Executive Summary / Key Takeaways

• Cleveland-Cliffs is executing a multi-pronged strategy to overcome recent market headwinds and company-specific challenges, targeting a significant financial rebound in the second half of 2025 and a higher run rate in 2026.
• Decisive actions, including idling six underperforming operations, are expected to generate over $300 million in annual savings and streamline the footprint, moving away from unprofitable markets like rail and specialty plate.
• The expiration of a disadvantageous slab supply contract in December 2025 is projected to provide a substantial $500 million annualized EBITDA benefit starting in 2026, removing a significant drag on profitability.
• Leveraging its vertically integrated model and unique assets like the sole U.S. GOES production and Great Lakes HBI plant, Cliffs is positioned to capitalize on expected domestic automotive recovery and trade policy enforcement supporting U.S. manufacturing.
• Despite recent losses and elevated debt following strategic acquisitions, the company maintains robust liquidity and is prioritizing free cash flow generation and asset sales towards rapid deleveraging, aiming to return to its target leverage ratio.

Forging a New Era: Cleveland-Cliffs' Strategic Pivot Amidst Market Volatility

Cleveland-Cliffs Inc. stands as a leading force in the North American steel industry, a position forged through a transformative journey from primarily a mining company to a vertically integrated steel powerhouse. Key acquisitions, notably AK Steel and ArcelorMittal USA in 2020, fundamentally reshaped the company, establishing a footprint that spans the entire value chain from iron ore extraction and processing to primary steelmaking and sophisticated downstream finishing. This strategic evolution has positioned Cliffs as a major domestic supplier, particularly focused on high-value sheet products for demanding sectors like the automotive industry.

Operating within a competitive landscape dominated by players like Nucor (NUE), United States Steel Corporation (X), ArcelorMittal (MT), and Steel Dynamics Inc. (STLD), Cliffs leverages its unique vertical integration as a core differentiator. While competitors like NUE and STLD excel with efficient mini-mill technologies, often demonstrating superior profitability margins (NUE TTM net margin ~7%, STLD TTM net margin ~9% vs. CLF TTM net margin ~-6.35%) and higher asset turnover, Cliffs' ownership of iron ore mines and pelletizing operations provides a degree of raw material cost stability and supply chain control that rivals relying more heavily on scrap or imported metallics may lack. This integrated model, coupled with its significant unionized workforce and established relationships, forms a foundational layer of its competitive moat. The competitive environment is further shaped by external factors, particularly U.S. trade policy. Management has been vocal about the impact of unfair trade practices, including dumping by foreign producers and, in their view, "dumping from the inside" by domestic competitors, which has contributed to market volatility and pricing pressure. The recently implemented steel tariffs are viewed by Cliffs as critical to creating a more level playing field and supporting domestic production.

Central to Cliffs' operational strength is its integrated blast furnace and basic oxygen furnace (BOF) steelmaking capacity, complemented by electric arc furnaces (EAFs) and advanced finishing lines. This allows for the production of a wide range of steel grades, including advanced high-strength steels critical for modern vehicles. A key technological differentiator is the company's position as the first and only producer of Hot Briquetted Iron (HBI) in the Great Lakes region from its Toledo plant. This high-quality, low-carbon intensive metallic is used internally to enhance blast furnace productivity, reduce reliance on coke, and lower carbon intensity, or as a premium scrap alternative in BOFs and EAFs, providing flexibility and cost advantages, particularly as scrap markets tighten.

Furthermore, Cliffs holds a unique position as the sole producer of Grain Oriented Electrical Steel (GOES) in the United States from its Butler Works facility. This specialized product is essential for electrical transformers, a market currently experiencing an extreme shortage driven by grid modernization needs and increasing electricity demand from sources like artificial intelligence. Despite representing only a small portion of total shipment volume (2% in Q2 2024), electrical steel contributed a disproportionately high 15% of total EBITDA in that quarter, highlighting its strategic importance and high profitability. The company also produces Non-Oriented Electrical Steel (NOES) for applications like electric vehicle motors. While R&D initiatives like the DOE-supported projects at Middletown and Butler aim to enhance efficiency and environmental performance (targeting significant GHG reductions), and the company had planned a transformer plant in Weirton to leverage its GOES production (later cancelled due to partner issues), these efforts underscore a strategic focus on leveraging technological capabilities and integrated assets to drive future value and maintain a competitive edge.

