, just mentioned AK steel because.
We are.
Concentrated effort on page.
To outside clients at this moment, so we're not even planning to use our HBV within a case due at the very beginning.
So just to give an idea how.
What is the H.B. I products in the marketplace right now, but back to Ashley I started Ashland.
To be interest in Ashland, because we're seeing the of high level of interest for our age.
So it would be.
An opportunity to create.
And the expansion in this metallics market and.
Developed.
As a producer pig iron for in the marketplace.
However, when they start doing that would have to do market analysis into market analysis, you realize that there is only so much.
Yes can't get too before they get into a ceiling that they can't pass and then if they can produce certain types of products.
Then you cannot we aim in all fairness to continue to supply the weakness Dallas, because they will not need it and they have other alternatives that might be more economically viable for these intelligent, yes, and they will not be buying the arent just because we got it might be avail.
In other words, they were paid media, yes, we will not be fruit juicy exposed part for automotive if they if they.
Okay.
Pig iron feel good thats not the restriction to produce exposed parch.
We we really.
Realize that.
We are getting to a point to a though hbr that were pretty much optimizes the market for yes, and so.
We'll ashland happen at this point I don't know I believe so because we are going to go first and foremost maximize AK steel capabilities, because when I realized that it yeah, absolutely not be able to get there.
I also realize that there was an untapped potential when day key assets that could develop even more important some other integrated producers that have a traditionally the history, both producing the broadest for the automotive market.
Away, they're going backwards so.
So they're going from pro for Waqar to a bicycle so less than two that I'm. Good that so it case do you have the R&D capability has the deck and Coca views as it patents as the processing clients. So we only need to improve its conversion.
Besides the balance sheet that there will be done before we we landed on March 13, So and Thats, how our forte, that's what we before leaving 39 years in six months and just business. So Ashland at this point isn't a backward.
I don't believe the marketing investment the market definitely needs already.
But I'm not sure if they need that I'm going to do everything I can follow market not to these ashland, because I went to grow the business of AK steel.
You also mentioned that Ela electric vehicle Revolution, I agree with your terminology, it's a revolution.
Import into still Revolution remember that Tesla.
Yes, well all aluminum.
That's a threex the evolution of the dead.
Thanks, I'll, let you see on the street.
Yes, Oh steel.
So there's a potential.
Towards steel as well.
And finally, the traditional car manufacturers.
Now at a point.
That's a realized that Tesla is for real LTV is for real so they're all jumpy answer this thing.
And I guess what.
They are all clients of it Casey.
So we are going to be developing.
If these materials for Tvs.
Inside our R&D center.
A middletown, Ohio.
And actually we are going to started right away.
So it's gummy AK steel will be a big beneficiary and when you see companies like.
Both staggered Volkswagen CEO same definitely is two to his executives deadlines years real if you don't believe you don't belong to Volkswagen at this point.
That means something general motors is coming with a bunch of Jvs.
Ford is going toward that.
Hopefully producing trucks called review producing traction in oil.
They are.
Huge client of AK steel are going to continue to support their development. So there's a lot coming and this thing and here in the United States, we ever to be pretty much.
I would say alone because we have arcelormittal USA.
Also participate in the marketplace, but I think thats going to have a lot of before for us.
Global improves a combined add our big glide Arcelormittal USA to are good and both sides in the help a lot side and the pellet site.
So from my answer is too long, but you'll get the three very interesting.
Very provocative points to talk about.
I really appreciate all the color Lorenzo it it's never enough out I'll keep it really short for my second question.
Breakdown of capital expenditures in 2020, Keith you May have mentioned that in your prepared remarks, but if you could just.
Reiterated case I missed that I would appreciate it. Thank you no problem. Lucas were 2020 were the range. We provide a 350 to 400 million breaks down HP is going to be or Toledo is going to be 270 290 million to complete.
Virtually all of that will happen in the first six months.
Sustaining capex for for cliffs, 70 to 90 million somewhere in there and roughly 20 million of capitalized interest during the year.
Fleet, the Toledo plant.
Yes.
That's a breakdown.
I appreciate it very much and continued best of luck. Thank you.
Thanks folks.
Your next question comes from Alex hacking from Citi.
Your line is open.
Hi, good morning, and thanks for the time.
