Q3 2023 Cleveland-Cliffs Inc Earnings Call

Speaker 1: Good morning, ladies and gentlemen. My name is Darrell and I am your conference facilitator today. I would like to welcome everyone to Cleveland Cliff's third quarter, 2023 earnings 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.

Good morning, Ladies and gentlemen, my name is Daryl and I am Your conference facilitator today, I would like to welcome everyone to Cleveland Cliffs third quarter 2023 earnings Conference call.

All lines have been placed on mute to prevent any background noise. 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 1095.

Speaker 1: 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.

Speaker 1: Although the company believes that its forward to the statements are based on reasonable assumptions, such statements are subject to risk-cononcertainties that could cause actual results in different material.

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 reports on forms 10-K, and 10-Q and news releases filed with the SEC, which are available on the <unk>.

Speaker 1: that can cause results to different materially or set forth and report some forms 10K and 10Q and news releases filed with the SEC, which are available on the company's web.

Company's website.

Speaker 1: Today's conference call is also available and being broadcast at clevelandcliffs.com. At the conclusion of the call, it will be archived on the website and available for watch time.

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.

Speaker 1: 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 Lorenzo Gonzales, Chairman, President, and Chief Executive.

The company will also discuss results excluding certain special items reconciliation for regulation G purposes can be found on the earnings release, which was published this morning at.

At this time I would like to introduce Lorenzo can solve it chairman President and Chief Executive Officer.

Speaker 2: Thank you, Darryl, and thanks to everyone for joining us this morning. Before Chelsea starts the discussion of our Q3 results, I want to provide another brief disclaimer.

Thank you Garo and thanks to everyone for joining us this morning.

Before Celsius starts to discussion of our Q3 results I want to provide another brief disclaimer.

Speaker 2: Back in August , we announced a potential exciting and transformational opportunity for Cleveland Cliffs.

Back in August , we announced a potential exciting and transformational opportunity for Cleveland cliffs.

Speaker 2: Since then, restrictions have been put in place on what we can say or disclose. And therefore, for the time being, we cannot discuss these issues.

Since then restrictions have been put in place on what we can say or disclose and therefore for the time being we cannot discuss the issue.

Speaker 2: So, before you start wondering why you will not hear anything about it, that's why.

So before you start wondering why you will not hear anything about it that's why.

Speaker 2: With that out of the way, I'll turn the call over to Celso.

With that out of the way I'll turn the call over to Celso.

Speaker 3: Good morning, everyone. In Q3, we generated revenues of $5.6 billion, adjusted EBITDA of $614 million, and gap earnings per share of $52 million.

Hi, good morning, everyone.

In Q3, we generated revenues of $5 6 billion adjusted EBITDA of $614 million and GAAP earnings per share of 52 cents.

Speaker 3: Total shipments reached 4.1 million net tons, and despite the UAW strike impacting three of our clients in the automotive sector, aggregate shipments to all of our automotive clients collectively were higher in Q3 than in Q2.

Total shipments reached $4 1 million net tons and despite the UAW strike impacting three of our clients in the automotive sector.

<unk> shipments to all of our automotive clients collectively were higher in Q3 than in Q2.

Speaker 3: Deal shipments from Cleveland Cliff to the automotive sector in Q3 were actually a quarterly record.

Steel shipments from Cleveland cliffs to the automotive sector in Q3, we're actually a quarterly record.

Speaker 3: During the quarter, we generated free cash flow of $605 million. As planned, we used the majority of that cash to pay down our ABL, bringing our net debt down to $3.4 billion, and boosting our total liquidity up to an all-time high of $4.4 billion.

During the quarter, we generated free cash flow of $605 million as planned we used the majority of that cash to pay down our ABL, bringing our net debt down to $3 4 billion and boosting our total liquidity up to an all time high of $4 $4 billion.

Speaker 3: We also returned approximately $60 million to shareholders by buying back 3.9 million shares during the course.

We also returned approximately $60 million to shareholders by buying back three 9 million shares during the quarter.

Speaker 3: With our ABL balance down to only 325 million, we now have a capital structure comprised primarily of low cost fixed coupon debt instruments with no upcoming maturities until 2020.

With our ABL balance down to only $325 million. We now have a capital structure comprised primarily of low cost fixed coupon debt instruments with no upcoming maturities until 2026.

Speaker 3: Since acquiring ArcelorMittal USA in December 2020, we have reduced our net debt by nearly $2 billion.

Since acquiring Arcelormittal USA in December 2020, we have reduced our net debt by nearly $2 billion and eliminated another $3 5 billion and pension and <unk> liabilities.

Speaker 3: and eliminated another 3.5 billion in pension and op-ed liability.

Speaker 3: That's a 60% combined reduction in net debt and post-retirement liabilities in less than three years.

That's a 60% combined reduction in net debt and post retirement liabilities in less than three years.

Speaker 3: Over the last couple of years, we have also reduced our diluted share count by 13%.

Over the last couple of years, we have also reduced our diluted share count by 13%.

Speaker 3: from a high of 585 million shares to only 509 million shares today.

From a high of 585 million shares to only 509 million shares today.

Speaker 3: Elaborating further on our Q3 results, shipments remain resilient, despite slowed service center sales during the quarter.

Elaborating further on our Q3 results shipments remain resilient despite slowed service center sales during the quarter.

Speaker 3: The maintenance activities we performed last year have paid off for us, as our operations have been running reliably, affording us the ability to achieve these strong shipment levels all year.

The maintenance activities, we performed last year have paid off for us as our operations have been running reliably affording us the ability to achieve these strong shipment levels all year.

Speaker 3: As I said before, notwithstanding the UAW strike, fuel shipments to automotive clients actually increased sequentially in Q3.

As I said before notwithstanding the UAW strike steel shipments to automotive clients actually increased sequentially in Q3.

Unknown Executive: Good morning, ladies and gentlemen. My name is Darrell, and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs 3rd quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. 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.

Speaker 3: This outperformance in automotive steel shipments and the lower service center shipments help to mitigate the change in average selling prices quarter over quarter with a richer mix, holding strong above $1,200 per net ton, even after the drop in overall index prices during the course.

This outperformance in automotive steel shipments and the lower service center shipments helped to mitigate the change in average selling prices quarter over quarter with a richer mix holding strong above $200 per net ton even after the drop in overall index prices during the quarter.

Speaker 3: Our cost reduction performance was also very good during Q3, improving by $31 per net ton, quarter over quarter.

Our cost reduction performance was also very good during Q3, improving by $31 per net ton quarter over quarter.

Speaker 3: This came in less than our previous guide, only due to this mix effect.

Unknown Executive: Although the company believes that its forward looking statements are based on reasonable assumptions, such statements are subject to risk to uncertainties that could cause actual results of different materially important factors that can cause results of different materially or set forth and report some forms 10K and 10Q and news releases filed with the SEC, which are available on the company's website. Today's conference call is also available in being broadcast at Cleveland-Cliffs.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 regulation, G purposes can be found on the earnings release, which was published this morning.

This came in less than our previous guide only due to this mix factor.

Speaker 3: But we will happily take that trade off, due to much higher prices associated with better.

Well, we were happily take that trade off due to much higher prices associated with better mix.

Speaker 3: We expect costs to fall by another $15 per net ton during the fourth quarter.

We expect cost to fall by another $15 per net ton during the fourth quarter.

Speaker 3: Since Q3 of last year, we have reduced unit costs by a total of $165 per net tonne year over year.

Since Q3 of last year, we have reduced unit costs by a total of $165 per net ton year over year.

Speaker 3: That is roughly $2.7 billion in savings at an annual run.

That is roughly $2 $7 billion in savings at an annual run rate.

Speaker 3: This solid performance in costs is expected to continue into next-

This solid performance and cost is expected to continue into next year.

Speaker 3: We are happy to report that our annual metallurgical coal buy will result in a $250 million reduction in 2024 coal cost.

We were happy to report that our annual metallurgical coal by will result in a $250 million reduction in 2020 for coal costs.

Darrell: At this time, I would like to introduce Lorenzo González, Chairman, President and Chief Executive Officer. Thank you, Darryl, and thanks to everyone for joining us this morning.

Speaker 3: We executed these 2024 annual contracts during Q3, and our negotiations were very well timed, as global Metcope prices rallied shortly thereafter.

We executed these 2024 annual contracts during Q3.

Lorenzo González: Before Celsius starts the discussion of our Q3 results, I want to provide another brief disclaimer. Back in August, we announced a potential exciting and transformational opportunity for Cleveland-Cliffs. Since then, restrictions have been put in place on what we can say or disclose, and therefore, for the time being, we cannot discuss the issue. So, before you start wondering why you will not hear anything about it, that's why.

In our negotiations were very well timed as global met coal prices rallied shortly thereafter.

Speaker 3: Among other savings, we have also locked in an additional $150 million in savings for fixed natural gas costs in 2024.

Among other savings we've also locked in an additional $150 million in savings for fixed natural gas costs in 2024.

With that I'll turn it back to Lorenzo.

Speaker 2: Thank you, Celso. As you may recall, we had to sacrifice production and shipments last year to bring some of the steel mills acquired in December 2020.

