Q2 2019 Earnings Call
After the speakers 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 are set forth in <unk> reports on forms 10-K, and 10-Q and news release filed with the FCC, which are available on the company website.
Today's conference call is also available and being broadcast at Cleveland cliffs Dotcom.
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 regulation G purposes can be found in the earnings release, which was published this morning.
At this time I would like to introduce introduce Keefe, Cosi Executive Vice President and Chief Financial Officer.
Thank you Mariama and thanks to everyone joining us this morning.
Before getting into the discussion of our second quarter results and outlook I wanted to briefly highlight the financial transaction, we completed earlier in the quarter to improve our balance sheet.
Shortly after we reported our last quarter results, we issued $750 million in unsecured notes due in 2027 at a five handle coupon.
This new issue allowed us to both retire legacy notes coming due in two years and reduce the size of our largest debt maturity tower in 2025 by $600 million.
With the transaction closed.
We have no debt coming due until the year 2024 also our previous 1.4 billion debt maturity tower in 2025 was nearly cut in half and pushed out another two years to 2027.
We accomplished all of this without a material change to our annual debt service expense.
Even though our balance sheet was already in excellent shape, we are and will always be on the lookout for opportunities like these to make it stronger.
Now to our financial results.
For Q2, we reported total company adjusted EBITDA of $249 million.
A dramatic increase from $21 million in the first quarter, which is typical for the seasonality of our business as it is today pre hbr.
Our mining and Palletizing segment generated $281 million and adjusted EBITDA up an impressive result, driven by stronger than expected shipping volumes of 6.2 million long tons as our customers maintained a healthy appetite for pellets throughout the quarter.
For the full year, we were able to maintain our pellet sales forecast of 20 million long tons.
Despite some reduction and nominations from one major client.
Our newly accomplished ability to produce and export meaningful tonnage of D.R. grade pellets.
Coupled with better overall pricing and the seaborne market were enough reasons for us to allow and maintain our forecast.
Lorenzo will discuss that in more detail later in this call.
The remainder of our expected 2019 shipping volumes will be more back loaded to the fourth quarter when the mills, usually stock up before the annual winter freeze.
During the second quarter, we had a six year high and pellet price realization with an average netback selling price of $113 per long ton.
That was driven by the rapid increase of iron ore prices. We have seen this year, which was good enough to more than offset the negative effect of falling domestic hot rolled coil prices throughout the quarter.
With HRC index pricing, reaching a low of $510 per short ton during the second quarter, we had to make a sizeable negative true up adjustment to revalue pellets sold in prior periods. Conversely, because our sales contracts utilize full year averages as indices and some contracts have quarter lag provisions, we have not fully benefited from the latest levels of iron ore pricing in our price realizations just yet.
As iron ore prices continue to average up.
And assuming the recent recovery in steel prices continues on its current upward trajectory, we would no longer be subject to negative true ups and can expect even higher selling prices for our pellets in the future.
Our cash costs for the quarter was $67 per long ton consistent with the guidance, we gave last quarter, where we expected to be at the high end of our outlook range due primarily to higher royalties and higher profit sharing.
That was a whole all other major cost components, including labor energy stripping recoveries and materials have remained consistent with our original forecast.
We expect cash costs to remain steady at the Q2 level during the back half of the year.
Another positive items for the second quarter was that due to the completion of our north shore plant upgrade ahead of schedule, we were able to record a small volume of intercompany Dior grade pellets to our metallic segment.
Because of the early completion of the North shore project and coupled with the anticipated ahead of schedule startup of the Toledo plant. We now plan on transferring more pellets to our facility this year than previously budgeted.
We are increasing our d., our grade pellet intercompany sale expectation from 500000 to 800000 long tons, all of which to take place in the third quarter.
Because these pellets are for intercompany use.
Unlike our third party commercial arrangements. These sales are recognized immediately after they are produced instead of when delivered explaining why all 800000 long tons will be recognized as sales in the third quarter.
Accounting wise you can begin to see how the intercompany DDR grade sales are being treated in our financials.
The margin, we will generate by selling DDR grade pellets to ourselves should be roughly comparable to the industry high average margin of the rest of our merchant pellets.
We record the revenue and cost of goods sold associated with the transfer at the segment level.
But these intercompany sales are eliminated from our consolidated results.
As such in this quarter and next quarter, our corporate consolidated revenue and cost of goods sold will be lower than that shown in the mining and Palletizing segment.
And the eliminated margin on intercompany sales will run through the corporate line item in our segment breakdown of EBITDA.
Finally, once the Hbr associated with these pellets is actually sold.
