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Who Will Win The Lucrative Autonomous Vehicles (Robotaxis) Race?



For some background you can read some of my previous articles:

One of the major trends of the 2020’s will be autonomous vehicles [AVs] used as robotaxis, known as Autonomous Ride Services [ARS], helped by the recent development of the ‘million-mile battery‘. There will be different types of services (fixed route, variable route, taxi, ride share) depending on the offering. Fixed route services have already begun in parts of the USA and China, but should grow rapidly from here. Variable route services can potentially follow if the technology allows. Taxi services will be similar to today but with no driver. Ride share will probably end up being the most profitable and cost effective with one vehicle having several paying customers.

Ride sharing services (Lyft, Uber etc) which typically charge ~US$2/mile will need to become autonomous otherwise they will not be competitive, as autonomous ride services will be profitable at ~US$1/mile.

It should also be noted in the future that ALL autonomous vehicles will need to be fully electric vehicles [EVs] in order to be competitive. This means those companies able to rapidly build out a battery electric vehicle [BEV] fleet have some initial advantage.

Autonomous vehicle revenues will be spread across several areas such as the software developers, hardware developers, the EV companies selling EV fleets, and finally the robotaxi services. The later looks like being one of the biggest opportunities so this article focuses on that.

A single robotaxi charging US$1 per mile and traveling 90,000 miles pa (50% of miles with a passenger) could earn US$45,000 pa. The revenue is then roughly divided up as total car costs 1/3 ($15K), vehicle owner 1/3 ($15K), AV service provider 1/3 ($15K). In many cases the AV service provider will also own the vehicles meaning they can achieve $30,000 pa gross profit per robotaxi. Given the service will operate automatically via an app the profit margin is extremely high. Almost all the $30,000pa will be profit.

If a company was able to rapidly scale to having a 1 million robotaxi fleet that could amount to US$30 billion per annum of gross profit at super high margin so effectively US$30 billion of profit pa. This model requires huge CapEx to own all the vehicles but payback on a 10-12 year vehicle life is just 1-1.5 years.

Note: If the 1m robotaxi fleet was owned by private car owners the CapEx is passed to the vehicle owners, but gross profit pa would drop to US$15m pa (1m x $15K).

Note: If the robotaxi ran set routes and took multiple passengers the revenues could reach or exceed $100K pa. In that case the robotaxi could potentially earn ~US$85,000 pa and a 1m fleet ~US$85b pa. Of course as competition in the sector intensifies the US$1/mile may drop thereby reducing revenues.

Elon Musk forecasts US$30,000pa gross profit for a robotaxi



  • Grand View Research – The global autonomous vehicle market demand is expected to reach 4.2 million units by 2030, expanding at a CAGR of 63.1% from 2020 to 2030.
  • Tesloop+Morgan Stanley Investor Explanation (video) – “Global mobility is equal to 100 x US$100b”. That calculates to be a US$10 trillion global market.
  • McKinsey (2019) – “Autonomous vehicles will likely shift a substantial share of the mobility market value away from products (that is, buying vehicles) and toward services (that is, paying for transportation per mile)…. Within this mix of opportunity and uncertainty, we believe AV players (from components vendors to mobility service providers) could earn trillions in revenues in China.” And for China – “In our base forecast, such vehicles could account for as much as 66 percent of the passenger-kilometers traveled in 2040 (Exhibit 1), generating market revenue of $1.1 trillion from mobility services and $0.9 trillion from sales of autonomous vehicles by that year.

A pic showing an autonomous vehicle in action

In a May 2020 update article on AVs by Bloomberg they state:

Self-driving cars are already charging fees in places such as: sunny Phoenix, where Lyft customers order up Waymo minivans; Texas, where Kroger groceries are ferried around by windowless, driverless pods from Nuro; and Florida, where Voyage zips octogenarians around one of the country’s largest retirement communities. Silberg calls these “islands of autonomy,” relatively static areas that have been thoroughly scanned, mapped and stress-tested by artificial intelligence algorithms. In the next two years, they’ll start popping up all over the place, he reckons.

A look at the leading players in the robotaxi race and the possible near term winners

Alphabet Inc. (GOOG) (GOOGL) – Waymo

Waymo One is Alphabet’s self-driving taxi service which uses set mapped out regions to run its service. They also have Waymo Via their AV delivery service. Waymo state that their Waymo driver (meaning AV) has over a decade of experience and driven over 1 million miles (Bloomberg quotes 20+ million miles).

In December 2018 Waymo One launched self-driving cars in Phoenix. Their main cars have been 600 Fiat Chrysler Automobiles (FCAU) Pacifica Hybrid minivan. In March 2018, Jaguar Land Rover announced that Waymo had ordered up to 20,000 of its planned I-Pace electric cars. Waymo use Intel (INTC) chips. You can read more here.

Bloomberg reports in total that Waymo has 600 vehicles with deals to buy 82,000 more. In May 2020 Bloomberg stated:

Today, if you want to pay to ride in a truly driverless car, there is only one place in the country to do it: suburban Phoenix, where Waymo carries fares with no safety drivers in a handful of the Chrysler Pacifica vehicles. The general consensus in the industry is that Waymo remains ahead of the competition by a year or more, based on several milestones.

In early December, Waymo’s autonomous taxi service topped 100,000 rides in the first year of its Waymo One pilot program in Arizona; in July 2019, those robo-taxis plugged into Lyft’s metro Phoenix network, expanding ridership well beyond Waymo’s base of 1,000 or so beta subjects; and in October 2018, Waymo secured a permit from the state of California allowing it to operate its cars without a human safety driver aboard, the first such certification.

Waymo is testing commercial applications of 18-wheelers made by Peterbilt, a unit of Paccar Inc., outfitted with its self-driving technology. Trucks also have been tested on public roads in California and in the Southwest, as well as on closed courses in Michigan.

My view is that Waymo/Alphabet is likely to be one of the top three winners in the robotaxi race and that they are the current leader.

Waymo plan different autonomous vehicles

Source: Home – Waymo

Tesla (TSLA)

Since October 2016 all Tesla vehicles were built with Autopilot Hardware 2, a sensor and computing package the Company said would enable “full self-driving” [FSD] capabilities once the software matured. In July 2020 Elon Musk stated that FSD is “very close“.

BBC News quoted in July 2020:

Tesla will be able to make its vehicles completely autonomous by the end of this year, founder Elon Musk has said….It was already “very close” to achieving the basic requirements of this “level-five” autonomy, which requires no driver input, he said…..a future software update could activate level-five autonomy in the cars – with no new hardware, he said.

Once fully autonomous level 5 is rolled out via over the air updates Tesla plans to offer Tesla owners and potential taxi customers access to the robotaxi network. Tesla will have a smartphone app with choices – “Summon a Tesla”, “Add your car to the fleet”, “Subtract your car from the fleet”. Musk sees a future where the robotaxis would return home and automatically park and recharge.

Tesla is differentiated by using cameras for vision and no lidar and according to Musk their in-house Tesla chip has significantly faster data processing capacity than any of their competitors (Nvidia disagrees). Bloomberg report that Tesla had 1 billion miles with autopilot engaged as of November 2018. They also state that the “current Tesla owners are training the system constantly, both when Autopilot is engaged and when it is in “shadow mode.””

Tesla’s advantages are significant and include – By far the largest fleet of potential BEV robotaxis in their owner network, their own software and hardware, and more miles of data collected than any competitor. All of this together means Tesla believe their robotaxi costs will be “around $0.18 or less per mile“. Furthermore Tesla’s visual system can adapt to any and all locations, and would not need to be on highly mapped out routes as per some of their competitors that rely more on mapping.