<unk> also as you may recall, we had some sacrifice production and shipments last year to bring some of the steel mills acquired in December 2020.

Speaker 2: from ArcelorMittal USA to a reliable level of performance.

From Arcelormittal USA.

Lorenzo González: With that out of the way, I'll turn the call over to Cecil.

A reliable level performance.

Speaker 2: Automotive is our biggest market, and we were anticipating much higher demand for automotive steel coming into 2023 versus 2026.

Automotive is our biggest market and we were anticipating much higher demand for automotive steel coming into 2023 versus 2022.

Cecil: Good morning, everyone. In Q3, we generated revenues of $5.6 billion, adjusted EBITDA of $614 million, and gap earnings per share of $0.52. Total shipments reached $4.1 million net tons, and despite the UAW strike impacting three of our clients in the automotive sector, aggregate shipments to all of our automotive clients collectively were higher in Q3 than in Q2. Fuel shipments from Cleveland-Cliffs to the automotive sector in Q3 were actually a quarterly record.

Speaker 2: Fast forward to Q3, our demand forecast has been confirmed and we have absolutely taken advantage of that.

<unk> four to Q3, our demand forecast has been confirmed and we have absolutely taking advantage of that.

Speaker 2: Q3 was our third straight quarter with total still shipments above 4 million net tons. Even in a business environment where service centers sat on their hands and were not actively buying for most of the quarter.

Q3 was our third straight quarter with total steel shipments above 4 million net flows even in a business environment, where service centers sat on their hands and we're not actively buying for most of the quarter.

Cecil: During the quarter, we generated free cash flow of $605 million. As planned, we used the majority of that cash to pay down our ABL, bringing our net debt down to $3.4 billion, and boosting our total liquidity up to an all-time high of $4.4 billion. We also returned approximately $60 million to shareholders by buying back $3.9 million shares during the quarter. With our ABL balance down to only $325 million, we now have a capital structure comprised primarily of low-cost, fixed coupon debt instruments with no upcoming maturities until 2020- Since acquiring Arsler Middle USA in December 2020, we have reduced our net debt by nearly $2 billion and eliminated another $3.5 billion in pension and op-ed liabilities.

Speaker 2: Delta Motors business in the United States is extremely competitive.

The automotive business in the United States is extremely competitive.

Speaker 2: Automotive is an industry that every steel producer wants to serve.

Outdoor motive is an industry that every steel producer wants to serve.

Speaker 2: When we negotiate our annual deals, we are competing against offers from countless other suppliers, including Korea, Japanese, German, other European, as well as against Mexican joint ventures and Mexican trans shipments.

When we negotiate our annual deals we're competing against office from countless other suppliers, including Korea, Japanese German or their.

European as well as against Mexican joint ventures, and Mexican trends shipments.

We also.

Speaker 2: have seen growing competition from EAFs and the ongoing threats from aluminum substitution.

Have seen growing competition from <unk> and the ongoing threats from aluminum substitution.

Speaker 2: There is no unfair advantage we have from that stand.

There is no unfair advantage, we have from that standpoint.

Speaker 2: The United States is by far the largest importer of steel in the world, importing more than 30 million net tons of steel in 2022 alone.

United States is by far the largest importer of steel in the world importing more than 30 million net tons of steel in 2022 alone.

Cecil: That's a 60% combined reduction in net debt and post-retirement liabilities in less than three years. Over the last couple of years, we have also reduced our diluted share count by 13% from a high of 585 million shares to only 509 million shares today. Elaborating further on our Q3 results, shipments remain resilient despite slowed service center sales during the quarter. The maintenance activities we performed last year have paid off for us as our operations have been running reliably, affording us the ability to achieve these strong shipment levels all year.

Speaker 2: no matter what changes with the market structure of integrated blast furnace based oxygen furnace operations in the United States might happen.

No matter what changed with the market structure of integrated blast furnace basic oxygen furnace operations aimed at United States might happen.

Speaker 2: these competitive forces are there and will continue to be there.

These competitive forces are there and we will continue to be there.

Speaker 2: What sets Cliffs apart in automotive is our excellence at serving the client.

What sets glyphs apart in automotive is our excellence at serving the clients we are just better.

Speaker 2: We are just better at meeting our customers needs.

At meeting our customers' needs.

Speaker 2: in a detailed driven and customized business like automotive reliable quality.

A detailed driven and customized business like automotive.

Cecil: As I said before, notwithstanding the UAW strike, fuel shipments to automotive clients actually increased sequentially in Q3. This outperformance in automotive fuel shipments and the lower service center shipments helped to mitigate the change in average selling prices quarter over quarter with a richer mix, holding strong above $1,200 per net ton, even after the drop in overall index prices during the quarter. Our cost reduction performance was also very good during Q3, improving by $31 per net ton quarter over quarter.

Reliable quality customer service and meeting just in time needs are Paramount.

Speaker 2: Customer service, emitting just in time needs, are paramount.

Speaker 2: in cliffs does that better than anyone else.

And cliffs does that better than anyone else.

Speaker 2: We have been willing to sacrifice throughput to serve the wide variety of parts each one of the clients needs.

We have been willing to sacrifice throughput to serve the wide variety of parts each one of their clients need.

Speaker 2: We have to reserve our available capacity to align with their production forecasts and we hold inventory for our automotive clients.

We have to reserve our available capacity to align with their production forecast and we hold inventory for our automotive clients.

As I have said before.

A steel buyer for a given car manufacturer can replace cliffs with another steel supplier just to buy cheaper steel from them for a little while.

Cecil: This came in less than our previous guide only due to this mix factor, but we were happily take that trade off due to much higher prices associated with better mix. We expect costs to fall by another $15 per net ton during the fourth quarter. Since Q3 of last year, we have reduced unit cost by a total of $165 per net ton year over year. That is roughly $2.7 billion in savings at an annual run rate.

History tells us that they will come back to cliffs after the buyer or the decision maker, a bob to him or her or both the buyer and the baas are replaced with someone else.

Speaker 2: We have seen that happen time and time again.

We have seen that happen time and time again.

Blips positioning automotive has been earned not given.

Cecil: This solid performance in costs is expected to continue into next year. We are happy to report that our annual metallurgical coal buy will result in a $250 million reduction in 2024 coal costs. We executed these 2024 annual contracts during Q3 and our negotiations were very well timed as global met coal prices rallied shortly thereafter. Among other savings, we have also locked in an additional $150 million in savings for fixed natural gas costs in 2024.

Speaker 2: And we continue to fight these numerous competitive forces every day to maintain and improve this reputation based on X.

And we continue to fight Theres numerous competitive forces everyday to maintain and improve these reputation based on excellence.

Speaker 2: as a direct result of increased automotive production volumes. We actually set a new company record for direct automotive shipments during the third quarter. Serpacing the previous two Hellsky quarters, even in the midst of model-year changeovers, and all the uncertainty before they strike was called by the UAW.

As a direct result of increased automotive production volumes, we actually set a new company record for direct automotive shipments during the third quarter, surpassing the previous two housekeeping quarters, even in the midst of model year changeovers and all.

All of the uncertainty before day strike was called by the U a W.

Speaker 2: So far, the strike affecting a number of plants of the Detroit tree has not impacted us materially on a direct automotive basis.

So far the strike affecting a number of plants of the Detroit three has not impacted us materially on a direct outdoor motive basis.

Lorenzo González: With that, I will turn it back to Lorenzo. Thank you so so. As you may recall, we had to sacrifice production and shipments last year to bring some of these steel mills acquired in December 2020 from Arcelo Miro, USA, to a reliable level of performance. Automotive is our biggest market, and we were anticipating much higher demand for automotive steel coming into 2023 versus 2020. 32. Fast forward to Q3, our demand forecast has been confirmed, and we have absolutely taken advantage of that.

Speaker 2: As of right now, the impact of the current outages on cliffs are less significant than what we felt from the microchip shortage and other supply chain issues. The entire automotive sector went through in 2021 and 2020.

As of right now the impact of the current outages on cliffs.

Less significant than what we felt probably microchip shortage and other supply chain issues. The entire automotive sector went through in 2021 and 2022.

Speaker 2: Also important to say, the majority of our automotive shipments do not go to the Detroit.

Also important to say the majority of our automotive shipments do not go to the Detroit, three and Thats, particularly true for our largest customer which is not one of the Detroit three.

Speaker 2: And that's particularly true for our largest customer, which is not one of the Detroit

Lorenzo González: Q3 was our third straight quarter, with total still shipments above 4 million net tons, even in a business environment where service centers sat on their hands and were not actively buying for most of the quarter. The automotive business in the United States is extremely competitive. Automotive is an industry that every steel producer wants to serve. When we negotiate our annual deals, we are competing against offers from countless other suppliers, including Korea, Japanese, German, other European, as well as against Mexican joint ventures and Mexican transcripts.

Speaker 2: In fact, we have seen much better demand from these other automates.

In fact, we have seen much better demand from this odd there outdoor makers as.

As a result, we expect total shipments in Q4 to remain around the 4 million net ton Mark.

If the UAW strike continues for a while.

Conversely, the service center sector was the one creating in Q3, the most negative impact associated with the UAW strike not the automotive Oems themselves.