You will see this margin re included in our consolidated results and EBITDA. This will have the positive impact of removing some of the seasonality inherent in our pellet business since we will be able to sell HB throughout the winter.
In wrapping up my remarks with list with less than a year left until the major capital spend on each VI is done we are just on the brink of our much anticipated overwhelming cash flow generating position.
It may be difficult for some to see right now given we are still in peak capital spending mode on HB.
But in less than 12 months, we'll be looking at a business that is set up to throw off enormous amounts of free cash.
I'd like to say with our Hbr plant completed and in full production.
Free cash on an annualized basis will be EBITDA minus $220 million.
Other than $100 million of sustaining capital and $120 million of debt service all the rest of the EBITDA is free cash since we will continue to use our Nols and I'd have to disburse any.
Cash to pay taxes for the foreseeable future.
And we're not even adding to this free cash number the cash coming from our a future AOMT refunds, which are real as you all know.
At price levels comparable to what we've seen this year and with H.B. I layered in.
We would expect to generate about an annualized $1 billion in EBITDA, meaning that we would have around $800 million in free cash flow to return to shareholders, primarily via stock buybacks and increased dividends.
On that positive note I will turn it over to Lorenzo.
Thank you Kate.
And thanks to everyone for joining us this morning.
I'm going to pick up right, where I left off in the last quarterly conference call.
With the same exact message I had last quarter.
Regarding the current and future situation of supply and demand of far more.
Welcome to the new normal.
Get use it to the new normal.
There is no short term or medium term solution.
For the shortages in the seaborne iron ore market.
With Cleveland cliffs profitability globally tied to the iron ore market, we have a nice future ahead of us.
This is exactly what I told you in the last call went the IODEX had just best to nine to dollar Mark.
On its way up.
At that price level or is likely above that number decline what desks of several financial institutions and other so-called experts one after the other.
Have called the iron ore bench, Mike Mark price at a peak.
And here we are today.
Three months later.
With the IODEX more than 35% higher than that at $121.85.
So one more time.
There is no short term or medium term solution for the shortages and seaborne iron ore market.
Welcome to the new normal.
Get you use it to the new normal.
Despite our prediction during last quarter's call and despite the iron ore price increasing day after day since then.
This stock market had no conviction about how much or even if.
Our second quarter results would actually benefit from that.
As always we did not fight that take.
Instead, we took advantage of the prevailing skepticism.
We increased the size of the share repurchase program and bought back another $130 million worth of Clootie shares during the second quarter.
Bringing the total amount spent to buy back shares.
$300 million since the inception of the program just eight months ago.
Other than H. VI, there was no better use of our capital then repurchasing shares.
Which we did.
At the age of $10 per share.
And now after buying back a total of 10% before outstanding shares.
Our long term shareholders own over 10% more of the company then they did just a few months ago without having to do a thing but stay long.
Sue UNEV winter through big kept those spend and producing HB nameplate. These will be seen as an absolute no brainer.
As always I, thank very much all the sellers of the shares we bought back.
You showed your shares.
Very cheap.
Again.
Thanks for your gifts to cliffs shareholders.
Besides the new normal for iron ore prices.
Jan if you will that drives our moves going forward is that the current weakness in the domestic steel market is temporary.
Actually we are already seeing the recently announced the steel price increases sticky.
And we have conviction that you have already passed the bottom for hot rolled steel prices in United States.
As far as domestic steel prices from now on the trend is upward.
Despite the low HRC price being an important part of the pricing formulas in our contracts.
We were able to hit a six year high in pellet price realizations, thanks to the IODEX performance.
Just as we intended when we redesigned the new pellet contracts for Cleveland cliffs, a few years ago.
I'd like four or five years ago.
We are now much better protected to weather demand reductions related to speed bumps in the domestic steel sector.
If you'll recall in 2015, we had several of our customers curtailing production at their blast furnaces, and we were fortunate to widen with two of our minds in response.
Since then we have been actively mitigating this situation and taking preventive measures against the possibility of such problem occurring ever again.
First with the addition of our HB I plant, we have created new demand for almost 3 million long tons of pellets per year.
These new demand will in good times tighten the markets and the embed times provides us with volume in certain.
While paying ourselves at a healthy margin.
Second our new pellet contracts have more take or pay components that minimize nomination reductions.
Providing us with another layer of protection.
Third we now have more optionality and product flexibility, we can make a standard flux superflux.
Andy I have great belts.
We can access both DCF metallics market or did traditional blast furnace market with quality specs for the full spectrum of needs.
And finally.
With the new normal in iron ore pricing, we have the export market as another high margin outlet for our pellets.
While we continue to first meet the obligations under our local supply agreements in the event of nomination reductions we can now sell to buyers overseas and still make decent money.
