As we shared near the start of the month, the AK Steel mill in Mansfield was idled on April 4 on an extended outage.
The mill’s parent company, Cleveland Cliffs, Inc., shared an update on its total operations on Wednesday that includes the impact of COVID-19, cost cutting measures it has undertaken, and preliminary first quarter 2020 results:
Cliffs’ Chairman, President, and Chief Executive Officer Lourenco Goncalves said, “The constantly evolving COVID-19 situation has been an ongoing backdrop for the actions we have taken to keep our employees and our Company healthy for the long term. With these goals in mind, we have made several adjustments to our operating profile and workplace safety procedures.” Mr. Goncalves added, “Automotive manufacturing has always been the backbone of the Cleveland-Cliffs business, even before the acquisition of AK Steel. As such, we have performed stress tests of our liquidity in the most extreme scenarios imaginable to us, which includes a prolonged demand outage and irrational prices for iron ore and hot rolled steel. After performing these stress tests, we have concluded that we are very comfortable with our forward looking liquidity position.”
Cliffs’ business updates include the following:
Steel and iron ore are considered essential by states in which the Company operates. Iron ore pellet, automotive (limited) and non-automotive steel shipments continue to be delivered as customers for all of these products continue to place orders.
Liquidity Stress Test
In the “extreme stress case” scenario and not including proceeds from any additional financing, liquidity reaches a trough of $370 million in September 2020 and then improves. Management notes that it does not expect the assumptions below to materialize.
Extreme Stress Test Assumptions:
- U.S. automotive plants remain shut down through the end of June 2020
- Slow recovery in production during second half of 2020
- Approximately 6 million new automotive builds from April 1, 2020 through December, 31, 2020
- Full-year AK Steel flat-rolled shipments of approximately 3 million short tons (from March 13, 2020)
- Full-year third party pellet sales of approximately 12 million long tons
- US HRC: averages $480/t in Q2 and Q3; $525/t in Q4
- IODEX: averages $70 between April 1, 2020 and December, 31, 2020
- Atlantic Basin Pellet Premium: averages $29 between April 1, 2020 and December, 31, 2020
- Cash burn rate: averages approximately $120 million per month during second quarter. Improves if shutdowns continue (as fixed costs become variable)
COVID-19
- Employees check temperatures and symptoms before entering workplace each day
- Work-from-home policy for those who are able was put in place ahead of government guidelines
- Overly stringent social distancing procedures were put in place within operating facilities
- Deep cleaning of operational facilities 24 hours per day
Impact on Operations
- Temporarily idled until market conditions improve:
- Dearborn Works
- All Precision Partners Facilities
- Toledo HBI Construction
- Approximately 65% of AK Tube Production
- Extended outage:
- Mansfield Works
- Butler Works
- Indefinitely idled: AK Coal
- Production to be idled in mid-April:
- Northshore mine (planned restart in August 2020)
- Tilden mine (planned restart in July 2020)
Cost Cutting/Liquidity Relief
- Variable costs (approximately 75% of total) largely eliminated at idled facilities
- Ability to reduce/defer annual capital expenditures by approximately $200 million in stress case
- Run rate synergy achievement of $120 million per year accelerated to October 2020 (previously March 2021)
- Working capital release from reduction of finished pellet inventories related to idle of Northshore and Tilden mines
- Plan to suspend future dividends (pro forma cash obligation of ~$100 million per year)
- 40% pay decrease for CEO
- Anticipate ~$150 million in liquidity relief from CARES Act (AMT refund acceleration, deferral of Social Security tax and pension contributions)
Preliminary First Quarter Results (only includes AK Steel results from March 13, 2020 to March 31, 2020) 1
- Revenues: approximately $345 million to $375 million
- Adjusted EBITDA 2: approximately $15 million to $25 million
- Mining and Pelletizing Sales volume: approximately 2.1 million long tons (including third-party sales volume of approximately 1.4 million long tons)
- Flat-rolled steel shipments: approximately 200,000 short tons (only including sales from March 13, 2020 to March 31, 2020)
- Pre-merger AK Steel flat-rolled steel shipments: approximately 1.1 million short tons for the period January 1, 2020 to March 12, 2020 (not included in revenues)
Liquidity (as of March 31, 2020)
- Total Liquidity: approximately $1 billion
- Cash: approximately $200 million
- ABL Availability: approximately $800 million
- Borrowing Base: approximately $1.8 billion
- Letters of Credit: approximately $200 million
- 1We have not yet finalized our financial results for the three months ended March 31, 2020. However, based on our unaudited preliminary analysis, we estimate that we will have the following selected results for the three months ended March 31, 2020.
2We are unable to reconcile, without unreasonable effort, our forecasted range of adjusted EBITDA to its most directly comparable GAAP financial measure, net income, due to the uncertainty and inherent difficulty of predicting the occurrence and the financial impact of items impacting comparability. For the same reasons, we are unable to address the probable significance of the unavailable information.