As this big day show off a strike gap picking up steam in July service centers did what they always do when they face uncertainty.

<unk> de stocked and sat on the sidelines.

However, the strike has not had nearly the impact these folks anticipated and they got.

Lorenzo González: We also have seen growing competition from EAFs, and the ongoing threats from aluminum substitution. There is no unfair advantage we have from that standpoint. The United States is by far the largest importer of steel in the world, importing more than 30 million net tons of steel in 2022 alone. No matter what change with the market structure of integrated blast furnace based oxygen furnace operations, the United States might happen. These competitive forces are there and will continue to be there. What sets Cliffs Apart in automotive is our excellence at serving the clients. We are just better at meeting our customers needs.

Caught flat footed again.

The best evidence of that is how quickly our two recent price increase announcements gain traction in the marketplace.

As for our annual automotive negotiations, our October 1st renewals, which represent about 30% of our total annualized out of volumes were another success.

We held onto important volumes and did not take any price decreases in fact in these negotiations were successful in implementing the cliffs H surcharge that we discussed last quarter.

As a reminder, blips.

Lorenzo González: In a detailed driven and customized business like automotive, reliable quality, customer service, and meeting just in time needs are paramount, and Cliffs does that better than anyone else. We have been willing to sacrifice throughput to serve the wide variety of parts each one of the clients need. We have to reserve our available capacity to align with their production forecasts, and we hold inventory for our automotive clients. As I have said before, I still buyer for a given car manufacturer can replace Cliffs with another steel supplier just to buy cheaper steel from them for a little while.

Blips H represents the premium we charge for supplying our customers in United States with the steel produced with close to 30% is scrap in our basic oxygen furnaces, Andy Hughes H B I in our blast furnaces.

Our clients in automotive.

And other sectors as well cannot that get that in Europe , or in Japan, or in Korea or in need yet or in China.

As a consequence of our operating Brexit practices with July Z <unk> and maximizing your scrap cliffs is among the lowest carbon intensity blast furnace based squawks, Jim furnace operations in the entire world and certainly much better than.

Lorenzo González: But history tells that they will come back to Cliffs after the buyer or the decision maker above him or her or both the buyer and the boss are replaced with someone else. We have seen that happen time and time again.

Any of the current top 10 largest steel producers in the world.

While cliffs H is a very important first step in decarbonizing the production of sophisticated grades of steel earlier. This month, we saw the most consequential step forward in advancing to the cliffs <unk> fees.

Lorenzo González: Cliffs position automotive has been earned, not given, and we continue to fight these numerous competitive forces every day to maintain and improve this reputation based on X- as a direct result of increased automotive production volumes, we actually set a new company record for direct automotive shipments during the third quarter, surpassing the previous two Helsinki quarters, even in the midst of model-year changeovers and all the uncertainty before the strike was called by the UAW. So far, the strike affecting a number of plants of the Detroit's tree has not impacted us materially on a direct automotive basis.

And which we will implement the use of hydrogen as reductions in our blast furnaces.

On October 13, as part of the bipartisan infrastructure in law, the White House and the U S Department of energy announced the plan to commit $7 billion toward clean hydrogen hubs across the country, including among the chosen.

Occasions northwest, Indiana, the most critical region for Cleveland cliffs.

As you have heard me say in the past, it's not we're about where the bulk is right now.

All about where the ball is going to be.

And where the ball is going to be is hydrogen.

Lorenzo González: As of right now, the impact of the current outages on cliffs are less significant than what we felt from the microchip shortage and other supply chain issues. The entire automotive sector went through in 2021 and 2022. Also important to say, the majority of our automotive shipments do not go to the Detroit tree and that's particularly true for our largest customer, which is not one of the Detroit tree. In fact, we have seen much better demand from these other automakers.

Hydrogen is the future.

Effectively all of the current carbon emissions in our footprint.

A result of the use of fossil fuel based reductions or energy sources, where there is no economically feasible alternative.

Hydrogen can and ultimately will change that.

Glyphs commitment to buy a large portion of the output from the Midwest hub.

Helped get dislocation selected by the department of energy.

Lorenzo González: As a result, we expect total shipments in Q4 to remain around the 4 million net-ton mark even if the UAW strike continues for a while. Conversely, the service center sector was the one creating in Q3 the most negative impact associated with the UAW strike, not the automotive OEMs themselves. As the expectation of a strike kept picking up steam in July, service centers did what they always do when they face uncertainty. They destocked and set on sidelines.

Furthermore, our commitment of a significant uptake ultimately makes the hub viable.

We solved the chicken and egg dilemma.

The very existence of the hub should attract other sectors and other uses including the viability of production of hydrogen fueled vehicles.

Clean and viable alternative to battery powered evs.

Most steel companies have decided that spending billions of dollars in building, new Eas based capacity to recycle scrap with growing residual corporate content is still way to go.

Lorenzo González: However, the strike has not had nearly the impact these folks anticipated and they got caught flat footes again. The best evidence of that is how quickly our two recent price increase announcements gained traction in the marketplace.

Unlike taking that fast.

We at Cleveland cliffs prefer the higher steel quality that comes with blast furnace based oxygen furnace steelmaking.

In addition, if hydrogen is available and cost competitive.

Lorenzo González: As for our annual automotive negotiations, our October 1 renewals which represent about 30 percent of our total annualized out of volumes were another success. We held onto important volumes and did not take any price decreases. In fact, in these negotiations, we are successful in implementing the Cliffs-H surcharge that we discussed last quarter. As a reminder, Cliffs-H represents the premium we charge for supplying our customers in the United States with steel produced with close to 30 percent scrap in our base oxygen furnaces and using HBI in our blast furnaces.

You already have blast furnaces. They use of hydrogen is very minimally capital intensive.

Only minor additions are needed like the new pipeline. We are currently installing at our Indiana Harbor plant.

Our decision to use hydrogen as our decarbonization path set us apart from the crowd and that to be accomplished in a much more cost effective and quality driven manner.

On that note.

I want to emphasize one more important point, we appreciate the value that the binding administration places.

On projects and investments that sustain and grow good pay middle class Union jobs.

Lorenzo González: Our clients in automotive and other sectors as well, cannot that get that in Europe, or in Japan, or in Korea, or in India, or in China. As a consequence of our operating practices, utilizing HBI and maximizing scrap, Cliffs is among the lowest carbon intensity, blast furnace, base cocks, gym furnace operations in the entire world, and certainly much better than any of the current top 10 largest steel producers in the world. Why, Cliffs H is a very important first step in decarbonizing the production of sophisticated grades of steel.

Regulatory authorities have been strict on fighting M&A deals that harm workers and rightfully so.

Most of you have followed the Cleveland cliffs for years and are very familiar with the way in which Cleveland cliffs works.

Collaboratively with our Union partners in particular the USW.

UAW and the International Association of Machinists.

I'm Grateful that President Whiteness administration is aligned with us in our long term collaborative approach with the unions and has taken loads that cliffs puts workers at the center of our strategic decisions and growth objectives.

Lorenzo González: Earlier this month, we saw the most consequential step forward in advancing to the Cliffs H2 phase, in which we will implement the use of hydrogen as reductant in our blast furnaces. On October 13, as part of the bipartisan infrastructure law, the White House and the U.S. Department of Energy announced the plan to commit $7 billion toward clean hydrogen hubs across the country, including among the chosen locations northwest Indiana, the most critical region for Cleveland Cliffs.

Last but not least one person would have been excited about these great opportunities.

Is delayed international President of the U S. W. My Dear friend, Tom Conway.

We shared the same views on a vibrant middle class in the resilient American manufacturing sector.

We at Cleveland cliffs mourn the loss of Tom Conway.

But our relationship with the U S. W will continue into the future is stronger than ever.

We congratulate David my call on his well deserved election as international President of the U S. W.

Lorenzo González: As you have heard me saying in the past, it's not about where the bow is right now, it's all about where the bow is going to be, and where the bow is going to be is hydrogen. Hydrogen is the future. Effectively, all of the current carbon emissions in our footprint are a result of the use of fossil fuel based reductants or energy sources, where there is no economically feasible alternative. Hydrogen can and ultimately will change that.

Dave has been the key leader within the West W. In building, our cliffs USW partnership, which has been a model for other companies and for other sectors of the American economy.

We look forward to continuing to fight for our people together with Dave My call.

With that I will turn it back to Daryl for Q&A.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Lorenzo González: Cliffs commitment to buy a large portion of the output from the Midwest hub helped get this location selected by the Department of Energy. Furthermore, our commitment of a significant offtake ultimately makes the hub viable as we solved the chicken and egg dilemma. The very existence of the hub should attract other sectors and other uses, including the viability of production of hydrogen-fueled vehicles, as a clean and viable alternative to battery-powered EVs. Most steel companies have decided that spending billions of dollars in building new EAF-based capacity to recycle scrap with growing residual copper content is the way to go.

A confirmation tone will indicate your line is in the question queue.

Press Star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.

Our first questions come from the line of Lucas pipes with B Riley Securities. Please proceed with your questions.

Thank you very much operator, good morning, everyone and congrats on a great quarter.