Tesla may have a cost advantage in robotaxis due to vertical integration


My view is that Tesla can be a low cost leader and winner in the robotaxi race. In fact I think Tesla will most likely become the leader in robotaxis due to their advantages discussed above. To be truly competitive in the mid-term I would like to see Tesla develop an autonomous electric mini-van/shuttle (people mover with about 12+ seats) or e-bus next. Tesla plans to use Models S, 3, X and Y as future robotaxis and Tesla semi & Cybertruck could also be AVs.

The rollout and hence revenues should start during slowly in 2021 (subject to regulatory approvals) and grow cumulatively each year. My article linked below shares my model and the potential impact on Tesla which can be very significant.

General Motors (GM)/ GM Cruise

GM Cruise has the world’s second-largest autonomous fleet of 180 vehicles that are undergoing testing, with more than 1.6 million kilometers (1 million miles).

GM had planned their AVs rollout in 2019 but has been delayed. GM has already partnered up with Lyft to offer rides from its autonomous fleet.

GM already has its own BEV the “Bolt’ which gives them some advantage over others. GM and Honda have developed Origin, a shuttle vehicle purpose-built for autonomy.

The autonomous Cruise Origin shuttle

The Cruise Origin driverless shuttle stands during a GM Cruise reveal even in San Francisco on Jan. 21.


Bloomberg reports:

GM is trying to launch an autonomous ride-hailing service in San Francisco…..executives say they hope it will happen soon. In preparation, Cruise has hundreds of its cars being tested in San Francisco. Vogt, now the company’s chief technical officer, has said that if a car can navigate San Francisco, it can handle any kind of driving. Cruise is using modified versions of GM’s Chevrolet Bolt electric car.

GM Cruise’s autonomous vehicle, the all electric Bolt


Argo AI (Ford (F)/Volkswagen [Xetra:VOW](OTCPK:VWAGY) (OTCPK:VLKAF))

Argo AI is backed by Volkswagen & Ford. Argo already has robotaxi and driverless delivery pilot programs in Miami, Washington, Detroit, Pittsburgh, Austin, Texas and Palo Alto, California. Argo is run by CEO Bryan Salesky, once a leading figure in Google’s self-driving car project and Pete Rander, previously a founder of Uber’s self-driving program.

Ford plans a multi-city commercial rollout of robotaxis and driverless delivery pods in the U.S. in 2022.

Amazon (AMZN)/Zoox

Amazon recently announced a billion dollar deal to buy self-driving company Zoox. Prior to this Amazon announced an order for 100,000 Rivian electric delivery vans by 2030. Adding these two news items together along with Amazon’s drones, it looks highly likely that Amazon plans to be a major player in autonomous delivery. This will cut costs for their consumers and give them a further competitive edge. As for robotaxis, maybe that will be next given Amazon’s history of disruption.

In December 2018, Zoox became the first company to gain approval for providing self-driving transport services to the public in California.

Apple (AAPL)/

Apple has been working on autonomous vehicles as well as their ‘on and off again’ electric car program dubbed ‘Project Titan’ which first began in 2014. In 2019 Apple bought, an autonomous driving startup based out of Mountain View, California.

MacRumours states: “What we know”

  • “Physical car project possibly still in the works.
  • Deep integration with iOS expected.
  • Autonomous testing permit received from the California DMV.
  • Self-driving software being tested…..
  • Reliable Apple analyst Ming-Chi Kuo also believes that Apple is still working on an Apple Car that will launch between 2023 and 2025….
  • Apple is also working on a self-driving shuttle service called “PAIL”, an acronym for “Palo Alto to Infinite Loop.” The shuttle program will transport employees between Apple’s office in Silicon Valley.
  • (According to German website Manager Magazin) Apple’s industrial design group has created prototypes of a van with black and silver finishes, indicating the Apple Car could be an Apple Van.”

Apple is currently testing its AV software platform in several 2015 Lexus RX450h SUVs in California. As of May 2018, Apple had 70 vehicles out on the road using its autonomous driving software.

Apple has the brain power and the money, which is why I rate them as the dark horse chance to swoop from behind in the robotaxi/AVs race, most likely with a robotaxi shuttle would be my guess.

Some recent independent ideas on what an Apple iCar may look like



  • (major backers are Toyota, Sequoia Capital China, IDG Capital and Fidelity’s Eight Roads). runs a pilot service in Irvine California, and was the first to launch a robo-taxi fleet and service in Guangzhou China in 2018.
  • Aptiv (APTV)/ Hyundai Motor Group (OTC:HYMTF) – APTIV acquired Nutonomy and is working with Intel (INTC), then later formed a 50/50 JV with Hyundai. They plan robotaxis by 2022 and may work with Lyft.
  • Aurora Innovation (private) (backed by Hyundai Motor Group, Inc. and Sequoia Capital). Aurora plan to supply multiple car OEMs with an AV complete package.
  • Nuro (NURO) (backed by Softbank) with a focus on pizza and grocery deliveries.
  • Other car companies including BMW (OTCPK:BMWYY)/Daimler-Mercedes (OTCPK:DDAIF, OTCPK:DDAIY), Toyota (NYSE:TM), Nissan (OTCPK:NSANY), Volvo,

Added to the above are the existing ride sharing companies Uber (UBER)/Yandex (backed by Toyota, Denso and SoftBank Vision Fund), Lyft (LYFT), Didi Chuxing, Grab Taxi, Ola, Gett, Mytaxi, and DriveNow. Note that the ride sharing companies already have established taxi customer bases, but they will need to move very quickly to autonomous or risk losing massive market share.

Note: There are literally hundreds of companies working on autonomous vehicles or somewhere in the AVs supply chain. For example Nvidia (NVDA) is a leader in AV software and solutions.

The Chinese ARS companies

Several Chinese companies are already operating Level 4 ARS mostly in China, with Level 5 (no driver in the vehicle) expected by ~2022/23. The leading companies are listed below. These are definitely worth investing in if you have an appetite for Chinese stocks.

  • Baidu (BIDU) – Baidu developed a platform that others can use called Apollo. The concept being the “Android of the autonomous driving industry.” In July 2018 China’s Baidu rolled out self-driving buses. At that time, Baidu’s AV Apollo platform now has 156 global partners, and had been used by over 12,000 developers and partners worldwide. Baidu has a fleet of more than 300 Level 4 test vehicles across 23 cities and has recently surpassed 3 million kilometers in urban road testing, putting it first among China’s AV developers.
  • AutoX (backed by Alibaba (BABA) & Dongfeng Motor)
  • Didi Chuxing (backed by Softbank (OTCPK:SFTBY),Tencent (OTCPK:TCEHY) & Alibaba) plans to have 1m robotaxis by 2030.
  • (private) (backed by Toyota), Hyundai
  • WeRide (Baidu backed)/Nvidia

AutoX backed by Alibaba is hoping to have Level 5 robotaxis by 2022/23

AutoX robotaxi project


Bloomberg’s ratings for the autonomous vehicle sector as of May 2020

Leaders Waymo GM Cruise Argo AI Aurora Aptiv
Posses Baidu BMW Daimler Nuro Toyota Uber Volvo
Rogues Nissan Pony.AI Tesla Zoox

Source: Bloomberg

Navigant Research’s rankings of leading autonomous vehicle companies


The future of transport

It should be pointed out that robotaxis circulating around being empty 50% of the time may not be a realistic future. Most city traffic problems are bad enough now without adding in robotaxis with no passengers, especially in rush hour.

Realistically governments will work towards traffic decongestion and reducing emissions; which will mean more and more electric mass transport vehicles such as electric trains, monorails, buses, shuttles (mini-vans), EVTOLs etc. This makes me think set route robotaxi e-buses or e-mini-vans/shuttles should do very well. Companies that focus on these types of vehicles should also do very well.