Recent Performance and Strategic Optimization

The first quarter of 2025 proved challenging for Cleveland-Cliffs, with results falling below expectations. The company reported revenues of $4.63 billion, a decrease from $5.199 billion in Q1 2024, and a GAAP net loss of $483 million, or $1.00 per diluted share, compared to a net loss of $53 million, or $0.14 per diluted share, in the prior-year period. Adjusted EBITDA for the Steelmaking segment, the primary reportable segment, decreased significantly to $184 million in Q1 2025 from $395 million in Q1 2024. This performance was attributed by management to a confluence of factors, including the lagged impact of very low steel prices from the latter half of 2024 and early 2025, underperformance from certain non-core assets, and a particularly disadvantageous slab supply contract. The decrease in average selling price per ton of steel products to $980 in Q1 2025 from $1,175 in Q1 2024 was a primary driver of the lower gross margin.

In response to these pressures and to optimize its operational footprint for improved profitability and efficiency, Cliffs has taken decisive action in 2025 by announcing the full or partial idling of six operations: the Minorca mine and partial Hibbing Taconite mine (to manage excess pellet inventory), the Hot End at Dearborn Works (while planning to restart the Cleveland Works C-6 blast furnace), Conshohocken, Riverdale, and Steelton. These idles are strategically aimed at streamlining operations, exiting loss-making markets such as rail, specialty plate, and high carbon steel sheet, and enhancing overall cost competitiveness. Management expects these actions to generate over $300 million in annual savings.

The acquisition of Stelco, completed on November 1, 2024, also factored into recent results and the strategic outlook. While contributing incremental volume (Q1 2025 steel shipments increased to 4.14 million net tons from 3.94 million net tons in Q1 2024), Stelco's inclusion also impacted average selling price due to its lower price, spot-oriented mix compared to legacy Cliffs' more contractual automotive business. However, Stelco is viewed as a low-cost producer that diversifies Cliffs' customer base into Canadian service centers and industrial markets, enhancing resilience, particularly in non-automotive segments.

Liquidity remains robust, with $3.0 billion available as of March 31, 2025, combining cash and ABL facility availability. The company successfully issued $850 million in 7.50% Senior Notes due 2031 in February 2025, utilizing proceeds for general corporate purposes, including ABL repayment, demonstrating continued access to capital markets. While leverage metrics are currently above the target following the Stelco acquisition, the company has a stated priority of rapidly deleveraging using free cash flow and potential proceeds from non-core asset divestitures, building on a track record of debt reduction after previous large acquisitions. Capital expenditures are also being managed, with the 2025 CapEx guidance reduced to $625 million, primarily focused on sustaining capital and adjusted strategic project scopes.

Outlook and Investment Thesis Drivers

Looking ahead, Cleveland-Cliffs anticipates a significant improvement in financial performance, particularly in the second half of 2025, with results expected to reset higher in 2026. This optimistic outlook is underpinned by several key drivers and strategic initiatives coming to fruition.

Firstly, the expected recovery in the domestic automotive market, coupled with efforts to reshore manufacturing and recent automotive tariffs, is anticipated to increase demand for domestically produced steel. As a leading supplier of automotive-grade steel, Cliffs expects to benefit significantly, projecting an annual EBITDA uplift in the range of $250 million to $500 million, starting incrementally in the second half of 2025 and fully impacting results in 2026.

Secondly, the full impact of the recently announced asset idlings is expected to materialize in the second half of 2025. These actions, aimed at eliminating losses from underperforming operations and streamlining the footprint, are projected to yield over $300 million in annual savings, contributing directly to improved profitability.