Lorenzo really appreciated your comments on hydrogen and good job there and I wondered if you could maybe expand.

On that hydrogen route.

A couple of fronts first.

Where with the carbon intensity go or with the Coke intensity go.

Once you fully converted.

Blast furnace.

Through the use of DRA and hydrogen.

Lorenzo González: Unlike taking that path, we at Cleveland Cliffs prefer the higher steel quality that comes with blast furnace-based oxygen furnace is to make... In addition, if hydrogen is available and cost-competitive and you already have blast funduses, the use of hydrogen is very minimally capital intensive. Only minor additions are needed, like the new pipeline we are currently installing at our Indiana Harbour plant. Our decision to use hydrogen as our decarbonization path set us apart from the crowd and that will be accomplished in a much more cost-effective and quality-driven manner.

Usage, and then secondly, more strategically.

Does that change how you kind of think about.

The.

The attractiveness of blast furnace assets.

You mentioned in your prepared remarks, others are betting on.

On Eas, you don't seem to go that.

Direction, and obviously that would be really interesting to hear how you think about that in the current context. Thank you very much.

Thanks for the questions Lucas.

Thanks for the kind words.

Let's talk about the the carbon intensity first.

It's very easy to understand where the <unk> is generated.

Blast wounds.

We load.

Blast furnace as part of the burden.

Sure.

The form of Coke and coal in the form of Coke is actually see.

Lorenzo González: On that note, I want to emphasize one more important point. We appreciate the value that the Biden administration places on projects and investments that sustain and grow good-pay middle-class union jobs. Regulatory authorities have been strict on fighting M&A deals that harm workers in rightfully so. Most of you have followed Cleveland-Cliffs for years and are very familiar with the way in which Cleveland-Cliffs works collaboratively with our union partners. In particular, the USW, the UAW and the International Association of Machines. I'm grateful that President Biden's administration is aligned with us in our long-term collaborative approach with the unions and has taken notes that Cliffs puts workers at the center of our strategic decisions and growth objectives.

That's C in a super saturated.

E C environment in the presence of.

Ratified or two we will generate a lot of Seo and that Seo that monarch side of <unk> is the reduction that takes the oxygen out of the pellet to create the aro metallic.

So.

And then when that chemical reaction happens <unk> generated so the more you take coke out of the blast furnace the least.

You are going to be generating Seo tool as simple as that.

Hydrogen.

Fall as an alternative.

Chemical reaction to remove the oxygen.

Instead of <unk>.

Combining to produce <unk>, and then C O two hydrogen.

Combined to produce H two O.

H two O is water.

Form of steam so instead of generating.

Massive amounts of C O two youre going to be generic in massive amounts of Sox team. So the more you replace cook with.

Lorenzo González: Last but not least, one person who would have been excited about these great opportunities is the late international president of the USW, my dear friend Tom Connoi. We shared the same views on a vibrant middle-class and a resilient American manufacturing sector. We at Cleveland-Cliffs mourned the loss of Tom Connoi, but our relationship with the USW will continue into the future, stronger than ever. We congratulate David Macau on his well-deserved election as International President of the USW. Dave has been the key leader within the USW in building our Cliffs-USW partnership which has been a model for other companies and for other sectors of the American economy.

<unk>.

The hydrogen.

The more you are going to take two out of the picture and the use of direct reduced iron in the form of <unk> and a blast furnace.

That is for a simple reason when you load the HB I want no longer laudian oxide Europe .

Loading iron metallic vast majority is FTE not FTE.

So we don't have ox.

Oxygen to be removed.

From that portion of the burden that is loaded in the form of <unk>, so that per se already reduced the needs of coke and Thats. The resort Coke rates are so low as of today, even without hydrogen because we load a massive amounts of <unk>. So we're loading out.

A lot less all inside the blast furnace, so we need a lot less problem with the hydrogen we're going to need even less carbon how much less time will tell because we only have one.

Lorenzo González: We look forward to continuing to fight for our people together with Dave who will turn it back to Daryl for Q&A. Thank you.

Trial, so far in our smallest blast furnace in our fleet Thats Middle top which was a big success and the next one will be Ah trial in Indiana hub was seven but that one we are going to do with a lot of hydrogen because we're building a pipeline for that so we are going to be the first ones in the world.

Unknown Executive: We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question Q. You may press star two if you would like to remove your question, from theCUBE. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions.

To adopt hydrogen as reduction and that will be a new route.

Will that change the app. So yes, absolutely will continue to generate less <unk> than the current route but yes cannot aim for.

Lucas Pipes: Our first questions come from the line of Lucas Pipes with B Riley Securities. Please proceed with your questions. Thank you very much, Operator.

Number that we're going to get with the hydrogen.

The other things because the electrodes.

Lorenzo González: Good morning, everyone, and congrats on a great quarter. Lorenzo, really appreciated your comments on Hydrogen and good job. I wondered if you could maybe expand on that hydrogen route on a couple fronts. Well, first, where would the carbon intensity go, or where would the co-contensity go? Once you've fully converted a blast furnace to the use of DRI and hydrogen usage, and then, secondly, more strategically, does that change how you kind of think about...

I've made by graphite and graphite D. C. You cannot make graphically the hydrogen because the graphite is solid.

That's why the electrodes are re <unk> and hydrogen as a gas so I would say that eas.

Limited in their ability to produce certain grades.

It will be limited on reducing C O two emissions beyond what they produced to date and the possibility to use the hydrogen are at this point a lot more interesting for the next 10 to 20 years, one more thing now that we are.

Lorenzo González: The attractiveness of blast furnace assets. You mentioned in your prepared remarks, others are betting on EAS. You don't seem to go that direction, and obviously that would be really interesting to hear how you think about that in the current context. Thank you very much. Thanks for the questions, Lucas, and thanks for the kind of words. Let's talk about the carbon intensity first. It's very easy to understand where the CO2 is generated in a blast furnace.

Completely convinced that we're going to have hydrogen Cleveland cliffs during Q4, we will adopt.

Ill pass to net zero and certainly will be a way before 2050, we are working on that will release that during 2000 and doing the the Q4 of 2023.

Lorenzo Thank you very much for that and congrats on on that.

Two quick follow ups the first.

The right to bid under Usw's basic Labor agreement, which you received on August 17.

Lorenzo González: We load in a blast furnace as part of the burden, coal in the form of coke. And coal in the form of coke is actually sea. That sea in a super saturated, in sea environment, in the presence of a ratified O2, will generate a lot of CO, and that CO, that monoxide of carbon, is the reductant that takes the oxygen out of the pellet to create the arometallic. And then, when that chemical reaction happens, CO2 is generated.

Is that right extend to the totality of U S steel or what nonunion assets, such as Big River steel, possibly be excluded from that and then secondly.

On the on the auto contract negotiations for annual 2024, if you could maybe just share some thoughts about.

Negotiating in the current environment. Thank you Barry.

Let me start let me start for the one that I'm going to be able to respond.

The contract we already said in our prepared remarks that you didn't take price decrease so we're able to keep our prices in good shape and we implemented click stage. That's all we're going to disclose and we are we're not comment beyond that on the other portion of your question Lucas.

Lorenzo González: So, the more you take coke out of the blast furnace, the least you are going to be generating CO2. As simple as that. Hydrogen follows an alternative chemical reaction to remove the oxygen. Instead of combining to produce CO and CO2, hydrogen will combine to produce H2O, and H2O is water in the form of steam. So, instead of generating massive amounts of CO2, you are going to be generating massive amounts of steam.

Understood.

Thank you very much for all the color and to you and the team best of luck. Thank.

Thank you.

Thank you. Our next question is coming from the line of Carlos de Alba with Morgan Stanley . Please proceed with your questions.

Yes.

Good morning Lorenzo.

Just on the <unk>.

Hydrogen discussion.

Maybe a couple of follow ups.

How much do you expect the capex to be as you convert.

Yeah, just you convert your blast furnaces to be able to be a hydrogen ready.

Lorenzo González: So, the more you replace coke with hydrogen, the more you are going to take CO2 out of the picture. And the use of direct reduced iron in the form of HBI in a blast furnace is for a simple reason. When you load HBI, you are no longer loading an oxide. You are loading arometallic, vast majority, this FE, not FEO. So, we don't have oxygen to be removed from that portion of the burden that is loaded in the form of HBI.

What is the investment for blast furnace or per ton of steel.

Second is there a limitation and if so what more or less is the range of two which you can substitute.

Lorenzo González: So, that per se already reduced the needs of coke. And that is the reason our coke rates are so low as of today, even without hydrogen, because we load massive amounts of HBI. So, we are loading a lot less O inside the blast furnace, so we need a lot less carbon. But EAFs cannot aim for a number that we are going to get with hydrogen. Among other things because the electrodes of the EAFs are made by graphite.

Coke with hydrogen English you blast furnaces.

Yes, so the first portion of the investment like I said in my prepared remarks, when you already have the blast furnace you have the two years we have the.

The valves everything in place we are going to have to build a pipeline basically to bring the hydrogen from where the generation is usually outside defense all the way to the blast furnace. We are doing that as we speak for Indiana Harbor set and we are doing Indiana Harbor said because.