A BYD electric monorail

Image result for BYD monorail pic smart city


Bidu’s autonomous mini-bus/shuttle in China


Toyota’s e-palette concept autonomous vehicle

Toyota e-Palette autonomous concept wins over Amazon, Uber, more


Amazon Scout – Autonomous fully-electric delivery



  • Technology risk in developing and maintaining autonomous vehicles and a robotaxi network.
  • Litigation risk – The risk of AV companies being sued for accidents etc. Insurance companies will have a say in this also. Some plan to self-insure.
  • Regulation risk – Governments are still gradually opening up areas for autonomous driving.
  • Public acceptance issues around AVs. I think the huge drop in taxi costs per mile will rapidly bring customer acceptance provided accidents are low.
  • Access to electric vehicles. Not all AV groups will be able to rapidly scale up a robotaxi network due to a shortage of EVs. Large EV makers such as Tesla have an early stage advantage.
  • Company risks – Debt, liquidity, management etc.
  • The usual stock market risks – Liquidity, sentiment.

Further reading


Shared autonomous electric transport will be a massive disruptive trend this decade. Electric robotaxis (especially shuttles) could be extremely profitable and earn anything from US$15,000 to $85,000+ pa per vehicle for robotaxis/ARS companies. For a 1m robotaxi fleet this equates to US$15-85b pa of very high margin gross revenues. Clearly this is a huge prize and explains why the biggest names are chasing it.

Autonomous vehicles will come in all shapes and sizes. There are three key elements for success – Effective software, electric vehicles, and licensing & regulation.

I think the companies that can grow their robotaxi network of EVs (and charging stations) the fastest with the lowest cost base have the best chance of gaining rapid market share, and ultimately being the winners. This gives EV manufacturers such as Tesla an early mover advantage.

Companies that can succeed in ride sharing AVs which carry multiple passengers (e-SUVs, e-mini-vans, e-shuttles, e-buses, etc) will do the best. More people per vehicle means more revenue per vehicle per mile. There is also the delivery sector for AVs that can do very well (includes smaller EVs such as e-drones, e-bikes and e-tricycles, e-trucks, e-semis).

My view for now is that the leading companies in the robotaxi race are Alphabet Google (Waymo), Tesla, General Motors, and Argo.AI (Ford/Volkswagen). I would not be surprised to see Amazon and Apple complete the list in leading AVs in the near future. Added to this group there are several Chinese companies led by Baidu, and include AutoX and Didi. There are also numerous other auto manufacturers and other companies working on AVs. For the software side it looks like Tesla and Nvidia lead.

At some point competition will increase so the first mover and cost advantages are important considerations, as well as getting the right vehicle mix.

The sector still faces various risks but the rewards for success are potentially enormous.

As usual all comments are welcome.

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Disclosure: I am/we are long GOOG, TSLA, Renault [FR:RNO]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.

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United Airlines: There Are Easier Ways To Make Money (NASDAQ:UAL)




With the capital base now firmed up, United (NASDAQ:UAL) should have sufficient liquidity to withstand any challenges into FY21, but the runway may not stretch too far beyond that, in my view. UAL also remains exposed to a great deal of uncertainty around an international and corporate travel recovery post-COVID, which makes this a rather risky name to own. I like the management team (see my prior bull thesis), but I think the easy money has already been made at this point.

3Q Misses the Mark

United posted 3Q20 adjusted EPS of -$8.16, well below consensus expectations, after accounting for COVID-related adjustments (e.g., ~$415m termination benefits and settlement losses, as well as >$1bn from the CARES Act grant) and other one-offs.

Source: Earnings Release

Driving the EPS miss were revenues down 78% YoY on lower capacity, of which passenger revenues were ~84% lower YoY. Domestic yields were weaker across geographies, down ~12.7% YoY, as United continues to price toward volume. From here, United’s loads likely need to improve significantly from the current ~47.8% (-38.3%pts) before airfares can be normalized. Opex was also down ~36% on an adjusted basis, though much of this was down to lower capacity (and fuel).

3Q wasn’t all bad though – cargo continues to be a resounding success, with sales rising ~49.6% YoY. Management deserves a tip of the hat here – post-COVID, UAL has been the most active US airline in driving cargo revenue, with >6,500 all-cargo flights now in operation. Now, this won’t fully offset passenger revenue declines, but it’s a clear step in the right direction.

Source: Earnings Release

4Q Guideposts Look Positive

Looking to 4Q, management offered the following guide – total revenues and passenger revenues down ~67% and 72%, respectively, on ~55% lower capacity. Opex is also guided at down 42%, driving daily cash burn in the $15-20m range (vs. ~$25m in 3Q).

I thought it was interesting that UAL is guiding toward breakeven cash burn ahead of Delta (NYSE:DAL) (recall DAL only expects to breakeven in spring 2021). But given UAL’s higher 4Q burn level, this would seem counterintuitive and likely indicates a more optimistic view on the 2021 improvement at UAL (management still expects demand to remain below ~50% of pre-COVID levels pending a vaccine, though). That said, I would not read too closely into these numbers, given the differing cash burn definitions between the airlines.

Liquidity Runway – Not as Extensive as It Appears

For 3Q, daily cash burn was in line with company expectations at $25m, driving a >$19bn liquidity position as of quarter-end. UAL expects to end the year with ~$16-19bn (depending on the CARES Act loan). That all seems good, but I think the United liquidity runway is a lot less extensive than it appears. Given UAL has a ~$2bn bridge maturing in early 2021 (secured by older aircraft), which needs to be repaid, that brings the liquidity position to $15-17bn using end-FY20 guidance. Assuming minimum liquidity is ~$8bn, that leaves an ~$7-9bn cushion relative to the guided $15-20m/day cash burn (i.e., a ~350-day runway in a bear-case scenario).

The Pace of the Corporate Travel Recovery is a Concern

As I outlined in my DAL piece, the outlook for business travel is a concern. Yet, UAL continues to pin its long-term hopes on corporate travel as its “bread & butter” (similar to pre-COVID). The disparity in views around a corporate recovery is telling – UAL believes corporate travel can recover with minimal structural impairment, which compares to DAL guiding toward an ~10-20% impairment. Both companies also differ on the timing – DAL is guiding toward recovery in spring 2021, with a full recovery two years out. This contrasts with UAL’s call for a recovery in late 2021 or early 2022, with a return to normalcy by 2024.

On a more positive note though, UAL has been flexible in the interim. Case in point – the company’s network is markedly different from its pre-COVID capacity allocation. For instance, UAL continues to add capacity at hubs like Denver and Houston, given the interior hubs are outperforming coastal hubs, as well as point-to-point flying to warm-weather destinations.

Easier Ways to Make Money

Airline stocks are one big unknown (as the contrasting DAL/UAL commentary showed), and post-COVID bounce, I think the risk-reward is a lot less favorable. To be clear, airlines could still bounce along with the industry tide and reopening prospects – in such a scenario, UAL should outperform. That said, UAL’s exposure to international and corporate travel puts it at a relative disadvantage to the low-/ultra-low-cost carriers, while its liquidity runway could come under pressure should things take a turn for the worse. Net-net, I am moving to neutral on UAL. Additional risks include competitive pressures, the Boeing (NYSE:BA) 737 MAX re-certification, and a COVID resurgence.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Cleveland-Cliffs Inc. (CLF) CEO Lourenco Goncalves on Q3 2020 Results – Earnings Call Transcript




Cleveland-Cliffs Inc. (NYSE:CLF) Q3 2020 Results Earnings Conference Call October 23, 2020 10:00 AM ET

Company Participants

Lourenco Goncalves – Chairman, President, Chief Executive Officer

Keith Koci – Executive Vice President, Chief Financial Officer

Conference Call Participants

Lucas Pipes – B. Riley FBR, Inc.

