Cleveland-Cliffs Looks to AK Steel Acquisition, New HBI Plant for Positive Outlook in 2020

Researched by Industrial Info Resources (Sugar Land, Texas)--Iron-ore-pellet producer Cleveland-Cliffs Incorporated (NYSE:CLF) (Cleveland, Ohio) is looking toward two major developments coming to fruition in 2020. The acquisition of AK Steel Holding Corporation (NYSE:AKS) (West Chester Township, Ohio), as well as the startup of the new Toledo hot-briquetted iron (HBI) production plant, are expected to transform the company, executives said on February 20. Industrial Info is tracking four active Cleveland-Cliffs projects worth $1.3 billion, and 25 AK Steel projects worth $196 million.

Click on the image at right showing Cleveland-Cliffs and AK Steel project activity by sector.

The two companies announced on February 21 they have received all necessary regulatory approvals for the merger, a stock-only deal in which AK Steel will continue as a wholly owned subsidiary. And with the needed clearances, the transaction is currently scheduled to close March 13.

With its purchase of AK Steel, Cleveland-Cliffs is set to become a vertically integrated steel supplier, from iron ore production to finished steel products, mainly for the automotive industry. Lourenco Goncalves, Cleveland-Cliffs' chief executive officer, noted a shift from combustion engine to electric vehicle (EV) production as a profit-driver for the company. "We are going to be developing EVs and materials for EVs inside our R&D Center in Middletown, Ohio. And actually, we are going to start it right away. So it's coming. AK Steel will be a big beneficiary," Goncalves said.

In its fourth-quarter and year-end earnings call, Cleveland-Cliffs reported full-year 2019 net income of $293 million, compared with $1.1 billion in 2018. However, the 2018 amount was inflated by a $461 million release of a U.S. tax valuation allowance and a one-time gain of $228 million for historical changes in foreign currency transaction. Consolidated revenue for 2019 amounted to $2.0 billion, compared with $2.3 billion the year prior.

AK Steel reported an adjusted net income of $107.4 million for full-year 2019, compared with $200.5 million in 2018. The company's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for 2019 was $446.5 million, compared with $563.4 million the year before, a result of lower steel spot market prices, lower shipments to the automotive and distributor and converter markets, and higher costs for iron ore, coal, and coke in 2019.

Meanwhile, the highly anticipated Toledo HBI plant will begin commercial operations in June, and is expected to have a nameplate capacity 1.9 million tons of HBI in 2021 (the first full calendar year of operation), for electric arc furnace clients in the Great Lakes region, including Indiana, Ohio, Kentucky and Illinois, and states further south, such as Mississippi and Arkansas. And in a few months, the HBI feedstock has the potential to replace pig iron from Russia and Ukraine.

Cleveland-Cliffs' targeted capital expenditures (capex) for 2020 is $350 million-$400 million, which includes the remaining spend for the HBI plant, compared with a peak spend of $656 million in 2019.

For more information on the HBI plant, see Industrial Info's project report.

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