Thirdly, a major catalyst for 2026 is the expiration of the disadvantageous slab supply contract with ArcelorMittal/Nippon Steel Calvert in December 2025. This contract, which has weighed on margins, is expected to be replaced by higher-margin business, providing an estimated $500 million in annualized EBITDA benefit starting in 2026.

Combined, these self-help initiatives represent a substantial potential improvement in annual EBITDA, positioning Cliffs for a strong financial rebound. Furthermore, management expects domestic steel demand to grow, supported by trade policy enforcement and broader economic recovery. Cost performance is also expected to improve, with a target of a $50 per ton year-over-year reduction in average unit costs in 2025 compared to 2024, primarily driven by the Stelco cost mix and operational efficiencies from the idles, with the majority of the benefit realized in the second half of the year. SG&A expense is also targeted lower at $600 million for 2025.

The investment thesis for Cliffs hinges on the successful execution of this strategic optimization plan. While recent results reflect challenging market conditions and the costs associated with addressing underperforming assets, the expected benefits from automotive recovery, cost savings from idles, and the expiration of the burdensome slab contract provide a clear pathway to improved profitability and cash flow generation. The company's vertically integrated model, technological capabilities (GOES, HBI), and focus on value-added products position it to capitalize on favorable market trends and trade policy support for domestic manufacturing. The commitment to debt reduction further strengthens the financial profile as profitability improves.

Risks and Challenges

Despite the clear strategic pathway and potential for a significant rebound, Cleveland-Cliffs faces several risks and challenges that could impact its performance and the realization of its investment thesis. Market volatility remains a primary concern, with fluctuations in steel, scrap, and iron ore prices directly affecting revenues and costs. While tariffs provide some support, global economic conditions, excess steelmaking capacity, and import levels continue to pose risks.

Execution risk is inherent in the strategic optimization plan, particularly regarding the successful idling of multiple facilities and the realization of the projected $300 million in annual savings. Unexpected costs or operational disruptions during this transition could impact financial performance. The expected benefits from the automotive sector are dependent on broader economic conditions and consumer demand, which could be influenced by factors like interest rates and employment levels.

The company is also exposed to litigation risks, including ongoing antitrust and commercial disputes such as the JSW Steel litigation and the U.S. Steel/Nippon Steel litigation, which could result in unfavorable rulings or significant costs. Environmental obligations and compliance with evolving regulations also represent potential liabilities.

While the expiration of the Calvert slab contract is expected to be a significant positive, the ability to fully replace that volume with higher-margin business depends on market conditions and customer demand at that time. Furthermore, the status and scope of strategic projects like Middletown and Butler, while supported by the DOE, are subject to change based on evolving energy priorities and negotiations, potentially impacting future capital expenditures and expected benefits.

Maintaining satisfactory labor relations is crucial, given the highly unionized workforce. Although relationships are currently highlighted as a strength, potential disputes could disrupt operations. Finally, while liquidity is currently strong, a prolonged downturn or unexpected cash needs could strain resources, particularly as the company prioritizes debt reduction.

Conclusion

Cleveland-Cliffs has navigated a period of significant market headwinds and company-specific operational challenges, resulting in disappointing recent financial performance. However, the company is not standing still. By taking decisive actions to optimize its operating footprint through targeted idles, strategically repositioning its portfolio with the Stelco acquisition, and anticipating the significant uplift from the expiration of a burdensome contract, Cliffs is actively addressing the core issues that have weighed on its results.

The investment thesis for Cleveland-Cliffs is centered on the expected financial rebound driven by these self-help initiatives, coupled with anticipated improvements in the market environment supported by trade policy and a recovery in key end markets like automotive. Leveraging its unique vertical integration, technological assets like GOES and HBI production, and strong labor partnerships, the company is positioned to capitalize on a potentially more favorable landscape for domestic steel producers. While risks remain, particularly market volatility and execution challenges, the quantifiable benefits expected from the strategic actions provide a clear pathway towards improved profitability, cash flow generation, and a stronger competitive standing in the years ahead.