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Steel Tailwinds Will Beat Iron Ore Headwinds for Cleveland-Cliffs

In recent weeks, Cleveland-Cliffs (NYSE:CLF) has more or less traded sideways. CLF stock is still down a fair amount from its high of $26.51 per share….

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This article was originally published by Investor Place

In recent weeks, Cleveland-Cliffs (NYSE:CLF) has more or less traded sideways. CLF stock is still down a fair amount from its high of $26.51 per share. This is mostly due to falling iron ore prices caused by a cut in China’s steel output.

Source: Pavel Kapysh / Shutterstock.com

Fortunately, shares in Cleveland-Cliffs, which produces both iron ore and steel, seem to be finding support between $20 and $21 per share. With this, now may be the time to buy the dip.

Yes, its iron ore business may face headwinds from what’s playing out in China. But this hiccup will be countered by tailwinds in Cleveland-Cliffs’ steel business. These include the coming U.S. infrastructure boom plus another driver of demand set to appear next year.

The best part is that with all eyes on the iron ore situation, CLF stock trades at a discounted valuation. With a forward price-to-earnings ratio in the single digits, this is far from a “priced for perfection” situation. It’s time to buy before the market’s opinion shifts back.

The Good Far Outweighs the Bad in CLF Stock

Considering its transformation into America’s largest flat-rolled steel company, why is the iron ore situation weighing so heavily on Cleveland-Cliffs?

Yes, after the mega-mergers it completed with two steel producers last year, the company has seen a major change in its revenue mix. That said, as I discussed a few weeks back, CLF stock still has substantial exposure to iron ore.

While no longer Cleveland-Cliffs’ main business, iron ore does make up a fair portion of its annual sales. Given this factor, it makes sense why the falling price of iron ore has caused a slide in the price of CLF stock.

The silver lining, however, is that concerns about this headwind are overblown relative to Cleveland-Cliffs’ overall prospects. Continued troubles in the iron ore space pale in comparison to the big tailwinds emerging for the company’s steel production operations.

On top of the infrastructure boom, there’s another factor that points to more demand and strong operating performance for steel in the forthcoming quarters.

The market is underestimating Cleveland-Cliffs’ future results, as seen from the stock’s low forward multiple. Once investors and analysts realize they’re wrong, shares will be back on their way to higher prices.

Cleveland-Cliffs Can Easily Beat Expectations

Admittedly, there is some logic behind CLF stock trading for 4.1x this year’s projected earnings. It’s having a banner year in 2021.

But looking ahead to 2022, the sell side is not so sure. Analyst estimates project a fall in earnings per share (EPS) from $6.04 to $3.99.

Steel stocks like this one typically trade at low valuations due to the cyclical nature of the industry. As a result, Cleveland-Cliffs might not be as “deep value” as it looks on a stock screener.

Nevertheless, that doesn’t mean a big rise in its price isn’t in the cards for CLF stock. There is a path for it to deliver results that handily beat expectations.

Outside of increased infrastructure spending, there’s something else that points to strong results for Cleveland-Cliffs next year: a “return to normal” for automotive production.

This year, auto production has been impacted by the global shortage in semiconductors. But as this supply shock resolves starting next year, pent-up demand for vehicles could lead to greater-than-expected demand for galvanized steel, which is used to build cars and trucks.

Additionally, don’t forget about the company’s “monumental” debt reduction plans between now and year’s end. Cutting down its debt could have a materially positive impact on earnings as well, as paying down debt reduces its interest expense.

Some analysts, like Goldman Sachs’ Emily Chieng, are aware of these factors. She highlighted both its automotive and de-leveraging catalysts as reasons behind her recent “buy” rating on the stock.

But until the rest of the street comes to the same conclusion, the opportunity remains to get Cleveland-Cliffs at a favorable price.

The Verdict on CLF Stock

Investors right now may be lukewarm at best about Cleveland-Cliffs. Until the situation with iron ore prices is resolved, this is likely to remain the case. But in the months ahead, there are plenty of catalysts set to play out that could do wonders in terms of shifting investor sentiment.

Coming in with an A-rating in Portfolio Grader, it’s clear the market has it all wrong when it comes to CLF stock. Buy it now before they change their mind and send its price soaring.