I just wanted to follow up.
With a question on the H.B. I know you've you said you've made.
A lot of commercial headway, there and congratulations on on on the success and it sounds like you have all the offtake that a lot of the authority sorted out.
Well I'm curious on the pricing.
Can you give us any color if possible on the pricing structure in terms of what type of contracts that you'll be entering into will they kind of be.
In terms of duration.
Then also in terms of the pricing mechanism for the H.B. I will it be linked to.
Indexes in any way and how often will the prices reset so any color there will be very helpful. Thank you.
Good morning, Alex the.
Hi product is being sold.
Two clients that have a way of doing business I mean, you say that for ever.
I've been saying that before we built the H plant, we have to respect the way the classes of business weekend.
Tried to impose a new way of doing business before entering a market.
So this books by in short term day Bye bye.
Our order is orders are more loosely.
Green Dot on terms of thought for the quarter and prices set in a monthly basis.
The biggest reference for price for us would be the price of big.
Adjusted for the value, we use that our Hbr I mean pig iron delivered to the client of course, but big idle.
Fob to borrow on Brazil were fob both of them a bit or that will be some board in Europe now delivered to the United States delivered to the can decide.
And I just for the values.
Remember regatta has 4.5% travel, but what I have 3% carbon scores, but not there we're going to generate a little less need we have a little more gag because we are low silica, but we're not zero silica.
Ill go ahead, we have about very high utilization. So a lot of gives and takes that will be defined by the value is but the values will be developed after the client is really using the product. So we're going to have six months.
Our seven months.
During June and that December of 2000 today to be adjusting this parameters, but by and large we are set we are happy add do we are going to.
Continue to develop this business that way it will be very profitable for us the payback the IR that I promise, we'll be when we first started will be easily the people.
Okay. Thanks, that's very helpful. Thanks for the time and good luck.
Your next question is from Seth Rosenfeld from Exane BNP. Your line is open.
Good morning, Thank you for taking the questions.
I can touch on two points person H.B. I and then secondly on Haslam, please but when it comes H.B. I and the Capex budget, you released talked about the Capex being I think sounds like a development being sounds like in Q4, I'm, obviously on trying to ramp up before the end of each one when it comes to Capex.
My understanding was the 2020, Capex, which was closer to 300 million implying that we're looking at 50 100 million bucks above that wasn't moving parts and not on key thing keeping the color earlier is each back capex. One of this element, what's actually increased unexpected budget. There and then secondly, please when it comes to pig iron enhancement.
Your comments about market research pointing to metallic market well supplied based on just journey to be I seems run counter to what we heard me back in December the time that deal announcement when affluent growth seems to be one of the key incremental growth drivers for the story.
Certainly what's changed in that time is this new market research you completed after the acquisition was announced or was always inline with expectations going back to December. Thank you.
Well first of all that set a record stake you said that.
HM.
Throughout the world, particularly here in the latter stages that we domain.
So my wife is still Baird.
So im just do a lot.
So remember when you said that that Hbr was we don't make because Uh huh.
Generates budget overruns and people can complete construction on time remember that set.
Hi, do and I'm glad you're right, there's not a window.
Brian So.
Our H.B. I guess on five hours Npis actually ahead of schedule and Orange guys on budget. So we are good with that.
Second the fluctuations the numbers for Capex us Kerry carryover from last year thinks that the for one reason or another we didn't update last year because it can pay later looked a little lumpy earlier, so that's pretty much.
Our rule of thumb when we're building something if everything goes on time and youre not being forced into to deploy the capital.
Earlier, if we can deploy the capital letter why not to do it so just.
Move from one year to another.
Yes Ashland.
That's what do adjusts for.
Well doing due diligence we are really deep.
Diving deep into AK steel.
We.
As far as public information is concerned.
We did not here too much from 8-K in public conference calls and things like that a lot of the automotive.
As we heard a lot about their balance sheet worth a lot about the bonds that are not refinance who we heard a lot about Asia closing here a lot that business and.
Good start digging into that business.
This is phenomenon.
Technical capabilities are immense.
And I would have to produce pig iron to support yes.
Part of it.
I'm going to support your cash out of each day I saw that have not been nine the importance of yes. So there is no hopefully to previous statements.
Just had to do is short that's a real potential for this.
