Subject: Re: FKA: CLF
Cleveland Cliff at $11.40, down from 52 week high of $23. A fairly impressive continual drop in the last 5 months.

Everybody like to be in the North American steel industry, right?

But hey, maybe there is a price for everything. They've had a bad year, with both shipments and prices down. But sometimes a cycle turns. They're about to buy Stelco in Ontario, which is apparently a fairly well run shop.

Consensus earnings for next year $1.07, equating to an earnings yield of 9.4%. Value Line has pencilled in earnings around $5.90 for 3-5 years from now, representing an annual earnings yield of 52% on today's price.


Interesting idea.

I have only heard of them because they just bought out Fairfax's Stelco for C$3.4b (including debt; that is the enterprise value), or $70/share, an 87% premium to Stelco's undisturbed share price. Although CLF was already down from $23 to $16 when they made that announcement, one of the reasons the market may have soured on CLF may be that they made this big acquisition at the peak of the market, as other competitors are also down a fair bit since the deal was announced July 15.

As a background, Stelco declared bankruptcy and was bought by US Steel (X) in 2007, was spun off by USS in 2016 to another company (called Bedrock) and IPO's Stelco in 2017 (about $23/share). Fairfax bought a 12.2% stake in 2018 (at $20.50/share, for $250m) in a private placement.

As you say, Stelco is a well-run firm, and it may wll be that the acquisition is perfectly sensible - it is supposed to be accretive to CLF's EPS, even before cost savings. It is hard to evaluate how much a company like Cleveland is worth, since its results are so cyclical, but at its current $5.3b market cap and with earnings in the past 4 years of -$0.1b, $3.0b, $1.3b and $0.4b, taking the 4-year average $1.15b, it seems like it could be very good if (a) the big Stelco acquisition makes sense and (b) if there is a reasonable chance that they get another year like 2022 or 2023 once in a while.

$60/share of Cleveland's purchase price for Stelco was in cash but $10/share was in CLF shares, so it will be interesting to see what a well-informed investor like Fairfax does with its Cleveland Cliffs shares.

dtb

dtb