On the date of publication, Louis Navellier had a long position in CLF. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Louis Navellier, who has been called “one of the most important money managers of our time,” has broken the silence in this shocking “tell all” video… exposing one of the most shocking events in our country’s history… and the one move every American needs to make today.

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Economics

Aluminum Shortages Next As “Magnesium Supply Dries Up”

Aluminum Shortages Next As "Magnesium Supply Dries Up"

This week, the largest US producer of aluminum billet used to make automobiles and…

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Aluminum Shortages Next As "Magnesium Supply Dries Up"

This week, the largest US producer of aluminum billet used to make automobiles and building supplies told customers and business associates that output capacity might be curtailed in 2022 due to a lack of magnesium supply.

"In the last several weeks, magnesium availability has dried up, and we have not been able to purchase our required magnesium units for all of 2022," Matalco Inc. President Tom Horter said in the letter obtained by S&P Global Platts

Difficult-to-source supplies of raw materials and soaring energy prices are adding to the headwinds, Horter said in the letter. 

"The purpose of this note is to provide this advanced warning that, if the scarcity continues, and especially if it becomes worse, Matalco may need to curtail production in 2022, resulting in allocations to our customers," he said. 

Horter said his company will source as much magnesium as possible and other raw materials, such as silicon, to maintain its planned production output for 2022. The warning comes as he told customers they should have contingency plans if supplies tighten. 

Aluminum billet cannot be produced without magnesium, which is a strengthening agent and allows it to be strong enough to be used in structural applications, such as automobile frames, engine blocks, and body panels. 

"We will provide an update in a couple of weeks," Horter said. "In the meantime, you may want to consider letting your customer base know of this silicon and magnesium availability crisis and also let them know that other products or inputs needed for making billet or slab may also reach a crisis point."

Horter added other challenges such as the cost of energy, labor, and shipping are increasingly mounting. 

Alcoa is another major US aluminum producer that also warned about shortages of magnesium and silicon. Without these two ingredients, both manufacturers cannot produce aluminum billet products. A reduction in US output would tighten global supply even further. 

The macro backdrop of the aluminum industry is a complicated one. First, a military coup in Guinea last month stoked concerns over the supply of bauxite, a sedimentary rock with high aluminum content. Then the closure of energy-intensive smelters in Asia and Europe have tightened global supplies and forced LME prices to record highs. 

The latest surge in industrial metals will continue to pressure inflation higher. 

So much for the Federal Reserve's "transitory" narrative. Higher costs will push up prices for new cars and other products made of aluminum.

Tyler Durden Fri, 10/15/2021 - 22:10
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Economics

5 Canadian metal stocks to buy

Highlights Over 43 per cent of the global mining firms are listed on the Toronto Stock Exchange and Toronto Stock Venture Exchange A stock mentioned…

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Highlights

  • Over 43 per cent of the global mining firms are listed on the Toronto Stock Exchange and Toronto Stock Venture Exchange.
  • A stock mentioned here surged by 104.8 per cent in the past year.
  • One of the companies listed earned a gross profit of US$380.2 million in Q2 2021, an increase of US$238.1 million year-over-year.

The Canadian headline index surged by 201 points or 0.97 per cent before closing at C$ 20,819. 94 on Thursday, October 14. Base metals, information technology, and the industrials sectors traded in the green.

Over 43 per cent of the global mining firms are listed on the Toronto Stock Exchange and Toronto Stock Venture Exchange. Here’s a compilation of five TSX-listed metal stocks to consider.

Also read: Top 5 TSX value stocks to buy

  1. Teck Resources Ltd (TSX: TECK)

Teck Resources is engaged in the development and mining of mineral properties. Its business units are focused on zinc, copper, coal, and energy.

Its gross profit increased to C$ 233 million in Q2 from the steelmaking coal business segment.

The company posted an adjusted EBITDA of C$989 million in the second quarter of fiscal 2021, up by 104 per cent year-over-year. Its liquidity as of July 26, 2021, stands at C$6.1 billion.

The stock trading C$ 39.10 apiece holds a P/E ratio of 106.10 as of October 15. The stock’s one-year growth stands at 104.8 per cent and nearly 56.3 per cent YTD.

