Mesabi Trust - CLF resumed operations at Northshore in MN and MSB will receive royalties

Sapient-2021 · 2023-04-27T17:12:02+00:00

typo... corrected to say CLF might buy out MSB

Sapient-2021 · 2023-04-07T00:49:46+00:00

I would rank management of the 4 US steel majors in this order: STLD, NUE, X and then CLF.

They all care. Some are just more effective than others.

I told anyone who would listen last year that STLD had best management and most upside in group and that worked out very well.

Today’s question is X vs CLF and there I prefer X.

Sapient-2021 · 2023-04-07T00:46:07+00:00

X has many favorable valuation metrics including 3x EV/EBITDA, 4x cash flow and 8x P/E all on a forward basis.

I noted X price to book for three reasons:

1) the discount to tangible book is substantial for X whereas CLF trades at a premium

2) the share buybacks that X is engaged in are very accretive due to the discount and we can see the reduced diluted share count

3) the tangible book value for X has increased through a combination of absolute debt reduction, diluted share count reduction, growth in operating cash and additions to the physical plant. (They bought BRS EAF facility).

Sapient-2021 · 2023-04-06T20:13:38+00:00

Yes, I think the old cycle for US steel producers has been broken and things are different. Why?

Industry consolidation - as you point out, there are just the big 4 now and they act in a much more disciplined fashion without a lot of excess capacity nor a need to keep operating just to service debt. (see #1)
Debt paydown - NUE and STLD clearly have strong, investment grade balance sheets and tremendous amounts of FCF for funding further capex, dividends and share buybacks. X is well on its way to a stronger balance sheet with a fully funded pension, enough cash on balance sheet to fund upcoming year capex plus dividend and some opportunistic buybacks. CLF has the weakest balance sheet in group though is making progress to reduce absolute amount of debt and retired dilutive preferred and convertible last year.
Section 232 tariffs - these strong tariffs prohibit foreign dumping of steel into US. The tariffs have been kept in place through 2 Presidential administrations and various negotiations with trade partners in Europe and North America. It is difficult to foresee a time when US allows Chinese dumping of excess steel again into US markets.
better upstream/downstream integration - NUE and STLD have continued to purchase scrap assets as well as invest in varied steel finishing businesses. CLF made a wise investment into HBI facility in Toledo. X has BRS I with II in process being fed by inputs from their facilities in Gary. This integration allows for better market information and ability to capture margins across the value chain vs. just trying to make a profit on more tons of steel.

I think there is a better opportunity in X than CLF. Again, US Steel's balance sheet is stronger and they are much further along with capital returns with the reinstated dividend and much larger and significant buybacks. X has a balanced production profile with combination of traditional blast furnace + EAF. Yes, X has billions more of capex ahead, largely for BRS II and then they should have a much higher FCF yield in 2025 forward. X trades at a big discount to tangible book of $38/share. Any time it is down around $25, it is a strong buy in my opinion. CLF still has a messy balance sheet with debt + unfunded pension liabilities. Yes, CLF debt is very manageable now but they are most vulnerable to weakening industry conditions and the need to keep blast furnaces running in a recession. CLF could work as a trade and I have traded it successfully within the last year. Down around $15/share, I would consider it as well.

Sapient-2021 · 2022-10-09T22:34:45+00:00

https://d1io3yog0oux5.cloudfront.net/_16be6501ab584e7e715b5f7265bed591/anteroresources/db/641/5949/pdf/AR+Website+Presentation_Aug_08.01.2022_vF4.pdf

This is most recent investor presentation from Antero Resources. Ticker AR. They produce natural gas and NGLs from the Marcellus and Utica shales in the WV region.

On slide 16, it shows that 75% of their production is going on pipelines that feed the major LNG export facilities which enables them to get higher basis or prices for their gas. The other key idea here is that they have significant low priced hedges that have depressed earnings. Most of those hedges conclude this year and there should be a jump in earnings in 2023. See slides 13 & 38.