It will be our high water Mark is the biggest blast furnace. They wanted to use the most in terms of hydrogen because of its size and.

It's also because it's a.

Uh huh.

Our flagship for instance.

Our biggest the biggest in the western hemisphere, and we are going to use as a demonstration.

<unk> for how to use hydrogen, but it's basically it's a pipeline in a couple of thoughts. So we are estimating that the this capex to be less than $9 million as we speak so it's very very minimal.

Also.

Don't forget we're not doing this for free we are going to pass these cost to the clients in the form of the cliffs age too like we're doing the classic <unk>.

Clients really want greener steel and I believe they do they should be willing to pay and they should be willing to pass along to the consumer or their end users whatever we can just keep talking about this thing is on that.

Theoretical exercise it sounds like everybody is creating four distinct to just go away. This thing is not going away. So if you're going to have to.

Lorenzo González: In graphite is C, you cannot make graphite with hydrogen because graphite is solid. That's why the electrodes are on graphite. And hydrogen is a gas. So, I would say that EAFs are limited in their ability to produce certain grades. They will be limited on reducing CO2 emissions beyond what they produce today. And the possibilities with hydrogen are at this point a lot more interesting for the next 10 to 20 years. One more thing. Now that we are completely convinced that we are going to have hydrogen clear on cliffs during Q4, we will adopt a path to net zero and certainly will be away before 2050. 23.

To tackle Robert I'd have to fight it they're going to have to fight it the right way. This is a business we are incurring costs.

As far as hydrogen I'll insist is not going to be massive cost but.

Whatever cost we have we're going to pass along in the form of clips H.

Or the other.

Part of the question I promised that I forgot can you repeat Carla.

Sure.

What is it what is the technical level or limits of tonnage that you can replace a hydrogen with orca. We had yes. That's a question I don't have an answer yet because.

The coke in the blast furnace.

Please.

A couple of different routes.

And of course, the most important one is.

To generate the reduction the reduction is seal like I explained.

Lorenzo González: Lorenzo, thank you very much for that and congrats on that. Two quick follow-ups, the right to bid under USW's Basic Labor Agreement, which you received on August 17th, does that right extend to the totality of US dealer with non-union assets such as Big River Steel possibly be excluded from that. And then secondly, on the auto contract negotiations for annual 2024, you could maybe just share some thoughts about negotiating in the current environment.

Before.

Lucas pipes.

But ah.

It's not just the fact that the Corp generates this you that's the reduction there.

The other the other roles.

The Coke place it gives us.

Source of heat for the.

The east side of the furnace remember youre melting solids and transforming liquid so that coke has that role hydrogen will play both roles redundant and source of heat. So from these two standpoints hydrogen is perfect, but there is one third rule that coke placing side there.

Lorenzo González: Thank you very much. Let me start for the one that I'm going to be able to respond, that's the auto contract. We already said in our prepare remarks that we didn't take price degrees, so we're able to keep our prices in good shape and we implemented the Cliffs Vage. That's all we're going to disclose. And we are not going to be on that on the other portion of your question, Lucas. Understood.

Blast furnace that hydrogen cannot replace.

Cook is.

Responsible for sustained the burden inside the blast furnace in a way that the gas is Ken.

Traffic inside the furnace in the chemical reactions can happen when you don't have pellets touching pellets by and large we have pellets, Dutch and Cook and <unk>.

Lorenzo González: Lorenzo, thank you very much for all the color and to you and the team best of luck. Thank you.

Carlos Dayaba: Our next questions come from the line of Carlos Dayaba with Morgan Stanley, please proceed with your questions. Good morning, Lorenzo. Just on the hydrogen discussion, maybe a couple of follow-ups, how much do you expect the capex to be as you convert or you convert your blast furnace to be able to be hydrogen ready? What is investment per blast furnace or per the range after which you can substitute coke with hydrogen in your blast furnaces?

That is structural.

<unk> inside the furnace is extremely important we can minimize that we have been doing that by reducing our coke rate and we will continue to do that with more <unk> and <unk>.

And with less Coke, but we don't have a limiter yet yes. This will be the object of several trials as we start to using we know to be a lot less I don't know how much.

Alright, great and just to clarify.

Yeah.

I'm, sorry, the $9 million.

Investments are less than 9 million investment in the pipeline esport plant and it is for the inside defense pipe.

Right yes.

Carlos Dayaba: Yeah, the first portion, the investment. Like I said in my prepare remarks, when you already have the blast furnace, you have the two years, you have the valves, everything in place, we are going to have to build a pipeline basically to bring the hydrogen from where the generation is, usually outside the fence, all the way to the blast furnace. So we are doing that as we speak for Indiana Haberset. And we are doing Indiana Haberset because that will be our high water mark.

Yes, it's a pipeline that will run from defense to differ to the blast furnace alright.

For a plant of that magnitude, it's an enormous plant we're talking miles. So it's not a small feat, it's a loan pipeline.

Alright got it.

And then just a pipeline it's not a it's not a complex technological facility or anything like that it's a pipeline, but sell loan pipeline and the pipeline that will Gary hydrogen. So it has specifications as well.

Carlos Dayaba: If the biggest blast furnace, they want that to use the most in terms of hydrogen because of its size. And it's also because it's our flagship furnace that our biggest, the biggest in the Western atmosphere. And we are going to use as a demonstration plant for how to use hydrogen. But it's basically it. It's a pipeline and a couple of valves. So we are estimating the these capex to be less than $9 million as we speak.

A well defined type of steel that they're going to be using for that pipeline.

Alright fair enough understood. Thanks for that those specifications and just another question if I may.

Yeah.

Auto price negotiation, so you mentioned October .

Any color you can provide on January have you started those conversations or are they going to start only once the auto strike and or given that most of your clients or not.

The Detroit three would you start negotiations have you started negotiations with the other.

Carlos Dayaba: So it's very, very minimal. And also don't forget, we are not doing this for free. We are going to pass this cost to the clients in the form of the Cliff's H2 like we're doing the Cliff's H. If clients really want green steel and I believe they do, they should be willing to pay and they should be willing to pass along to the consumer or their end users, whatever. We can't just keep talking about this thing as theoretical exercise.

Yes, and when would you expect to complete those.

No the negotiations are ongoing Carlos and.

There is no bearing on what happens with the strike and by the way my position with the strike is very clear. This strike has first.

The mid point by by a lot.

It's not something that we will stay.

Forever I don't believe that we're going to have this strike.

Carlos Dayaba: It sounds like everybody is praying for this thing to just go away. This thing is not going away. So if you're going to have to tackle, if you're going to have to fight it, you're going to have to fight it the right way. This is a business we are incurring costs. There are not as far as hydrogen I will insist. It's not going to be massive costs. But whatever costs we have, we're going to pass along in the form of Cliff's H. For the other part of the question, I've promised that I forgot.

Going beyond Q4.

These things have a beginning have a peak and must have been an otherwise think.

Go nowhere and starts to destruct not built anything so we're a lot closer to the end than to the beginning of this strike, but it has no bearing on our negotiations are negotiations ongoing it's going extremely well.

Alright, Thank you very much thank.

Thank you.

Carlos Dayaba: Can you repeat Carl? What is the technical level or limit of time you can replace hydrogen with hydrogen? That's a question I don't have an answer yet. Because the cook in the blasphonse had a place, a couple of different rules. And of course, the most important one is to generate the reducter. The reducter is CO, like I explained before to look as pipes. But it's not just the fact that the cook generates the CO, that's the reducter.

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Our next questions come from the line of Timna Tanners with Wolfe Research. Please proceed with your question.

Carlos Dayaba: The other role that the cook plays is as a source of heat for the inside of the furnace. Remember, you are melting solids and transforming liquids. So that cook has that role. Hydrogen will play both roles reductant and source of heat. So from these two, it's 10 points. Hydrogen is perfect. But there's one third role that cook plays inside the blast furnace that hydrogen cannot replace. Cook is responsible for sustained the burden inside the blast furnace in a way that the gases can traffic inside the furnace and the chemical reactions can happen.

Hey, good morning, guys hope, you're well I wanted to ask a bit more about the Q4 outlook. I know you said that $15 per ton cost savings just talked a little bit about some of the auto contracts that kick in in the October timeframe, but anything further about mix or how to think about some of the other.

Components.

Well Q4, we are going to have a bigger impact on the the shipments to automotive than we had so far remember the strike started September 15.

And it has been picking up steam.

Since then now that we are on October 24th we are.

Now with more than a month, so 24 days of the quarter have been affected by the strike. So we're going to have a difference in mix in Q4 income and compares with Q3, because we're going to be somewhat affected by the fewer shipped.

<unk> Tau board that said.

About the service Center service centers.

Have been not buy.

They passed Q3 without by day.

They were the doctors that can't touch blood they cant steal so now they need to touch deal they need to buy that's why they got.

Carlos Dayaba: You don't have pellets touching pellets by and large. You have pellets touching cook. And that structural role inside the furnace is extremely important. We can minimize that. We have been doing that by reducing our cook rate. And we will continue to do that with more HBI and with less cook. But we don't have a limited yet. This will be the object of several trials as we start using. We know to be a lot less.

