Is Cleveland Cliffs a Four Bagger? $CLF

Welcome to the first full week of trading for 2025, or at least it would have been a full week if not for the Thursday holiday to celebrate Jimmy Carter.

For the New Year’s fitness challenge, I owe you 6 pushups and 31 sit ups for Friday’s article. Still a pretty low amount of traction given that 2,310 people viewed it! On one hand, I am thankful the numbers aren’t absurd, but on the other, I was hoping that some enthusiasm surrounding restacking would help me grow this newsletter.

As a quick reminder, for the month of January, I will do 1 pushup for every restack and 1 sit up for every like that each writeup receives. If the combined number of likes and restacks reaches certain milestones, it will create a narrowing window of intermittent fasting.

An awful lot of what gets classified as value is just cyclical. Lots of industries operate on their own cycles, supply crushes prices, low prices reduce supply, low supply drives up prices, high prices induce supply. Wash, rinse, repeat.

I typically focus on companies with a market capitalization of under $3 billion, because that is the hunting grounds in which I usually find mispricing. But I am not dogmatic, and in this case, even a midcap can spend a moment in the dumpster, and that is where I find them.

I don’t find the steel industry to be particularly enticing, but I do find it to be cyclical, and with the recent selloff in value, steel was especially hard hit. But with the recent political machinations toward industrial policy, national security focused tariffs, infrastructure buildout, reindustrialization, reshoring, etc., it might be time to give steel a chance.

In 2024, I had written about a FinTwit darling, Algoma Steel (ASTL), but in the writeup, I compared them with Cleveland Cliffs (CLF) for reference. The comparison with CLF really made my focus on ASTL half-hearted, because it was CLF that had those characteristics which I look for in a value stock; aggressive insider buying, low cost structure to survive the downturns, and of course, being really cheap. And now Cleveland Cliffs is even cheaper than it was in June of 2024.

Cleveland Cliffs, until 2014, was an iron mining company that had fallen into dire straits. An activist firm, Casablanca Capital acquired a 5% stake and was successful in implementing change, placing the current CEO, Laurecno Goncalves, as a board member in February of 2014. When it was determined that prior management would not implement necessary changes, Laurenco was appointed Chairman, President and CEO in August of 2014.

Since that time, Cliffs spent the first five years achieving operational efficiency and repairing the balance sheet, and the next five years engaging in aggressive acquisitions. The tangible book value per share has gone from -$11.32 to $15.16 under Laurenco’s management. Cliffs resources expanded from being an iron mining company with 2,500 employees to the second largest and vertically integrated steel manufacturer in North America with 30,500 employees. Revenue has grown from $2.5 billion to $23.6 billion at the peak in 2022.

Casablanca Capital has come and gone, but Laurenco Goncalves remains, engages in consistent insider buying, and hired his son to be the CFO. Living in the age of Elon Musk, the Great Men theory of history is witnessing a revival. One investing strategy is just to find those handful of excellent capitalists and to hitch a ride on that freight train, and I have to admit, in the case of Cleveland Cliffs, that is a compelling idea.

Steel is a cyclical commodity, and in all cyclical commodities, it is important to be a low cost producer with a healthy balance sheet so that when the washout comes, you know that the company you own will survive to enjoy the high prices that follow. With the recent acquisition of Stelco, a Canadian steel company, and vertical integration down to the iron mines, Cleveland Cliffs should be that low cost producer. There are no debt maturities until 2027, although CLF does have some leverage, after the acquisition it should be around 2.5x debt to EBITDA.

In the prior two acquisitions, AK Steel in 2019 and Arcelor Mittal USA in 2020, management understated the synergies that were eventually realized. In the most recent earnings call, management guided that the $120 million annual synergy expected from the Stelco acquisitions were only from SG&A cost savings. Management has not given any numbers regarding the efficiencies that will be gained by having access to Stelco’s coke processing facilities, lowering the coking coal costs of several of Cliffs’ legacy blast furnace operations. It’s a green flag when management under-promises and over-delivers.

Regarding capital allocation, Cliffs has spent most of the last ten years plugging holes in the balance sheet. Not only have they paid down $1.5 billion of debt in the last few years, but more importantly, they retired around $3.8 billion of legacy pension obligations. What money has been diverted to return capital to shareholders was about $1.1 billion of share buybacks since 2022, retiring about 11% of the float. Due to the recent acquisition, capital allocation will again be focused on debt retirement over share buybacks. Which is somewhat unfortunate as the current share price is quite attractive for buybacks.

Still, Cliffs has about $1 billion of EBITDA in the last twelve months during a somewhat difficult time for steel prices. As a generalist, I have no guidance on when a certain commodity cycle will turn, but management was very enthusiastic on the last earnings call, even without knowing the outcome of the recent election, that stronger steel prices would arrive in the first half of 2025 due to the interest rate cutting cycle. Compared to other steel manufacturers, Cliffs is particularly connected to the US automobile industry, however, the Stelco acquisition does give Cliffs much more exposure to spot steel prices.

If Steel prices stay depressed, Cliffs is projecting another $600 million in EBITDA from the Stelco acquisition, so the next 12 months of EBITDA could be around $1.6 billion, which isn’t bad for a $4.67 billion market capitalization company. But at a middling part of the steel cycle, Cliffs could do around $3 billion EBITDA, and in a peak year, could do upwards of $6 billion in EBITDA. Again, I have no idea when the steel market will recover, but it is almost certainly tied to interest rates for new car purchases and increased construction spend.

Despite being in a low-multiple sector, Cliffs has traded previously above a price to sales ratio of 1.0x. Today it trades at around 0.23x price to sales. After the Stelco acquisition, peak sales will probably be around $28 billion, and a price to sales ratio of 1.0x would imply a share price of $56. Similarly, Cliffs has traded around a price to book ratio of 2.0x, compared to the current 0.65x. If Cliffs continues to add over $2 to tangible book value per share per year, and trades up to a price to book of 2.0x, that would imply a share price of around $40 within two years. So Cliffs has the potential to be a four or five bagger within two to three years, if we see a cyclical upswing in steel prices.

In summary, Cliffs has a strong management team that buys into the company, under-promises and over-delivers, engages in accretive acquisitions, and is not afraid to buyback shares aggressively as long as they are paying down debt as well. Steel is a necessary and cyclical commodity, and the next time the cycle is in an upswing, Cliffs could be a 4x to 5x. Whether that takes two years or four, I have no idea.

This year I am going to add a price target and timeframe to each writeup so that I can more easily compare ideas. I bet there are at least a couple of stocks I would consider selling to buy CLF, and it would be helpful if I could compare my own price targets.

Cleveland Cliffs (CLF) $9.50: $40 - $56 by 2027 - 2028.