Although the Bellekeno hasn't moved much since the beginning of the year.
Pellets are much more expensive in the seaborne market by virtue of the increases IODEX.
Remember the pellet premiums the some of the iron ore price with the pellet premium.
Just doing simple math on the IODEX Impella Freeman and assuming current freight charges to ship out of this new way into dangerous sport market, we wouldn't be able to enjoy price realizations and the seaborne market similar to what we currently get from our long term domestic clients.
That effectively provides as we've done another accretive alternative source of demand for cliffs pellets outside of United States.
In fact over the past months, we saw one of our customers pulling forward planted manifest into this year and lowering its felt nomination as a result.
So far we are offsetting these revisions by sending more pellets to our Toledo facility, which is actually necessary given the accelerated startup date updates VI plants.
We are also is scheduling a few vessels to the export market, including sales of both blast furnace and D.R. grade pellets to seaborne customers.
As you can see from our consistent costs results will continue to produce these pellets and reliable safe and environmentally friendly manner.
And should be able to accommodate to revise the belt nominations without complication.
Also we can always assume that a portion of the demand not being served by diesel fuel maker is actually being covered by another clips customer as we actually saw some incremental demand for wind and other clients.
And event.
Our strategic foresight to be ready for new scenarios is the reason why we are heading toward our fifth consecutive year of EBITDA growth.
Event with low domestic steel prices.
Offset by a new normal of robust IODEX and the scarcity of pellets in the seaborne market.
We will be even more protected next year and going forward with the addition of HB to our portfolio.
With the conclusion of our north shore up the great project in the second quarter and the initial production of great pellets are ahead of schedule.
We were also able to push the conclusion of our Toledo H.B. I plant construction to an earlier startup.
With that we are now Amy we start commercial production of HB I No later than June of 2020.
Or two months ahead of the regional scared.
At this time.
I would like to personally thank and congratulate.
Greg I feel is that the end all involved in the completion of the north shore upgrade for their hardware I'm sorry.
It's Steve Pausing and all involved in the completion of the north shore up the grade for their hard work force for the leaving idea grade pellets on spec.
In the very first batch and second for making possible on earlier startup in Toledo.
On that note this past quarter was a productive one for Rosenthal legal.
Among other accomplishments we finished the stick build portion of the reactor tower, which is currently is which currently stands at 200 feet tall.
From now on and over the next few months, we will be using the largest grain currently in operation in America to finish the remainder of the tower and to complete their 450 foot taller structure.
We are also movie our general manager of construction in North shore, the Steve Pausing to help the general manager of Toledo, Craig Phillies assay and I have a combination of betterment and Batman taking care of the very end of the construction of Toledo, which were very excited with.
With project completion, and commercial production now less than a year away. We have reached a spot where we have certainty and visibility on total expands.
We have always been working with a 20% construction continues respect station, which is the usual standard for a project of this size.
Now that to have clarity of completion. We are pleased to report that to you only need to allocate about 13% as contingency.
The primary items, making up these allocations are additional infrastructure and additional soy stability stability work necessary to facilitate a bigger and more automated plant than originally planned it and most importantly, the extra labor costs driven by the advanced the construction schedule.
After allocating the contingency and assuming a bushel is scrap price environment going forward consistent with the last two years define our IR are of the project calculates at a very good number up 26% private equity would Q4 at 26% internal rate of return.
That's our number.
The rewards of our Hbr plant are not just financial.
Those that closely followed the industry are well aware that the transition from blast furnaces to EEI apps further enhances our already pristine and environmental and emissions profile in the United States.
His suicide present in virtually every day.
Despite several centuries off effort the world has yet to identify a viable replacement for steel wire producing and consuming steel at a pace that continues to accelerate.
However.
I made this point before and I'll do it again the world needs more skew.
But the world also needs less pollution.
I really hope that the current move we have been seeing in the capital markets toward environmental social and governance compliance to be real.
If that proves to be the case.
In the not so distant future.
Only SG compliance companies like Cleveland cliffs and countries like the United States.
We all deserve their location of capital from sensible investors.
When that happens.
China and others to make in countries like India, we will not be able to continue to pollute the world environment as they do now almost completely and check.
Particularly in our space.
We're pleased to making is finally embraced worldwide.
The future will be high grade iron units.
Meaning higher content or payloads and metallics.
This is what Cleveland cliffs is about.
And any initiative, we explore in the future we will be centered on this core products predicated by what we feel is an undeniable trends.
Wrapping up we are already benefiting from the new normal.
With a shortage in the iron ore market, particularly for pellets and soon enough we should benefit from the next trend and overdue bush to environmentally friendly steelmaking worldwide.