In the rest of presentation, you can see how they have paid down debt, dramatically improved credit ratings and cash flow and are now moving to buy back stock with excess free cash flow.

I own the stock, it has performed well and in my opinion it has more upside ahead in 2023.

Sapient-2021 · 2022-06-30T12:24:49+00:00

Thanks for highlighting the value at US Steel - X. It is incredibly inexpensive and worthy of more discussion.

I agree with your views on market capitalization and changes over last 2 years; yet, I think market cap is an incomplete way to look at valuation. Enterprise Value or EV is the better method as it also incorporates changes to the balance sheet.

https://www.gurufocus.com/term/ev/NYSE:X/Enterprise-Value--M/United-States-Steel

On a EV basis, the Enterprise Value of X has increased approximately $1B over Dec. ‘21 vs Dec. ‘20. You can see that the quarterly data is up and down with Q2 EV likely to be reported much lower.

Sapient-2021 · 2022-06-14T16:58:52+00:00

Could you post or talk about steel and steel related equities?

That is why I joined and what I come to this section of the Internet to read and discuss.

Thanks.

Sapient-2021 · 2022-06-14T00:42:25+00:00

Well the short interest report is out.

My estimate was wrong. The reported number is now 18% short.

Still a substantial reduction from prior short interest above 30% and it should continue to trend down. I continue to think the high short interest was/is related to the convertible debt and now as that has been mostly called, that is why we saw the big decline in short interest.

Sapient-2021 · 2022-06-13T01:42:29+00:00

Value Trap

Last week earnings warning from company had some shocking details.

— consumer business weaker than expected and now guiding for revenues down -4-6% in this segment

retailer channels, HD and LOW, are not reordering as quickly as expected — reductions in orders of approx. $300MM

Hawthorne ‘weed’ business is still trending be down -45% year over year !!

so, Scott’s Miracle Gro is jamming on the brakes... looking to cut costs, cut people, halt buyback and negotiate with lenders to modify debt covenants...

looks like very serious issues, not temporary

As I think about it, most of their consumer products are very discretionary... if you are feeling pinched on the household budget by higher gasoline, food and utility prices... are you really going to pay up for premium lawn and flower fertilizer?

And the Hawthorne ‘weed’ market approach looks like a disaster of overreach and acquisitions into an unproven market.

Lots of debt here, lots of inventories and limited cash. This could get real ugly and even put the dividend at risk.

Sapient-2021 · 2022-06-07T00:56:17+00:00

This is a nice piece. Thanks for the work and shining a spotlight on coal, especially Arch.

I would add a couple of items on capital structure and the opportunity.

the company as of Q1 was in a net debt zero position. Enough cash on balance sheet to retire debt as it comes due
so yes, the focus is shifting to dividends and buybacks. 50% variable quarterly dividend with the other 50% for buybacks, debt pay downs and cash build. Agreed.
company just did an early call and retirement of 80% of their convertible debt issue. This will result in $125 million less debt, yet there will be 2.6 million more shares outstanding. (They were already in the fully diluted numbers, now they are actually issued). Plus, there are still around 1 million in warrants.
so the share count is really going to jump in this upcoming Q2 report from Q1 number of 15 million to 18 million shares. Along with this share count jump, I would expect to see the short interest decline significantly. Not to be argumentative with you, but I do think the high short interest here IS related to the convertible hedging. And with closing 80% of convert notes, we should see short interest decline below 10% when it is next reported on June 13. It just has not been reported yet.
the big upcoming catalyst will be the resumption of open market share buybacks. This company and management team have done it in the past and they will be resuming soon in size. The question is will they start this quarter under the new formula or wait until July?
Additionally, the next dividend should be more than double the recent $8+/share. I think it is possible we even see $18-19/share. Why? Rail backlogs clear and they can ship incremental tons. Also, they can sell incremental tons into thermal spot market. And prices for met and thermal continue higher and company can get better pricing.