Seth Rosenfeld – Exane BNP Paribas

Matthew Fields – Bank of America

Phil Gibbs – KeyBanc Capital Markets

Alex Hacking – Citi

Karl Blunden – Goldman Sachs


Good morning, ladies and gentlemen. My name is Michelle and I am your conference facilitator today. I would like to welcome everyone to the Cleveland-Cliffs third quarter 2020 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. 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 company website.

Today’s conference call is also available and being broadcast at After 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 in the earnings release, which was published this morning.

At this time, I would like to introduce Lourenco Goncalves, Chairman, President and Chief Executive Officer. Please go ahead.

Lourenco Goncalves

Thank you Michelle and good morning to everyone listening on today’s call. Our third quarter results are a clear demonstration of the resilience of our company and a positive confirmation of the timely actions we took during the second quarter to prepare our operations and our inventories for the recovery of our main market, the automotive industry.

We were significantly affected in Q2 by the unprecedented shutdowns that took place throughout the entire auto sector for an extended period of time of more than 10 weeks. Conversely, the sharp recovery in automotive production is starting in the second month of Q3 made abundantly clear who are the real player for automotive and who are the ones that are less relevant as suppliers or not relevant at all.

With that, our Q3 numbers speak for themselves. The $126 million in adjusted EBITDA represents an over $200 million recovery from Q2. During the most challenging days of the pandemic, we went on the offensive. We prepared our operations to be ready when the uptick in demand inevitably came and our clients would be back asking for just-in-time delivery. Our work in preparation for and ahead of the automotive sector restart gave us the excellent steelmaking cost performance we showed in Q3 as well as the sizable working capital release that contributed to our $150 million free cash flow generation for the quarter.

We used this cash flow to pay down debt, reducing our ABL balance by $150 million in Q3. Since we closed the key acquisition in March, we have cut our ABL balance in half, from $800 million to $400 million. As we have stated before, our number one priority with free cash flow is and will continue to be paying down debt. And with the robust cash flows anticipated for the coming years, we should be able to continue to consistently delever.

Our good third quarter results were still negatively affected by a slower than usual shipment pace during the beginning of the quarter, particularly in July as well as elevated idle costs reflecting Dearborn, North Shore and Mansfield is still being down in the early part of Q3. As such, with shipments at a healthy state and idle costs savings, our financial performance should continue to improve as we progress towards the end of the year. With that, we expect closing 2020 on a high note with strong fourth quarter results.

As we approach the end of 2020, our strong performance is not the only relevant thing we look forward to. Before the end of the year, we expect to close on our acquisition of substantially all the operations of ArcelorMittal USA. Our third quarter results are a clear illustration of the power of base loads, volume and dilution of fixed costs in this industry and in this regard, this deal will only help us improve our profitability.

It has been a little less than a month since we made our announcement and in that short period of time, our Cliffs team has grown even more excited about the potential for optimization of all of those assets under one roof. The combined footprint of legacy Cleveland-Cliffs, AK Steel and ArcelorMittal USA are a steelmakers dream when it comes to both quality and cost efficiencies. We are preparing for a smooth transition and to hit the ground running as soon as the deal close.

Nowadays, people talk a lot in news about technology. I cannot think of anything more technologically advanced than literally using explosives to pull iron ore from the ground in our mines in Michigan and Minnesota and then ending with car parts and components manufactured at our subsidiary Precision Partners using robotic operations equipment and delivering just-in-time to our automotive clients. We are doing exactly this and more, all within our footprint from our Taconite mines to our state-of-the-art, hot-dip galvanizing line and further downstream into our fully-automated manufacturing facilities for automotive parts.

We fully recognize the responsibility that comes with becoming the largest flat-rolled steelmaker in North America. Going back five years ago to my criticism of the irresponsible behavior of the major iron ore miners, I have long been a proponent of value over volume approach. Under my watch, Cliffs has never been and will never be tempted by the stupidity of volume for volumes sake. We will continue to manage our business in the most quality-focused and cost-efficient way, always reaching for real value and return on invested capital. For now, we are working through the regulatory approvals of our transaction. And we will certainly have more to discuss once we have closed the acquisition of ArcelorMittal USA in a couple of months.

Another piece of excitement as we approach the end of the year is the upcoming startup of our state-of-the-art direct reduction plant in Toledo, Ohio. We have completed all construction and installation and we have now entered into the final stage of commissioning the plant. At this time, we are pleased to inform you that we look forward to start producing HBI in a few more weeks.

Our original plan to become a merchant seller of HBI remains the same. However, with our AK Steel existing footprint and the announced acquisition of ArcelorMittal USA, we plan to redirect a relevant portion of our HBI production to in-house utilization in our own EAF, BOF and blast furnace. Nevertheless, we should still have a meaningful tonnage of HBI available to sell to select many new clients.

For EAF, the value proposition of this product is well known. Our 3% carbon content HBI is a top quality metallic feedstock without the impurities that come with scrap and without the complete disregard for environmental compliance embedded in imported pig iron from the usual sources in Russia and in Brazil. The metallization in carbo content of our HBI are very similar to the foreign pig iron that a number of American EAF-based steel companies import to the tune of five million metric tons per year. However, our direct reduction process uses pellets as feedstock instead of dirty sinter and natural gas as reductant instead of coke or charcoal, making our HBI much more environmentally friendly than foreign pig iron.

Our HBI also has a superior logistics advantage over imported pig iron. We will deliver HBI to our clients in sync with their consumption rates and without imported pig iron’s significant freight cost component or multi-month lead time. While we use our HBI in-house at Cleveland-Cliffs in our own EAFs, we also use a portion of our HBI in our blast furnaces to improve furnace productivity, reduce coke rate and costs associated to coke consumption and very importantly, to reduce carbon emissions. Equally relevant, Cleveland-Cliffs is a buyer of scrap and our HBI may also be used in our own BOF as coolant to reduce our scrap costs, every time, the cost of the scrap we buy in the market justifies such use.

Thanks to not having signed any long term contracts with our HBI clients, we were able to keep all this optionality to the benefit of Cleveland-Cliffs and to the benefit of certain select EAF-based steel companies with which we have been working for several months and which will soon start receiving our HBI. Said another way, we fully expect our HBI to become as early as next year, in 2021, a positive differentiating factor between our own blast furnaces and the blast furnaces of other integrated steel mills with no access to HBI as well as a positive differentiating factor between the mini mills that will be our clients for HBI and the other.

Back to our third quarter results, I would like to highlight a few items, starting with the 80% increase in flat-rolled volumes to 1.1 million tons. The increase was almost entirely driven by the automotive market, which made up 73% of our sales. I will repeat, 73% of our sales. This number was 63% in 2018 and 66% in 2019 and is now 73% in Q3 of 2020. It pays off to be able to produce all types of material for automotive clients, particularly exposed parts.

As you all know, our subsidiary company, AK Steel has been supplying exposed parts to the automotive industry for a long, long time and from several different locations. And due to our equipment and our technological capability, it is actually natural for us to produce the high-end material. We don’t need to go out of our way to do it. It also helps to be able to deliver material in time every day and to provide second-to-none technological support from our state-of-the-art R&D center and to be able to produce parts and components in-house.

In sum, we already are where others are trying really hard to get to. Our predictions around the effects of the pandemic on increased automotive demand have come to fruition. Railroad transportation, air traveling and ride-sharing are no longer considered safe by consumers. In fact, private car ownership is growing and traveling by car is trendy again for individuals and families. The U.S. automotive seasonally adjusted annual rate increased from 8.6 million units in April to 16.4 million units in September, even while fleet sales remained down 30%.

The recovery in car sales is consumer-driven and shows no signs to end anytime soon as it also follows people’s migration from concentrated in metro areas to suburban living. We are working closely with our automotive clients to keep up with this increased demand and to help them replenishing their inventory which sits at just 50-day sales of 10 and nine-year low. The inventory situation is even more dramatic for the truck and SUV market which, by the way, accounts for about 83% of our sales to automotive clients.