With that I will turn the call back over to the operator for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then one on your telephone keypad, we'll pause for a brief moment to compile the kewaunee roster.
Your first question comes from Lucas pipes with B. Riley FBR. Your line is open.
Hey, good morning, everyone and congratulations on another very good quarter.
Thanks, Lucas good morning, the rental.
Good morning.
Laurence I first wanted to ask on the Capex side. So there were a couple of moving pieces you mentioned, the lower contingency of 13%.
Versus the 20% previously but then.
You increased this year, well I mean, the way I understood. It maintaining the total capex guidance for the project could you could you just kind of walk us through it what are we expect what should we expect for 2020 in terms of capital spending and where would we see the benefit of the lower contingency. Thank you.
Okay. Thanks, a lot there, but couldn't use to be 830 million and where we are actually give me a few.
Good news, we're delivering a few number of good news regarding the broad first.
We are now less than a year away from conclusion.
With that with the fact that we anticipate that at least two months the conclusion of the projects in startup of the plant it's time to relocate confusion.
Based on our best estimate at this point, we don't need the entire 20% that would have been a a working with since the beginning of the project will be 13%.
So if you go public did not reveal something like 110 million on top of the 830 minute that we're talking about.
And then the fact that we're spending more this year than we previously anticipated it's very easy to understand we are spending money. This year that we're supposed to spend all in next year. So things that were in general February of next year now in December November October of this year. So we need to do to bring a up does expenses upfront. Because we are ahead of schedule. So that's the difference in 2019, capex and as far as 2002 and it will be the belt. So.
Qualys.
The 830, plus the contingency.
As the number four for four completion, no matter, who do a little more in 2019 or a <unk> and a little less in 2020, we're still doing the same thing. So that's the entire story.
Got it okay. That's that's helpful. Thank you for that and then the 26% IR are.
Does that include any of the benefit that you would capture on the mining and Palletizing side. So you mentioned, you're going to tighten the pellet market as well and then I I see opportunities for higher prices when you sell intercompany versus some of the contracts you have out there.
That benefit be captured in the 26% Iraq.
Yeah, Thanks for asking the clarification and the answer is no.
We are considering that 26% we accomplished in the 26% our our after being.
For the the D.R. grade pellets that we are delivering from north shore to Toledo at market price. If you include the.
The benefit of the production off Oh, Yeah, Great Delta at AMD, you account for that do you have read pellet cost.
They are I wouldn't be way above 30%, but that it would be disingenuous Lucas because we also spent 91 or $92 million at northshore to create that capability. So I don't have from the top of my head. They are our combined including both projects, but I assume that to be.
Mid to low Thirtys.
30%, 31%, but then I need to add the Capex that was spent there as well so I'm just to stay with the capex offer to legal and I'm, considering the price of feedstock paid at market price that not cost goods profit perfect.
Got it got it okay, that's very helpful.
I will turn it over for now and continued.
Best of luck. Thank you.
Thanks Lucas.
Your next question comes from Allan spends with Jefferies. Your line is open.
Hi, good morning, and thanks for taking my time.
Questions.
First on Capex I'm wondering how quickly after you reach commercial production you think you can get that to reaching kind of a nameplate capacity.
Good morning, Alex nameplate will be our targets for 2021.
A 2020, we will be the year that we're going to finish the plant we're going to do a lot of trials with the clients that we continue to discuss with the clients will progressively.
Fell in love with the fall in love with the with the product we know that that will happen that would be the first part was step the second step they'll get rid of a pig iron from Russia pig iron from Ukraine. This isn't Ics countries that are.
Any views of the United States by and large like Russia. So we cant wait to take these guys are of the markets very quickly. So that's the route are going to do and that's the work we're going to do in 2020.
And we plan to do all that during 2020 to a point that when we were hit Jerry first 2021 will be aimed nameplate.
Pace already so you should consider that 2012, it will be whatever it to be and 2021 will be nameplate.
Okay understood. Thank you and more near term.
Obviously, a very strong set of sales volumes for this quarter and I think Keith Keith made the comment earlier about being the remainder of the year a little bit more dotcom backend weighted how should we think about sales volumes in Q3 versus Q4.
We are expecting Q3 volume.
At 5.5 million or more in the queue for a sub something above six let's call between six and 6.2. So these are the numbers and then its all but you are not adding up to 20. Yeah of course, we are at the same token that we are expecting the number just mission to Q3, whether staying the way whether it is right now we should do better than that and Q4 is always a known because we never know when winter we will hit I think the biggest.
Points to consider right now Alan if you allow me is that any dramatic drop of nomination that the clients.
Put on US right now by the way.