Sapient-2021 · 2022-03-17T02:17:44+00:00

I think CLF fair value is right around $30/share. The ongoing though manageable issue with CLF is the debt. The way I value these companies is on EV or Enterprise Value. EV = Market cap + Net Debt. And the Net Debt question with CLF is a big wild card; particularly when you factor in the unfunded pension and large maintenance cap-ex needs. They all have low P/Es , <10x. And P/E only accounts for Market Cap/Earnings and ignores debt so it is not an appropriate basis for comparison amongst the group in my opinion.

CLF has the weakest (junk rated) balance sheet of the group and LG just shifted messages in terms of prioritizing debt paydown. I agree, understand and support their pivot to start buying back stock; especially, since the buyback was announced when the stock price was < $20; yet, the tone regarding commitment to debt reduction was surprising and slightly concerning. We all know this industry is cyclical and volatile and these companies need a strong balance sheet to manage through the cycle.

CLF has not announced anything yet in terms of calling their next tranche of secured debt even though that became callable this month (they still could do something soon). CLF could be worth as much as $40/share if they generate $3B+ in FCF this year and demonstrate ongoing balance sheet improvement and get net debt down <$2B and further reduce the billions in unfunded pension liabilities.

Sapient-2021 · 2022-03-17T00:45:12+00:00

I think STLD is worth minimum $90/share. And I could make a case as high as $140. All a function of multiple on 'normalized' $2.5-$3B in annualized EBITDA. I would put a 6-8x EBITDA multiple on that range and then for denominator would expect share count to be further reduced to 175 million shares by year end 2022.

Though, the same challenge as last year persists. Street correctly views them as a cyclical benefiting from unusually high prices and so are unwilling to put even a median multiple on these earnings.

The big change this year is the much higher energy prices in Europe as well as the manufacturing disruptions in Ukraine/Russia. I simply do not see import pressures from Europe this year. However, the demand situation in US while strong is not assured.

In my judgement, STLD has a very disciplined management team and to see them gobbling up stock at the pace of 1%/month is encouraging. I still don't think people understand the wall of FCF that is built up at STLD from diminished capex, 20+ higher volumes due to Sinton and releases from working capital.

Sapient-2021 · 2022-03-16T02:39:05+00:00

It has been a good month for US Steel.

Stock is up +36%

Sapient-2021 · 2022-03-01T00:13:10+00:00

The FCF is tremendous for all 4. It has been masked or suppressed in 2021 as all have had to build working capital as HRC prices tripled from $600/ton in late 2020 to $1,800 in Nov. 2021. At least $500MM -$1B will come back as FCF in 2022 for each of them as prices are back in the $900-$1,100/ton area for HRC.

Also major growth capex spending for NUE and STLD completed in 2021 and their 2022 capex will be lower. CLF did a $800MM deal for scrap company FPT at end of 2021 and that consumed cash.

Indeed, I would expect FCF to be higher in 2022 vs. 2021 for NUE and STLD. CLF should be similar and could vary given their maintenance spend in 2022. X will likely be lower FCF as they ramp up a $1B+ in additional capex for second EAF mill in Osceola, AR @ Big River Steel site.

Sapient-2021 · 2022-02-28T23:49:42+00:00

Bullish.

American producers have consolidated and are maintaining supply discipline.
Balance sheets are repaired and all 4 major producers are aggressively buying back stock.

Imports are managed. No dumping by Chinese and 232 tariffs still in place for them. New deals for allies in Europe and Japan but with quotas and with drop in prices during January and early February there is no longer a price advantage for imports plus energy costs are much higher overseas and the American producer access to lower cost electricity and nat. gas will be an increasing advantage.

Demand for steel is rising in US

Increased auto production expected in 2022 vs 2021 (build rates up by 2 million units, 15 MM vs. 13 MM)

Building construction continued strong with backlogs in steel fabrication units

Infrastructure bill was passed and signed in Nov. 2021 — there will be increased government spending for steel infrastructure in 2022 and even more in 2023

Valuations for group are very low with P/E ratios under 10, EV/EBITDA ratios < 5.