Ongoing for the existing 8-K business, particularly well in west related to automotive.
Extremely impressive.
Our first team.
Investors day for AK steel will get done at this research and development said, it well vacates deal in Middletown, Ohio, and I'm sure you're going to be there said youre going to be surprised as other recent challenges we were as well so there's no.
Well, it's just due diligence that's what why companies do due diligence with the acquiring other companies to really learn.
What they are getting into so we realize that are getting into something a lot bigger a lot more relevant although more.
Importantly in terms of a return to the shareholders than just producing big the marketplace. Our investment I won't say, that's not going to come up just say that these was now we behind in the in the scale of priority.
Okay. Thank you very much with new best at home.
Thank you.
Your next question comes from Nick Jarmoszuk from Stifel. Your line is open.
Hi, learn so good morning.
Correct.
Question for you on the EBITDA guidance does it assume any contribution from the H.B. I plant in the second half the year.
Look visiting.
Keep in mind that.
As was 2021 pumps.
We are going to have not been in terms of intercompany sales will forget.
So.
We don't change everything in terms of the things that.
You see it is.
Does that.
But I'll, let Keith goosey going to do as well as in numbers related to that guide range as far as the the startup of Hbr.
We're pretty modest with the back half and we've only put in $30 million of EBITDA coming from HP.
In 2020, its and its mainly just do the ramp up and and there's always theres always some additional cost and getting started.
The number grows immensely in 2021 as we expect to have a four year.
Running running at the at our and our nameplate capacity. So we we've we're looking at roughly $200 million of EBITDA generation and 2021 and and that's that's what we've got in our guidance.
Okay.
As part of.
Let me complement one thing about it as part of 2020.
So between 650 Beaufor Hot band in the United States is still very modest number.
And that should be a number is to achieve not falls for IODEX well today by $1.10 cents.
Our next those volumes. This morning. So then you'll know what normal is unabated.
Volume was unable to destroy the IODEX.
They get destroy the pellet premium no doubt about when you reopened contracts that are set in stone and clients Andrew except.
Clients cried Wolf.
That does things go down the he is probably the biggest victim of this.
Absurd.
So there will be part as they are giving away revenue by giving away the Philippines very soon do need to.
Come to reality that both to go up like Keith explained for the vast majority of pellet producers in the world. The current Gulfstream doesn't cover their costs. So they are in trouble folly might be okay. Because today manipulation of the Brazilian real that's now trading at.
$4 and third.
One $1.44 four.
37, ryals, so it's pretty absurd, so that could give.
Pressure that theyve all costs under control, but they don't so there has to play catch up with the Bellekeno very soon.
That's why we put a 50 bucks.
Number four hours speculation because we believe that will be higher.
Nick when one more follow up to my comment real quick the the 30 million that I quoted does not include the intercompany margin. So we we also recognized on the margin that price that we're charging to ourselves. So there is an additional margin in the H.B. I products and so that will be in the mining and Pelletizing division. So it's we point.
At another days the profitability of.
That's right, yes, but not the there the profits that we mix selling built at market price pro north shore to iron units for not shortened bullied because we had to do that way because.
Among other things would be ROI as to Miss Abhi Trust.
On based on market price, so we don't mess with that.
Okay.
With the customers that you mentioned does that fully contract the nameplate capacity of two you know.
No.
Whether me five orders for 1.9.
Below that two for proposing on of course, not nobody had.
Nobody has that for April weiser that for Hbr idle have fulfilled.
Moving to company the World esports deals away why we're asking this question.
Right to say that I don't have awarded Portage guys that there's a very black.
No I was just curious as to how much of expenses contracted.
Everything that we're going to produce at the beginning and then it's up to US if the product is good as we believe the product is ended clients believed that the product is we're going to have a great business.
If the product is like other.
Producers and even well here in United States indexes.
We'll probably have trouble, but we're not depth us we have a single source of bills coming for Northshore, we know how to deal with our war, we have been dealing with our war for 173 years. When we learned when think are too and we also understand how to deal with.
Contract business to supply feedstock to clients, so we're going to be fine Nick.
We have to orders and we need to start and go from there.
Okay, and then returning to the pellet discussion on.
Do you have any thoughts that volley could be looking to give some sort of.