Abundantly clear for this quarter, so far no dramatic domain the decline in the nomination only a decrease in transition from one client partially offset for another by another client that increased their nomination. So so far so good but.
The biggest change with this company right now from the clients' perspective, they start dropping denomination right now when the Sun is up in the Sky and the weather is good in the Lake there.
Our actually.
We have so much water in the lakes applicant loads the both above and beyond what was the draft line before and we're really taking advantage of that because we have of our depth in the lakes that are favoring transportation.
Dropping nomination right now can be a three cyto moved because I'm going to start moving pellets into.
Toledo, I'm going to start moving pellets to Quebec city to export and we will comply with all nomination arrangements and all commitments that we have with the clients I'm just not going to be as fast as in the past to go back when they have a change of mind, so they might need to wait and.
That is a problem.
I don't know to follow the complex global loop that explanation, but I'm just showing you that at this point, where a lot more protected against.
Against fluctuations in munitions within the contracts, but the clients are more exposed and they need to take that into consideration when making their decisions on change in conditions.
That's very clear and just a quick clarification. The Q3 number is that inclusive of the 800000 tons you will sell internally.
Yes, yes, okay cause physical condition, we use the same the same fleet the seasonal defend port the same handling equipment. So yes, that's correct.
Okay. Thank you very much.
Thank you.
Your next question comes from Matthew Fields with Bank of America. Your line is open.
Hi, Lorenzo Hey, Hey, Keith Congratulations again on the progress and Toledo.
Thanks, very much couple of things.
I just want to ask about.
Jump jump all over it I'm, sorry, but so you're you're exporting a few pilots both sort of regular pellets NDR grade pellets adequate back city well, what's your what's your sort of Netbacks math on gain on to Europe .
That's very similar to the current after freight.
Our the current in the domestic market if we.
Pricing is factored into the range so.
We have because of the the current favorable condition to export.
Price wise, we can netback more or less the same thing even do a beam extra freight.
So if if iron ores.
Give or take 120, the pellet premiums give or take 65 or 70.
And your freight is x. netting back to you you're getting about 110 or 112 on your on your netback for realizations.
Yeah, we have the range that we provided the.
Stance, regardless of selling everything the magical youre selling a portion.
Exports.
Okay. Okay, great. Thank you.
And then.
You mentioned that.
Your capital allocation is kind of going to be when once we're at nameplate and 2021 and beyond.
Capital allocation will be primarily for for dividends and share buybacks.
Does that mean kind of the current.
That value.
Current level of debt, which is 2.2 billion roughly is that the right level of debt for cliffs going forward once once toledos up and running or do you want to see it a little higher a little lower.
Okay. This thing of a right level of debt is a very tricky and in the past when we had to really clean up the balance sheet and the.
Good things that with the target of a billion, which we kind of go through because.
Got to 1.3 billion, but I spent 300 million buying.
Out my partners.
At two of the corporations and buying land in Nashwauk recall that Matt and now. We are also has been another $300 million with share buyback. So you know, it's a moving target today. The fact of the matter is.
We are extremely we then what's what are these cost was explained we're extremely comfortable at this point because as soon as we have H.B. I up and running our EBITDA minus $220 million is.
Free cash and what to do with free cash in a company like cliffs, you'll give it back to the show.
Through share buybacks through increased dividends to truly special dividends. So that's what we are heading to here, we are not going to spend more than $100 million in capex a year. After we have.
H.B. I.
Done and up and running and remember H.B. I.
Needs. Additionally, I've written is a lot less capex there now.
Concentrating and Palletizing build brands and the mine so it's a different anymore as far as maintenance Capex, So 100 million a year its actually rich, but let's consider 100 million and then I have $120 million in interest expense that.
That's pretty much it and for that for the foreseeable future remember, we don't have anything to to address until 2024. So EBITDA minus two 220 thats the money that we have available to bring much give back to the shareholders every year.
And there is no M&A or other expansion plans that you.
You'd allocate cash too on the on the top of mind.
But not today.
I can say never we are always.
Looking for opportunities, but these opportunities are far and few and far between.
It's very difficult to to exceed the returns off.
That said share repurchase at this point remember we made I look on a go decision to buy back stock.
That was all I explained that before I started so we're always analyzing this M&A things and Monday possibilities.
We are always on our lives I guess.
Alternative uses of capital, we're not going to grow just to be big.
I'm comfortable with the size I'm comfortable with what I'm doing I am comfortable with my my.
Industrial basis, and I'm more than quarter I'm Super excited about the fact that very soon we are going to be producing hbr. So I don't need size to feel better I feel very good that we are you know through even better if I start returning money to the shareholders more massive way, we're returning a lot $300 million no aware research analysts call did that the buyback of another couple much bigger than us. They acquired back a 127 million equal that is strong execution I didn't I didn't even know that buying back stock was execution, but execution for me is operating and selling stock but.