After their initial restarts in May, the OEMs did not really hit their stride from a steel ordering standpoint until mid-August. So our 1.1 million ton shipping volume still reflects a little black for the first half of the third quarter. That said, our clients have been doing well to an extent. This trend has also been evident in our downstream business, particularly with Precision Partners, whose stamping capabilities are in high demand. In sum, as we are very pleased with the timing of our acquisition of AK Steel and our current role in the automotive market, we are also excited with the acquisition of ArcelorMittal USA. Going forward, we intend for the high-margin automotive space to remain our core commercial book.

On the mining and pelletizing side, our better than anticipated cost reduction and the strong iron ore prices in the international market were the reasons for our good Q3 results through our legacy business. The pricing indexes that act as a proxy for this business and the volatility associated with these indexes have always been a double-edged sword, making predictability of our cash flows a difficult thing. Once the ArcelorMittal USA acquisition is complete, we should be able to secure in-house demand for 90% of our pellet output, significantly reducing the unpredictable influence of commodity prices.

The one index that stands out most is the pellet premium, which has been contaminated beyond repair by incompetent players in the market. Once the acquisition of ArcelorMittal USA closes, this particular index will be meaningless to our results and that’s a good thing. Regardless, after the closing of the acquisition of ArcelorMittal USA, our legacy iron ore business will be as critical as ever for our performance and should continue to provide us a competitive advantage in the form of high-quality in-house custom-made felt.

As a combined company, we will continue and truly emphasize our commitment to sustainable steel making. We are a relevant player in the most environmentally friendly steel industry in the world, the American steel industry. We have seen our integrated steel plants with pellets and soon also with natural gas reduced HBI. Going forward, we plan to provide enhanced disclosures on our carbon emission reductions and overall environmental performance through our upcoming sustainability reports.

With that, I will turn it over to Keith Koci before my closing remarks. Keith, please?

Keith Koci

Thanks Lourenco. As you noted, our dramatic $208 million quarter-over-quarter improvement in adjusted EBITDA was driven by increased steel shipments to the higher-margin automotive business, better cost through increase production volumes and reduced idle costs and also driven by increased pellet prices. After excluding $22 million in one-time items such as acquisition costs, severance and inventory step-up amortization, our earnings per share was in positive territory for the first time this year.

In the steel and manufacturing segment, our automotive carbon shipments increased 164% to 667,000 tons compared to 253,000 tons in the second quarter, driving the bulk of the improvement in our flat-rolled volumes. As noted on our last call, we expect fourth quarter shipments to climb even further and look similar to what was shipped by AK Steel in last year’s fourth quarter.

On the cost side, temporary idle costs in this segment were $39 million, which should be reduced to less than $10 million in the fourth quarter. Also, of our total SG&A of approximately $60 million in the quarter, $37 million of that flowed through this segment, with most of the remainder running through corporate.

As for mining and pelletizing, sales volumes of 4.9 million long tons came in as planned and we expect to see an increase of about 10% into the fourth quarter as furnaces stock up ahead of the winter months. Pricing per long ton of $98 was supported by a higher IODEX, partially offset by a lower HRC average and lower pellet premiums. At current commodity prices, we would expect to see an increase in this rate in Q4, due primarily to the recent run-up in HRC.

Our cost per ton improved quarter-over-quarter due to reduced idle costs. And with all of our mines back in operation, we should see more normalized levels in Q4. Margin eliminations for the third quarter were $29 million, which we expect to look similar in the fourth quarter as we restock pellets at AK Steel ahead of the winter months. This amount should be normalized to close to breakeven throughout next year, absent the impact of the ArcelorMittal USA acquisition.

On the CapEx side, of our $96 million in capital spend during the quarter, about $46 million was related to the HBI plant and about $14 million was capitalized interest with the remainder in sustaining capital. We expect another $125 million in CapEx spend for the remainder of the year, lowering our full year expectation from approximately $535 million to $500 million.

Our immense level of free cash flow generated during the quarter boosted our total liquidity to $1.2 billion between our cash and ABL availability. Along with improved performance across the board, we saw favorable working capital changes of $187 million during the quarter. Due to recovery in business levels we have seen, we expect to invest in working capital in the fourth quarter as well as make contributions to SERP and pension plans, but still expect a free cash flow positive back half of the year as predicted last quarter, which has been further enhanced by favorable market developments.

In closing, the actions we took during the most challenging period of the pandemic are enabling us to benefit from an improved demand environment and working capital release. The robust recovery we foreshadowed last quarter is evident in our third quarter results and we expect further improvement in the fourth quarter.

With that, I will turn it back to Lourenco.

Lourenco Goncalves

Thanks Keith. Before I turn the call over to the operator for questions, I will remind you that as we work to close the ArcelorMittal USA acquisition, I am restricted from discussing the antitrust review process or providing any further guidance on our plans for the business and the operations to be acquired. So we ask in advance for you to delete these questions from your list. Outside of that, I am happy to discuss anything, deal-related or not.

Clearly, we have a lot to be excited about as we approach the end of this year. The accelerating recovery in the automotive space, the commissioning of our direct reduction HBI plant and of course, the pending goal of our second transformational acquisition in less than a year. The combination of all three provides us with all the tools we need to accomplish our operational and financial goals. We look forward to continuing to surprise everyone to the upside on what we are willing to do and capable of doing with this great company.

With that, I will turn it over to Michelle for Q&A.

Question-and-Answer Session


[Operator Instructions] The first question comes from Lucas Pipes. Your line is open.

Lucas Pipes

Hi. Good morning Lourenco and Keith. Great job this quarter.

Lourenco Goncalves

Good morning.

Lucas Pipes

Good morning. I wanted to start out with a big picture question. This week, we have heard from some of your peers about their desire to grow their auto volumes over the coming years. And as a market leader, are you concerned about a loss of share? Or conversely, would you say that there’s even an opportunity for you to work together with these peers as you supply them with the metallics that they need to penetrate these auto markets? I would really appreciate your thoughts on this. Thank you.

Lourenco Goncalves

Lucas, that’s a great question. And again, like I said in my prepared remarks, we are supplying more than three million tons, close to 3.5 million tons to automotive to-date. The acquisition of ArcelorMittal USA obviously will increase dramatically this number. So we are already a big supplier to automotive and we will become a bigger supplier to automotive.

Others are coming and trying to grow market share, rightfully so, totally understandable. They need metallics. We will have metallics for some. We are going to have metallics for everybody. It would be a competitive process. Let’s see who is going to pay the price to be an environmentally compliant supplier to the automotive industry and who are the ones that will insist with pig iron from Brazil or pig iron from Russia, importing the pollution from these two countries into the United States. Let’s see for how long we, as a country, will tolerate this type of bad behavior. So there’s a lot of things in place at this point.

The important thing is that automotive supplies rely on relationship, quality, on-time delivery capability and the capabilities to support future development. All these things that we have been doing for a long, long time and it will be further enhanced as we acquired ArcelorMittal USA. So it will be an interesting thing to see. And it’s a dynamic market. There’s a room for all the good players. We are going to provide feedstocks to the ones that want to play in an environmental compliant way. We will be glad to compete in a level playing field. We hate bad competition, but we cheer good competition. That should help you.

Lucas Pipes

Very helpful, Lourenco. And just to follow-up on this, you mentioned there won’t be kind of enough metallics for everyone. In light of that, has there been maybe increase or decrease, specifically as it relates to pig iron. Obviously, there’s been Ashland in the past. Now you have a broader portfolio of potential assets to choose from, as it relates to pig iron. Any updated thoughts on that?

Lourenco Goncalves

Yes. Look, after the acquisition of ArcelorMittal USA, Lucas, we are going to have a total of 10 blast furnaces. And today, we have three. And of the three that we have, one is down, it’s Ashland. So we are going to be buying assets that have other blast furnace that are down right now and they are probably in a better position to produce pig iron, if and when we decide to so. If we are going to do it or not, to be seen.