A price increase of 100 books check the box and then they've got another one a fifth check the box and there is more to come and it's better for them to start but they have already started by the way.

Buying a lot more now because otherwise they will buy a lot more in Q1 and it will be a lot more expensive.

That's the color I'd like to give.

Social.

Something.

Oh, no I was just going to complement just to round out the conversation timna.

Carlos Dayaba: I don't know how much. All right. I'm just clarifying. Sorry. The 9 million investment or less than 9 million of the investment in the pipeline is per plant. And it is for the inside defense pipe. Right? Yeah. It's a pipeline that to run from defense to the furnace. To the furnace. All right. Yeah. What for a plant of that magnitude? It's a normal plant. We are talking miles. So it's not a small feat.

Timna.

As we guided costs are going to be down $15 quarter over quarter.

And this decrease in cost will help partially offset the decrease in average selling price.

But from a shipment standpoint will be around that 4 million ton level again in Q4.

And then from a mixed standpoint, we'll have less kind of the value added product.

But.

Working capital should provide us a nice tailwind from a free cash flow standpoint, So I think the way to look at it is Q4 will be sort of a trough in terms of EBITDA, but will generate a lot of cash.

Carlos Dayaba: It's a long pipeline. All right. Got it. And then just a pipeline. It's not a complex technological facility or anything like that. It's a pipeline. But it's a long pipeline. And it's a pipeline that will carry hydrogen. So it has specifications. It's a pretty well defined type of steel that are going to be using for that pipeline. All right. Fair enough. On the two things for those locations.

Perhaps even more cash than EBITDA during the quarter, which will support our ongoing capital allocation priorities and deleveraging continuing to pay down debt, we'll use some of the cash to to pick up some shares if the price remains at these discounted levels.

Lorenzo González: And just another question if I made on the auto price and negotiations. So you mentioned October. Any color you can provide on January. Have you started those conversations or are they going to start only once the auto strike ends? Or given that most of your clients are not the Detroit tree. Would you start negotiations? Have you started negotiations with the other OEMs? And when would you expect to complete those? No, then of course, these are ongoing colors.

So I think that's the way to think about Q4.

Okay, Great you answered some of my next question, which is going to be on an updated thinking about capital allocation. So not sure if I need to have any need further comments would be great.

Anyway. The other question I had was just I know there are smaller parts of your mix, but we were kind of surprised to see stainless and electrical volumes down I assume that stainless and electrical it's been sold out and you've got that more tons, there and and also on the plate side would be great.

An update on those markets. Please.

Yes.

Lorenzo González: And there's no bearings on what happens with the strike. And by the way, my position with the strike. This strike is very clear. This strike has passed the midpoint by by a lot. It's not something that we will stay forever. I don't believe that we are going to have this strike going beyond Q4. These things have a beginning, have a peak and must have an end. Otherwise, things go nowhere and it starts to distract not to build anything.

We are seeing an hour.

Actually it's a good point would point quarter.

Quarter on a very interesting point.

The Atlantic Coast use situation here in the United States right now.

As free marching in flux, because you are still going on.

The America market that consumes goes.

<unk> knows the consumption of Nos will pick up.

When the the production of electric vehicles picks up.

Lorenzo González: So we are a lot closer to the end than to the beginning of this strike. But it has no bearings in our negotiation. Our negotiation is ongoing and is going extremely well. All right, thank you very much. Thank you.

And this is due in.

In talking mode, but not in execution mode. So we are prepared.

We invested to produce high performance knows we call Morrow Max.

And.

We are selling but we're not selling a lot because.

Unknown Executive: As a reminder, if you would like to ask a question, please press star one on your telephone keypad.

The biggest producer of electrical vehicles in the United States doesn't produce here in the United States, producing China produced in Germany, but doesn't produce here. So we don't sell to them.

Timna Tanners: Our next questions come from the line. If Timna Tanners with Wolf Research, please proceed with your questions. Yeah, hey, good morning, guys.

Lorenzo González: I hope you're well. I wanted to ask a bit more about the Q4 Outlook. I know you said the $15 per ton cost savings. Just talked a little bit about some of the auto contracts that kick in in the October timeframe, but anything further about mix or how to think about some of the other components. Well, Q4, we are going to have a bigger impact on the ship and store to board it.

In China, we don't sell to Denny, Germany, maybe one day, we will but we're not at this point. So we're waiting for the real Americans to start buying more of our modem X. That's been those portion of the gold portion continues to be way under.

Supplied.

Because we need a lot, but the problem is that our clients have all kinds of problems with.

Lorenzo González: Then we had so far. Remember, the strike started September 15th, and it has been picking up steam since then. Now that we are on October 24th, we are now with more than a month. So, in 24 days of the quarter have been affected by the strike. So, we're going to have a difference in mix in Q4 in comparison with Q3 because we're going to be somewhat affected by the fuel shipments to auto boards.

People supply chain issues and the ability to handle the tonnage we have actually one client that has been able to overcome these things that everybody else is running behind so it's about the downstream of the plant not about the plant. The plant is able to produce more now because we're able to move.

Those two zanesville, so the Butler plant.

They produce.

Electrical steels is now able to be totally focused on re oriented electrical steels. The demands theoretically is there, but the clients need to be able to digest.

Lorenzo González: That said, think about the service centers. Service centers have been not buying. They passed Q3 without buying. They were the doctors that can't touch blood. They can't touch steel. They are buying a lot more now because otherwise they will buy a lot more in Q1 and it will be a lot more expensive. That's the quality I would like to give. I was just going to compliment just to round out the conversation.

The higher tonnages.

Not on us it's on them.

Okay. That's helpful. Thanks very much.

Sure.

Thank you our next questions come from the line of Bill Peterson with Jpmorgan. Please proceed with your questions.

Yeah, Hi, good morning, and thanks for taking the questions spoken a lot about the decarbonization in auto I was hoping if you can provide some color on some demand outside of auto and in particular, how youre thinking about the demand showing up for the various buckets of policy support whether it be the IAG.

IRA maybe as it relates to solar business, our chipset and how those various pipelines or could evolve in.

How they have evolved since the start of the year, how they could evolve into next year.

Lorenzo González: Tim, as we guided costs are going to be down $15 quarter over quarter. And this decrease in cost will help partially offset the decrease in average selling price. But from a shipments standpoint, we'll be around that $4 million level again in Q4. And then from a mixed standpoint, we'll have less kind of the value added product. But working capital should provide us a nice tailwind from a free cashless standpoint. So, I think the way to look at it is Q4 will be sort of a trough in terms of EBITDA, but we'll generate a lot of cash.

Yes look.

The biggest things so far.

This year has been military.

And when a world that is now.

Worse in.

Two fronts and the potential of a third front in Asia.

That's always looming in the background between China, and Taiwan and China.

Trying to see we have a lot of demand for military users. We can discuss too much we are a big supplier of military is steel.

Lorenzo González: You know, perhaps even more cash than EBITDA during the quarter, which will support our ongoing capital allocation priorities and de-leveraging, continued to pay down debt. We'll use some of the cash to pick up some shares if the price remains at these discounted levels. So, I think that's the way to think about Q4. Okay, great. You answered some of my next question, which is going to be on an update, dunking about capital allocation.

So we're not going to be able to elaborate much on that but it has been a very very important portion of our business here at Glu cliffs infrastructure is starting to pick up and things related to <unk>.

Alternatives clean sources of energy as well, particularly.

Wind and solar solar panels have been.

One of our greatest.

Lorenzo González: So, not sure if I need to add that, but any further comments would be great. Anyway, add though, other question I had was just, I know they're smaller parts of your mix, but we were... I'm kind of surprised to see Staneless and Electrical volumes down. I assume that Staneless and Electrical has been sold out and you've got more tons there. And also on the plate side would great in the update on those markets, please.

Bright spots in our mix of sales.

And.

If I.

<unk>.

Want to elaborate a little more in terms of demand our emphasize one more time that demand coming from service centers is coming back we will come back because they don't have it on the water business.

Lorenzo González: Yeah, look, we are seeing in our, actually, it's a good point. Good point. You caught on a very interesting point. The Electrical Stealth situation here in the United States right now is pretty much in flux because you are still in an American market that consumes ghosts, not nose. The consumption of nose will pick up when the production of electrical vehicles picks up. And this is still in talking mode but not in execution mode.

The option for them to they are started to become more and more relevant for the supply chain because they don't carry inventory when prices are going down and they don't carry inventory when prices are going up because price will go down after the good.

They go up so that's a brief.

Difficult.

<unk> to be in so I have serious questions. If we really need service since we are having service center coming to us and asking for us to expedite orders. That's outrageous that's beyond the ridiculous. So anyway. This is a group of companies that need to take some type of religion and.

Change the way they do business and I believe there will be a very optimistic person.

Lorenzo González: So we are prepared and we invested to produce high-performance nose, we call Moto Max. And we are selling but we are not selling a lot because the biggest producer of electrical vehicles in the United States doesn't produce here in the United States, producing China, producing Germany, but doesn't produce here. So we don't sell to them in China, we don't sell to them in Germany. Maybe one day we will, but not at this point.

I believe that that will be a big source of supply coming into Q4, and even more in Q1.