Anyway, if $127 million for that huge company is strong execution 134 as is your acquisition execution. So.
We are we are returning a lot of money to the shareholders on that our.
Dividend increase 20%, it's funny when some naysayers tried to dismiss our our dividend. So only five sets us just six said well it's.
At $10 that was the the.
The prevailing stock price on do you stop corrected finally, correct to a number that is still very low, but it's a lot better than 10.
Our yield is 2.4% so yes, how many companies in our space delivers up 2.4% yield when on dividends and this is growing these will continue to grow this money belongs to the shareholders long shareholders.
And especially in a company like ours with zero chance of having a our balance sheet problem or like we had five years ago risk of bankruptcy and things like that the 70 million share short Oh, My gosh I have a I read the source of free money from these short.
It's right there.
They probably don't realize but I continue to boil then like frogs.
Pant wall of water.
This is low but one day they'll realize that it's not a warrant pool, it's their deathbeds.
[laughter].
Fair enough. Thanks, one last one for me. Please just bigger picture with IODEX kind of a 120 like I said in the in the pellet premium up to 67 and a half.
Our European steel makers really really paying 180 590, a ton for for pellets are they demanding and sessions at what point do they start to really push back or even sort of idle blast furnaces.
Look I don't have an answer for you on that.
I havent sold to ballast when Europeans to making a long time.
So.
I don't know.
Yes, and actually they export opportunities that were envisioning at right now are not even Europe I believe one is fully mapped that Europe is the next playground for China.
They like a lot of they are they the love for Threed.
They are the free three years, so they believe that tariffs.
Should not exist to protect.
The domestic markets against the bed players like China and others.
So now that we have production here in the United States. The Chinese steel that continues to grow and continues to increase the Chinese output needs that needs a home and apparently they are finding a home in Europe right. Please.
Because they love free trade zone, I'm enjoying seeing Chinese steel going to Europe . So I don't know the answer to your question.
Okay, Thanks, very much and congratulations again.
Alright, Thanks, Matt.
Your next question comes from Scott Scherr with Clarksons. Your line is open.
Good morning, everyone and congratulations on a very strong quarter.
Lorenzo could you talk a little bit more about your outlook for the pellet premium going forward, we've seen such a compression of the quality spread recently I'd be interested to hear your thoughts on when this will return to a more normal level.
Yeah look I.
That's a very good question look.
You should never lose track to the fact that the.
The the pellet price is not the build premium the gold price is the sum of the IODEX with that.
What are the some of the price of war no matter, if it's IODEX, 62% or the benchmark price for 65% blows up bill upfront the way we envision here in our contracts in the 62 plus correction for iron content plus pelting, that's a price so if the IODEX appreciated from 92.
Two to 120 185 lets go on an end to end just facility my calculation.
So appreciate the 30 Bucks.
The pellet premium theoretically could go down 30 Bucks and I'm just doing the same spot.
And of course, the Pelfrey didn't go down 30 Bucks that does bring went down three bucks.
So blustery minus three it's a plus 27.
So we are good so it's sort of pellet premium think.
And people get really stuck in his details of how that the prices are calculated and this and that at the end of the day.
I was in China as always speaking all his line always pretending all this polluting.
Everybody else, that's bite pellets, they pay a lot more for pellets, because they must comply with environmental regulations that will not allow them to use crack as feedstock.
Like here in the United States like in Canada.
And few other goods like Japan.
But you're not us so.
Their pay more.
The answer a question.
Yeah.
Barry.
Yes that was very helpful. Thank you just to follow that up on iron ore price in general I do expect supply demand conditions to east from here in pricing to move lower or is this do you see the $120 a ton level is the new normal.
Yeah, I have been qualities do normal for some time.
I am surprised that the I'm still kind of the only one.
That makes my life really easy because you know I just need to execute accordingly to what I say and I have been executing the according to what I say, so look with there.
Well go back four months five months wearing in July right now so go back four months.
At that time as Amy steel maker in the World should have a moment off a record and say Oh, my gosh iron ore prices are going up.
In mice to prices are not great.
Better must find a way to increase the steel prices.
Well I know this will make as they prefer to get stuck with that think of I can tell you what I can come through at some point through what cannot control. Okay. Okay. So now in Q2, you are going to to enjoy your own inability to to see reality.
And going forward.
Welcome to the new normal get used to the new normal we are not going to do any Amazon Prime day, we're going to continue to charge full price for the pellets.
So if were going crazy prices, you are going to be squeezed.