I am not going to be producing pig iron to compete against those pig iron from countries that pollute, that’s for sure. That’s 100%. So if the value proposition is there, we will produce. But don’t forget, we are going to have some HBI because not all HBI will be consumed enough. We plan to reduce, for sure, HBI for our own EAF. We plan to, for sure, use HBI for our own blast furnaces. We are not going to sell HBI to blast furnace companies.

So we are going to be the only ones with access to this feedstock. And that being said, we will have a lot of HBI to sell. I want to start with HBI, see how the market behaves and then we will make a decision regarding pig iron.

Lucas Pipes

Very helpful. Thank you Lourenco. And then really quickly, just switching topics. I wondered if you might be able to shed some light on potential proceeds from asset sales? Should we be thinking tens of millions of dollars or hundreds of millions of dollars of potential cash proceeds? Any color would be appreciated. Thank you.

Lourenco Goncalves

I will let Keith answer that. Keith, please go ahead.

Keith Koci

So as far as, you are talking about asset sales, Lucas?

Lucas Pipes


Keith Koci

Well, right, at this point in time, we are not contemplating anything along those lines. What we are buying and what we have now is all considered to be core for what we want to do going forward. So if anything were to come up and become non-core, we would do exactly what we have done in the past which would just be pay down the ABL. But we really don’t have anything on the horizon. And it’s premature to speculate on the asset base. We are very happy with what we see so far and I wouldn’t anticipate any significant, if at all, any divestitures.

Lucas Pipes

Very helpful. Lourenco and Keith, I really appreciate it and keep up the great work. Thank you.

Lourenco Goncalves

Thanks Lucas.


And your next question will come from Seth Rosenfeld. Your line is open.

Seth Rosenfeld

Hi Lourenco and Keith. Thank you for taking our questions today. If I can start out, please, with a question on the outlook for your steel sales to automotive customers. Obviously, this time last year, the AK business was under different management and the steel market was under quite a bit of stress back then. Today, you are in control of these assets and the steel market is in much better shape. Can you walk us through how you view the outlook for automotive contract negotiations going forward? I know this have been touched on in the past and particularly an area of focus for being paid for the value you give your customers. What would you expect as feasible, I guess, going into 2021, please?

Lourenco Goncalves

Seth, contract negotiations with the automotive clients is an ongoing thing. We don’t have a date at which we settle a contract. We have been negotiating. Of course, contracts that we are renegotiating as we speak, are easier to renegotiate than contracts that we negotiated a month ago or two months ago or three months ago because the market in the COVID backdrop are a lot more constructive than they were at one or two or three months ago. So that’s pretty much as much color I would give to you. I am not going to go further than that because that will involve disclosing things that are not really things that we like to disclose.

Seth Rosenfeld

Okay. Very fair. If I can ask a second question, please, on HBI. Thank you for the color on both the ramp-up in Q4 and also the customer mix you are targeting. Can you give us an updated sense of the ramp-up schedule as you expect volumes to hit more capacity over what time horizon, please? And if we can expect, if you are going to speak, going into 2021, would you expect a particular portion of those fees internally? Or would you first target third party sales?

Lourenco Goncalves

Yes. We are approaching production right now because commissioning is happening as we speak. So we will start producing 1.8% carbon, which is the first product that we are going to produce. And all the 1.8% product will be consumed in-house. And this will be for a couple of months.

As we start next year, we will be already transitioning from the 1.8% carbon to the 3% carbon. That’s the product that we would like to put in the marketplace. So we should start having products for clients at the beginning of the second quarter. That’s what we are anticipating.

And by the way, Seth, you have been pushing towards or you don’t have context, you don’t have the context. Now you understand, it was by design and it was all done based on the plan. We were able to buy AK Steel. We were able to agree on a deal with ArcelorMittal USA. So apparently, you can cut contract every time we want, every time we decide to do so.

But at this time around, we like the transactional nature of the market. That’s why we kept all this optionality for us. I hope now that everything is clear, you were able to connect the dots why we didn’t have the long term contracts.

Seth Rosenfeld

Yes. That’s clear, Lourenco. Thank you. And just one final question, please, if I can, an accounting question on the upcoming Mittal transaction. Obviously, there was some confusion on kind of the deal announcement on the different type of pension accounting in yourselves and Mittal, within the $1.5 billion or $3.1 billion of pension liability. When the deal closes in Q4, can you confirm how you expect to account for the pension liability? Would it be closer to Mittal’s reported $3.1 billion or to the economic value that you reported of $1.5 billion, please?

Lourenco Goncalves

First of all, there is no confusion on that. These are different approach to the same thing. That’s abundant to clear. But I will let Keith explain a little bit on that.

Keith, please.

Keith Koci

Yes. Sure, Seth. So as Lourenco mentioned, yes, it’s really, it’s the accounting valuation, which is, as we all know, is on a pretax basis and done consistently and applied for the accounting rules for comparability amongst companies. And then, of course, we used an economic approach to arrive at the value of the equity of AM USA. So as far as what we would expect, if all else being equal, if all assumptions that were put into the accounting numbers at AM USA, if all those assumptions remain the same, then we are going to get the same accounting results that they got. And that was roughly a $3 billion liability on the balance sheet. And then you have an offsetting $700 million plus deferred tax asset on the asset side of the balance sheet. So it’s two different purposes. But we would expect really to come out in accordance with GAAP with a similar outcome.

Lourenco Goncalves

Yes. The important thing right there, Seth, is that not to try to find something that doesn’t exist. This transaction involves two parties that are very sophisticated steel makers, the Mittals and ourselves. Give us credit for that. So we know what we are doing. We understand the numbers and they do too. And it’s a clear win-win situation.

Actually, the verdict of the market is just that. Since the announcement of the deal, the stock that appreciates the most in our space is Cliffs and the second is MT, Mittal. So the market has spoken. And so there is no such a thing, oh, Mittal pulled one on Cliffs or oh, Cliffs pulled one on Mittal. No, that’s not the case. The Mittals actually, they are ArcelorMittal, will stay as a meaningful shareholder of Cliffs, at least for a while. And so there’s no such a thing.

And I hope you understand. There’s no win-win without someone losing. So we also, at least from my perspective, we know what we are doing and we know where we are going, so who is going to be the ones losing for us to win. But between Cliffs and ArcelorMittal, the two participants in this transaction, it’s all win. And we are both very well aware of the numbers and the impact on valuation.

Accounting is a different story. How we pay for, how we meet our financial commitments, it’s very well known. Keith Koci and I have been doing this together for more than 15 years.

Seth Rosenfeld

That’s great. Thank you so much.

Lourenco Goncalves

All right. Welcome.


Your next question comes from Matthew Fields from Bank of America. Your line is open.

Matthew Fields

Hi Lourenco. Hi Keith.

Keith Koci

Hi Matt.

Lourenco Goncalves

Hi Matt.

Matthew Fields

Maybe just a housekeeping one first. So I appreciate the guidance you gave on cash flow, working capital. Dovetailing with the comments from last quarter where you said $100 million working capital positive, it implies an $85 million roughly give back in the fourth quarter, which you kind of alluded to along with pension contribution. Can you just give us a little clarity on the sort of quantum of those two cash items, please?

Keith Koci

Yes. I am sorry. We are looking at a $50 million. $50 million pension payment. It’s really due on January 2, but it will get, because it’s a federal holiday, we will have to make it on December 31. That gets pulled back in.

And as far as the inventory and working capital potential build in the fourth quarter, it remains to be seen how that is. I mean, in a normal fourth quarter, we might see that build because we are putting some pellets in front of the AK furnaces and you might see in a normal year, you might see the OEMs slow down a little bit in December. But there are some indications that not all OEMs are going to slow down.

