Cleveland-Cliffs Inc. Upgraded To 'B+' On Strong Cash Flow; Outlook Stable

  • Cleveland-based iron ore producer Cleveland-Cliffs Inc. continues to benefit from elevated iron ore prices, and we anticipate the company's Port of Toledo hot briquette iron (HBI) plant will contribute incremental gross profit starting in 2020.
  • In addition, we have increased our iron ore price assumption for the rest of 2019 by $10 to $75 per dry metric ton (dmt).
  • As a result, we are raising our issuer credit rating on Cliffs to 'B+' from 'B'.
  • At the same time, we are raising the issue-level ratings on Cliffs' $392 million in senior secured notes due in 2024 to 'BB' from 'BB-', the various senior unsecured guaranteed notes to 'B+' from 'B', and the senior unsecured nonguaranteed debt to 'B-' from 'CCC+'.
  • The stable outlook reflects our expectation that Cliffs' adjusted leverage will remain 3x–4x over the next year even if iron ore prices fall slightly.
DALLAS (S&P Global Ratings) April 15, 2019--S&P Global Ratings today took the rating actions listed above. The upgrade reflects our expectation that adjusted leverage will remain below 4x over the next 12-24 months. During the first quarter of 2019, average iron ore spot prices were about $8 above our $75 per dmt price assumption for the year, and elevated prices could hold above our price assumption given concerns related to supply-side disruptions. Moving into 2020, we expect the ramp-up of the HBI plant to offset slightly lower external pellet sales by introducing a product with significantly higher contribution margins. This will allow the company to maintain credit measures consistent with the rating, despite our assumption of continued softening in iron ore prices.
The stable outlook on Cleveland-Cliffs reflects our expectation that leverage will remain 3x-4x over the next year. We expect this to be supported by iron ore prices above $75 per dmt, and assuming limited cost overruns associated with the new HBI plant.
We could lower our rating on Cleveland-Cliffs if leverage rises above 4x or EBITDA margins dip below 25%. This could happen if there is a sharp decrease in iron ore demand, which would depress prices and narrow margins. We may also lower ratings if the HBI expansion runs over budget or is extended and is supported by additional debt issuance.
Given our expectations for elevated capital spending and declining iron ore prices, an upgrade is less likely over the next year. Nonetheless, we could raise our ratings if Cliffs decreases its adjusted leverage below 3x, particularly if its discretionary cash flow (cash flow from operations less capital spending and dividends) is positive and the HBI plant expansion remains on track. This could happen if iron prices remain elevated and management uses the company's excess cash flow to prepay its upcoming maturities.
Cleveland-Cliffs supplies iron ore pellets to North American blast furnace steel producers. The company produces iron ore from four mines (operating near full capacity) and pellet plants located in Michigan and Minnesota. For 2018, Cliffs sold over 20 million tons of iron ore, and had about 1 billion tons of proven mineral reserves.
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