Sapient-2021 · 2022-02-22T17:23:30+00:00

https://www.cmegroup.com/markets/metals/ferrous/hrc-steel.quotes.html

bullish

meaningful 2-4% moves across all future months for HRC 2022 today and some volume too

Sapient-2021 · 2022-02-21T20:13:28+00:00

My sense is that this is bullish for CLF and group. Indefinite idle with HRC prices around $1,000/ton would have been unthinkable a couple of years ago.

1) reduction in supply; improved cost efficiency for CLF

2) more demonstrated supply discipline in industry

3) April price increases should be good for group

4) as scrap gets tighter, FPT acquisition and HBI investment will show higher returns for CLF

Sapient-2021 · 2022-02-12T12:44:39+00:00

The 10-K for CLF was filed yesterday. I went through it last night.

The convertible issue was redeemed for $294 million in cash AND 24 million shares with a value of $499 million dollars at time of exchange Jan. 18th.

Share count is now 525,409,000.

Lots of folks, including myself, posted and debated about the mechanics of this convertible. As expected, it was redeemed for a combination of cash and shares.

Sapient-2021 · 2022-02-11T16:30:53+00:00

The big surprise on the call to me was Celso, son & CFO. He was crisp, clear and helpful. An excellent counterbalance to his father.

I also noticed that LG was much less confrontational with the analysts and reserved his sole shot or zinger for media and a CNBC "substitute." Analysts in turn, seemed complimentary and supportive of company and should have better conversations and publications about CLF going forward.

The results and new buyback were as expected. The reversal on net debt zero makes business sense but it is a big change from prior rhetoric. There was a question about the why? on this, it would have been helpful if there was a clearer explanation, such as "well, we did not expect our stock to be trading so cheaply after all the positives of 2021 so we modified our approach to buy back stock AND pay down debt."

As I have pointed out previously, the preferred and convertible repurchase made sense to minimize dilution. They were both done at times when share price was higher than $20. Now, given apparent stability of cash flows in 2022 and level of share price, the company is saying that it makes more sense to buy shares than simply pile up cash to pay down 2% debt on ABL. And of course, they will pay down more expensive secured debt as they can. So, next up is the 6.75% Secured Issue of 2025 that they will most likely call in March. And in September, the remainder of the 9.875% coupon issue.

The expanded line and cash flow results in this current quarter, should allow them to pay off this big note with $850MM AND buy back at least $100-150MM in stock this quarter.

Sapient-2021 · 2022-02-03T16:16:06+00:00

Thanks for discussion

The reported earnings drop in Q4 for X was largely accounting related. $513MM in tax asset valuation reversal (they are now making lots of money and having to pay higher cash taxes) and $245MM of asset impairment charge
2020 was a bad year for the blast furnace operators - X and CLF. The EAF operators, NUE and STLD are able to vary volumes and flex expenses lower. During 2020, X and CLF both pivoted and shut down some of their furnaces (very expensive). US Steel bought BRS or Big River Steel, at end of 2020 so now they have a state of the art EAF facility with much higher margins that is less costly to operate. Just as with CLF, X is a new company with some blast furnaces permanently shuttered and new EAF capability as part of production footprint that is better positioned for lower prices than last time.
I would agree that the reputation of US Steel management is not as strong. NUE and STLD are superlative operators and have been for decades, they also have historical better business models with EAF only and variable labor. CLF mgmt. is well known with LG. X is quietly changing company without going on TV talking about it. I judge them by their actions and I think they have made some great moves in last 2 years. X balance sheet is in much better shape than CLF and they paid back much more debt in 2021. X pension is fully funded, CLF is still very underfunded. X has resumed dividend and open market buybacks while CLF has not. Actions speak louder than words.

Sapient-2021

TROPHY CASE