That's my message to my clients into the clients of other iron ore miners because they don't talk to their clients like that there are a lot more politically correct me.
But anyway, that's a different conversation.
Great. Thank you very much Lorenzo high good luck going forward.
Thank you very much.
Your next question comes from Nick Jarmoszuk with Stifel. Your line is open.
Hi, good morning, Lauren So Keith.
A question why didn't it.
With the North shore project, what is the tea, our pellet production capacity now.
3.5 million long tons per year.
And all of that will be consumed by the Toledo plant.
No.
The Toledo plant is 1.9 million metric tons, a year and we need at that full something like 2.7 2.8 million.
Long tons of pellets ticking yield into consideration. So you always have if you produce.
North shore at capacity with Deere grade pellets, we will always have like 700 to $800000 a year of deer grade pellets that we plan to sell to select clients.
That we have.
Ongoing relationships.
Okay, we're not going to supply anyone.
That.
We will produce hbr to compete against us. So that's not going to happen. So I went to supply someone that will put I already told midrex and turnover goal. So in another territory because right here in the United States, you have a problem I'm not going to supply.
Any their grade pellets to anyone in the Midwest. So.
It's not going to happen, but I will supply other other companies were like in the past we supplied nucor in Trinidad we supplied arcelormittal in Canada. So these are the ones in a way. We are looking for are always looking for long term partnerships that could be.
Good for us like North Africa Middle East please like that.
Okay.
At least that's our basically add were left in the rain.
With the problems that.
Happen in Brazil, So underscores an opportunity there right now.
And with the tons that the company is exporting can you give us what the volumes are between regular blast furnace pellets and if there are any H.B. I pellets in there as well.
We don't have this breakdown just yet because we just started moving pellets to Quebec City, and we started to move into your grade. So at this point, we havent moved any.
Blast furnace bells, just yet just the average so we'll see.
Hey look if there is no cancellations no reduction in nomination.
Going forward I will stop.
And redirected the pellets to the domestic market. Let me ask you, but we will always be my first priority, but we're aware just preparing ourselves to that.
Due to the event.
Nomination cuts will come and then I will not come in this article outgoing equal to what I can tell you know I can control stuff like that.
I can't control, what they do but I can control what I would do depending on what they do.
So thats called the strategy and execution, we do that a little later.
As of today, what are you expecting the export volumes to be.
As of today 300000 tons.
But if you ask me to more I might say 500.
In one week would be 100.
For one reason I don't know yet.
As these pellets or transport it from like Lake superior through the locks and through a Quebec city.
Are they damaged as a quality degraded any from all the handling or no.
Pellets the luck handling.
So every time you.
Okay load up built Andrew load again, you generate find do create issues. So bell is like to be moved from point a to point B and then loaded again, that's not a thing that we like to do but that's the actually the nature of the Beast, all just pellets that move in the seaborne market they move a lot.
I'll give an example.
Brazilian producer.
Spell the mineralized and move the pellets to the board and the load on a vessel and then the vessel go through seaborne and then we will get to the fourth in China, and unloaded and put in storage at the Port and then someone will grab that pellet to move to a closer stored into the new then to be sold for IMMU. So how many times. This belt was loaded and unloaded generating finds injury problems, so ours will not be different but.
The good thing is that our tell us or high quotes on the resist to look more to this type of deterioration, but you are right. The deleveraging in general don't like that.
And then last question on the empty refund could you remind us what the refund schedule is over the next several years.
I'll, let Don I'll, let Keith answer that nuclear we've got a we've got another 170 million coming.
And it's broken out over the next three years. So you can see with $58 million come in 2020.
And then following after that you've got like 28 million each year after that.
So.
Okay. That's that's the balance of it.
Right.
Correct.
Okay. That's all I had thank you.
Thanks Jay.
Your next question comes from Sean Wondrack with Deutsche Bank. Your line is open.
Hi, there.
Nice quarter and was impressed to see that you accelerated timeline on H.B. I plant.
Just a couple from me. This morning, you mentioned earlier something about having not fully benefited from the iron ore price realization can you just clarify what you mean by that.
Yes look each contract is different.
Each quarter it with the different clients is different for example, there's one client that has a lag in their contract. So this client hasn't seen any huge price increases because he is do being charged and based on the price of our war back in.
March April may be so very soon who will be.
April may and June and so on and so forth. So.
And Thats one client that has his leg.
So.
All things considered things will continue to to improve for us and we believe that.
There's a steel prices recover we should also have.
Help from that so does that sorry.
Right and the steel price recovery that should help offset even if there is a little bit of weakening in the iron ore price.
You know just given where steel prices are.