Yes, thanks for that color another kind of a bigger.

Bigger picture question. So we've read recent reports that the U S and Europe are discussing.

Use tariff rate quotas.

It may be potentially.

Allowing more imports, but I guess, how do you see this impacting U S steel market and what is your kind of view on that on that topic.

Lorenzo González: So we're waiting for the real Americans to start buying more of our Moto Max. That's the nose portion. The plant is able to produce more now because we're able to move nose to Zenzhu, so the butler plant that's the plant that produce electrical stills is now able to be totally focused on reoriented electrical stills. The demand theoretically is there, but the clients need to be able to digest the higher tonnages. It's not on us, it's on them. Okay, that's helpful. Thanks very much. Thank you.

Yes, I think that that ship has sailed for now.

Discussions didnt.

Conclude with <unk>.

Our solution for the request of the European Union.

The situation has been maintained.

Tru's tariff rate quarters are still in place and the alternative to the tiara Appeals or section two to retool and section 222 has not been revoked.

What we did in the in there in the World view is more free trade, but we need more free trade both ways.

United States need to export some still to Europe .

You'll have highly subsidized European steel industry like for example, the U K that is controlled by an Indian company and a Chinese company.

And we only hear about more and more money being given by the government to decarbonize the the.

The breach the steel industry and do a decent that it's just the government subsidizing the replacement of equipment.

Bill Peterson: Our next questions come from the line of Bill Peterson with JP Morgan. Please proceed with your questions. Yeah, hi. Good morning. Thanks for taking the questions. He's spoken a lot about the decarversation and auto. I was hoping if you can provide some color on some demand outside of auto.

With replacing blast furnace <unk>, absolutely the Eas Fi two thirds of the workforce and claiming that they are decarbonize in.

Greening the steel it saw BS.

This is all Chinese take advantage of the bridge, so I believe that.

Lorenzo González: And in particular, how you're thinking about the demand, you know, showing up for the various buckets of policy support, whether it be, you know, the IJ or IRA, maybe, you know, it's related to solar business or chipsac and how those various pipelines are could evolve in and how they have evolved since the start of the year, how they could evolve in the next year. Yeah, look, the biggest thing so far this year has been military and we know world that is now with the wars in two fronts and the potential of a third front in Asia.

Earlier, rather than later, we'll be able to export some steel to the U K and high quality steel and create a free trade that away from the U S to Europe . That's my plan.

Okay, great thanks for that color.

Thank you our next questions come from the line of Tristan Dresser with BNP terrible. Please proceed with your question.

Yes, hi, Thank you for taking my questions.

The first one is on capital allocation I think for a number of quarters. The focus has really been on deleveraging and then returning cash to shareholders in some time both at the same time.

Lorenzo González: That's always new in the background between China and Taiwan and South China Sea. We have a lot of demand for military uses. We can't discuss too much. We are a big supplier of military steel for the, for the dual D. So we're not going to be able to elaborate much on that, but it has been a very, very important portion of our business here at Cleveland.

What has really changed in your view of your the strategy to look more maybe favorably at large M&A.

How should we think about crest moving four rigs.

Regardless of the bid.

Is the priority now more towards growth.

If you can discuss a little bit the strategy there that'd be great.

Yeah.

Lorenzo González: Infrastructure is started to pick up and things related to alternative clean sources of energy as well particularly wind and solar solar panels have been one of our greatest bright spots in our mix of sales I want to elaborate a little more in terms of demand I will emphasize one more time that demand coming from service centers is coming back will you come back because they don't have it or they go out of business That's another option for them too.

Yeah, sure Hey, Tristan.

We've been pretty clear in terms of our capital allocation priorities.

And we've reduced debt.

By a large amount.

We feel like we're in a position now that we have the flexibility.

To go in other directions.

Whether that be accelerating share buybacks at the right time or introducing a dividend.

We won't stop paying down debt, but we have the flexibility with the capital structure that we have to go in different directions.

From an M&A standpoint.

The flat rolled market remains fragmented.

There are many avenues that we could pursue toward further consolidation we've been very successful in M&A in the past.

Lorenzo González: They are started to become more and more irrelevant for the supply chain because they don't carry inventory when prices are going down and they don't carry inventory when prices are going up because prices will go down after they go up so that's a pretty difficult position to be in so I have serious questions if we really need service center we are having service center coming to us and ask you for us to expedite orders that's outrageous that's beyond the ridiculous so anyway this is a group of companies that need to take some type of religion and change the way they do business and I believe they will but I'm a very optimistic person and I believe that that will be a big source of supply coming into Q4 and even more in Q1 Yeah, thanks for that color another kind of bigger quick bigger picture question so we've read recent reports that the US and Europe are discussing the used territory quotas it made potentially allowing more imports but I guess how do you see this impacting the US deal market what is your kind of view on that on that topic? Yeah, I think that that ship has sailed for now the discussions didn't conclude with a solution for the requests of the European Union the situation has been maintained the TRQs the territory quotas are still in place and the alternative to the TRQs are section 232 and section 232 has not been revoked what we need in the in the world bill is more free trade but we need more free trade both ways the United States need to export some still to Europe you know we'll have a highly subsidized European is still industry like for example the UK that is controlled by an Indian company and a Chinese company and we only hear about more and more money being given by the government to decarbonize the the the the bridge is still industry and do this and that it's just the government subsidizing the replacement of equipment with replacing blast furnace bio apps with the E.A.Fs firing through thirds of the workforce and claiming that they are decarbonizing and greening the steel it's all BS and this is all Chinese taking advantage of the bridge so I believe that early rather than later we'll be able to export some still to the UK and high quality steel and create a free trade the other way from the US to Europe that's my plan Thank you.

<unk> executed well timed acquisitions that we haven't overpaid for.

And that's what we're going to continue doing going forward.

Our net debt target of one times through the cycle EBITDA will remain regardless of what we do from an M&A standpoint.

We feel good where we are right now we've paid down we've got back to back quarters of $500 million of net debt reduction.

You can look through Q4 and see how much cash we're going to generate we'll continue using that cash towards paying down debt towards buying back.

Shares when appropriate and being aggressive and opportunistic with M&A opportunities.

Alright, that's very clear thank you.

And maybe a second question a bit more bigger picture on the aluminum I think you mentioned a little bit the threat and the crew.

<unk> market share that aluminum is having against.

That rule.

Yes, we'd like to have you on the debate around the future of steel intensity than cars.

Notably versus aluminum.

Yes, that's my question. Thank you.

Yes look illumina has been.

Or a threat.

For steel for a long time.

And.

With the mixed results mix mixed successes.

Keep in mind beverage cans, one day, where all team Blake and now they are all aluminum.

That box for Cam, making they want.

On the other hand for cars, they have penetration, but it's not that big success that.

We'll talk about we have situations like the F 150 that was supposed to bring <unk> 250 to <unk> 50, the explored the expedition so far.

The only therefore <unk> the F 150.

We at Cleveland cliffs have a huge participation of therefore 50 on high strength low alloy structure steels and everything thats inside the car and view.

Beyond the Hood so.

My intention with therefore 50 sticking aluminum out and I believe all wheel so going forward. So it's a fight and we will continue to fight it as another competitive threat that we have to.

Continued to big seriously and now we may have.

Our steel company, that's beauty on aluminum company, so our aluminum.

Aluminum to compete against US right here in the United States. So I don't believe that this will be a homerun, but I don't take distinct.

Tristan Gresser: Our next question is from the line of Tristan Gresser with BNP Parable. Please proceed with your question. Yes, hi. Thank you for taking my questions. The first one is on capital allocation. I think for a number of quarters, the focus has really been on de-leparaging and then returning cash to shareholders and sometimes both at the same time. What has really changed in your view of your strategy to look more maybe favorably at large M&A? How should we think about cliff moving forward? Regardless of the bid, is the priority now more towards growth?

Likely we are going to compete and we're going to win but we're going to have to fight it as a competitor and we will compete.

Yeah.

Alright. Thank you okay. Thanks, a lot for the color.

Thanks, Thank you.

Next question is coming from the line of Lucas pipes with B Riley Securities. Please proceed with your questions. Thank.

Thank you very much operator, thank you for taking my follow up question.

Lawrence I wanted to ask a little bit about cost reductions for 2024, great job on the coal side.

You mentioned, there are cost reductions, including coal and I Wonder if you could maybe expand a little bit on the other.

Lorenzo González: If you can discuss a little bit of the strategy there that'd be great. Yes, Sherrod Hey Tristan. You know we've been pretty clear in terms of our capital allocation priorities and we've reduced that by a large amount and we feel like we're in a position now that we have the flexibility to go in other directions. You know whether that be accelerating share buybacks at the right time or introducing a dividend, we won't stop paying down debt, but we have the flexibility with the capital structure that we have to go in different directions.

Cost drivers that may.

May move to your advantage in 2024.

So also take that Lucas. Please go ahead Sir.

Yeah, sure Hey, Lucas, Yes, I mean, we expect further cost reductions next year as well.

We will see benefit from this new core contracts and lower natural gas prices for the hedge portion.

We have lower inventories starting points in 2024 as well.

Specifically as it relates to Q4.