So while we are saying there is a bit of a chance for a build in Q4, it’s also possible that that number can be close to zero. If the OEMs pull consistently all the way through the holidays, we will probably not build much in the way of inventory in Q4.

Matthew Fields

Okay. Great. That’s very helpful. And then great progress paying down the ABL. I understand you want to keep that open to help fund the equity portion and the working capital efficiency for ArcelorMittal USA transaction. But what’s the trade-off in your mind between paying down ABL and sort of buying back sort of discounted bonds in the marketplace at this point?

Lourenco Goncalves

Matt, look, this thing of buying back bonds at a discount in the market right now, I think that this ship has sailed. This was an opportunity that we took advantage in 2015, 2016 and a few times after that. But this was when we had a big opinion in the market that Cliffs would not survive. So there was really a deep discount that would really make the transaction a very interesting transaction for us.

At this point in time, I don’t see that, to be honest with you. So you have our bonds really trading and very strong. And okay, we might identify a tranche here and there, but not really meaningful from the big scheme of things. So there are other ways to skin that cat and we will be addressing at the right time.

But buying bonds, cents on the dollar, that’s not something that would be available for us at this point. I don’t think so. Everybody understands that we are a company that will continue to grow and our bonds should be value at par.

Matthew Fields

That’s a fair point. We read a couple of things about maybe Nippon potentially selling their stakes in those Indiana JVs to you as part of the overall Arcelor transaction as to Indiana joint ventures. Can you comment on that at all?

Lourenco Goncalves

I cannot. Beyond what’s in the public disclosures, the answer is no. We have that completely squared out. And what I have informed about that is in the press release that we did. But we respectfully are waiting for Nippon Steel to manifest their position and we will act accordingly.

Matthew Fields

Okay. And then just a comment you made earlier, which I thought was kind of interesting. You talked about the transaction as being a win-win. But when you have win-win, somebody loses. Maybe you could just sort of talk about how you see the industry evolving and sort of winners and losers as a result of your transaction with Arcelor?

Lourenco Goncalves

I will talk about the winners, Cleveland-Cliffs and ArcelorMittal.

Matthew Fields

All right. It’s a fair point.

Lourenco Goncalves

The losers, time will tell. But they are out there. And they now have competition. Because before, some were dying on their own. Some others were just flying above the radar. For the ones that were sort of dying on their own, they will continue to die on their own. And for the ones that are flying with no competition, now they have competition. But the good ones will survive, the bad ones will not. And we will see.

Matthew Fields

All right. Thanks very much. I appreciate it. And good luck in closing the transaction.

Lourenco Goncalves

Thanks Matt.

Keith Koci

Thanks Matt.


Your next question will come from Phil Gibbs. Your line is open.

Phil Gibbs

Hi. Good morning.

Lourenco Goncalves

Good morning Phil.

Phil Gibbs

Lourenco and company, the iron ore pricing in 3Q was strong, pretty consistent with the first half of the year. Obviously, iron ore prices were good and hot-rolled prices toward the end of the quarter clearly got better. Were you taking any true-up positively or negatively in the third quarter? Because clearly, the HRC true-up never came, given the recovery?

Lourenco Goncalves

Go ahead Keith, please.

Keith Koci

Yes. Actually, Phil, yes, the HRC came kind of late in the quarter. So there really wasn’t probably, actually it had an offsetting impact on the rate for the quarter. The IODEX is what ran earlier in the quarter and gave us a positive true-up. We always true-up every quarter. We are required to do so. And the net true-up for Q3 was up, I think, roughly $10 million, $20 million affecting the rate, not in a tremendous way, but it had an impact on rate. Based on the pricing we are seeing right now in commodity pricing, we could see a minor small true-up again in Q4, but we are only four weeks into the quarter and we will see how the rest of the quarter plays out.

Phil Gibbs

Okay. So a few bucks a ton positive true-up in 3Q. And I think you said pricing a little bit above the third quarter and the fourth. Is that right?

Keith Koci

That’s right. If commodity prices stay where they are today and run even for the rest of the year, we would get another small increase in rate for the fourth quarter.

Phil Gibbs

Okay. Terrific. And the idling costs that you were carrying when you said those are, I think you said those are lapsing, right, in the fourth quarter for the mining side and then we are almost through a big slug at AK? Is that correct?

Keith Koci

That’s right. What we are left with is about $10 million in the quarter for the steel and manufacturing side. And that’s really just a normal level. That has nothing to do with volume. It has nothing to do with COVID. That’s just, you are going to get $10 million in any quarter just due to routine maintenance. So you can effectively say it’s done in Q4. But there’s always a little bit for just routine scheduled maintenance from time-to-time, half a day a here, quarter a day there, that kind of thing.

Phil Gibbs

And then last question, Lourenco. HBI, when it gets up and running, given your position, I think there’s some water access there from what I remember. Is there an ability to get material into Canada pretty easily if you need to do that?

Lourenco Goncalves

We don’t see the reason for that. In our own locations, we have consumption. And the clients that have been working with us and I will not disclose any new clients, I would just mention one that because he has mentioned probably, Steel Dynamics have been working with us for some time. Steel Dynamics will get HBI. So I think we are going to consume everything in the United States.

Phil Gibbs

Okay. Thanks very much. Great work.

Lourenco Goncalves

Thank you.

Keith Koci

Thanks Phil.


Your next question will come from Alex Hacking. Your line is open.

Alex Hacking

Yes. Thanks Lourenco and Keith. I just want to follow-up on the HBI. Maybe I missed it, but have you quantified the volume that you are going to take internally? What’s that with Mittal?

Lourenco Goncalves

I am sorry, the volume what?

Alex Hacking

The volume of HBI that you would consume internally?

Lourenco Goncalves

Yes. Look, if you need to have a number right now, I would say that we are going to have at a very least one million to 1.1 million tons to sell to the market. So the balance would be consumed internally.

Alex Hacking

Okay. Perfect. Thank you.

Lourenco Goncalves

And then that’s the very least, because 1.9 is our nominal capacity. So I am anticipating using internally a pretty big chunk. But we will still have a lot of HBI to sell.

Alex Hacking

Okay. Thanks. And then I just want to follow-up around your comments around the environmental credentials of your automotive steel. I mean, your point is well taken that your HBI product has significant environmental advantages over imported pig iron. But I mean it’s your assertion that when we look at the whole Scope 1, Scope 2 emissions profile of your automotive steel, that it would be superior to that of EAF automotive steel? Thanks.

Lourenco Goncalves

Well, let’s think. When I talk Scope 2, electric arc furnaces in general and we say that because we have electric arc furnaces and after we acquire ArcelorMittal, we will double the number of EAFs that we have from two to four. So we are very familiar with that.

We buy electricity from the grid. And the grid in the United States is not a grid that is on solar or wind or even nuclear. It’s basically natural gas and it’s still a lot of old school thermal coal. So that’s why Scope 2 for electricity. Electric arc furnace buys that electricity. So we buy too to produce HBI. And we use natural gas. We are not going to be using hydrogen anytime soon in direct reduction or blast furnaces, not here, not in Europe, not in China, not in Japan, not anywhere, just because the technology still doesn’t exist. So our HBI plant, natural gas based, will be state-of-the-art when we start to, from the environmental standpoint as well when we start producing very soon.

So I think we are very well situated to compete with our blast furnaces because we use pellets. We will be using HBI and therefore we will be reducing coke rate. When you reduce coke rate because the HBI is already reduced, so we don’t need coke to reduce, we only need coke to produce heat. So that reduces the need for coke. You are reducing the need for coke, you are reducing C. When you reduce C, you are reducing the generation of CO2. So that’s how the HBI thing works.