Just quick question why you expect how the how the how the other I'm expecting weakness in oil prices.
No I'm, not saying that I'm, just saying that like as an investor when you're thinking about it coming off this very low steel price you're only provide you additional upside.
Basically Craig you said that the good offset.
Weaker oil prices and the due to the very comfortable for me to just agree with you, but I have to call out on that because I I spent I have been spending a lot of time in these calls explaining why theres no weakness ahead in iron ore price, but you know people disagree thats why we buy stock in the marketplace.
To Deutsche Bank, I haven't checked the commodity deck of Deutsche Bank does this.
But we do know you the price deck of your euro or big.
I'm, not even 100% sure, but mers excuse me learn so I don't think the price of iron ore is going down that's not what I'm trying to say here, okay. Our focus on growing the slippage I assume that was confusing.
No no just only to apologize.
Okay cool the freight advantage when you think about it.
Supplying new customers are in the Midwest with HP.
And can you just.
Big picture, what is your freight advantage of supplying them versus Russia, Venezuela.
Or any of these other countries that have been shipping DRA pig iron to those clients as of now.
Okay, let's take depends on of the advantage it varies with the client, but let's take one that's really easy to understand.
North public school.
Let's start with scope, we will be a big buyer of our Hbr, we are going to lead to higher dairy Delphi.
They will be receiving our our HB I continuously by truck.
So they will not have to carry any inventory on their site.
Because we are going to deliver pretty much just in time.
And the only freight that they were being struck freight.
If they were buying from Russia.
That material to have to be transported from point of production to port in Russia, then loaded enough vessel, then sale to the United States.
Unloaded in Quebec City and then.
Right or or New Orleans.
And then low that is our vessel to two two brief too.
To to the site that would be our barge up the Mississippi or.
A tree from boards to Delta, Ohio.
And you keep adding these things are compared with a freighter.
So it's a huge freight handling.
Right and our plan is to share.
This advantage with the clients not to give it away.
But to share with the client so the client.
We will not have to pay the humongous freight to bring.
Pig iron prone.
It's not the please.
And the owned and had we are not going to give the entire Andrew will share a lot with the clients. So we are going to be very price competitive.
We're going to be very quality competitive our hbr is not the H.B. I have the past is not HB I.
Historically it has a lot more.
Mechanical resistance it has 3% carbon content with free close to pig iron. So it will be like big IYR, just bad and.
It will have a far our logistics advantage that is.
A second to none and as far as quality one thing that we're going to have we're going to have H.B. I being produced from our offshore.
I for one mine Thats, the Babbitt mine and one pellet plant that's the north shore plant. So only pull courses are of Northshore will be produced reducing D.R. grade pellets for Toledo. So that's the type of narrow quality that middle layer. Just are looking for so the operators off this year, yes, we will have something as far as feedstock that they don't know yet as soon as they start receiving material for trial. They will become excited the same way the operators of blast furnace are always excited about our blast furnace bills.
Right.
Thank you for that explanation is very helpful.
And then my last question just.
You're coming into a position of strength like you've never seen before you know the guiding to roughly a billion of EBITDA against cash needs of only $220 million, you're basically going to have cash to do whatever you want in terms of dividends share buybacks debt reduction.
Given that kind of backdrop and the lack of supply security for iron ore in the U.S. are you worried about cliffs as a company, becoming an acquisition candidate and have you seen any kind of M&A interest towards Chris over the past few months.
Look we are pursuing the stock exchange everyday.
And our price our stock price has been absurdly low for an extended period of time.
In the meantime.
There was that good.
Directly balance sheet wise.
Could make a move and makeup.
An offer to buy cliffs. They were all involved in what I used to call. The Brazilian Australians championship of disability, they're very interesting being the low cost producer of the world and now they are paying the price for that.
Instead of seeing looking into buying are accompanied like cliffs, they're concerned about fixing the.
The disaster that was made first by Samarco endeavors by Valley. There are also open with a few problems at the port in and fires in lots of stuff that they're all a consequence of.
Our cost cutting environment that I have been throughout the five years explain mining business is not a cost base business.
It's a different ballgame is values its margin it seemed using money to maintain your facilities and mines. So.
Our focus on cost is important but can't be the main focus so the answer to you is do despite their opportunity.
They are the ones that could buy clips they are not going to pay the price.
Yes, I would demand to sell the company because they are busy taking care of their own problems at this point.
Right.
Makes sense. Thank you very much for all the clarity there and good luck next quarter.
Thanks, a lot and with that we are going to turn the call back to the operator to wrap up and I appreciate the interest and we will keep in touch thanks a lot.
This concludes today's conference call. Thank you for joining US today you may now disconnect.