Lorenzo González: From an M&A standpoint, the flat-rolled market remains fragmented. There are many avenues that we could pursue toward further consolidation. We've been very successful in M&A in the past. We've executed well timed acquisitions that we haven't overpaid for and that's what we're going to continue doing going forward. Our net debt target of one time through the cycle EBITDA will remain regardless of what we do from an M&A standpoint. But we feel good where we are right now.

The $15 a ton quarter over quarter reduction that we guided to that's going to be largely driven by by mix with less automotive and higher volume of less value added product.

Driven by more service center demand, that's going to have an impact on cost.

And this impact ultimately run through inventory.

So as we look forward you can kind of see how will have continued cost reductions here in Q4 and into next year.

Okay.

So.

Helpful.

Would it be reasonable to kind of take a Q4, starting point and then for the reduced energy cost gas and coal off of that base.

Lorenzo González: We've paid down. We've got back to back quarters of $500 million of net debt reduction. You can look through Q4 and see how much cash we're going to generate. We'll continue using that cash toward paying down debt, toward buying back shares when appropriate and being aggressive and opportunistic with M&A opportunities. All right. That's very clear.

Tristan Gresser: Thank you.

Yes, that's the right way to think about it.

Thank you very much the rents on sales so again best of luck.

Thanks, Lucas Thanks Louis.

Thank you our next questions come from the line of Carlos de Alba with Morgan Stanley . Please proceed with your question.

Yes, Thanks also staying on cost.

So.

Beyond the <unk>.

Lorenzo González: And maybe a second question is a bit more bigger picture on the aluminum. I think you mentioned a little bit the threat and the growing market share that aluminum is having against the flat-roll. Yeah, we'd like to have you still on the debate around the future of still-intensity in cars, notably versus aluminum. Yeah, that's my question. Thank you. Yeah, look, aluminum has been a threat for a long, long time. And with mixed results, mixed successes.

A very very large savings on coal and natural gas next year.

I don't know sell solar and so can you talk about other initiatives that you may have a more on productivity or you.

More efficient labor deployment.

Or any other changes on how you do.

So you make a steel besides of the savings on raw materials that you can point to and if you have any quantification of those that will be really interesting to get any color.

Yes.

Our work.

Back in the second half of 2022, when we deliberately.

Lorenzo González: Keep in mind, beverage cans, when they were all clean plate. And now they're all aluminum. So check that box for caremaking they want. So, on the other hand, for cars, they have penetration, but it's not that big success that people talk about. We have situations like the F-150 that was supposed to bring the F-250, the F-350, the Explorer, the Expedition, and so far, it's only the F-150, and if the F-150, we at Cleveland-Cliffs have a huge participation of the F-150 on high-strengths, low-alloys, structure, and stills, and everything that's inside the car and beyond the hood.

Reduced throughput in order to fix the equipment that we bought from Arcelormittal USA.

Uh huh.

Much worse shape than the equipment that we bought from AK steel.

We.

Did that knowing that our results will take a hit the results took a hit and since then we are demonstrating that good equipment and good people. Good Union Labor force can produce a lot of steel so three quarters in a row in an environment that is not the most.

<unk> Viibryd I have ever seen for sure we have seen better than that we are delivering more than 4 million shipping more than 4 million net tons of steel three.

Three quarters in a row. So so far so good productivity has been achieved and it is not productivity just producing commodity hot rolled we produce all kinds of very sophisticated products for a very.

Lorenzo González: So, my intention with the F-150 is taking aluminum out, and I believe it will, so going for it. So, it's a fight, and we will continue to fight. It's another competitive track that we have to continue to take seriously, and now we even have a steel company that's built an aluminum company. So, they have aluminum to compete against us, right here, in the United States. So, I don't believe that this will be a home run, but I don't take these things likely. We are going to compete, and we're going to win, but we're going to have to fight. It's a competitor, and we will compete.

Demanding customer base that is.

Primarily.

<unk> and other Oems so we.

We are very <unk>.

Such fight with our level.

Productivity. So other cost initiatives are all related to the fact that we are a big buyer of everything.

Like we did with call big buyers tend to have.

A good treatment from the suppliers, particularly if the big buyer knows how to buy.

We.

Nailed with cool, let's face it.

Lorenzo González: All right, thank you. Thanks a lot for the color. Thanks.

Unknown Executive: Thank you.

We close our deal at the perfect timing because I remember this was a mining company before we understand commodities. So we know how to negotiate these things so I'm not going to elaborate beyond that colors, but.

Lucas Pipes: Our next questions come from the line of Lucas Pipes with B-Riley Securities. Please proceed with your questions. Thank you very much, Operators. Thank you for taking my follow-up question. Lorenzo, I wanted to ask a little bit about cost reductions for 2024. Great job on the coal side. You mentioned there are cost reductions, including coal, and I wondered if you could maybe expand a little bit on the other cost drivers that may move to your advantage in 2024.

That's basically what we do sell sorts to complement something just to quantify it a little bit right. Carlos So when you take everything into account, our normalized repair and maintenance the lower input costs the higher productivity.

These lower costs that are going to they're going to bleed into 2024 will more than offset any kind of increase we see in labor.

Lucas Pipes: Thank you very much. So, so take that Lucas. Please go ahead, Silas. Yeah, sure. Hey Lucas. Yeah, I mean, we expect further cost reductions next year, as we will see benefit from this new coal contract and lower natural gas prices for the hedge portion. We have lower inventory starting points in 2024 as well, specifically as it relates to Q4, the $15 ton quarter-over-quarter reduction that we guided to, that's going to be largely driven by mix with less automotive and higher volume of less value added product driven by more service standard demand.

And if we had to put a number on it costs should return to that $1000 a ton range for 2024.

Alright, Thank you very much I appreciate the color.

Thank you Scott.

Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to Lorenzo can service for any closing comments.

Daryl as always great pleasure discussing Cleveland cliffs with you.

Now, we're going to take the longest gap.

In our <unk>.

Sequence of conference calls because the next quarter to discuss would be Q4. It will be the end of the year. So we will probably only be talking with you in February .

Lucas Pipes: That's going to have an impact on costs, and this impact will ultimately run through inventory. So, as we look forward, you can kind of see how we'll have continued cost reductions here in Q4 and into next year. So, that's helpful. So, would it be reasonable to kind of take a Q4 starting point and then for the reduced energy cost gas and coal off of that base? Yeah, that's the right way to think about it. Thank you very much, Lorenzo and Silas.

We're going to have.

A lot of things to discuss in February so stay tuned.

Keep paying attention because we move first.

Even though not everybody does the same but we still keep pushing.

I really appreciate your interest in Cleveland cliffs, and I wish you guys have haptics, given and because we're not going to be talking between now and their Merry Christmas all the best Bye now.

Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.

Silas: So, again, let's move on to the next one. Good luck. Thanks, Lucas. Thanks for this. Thank you. Our next questions come from the line of Carlos Sayaba with Morgan Stanley. Please proceed with your question. Yeah, thanks. Also stay not on cost. So beyond the very, very large savings on call and natural gas next year. I don't know, Celso Lorenzo, can you talk about other initiatives that you may have more on productivity or your more efficient labor deployment or any other changes on how you do, how you make a deal or besides the savings on raw materials that you can point to and if you have any quantification of those that will be really interesting to get any color.

[music].

Silas: Yeah, okay. Our work done back in the second half of 2022 when we deliberately reduced throughput in order to fix the equipment that we bought from our salon below USA. That was a much worse shape than the equipment that we bought from AK Steel. We did that knowing that our results would take a hit. The results took a hit and since then we are demonstrating that good equipment and good people, good union labor force can produce a lot of steel.

Silas: So three quarters in a row in an environment that is not the most vibrant I have ever seen for sure. We have seen better than that. We are delivering more than four million shipping more than four million net tons of steel three quarters in a row. So, so far, so good productivity has been achieved and it's not productivity just producing commodity hot road. We produce all kinds of very sophisticated products for a very demanding customer base that is primarily automotive and other OEMs.

Silas: So, we are very satisfied with our level of productivity. So, other cost initiatives are all big buyer of every day, like we did with coal. Big buyers tend to have a good treatment from the suppliers. Particularly, if the big buyer knows how to buy, we nailed with coal. Let's face it. We close our deal at the perfect timing because I remember this was a mining company before. We understand commodities. So, we know how to negotiate these things.

Silas: So, I'm not going to elaborate beyond that Carlos, but that's basically what we do. So, let's complement something. Now, just to quantify it a little bit, Carlos, so when you take everything into account, the normalize repair and maintenance, the lower input costs, the higher productivity, these lower costs that are going to bleed into 2024 will more than offset any kind of increase we see in labor. And if we had to put a number on it, cost should return to that $1,000 ton range for 2024. All right. Thank you very much. I appreciate the color. Thank you. It's color. Thank you.

Unknown Executive: We have reached the end of our question and answer session.

Lorenzo González: I would now like to turn the floor back over to Lorenzo Goncalves for any closing comments.

Unknown Executive: I really appreciate your interesting Cleveland clips and you I wish you guys have a happy Thanksgiving and because we're not going to be talking between now and then Merry Christmas. All the best by now. Thank you.

Unknown Executive: This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.