On the other hand, EAF not only have electrodes that are graphite and graphite in C but the EAF inject O2 to produce CO2. And that’s why our HBI will have 3% because our electric arc furnace clients asking for higher carbon content. We can produce less but they like 3%, so be it 3% it is. That’s what the clients want.

So when push comes to shove, I am not seeing that much of an advantage between the current EAF injecting O2, generating CO2 and blast furnaces that today already use pellets and will be using HBI. So it will be a pretty interesting thing to see. And even more important, the American steel market is 70% EAF, 30% blast furnace BOF. And altogether, in 2019, 88 million tons.

China alone has 10% of one billion in EAF. That’s 100 million tons. So if EAF was the solution, China would not be polluted. However, China has 90% blast furnaces and all the blast furnaces are sinter, impure sinter. So 900 million tons of steel tons are produced under the worst possible scenario. Nevertheless, the major miners in Australia and Brazil, BHP, Rio Tinto, Fortescue, Vale, they all have targets for Scope 3. And their Scope 3 emissions are all, almost all, in China. So how come they commit with China? China can cut excess capacity. But China will cut their Scope 3 in their emission just because there are Scope 3 emissions for their mines, not going to happen.

So there’s a lot of conversation, long story short, Alex. There’s a lot of conversation, but very little action on this environmental thing. The good news is that starting 2021, not 2030, not 2050, not 2060, I am talking 2021, that next year, they are going to be using HBI. And our HBI now we have less, then 2022, then in 2023, then in 2024. When you get to 2030, we are going to be doing this for 10 years. So we are going to be way ahead when others will get there.

I hope you have got the detail. So it’s hard to condensate and a very good question, but to condensate to the answer in a few minutes.

Alex Hacking

I appreciate your thoughts, Lourenco. And I take your point. It’s a very nuanced discussion with a lot of assets and not easy to condense. So thank you.

Lourenco Goncalves

Thank you.


And our final question for today will come from Karl Blunden from Goldman Sachs. Your line is open.

Karl Blunden

Hi. Good morning. Thanks for the time. I guess some things that have changed since the last time we spoke just, I guess, a month or two ago is that the steel market is looking stronger. Your operating progress is pretty clear in the 3Q results. So maybe some thoughts and you will have some decisions that you can make regarding cash deployment and optimal leverage over time. I would just be interested in your thoughts about what the right level of leverage for the business is going to be, including those legacy liabilities as you ramp-up the combined company?

Lourenco Goncalves

Yes. Look, Karl, everything we do in this company is geared towards reducing the leverage. Even the ArcelorMittal transaction is deleveraged. You can think about that. Prior to the acquisition, we are 4.3 rimes leveraged. After the acquisition, because we are using stock and because of the structure of the acquisition, we are going to be 3.6 times. And that was when we announced.

Now we announced results. We already paid down the ABL. And since we announced the acquisition of AK, we paid the ABL in half, from $800 million to $400 million. So we will continue to deleverage. And EBITDA generation will be all deployed to pay down debt. So there is no second news. There is no, oh, but why did you do this or you can do that. We are not going to do anything. We are going to pay down debt.

And we are going to continue to protect the equipment and do CapEx and all these things are taken into consideration. But the use of excess cash flow will all go towards reducing debt. So you should expect us to be below three very soon. And then we will go from there. So the next target is to bring leverage below three times.

Karl Blunden

All right. That’s helpful. Maybe this is too specific but when you think about the trade-offs between secured and unsecured debt price versus flexibility around covenants and so on, is there a guidepost we should think about in terms of what your priority is there?

Lourenco Goncalves

Yes. Well, another great thing that we are acquiring together with the ArcelorMittal assets, we are improving dramatically our secured capacity but we are also trading in a trend that will allow us to issue unsecured debt easily and at a very low coupon. So all things considered, we are in the right spot in terms of continuing to use all of our expertise in the debt markets and to continue to make the right moves in terms of improving our capital structure and reducing our leverage.

Karl Blunden

That’s very helpful. Thanks very much.

Lourenco Goncalves

Thank you.


We have no further questions in queue. I turn the call back over to the presenters for closing remarks.

Lourenco Goncalves

Thank you very much for your interest in Cleveland-Cliffs. Next time we speak, we will be a bigger company. And we are very excited, very much looking forward to speak with you after the acquisition of ArcelorMittal USA closes. Thank you so much and have a great rest of the week. Bye now.


Thank you everyone. This will conclude today’s conference call. You may now disconnect.

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More U.S. companies offer earnings guidance despite pandemic By Reuters




© Reuters. FILE PHOTO: A street sign, Wall Street, is seen outside New York Stock Exchange (NYSE) in New York City, New York

By David Randall

NEW YORK (Reuters) – With earnings season in full swing, more companies are again offering earnings guidance, signaling to investors that some corporations are adapting to uncertainty about a global pandemic that may extend deep into next year.

Overall, 73 companies in the S&P 500 index have offered guidance this quarter so far, up from last quarter’s 65 pre-announcements but well below the 170 companies that typically offer guidance, according to Refinitiv data. The companies offering guidance are giving the most bullish expectations in Refinitiv data going back to 1997.

“If a company is able to offer guidance it shows that they’re able to have a better idea of what’s coming down the road,” said Charlie Ripley, senior investment strategist at Allianz (DE:) Investment Management.

The market has been buffeted by cross-currents related to the looming Nov. 3 U.S. presidential election, drawn out fiscal stimulus talks in Washington and a resurgent pandemic. Still, investors appear more hopeful in recent months.

Fifty percent of high net worth U.S. investors surveyed by UBS Global Wealth Management voiced optimism on the economy, up from 41% three months prior, with 55% optimistic on stocks, up from 44%. The S&P 500 index is up nearly 7% year to date, including a 2.2% gain since the start of October.

So far this quarter, shares of AT&T Inc (N:), Verizon Communications Inc (N:) and Quest Diagnostics Inc (N:) have rallied after each company gave investors updated guidance on how they expect to fare over the next fiscal year.

“It’s not surprising we’ve had so many beats this quarter because we entered the season with very little guidance,” causing analysts to slash their estimates, said Katie Nixon, chief investment officer at Northern Trust (NASDAQ:) Wealth Management.

“Now we’re seeing how companies expect to be able to navigate through the challenges of the year ahead,” she said.

Investors next week will wade through the busiest period of earnings season so far, with companies ranging from Beyond Meat Inc (O:) and Microsoft Corp (O:) to Pinterest Inc (N:) scheduled to report results.

Microsoft, in particular, should outperform its conservative guidance thanks to strong PC shipments and growth of its Azure cloud computing platform, said J. Derrick Wood, an analyst at Cowen.

“The set-up feels more compelling as the bar was reset last quarter and as macroconditions are improving,” he said.

Nearly 86% of companies that have reported earnings so far have beat analyst expectations, a rate 20 percentage points higher than the average beat rate since 1994, according to Refinitiv data.

Still, investors like Nixon say they are looking past beat rates and focusing on companies that can improve or maintain measures such as refinancing debt, raising cash, and controlling costs regardless of the pandemic’s trajectory or a breakthrough in stimulus talks.

The White House and congressional Democrats remain in negotiations for another coronavirus relief bill, though Senate Majority Leader Mitch McConnell has signaled he may not bring the bill to the floor until after the election.

Companies in the S&P 500 index are likely to post average earnings growth rates of up to 25% next year as they bounce off of prior-year comparisons during the worst of the economic lockdowns, said Steve Chiavarone, a portfolio manager at Federated Hermes (NYSE:).

Companies that can offer positive guidance despite the unknowns are also more likely to weather higher corporate taxes expected if Democratic challenger Joe Biden beats President Donald Trump and Democrats take the U.S. Senate, he said.

“We’re seeing a lot of positive metrics that show that these companies may be able to easily absorb any cut to earnings,” he said.

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