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Cleveland-Cliffs Crushes Earnings Estimates. Contract Steel Pricing Does It.

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Steel coils at a production hall

Ina Fassbender/AFP via Getty Images

Rising prices helped steel maker


Cleveland-Cliffs

report much better-than-expected first-quarter sales and earnings. Prices for Cliffs steel rose even as spot prices for steel dropped in the first quarter.

Cliffs (ticker: CLF) stock was higher following its rising pricing trend. Now the company just has to convince investors that the good times will last.

Cleveland-Cliffs reported adjusted earnings per share of $1.71 from $6 billion in sales. Wall Street was looking for EPS of $1.46 from $5.4 billion in sales.

Shares rose 4.1% in premarket trading to almost $31 a share.

S&P 500
and

Dow Jones Industrial Average
futures were both down about 0.4%.

“Our first-quarter results are a clear indication of the success we have been able to achieve as we renewed our fixed-price contracts last year,” said CEO Lourenco Goncalves in the company’s news release. “Despite the decline in spot prices for steel from Q4 to Q1 and its lagged impact on our results, we were able to continue to deliver strong profitability.”

Goncalves expects Cliffs to generate record cash flow in 2022. In 2021, Cliffs generated about $2.1 billion in free cash flow. Wall Street is projecting about $2.9 billion in free cash flow for the current year.

Cleveland-Cliffs’ market capitalization is less than $16 billion. The stock trades for about five times free cash flow and about five times estimated 2022 EPS. That’s a low PE ratio and lower than seven times average of the past couple of years.

Investors seem to believe steel prices won’t stay elevated. Falling steel prices would drag down earnings, but Cliffs first-quarter results showed that there is a difference between spot and contract commodity prices. Cliffs pricing stayed strong even as spot prices weakened.

In the first quarter, spot prices for hot rolled coil — a key benchmark product —averaged roughly $1,200 a ton, down from more than $1,700 a ton in the fourth quarter. Cliffs average selling price in the first quarter was $1,446 a ton, up from $1,423 in the fourth quarter.

Management hosts a conference call at 10 a.m. Eastern time to discuss results. Analysts and investors will be eager to hear about contract pricing trends for the balance of 2022, heading into 2023.

Coming into Friday trading, Cliffs shares have risen about 36% year to date.

Write to Al Root at allen.root@dowjones.com

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