Discount to their European customers to maintain blast furnace throughput to the no once the margins in Europe improve that no get a little more aggressive with the pellet premium is that do you think that's a reasonable way to think about it I.
I think the reserve way to think about that so many people getting trained on the job on the job training as well as soon as they learned the business that do start to chart declines what they need to track, but just for volume resolve to the board members our volume to resolve itself probably thing.
And falling at this point has other things will result, they have a few people go into jail using some assets. There. So I don't know got asked that.
All right. Thank you.
Thank you.
Your last question comes from James Finnerty from Citigroup. Your line is open. Please go ahead.
Hi, Thanks for taking my question on just on the 8-K as that you intend to refinance the 20 120, threes will 20 ones be unsecured and guaranteed like the 25 cents when sevens.
Look I as you know.
Hi, one Dallas I can't talk about that right now.
So we will announce to do the right that.
We have a track record of doing this type of transactions and doing the transaction right.
Look at bat check the last five and a half years.
Plenty of.
Compares just here with equivalent players, but I can't show by and right now and I will not disclose that at this point, where we are set the good stay tuned.
Okay, and then in the timing is still to be determines it could happen in conjunction with the closing of the transaction or the happened. Afterwards is that's my son that you're going to be done, but by the one I mean, we're going to hit the ground rent.
We are going to be done remember, we already distributed the covenants are big ones checked the box.
We already are rated they be up.
So check the box.
So the last piece missing is the bonds.
So we're going uptick we're going to take care of that and lending land. There we're going to have four year window of opportunity to work.
And get AK steel.
Refocus on commercial.
Refocus on developing steels and more importantly, the anything charging declines.
Our price that to be a proper for the type of technology. That's embedded in this do that we produce.
Great. Thank you very much in Isnt helpful.
Thanks James.
And your final question comes from Tyler Kenyon from Cowen Your line is open.
Hey, good morning, Thanks for squeezing me in so you've given us some standalone EBITDA guidance based on current commodity price input.
For Perquisites wondering if you could provide a little bit more detail.
On the embedded pellet volumes cashcall, and perhaps ask any assumptions within that 550 to 525 million range.
He's going to pick but yeah, I mean, the standalone I mean, especially in a kind of similar year over year.
Cash cost of production up roughly 3% mainly product mix is a big part of it because we'll be producing a lot more de are great pellet the D.R. grace period cost more to produce.
We also see some additional maintenance cost in the year, you'll see.
Some higher costs at Tilden stripping because we've extended the life of mine.
You'll see as soon as we disclosed in our 10-K.
And then natural increase in labor cost each year, so I see a little bit of increase there.
The other factor.
At today's prices.
Currently our goal of two cents increase something like that.
Less than two goes okay great.
And then anything just on volume assumptions for third party pellet itself.
Volume, we will be the 20 to 20.5 billion tons range.
And you could provide a focused on on how much will be going beyond in terms of inventory bill.
Now inventory built or we already built the that story. So we don't have any more inventory build to do.
Actually in 2020.
We are considered that we're going to be moving all the 1.5 to 1.8 million dollar bills because to be ramp up year and ER is starting to totaled 21, we're going to.
Bullish that state. It's a for two produced 1.9 million metric tons of of HP, we're going to need $2.8 billion of billets, moving Toby, but there will be 2021 and beyond.
Okay. Thank you.
Hey, good Tyler.
Christina.
There are no further questions there no further questions at this time do you have any closing comments today.
Just mo wish everybody.
Great.
Certainly.
Both Dick if you pay attention we are moving fast.
We are doing everything we have to do we are excited about the transaction. We're excited about hbr. We're excited that we have a transformational event that to change Cleveland cliffs going forward and will guarantee that this company will be here for the next.
50 to 100 years, we're pleased with what we have done we appreciate the support of our shareholders.
And so far the votes coming in massively in favor of the transaction. We appreciate each one of the retail investors and institutional investors that continued to demonstrate every day there.
Support to our strategic moves we are together I am one of you I'm a big shareholder of this company my family will be involved with this company for two or three generations going down. So that's how we see this business. There's no short term thing here.
Working for us shareholders of disco, thanks, very much evergreen.
Hi, My.
Gentlemen, This concludes today's conference call. Thank you for participating you may now disconnect.
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