  1. First Quantum Minerals Ltd (TSX:FM)

The stock worth C$ 27.68 apiece grew by nearly 125 per cent in the past year and 21.13 per cent year-to-date. First Quantum Minerals produces gold, zinc, nickel, copper, and cobalt.

It has mining operations in Australia, Africa, and Latin America.

Also read: Top 3 Canadian smallcap stocks to buy this fall

Its cash flows from operating activities of US$679 million in Q2 2021 were US$524 million higher than Q2 2020.

First Quantum stocks hold a P/E ratio of 46.70, as per TMX data.

The mining firm had US$1.79 billion in net unrestricted cash and cash equivalents at the end of the quarter.

  1. Labrador Iron Ore Royalty Corporation (TSX:LIF)

In the second quarter of fiscal 2021, the investment company posted a royalty revenue of C$ 78.8 million, compared to C$ 46.2 million a year ago.

Its equity earnings from Iron Ore Company of Canada were C$66.2 million in Q2 2021, compared to C$28.7 million YoY.

The steel firm’s stocks surged by nearly 40 per cent in the past year, with a P/E ratio of 7.10.

The company pays a quarterly dividend of C$ 2.10 per stock, with a three-year dividend growth of 39.51.

Also read: This TSX oil & gas stock skyrocketed 285% in a year!

  1. Lundin Mining Corporation (TSX: LUN)

The mining firm’s stocks traded C$10.28 at close on October 14. The diversified base metals producer has operations in Chile, the US, Sweden, Portugal, and Brazil.

Lundin Mining’s gross profit for Q2 2021 was US$380.2 million, an increase of US$238.1 million year-over-year.

The Canadian mining leader had cash and a net cash balance of nearly US$250 million and US$ 190 million as of July 28, respectively. The firm has a return on equity (RoE) of 15.07 per cent and its current dividend yield of 3.5 per cent.

The stocks surged by over 34 per cent in the past year and over 12.8 per cent quarter-to-date.

  1. Turquoise Hill Resources Ltd (TSX:TRQ)

The firm through its principal asset, the Oyu Tolgoi copper-gold mine, is engaged in the exploration, development, and mining operations.

The international mining company posted US$ 317.8 million in revenue from the operating segment for the three months period ended June 30.  The stocks delivered an ROE of 4.63 per cent and a return on assets of 3.25 per cent on October 15.

The scrips have added nearly 80.37 per cent of growth in the past year. It closed at C$19.12 on October 14.

Also read: The Best Cryptocurrencies of 2021

Bottom line

With inflation looming, gold and base metals prices could hold steady or grow. However likely this is, it’s not a given.

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Economics

Milton Friedman and “Zero Cost” Expanded Government

President Joe Biden has declared that his proposed $3.5 (or is it $5.5?) trillion “Build Back Better” social agenda will have a “zero” cost—as…

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President Joe Biden has declared that his proposed $3.5 (or is it $5.5?) trillion “Build Back Better” social agenda will have a “zero” cost—as in $0.00! Why?  Because the added expenditures will be covered by increased revenues drawn from businesses and the “rich.”

The President and other progressive Democrats, who have parroted the Biden claim, should reflect on the wisdom of the late Milton Friedman, who had a knack for crystallizing stark economic truths.

During the early 1980s, when supply-side economics was the rage, Reagan Republicans promoted tax-rate cuts as a means of reviving the economy (because the cuts would increase people’s incentives to work, save, and invest), which Friedman believed distracted them from concern about what was happening to government outlays, which continued to rise throughout the decade.

Friedman framed the fiscal issues of the day differently, and with far greater clarity than anyone else. He admonished everyone (including President Reagan’s advisors), to “Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax. . . If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing.”

And make no mistake, government outlays have risen substantially, especially lately, increasing from $3.9 trillion in 2016 to $6.6 trillion in 2020 (including Covid outlays). Even without passage of the reconciliation bill, the White House estimates that federal outlays will continue their upward march through 2026.

Friedman understood that the real taxes on the economy ultimately come in the form of government outlays siphoning off resources for public purposes that would otherwise be used in the private sector. If the government chooses to build a bridge or road, the concrete and steel could have been used to produce houses and office buildings.

How the added government outlays are financed—through taxes, newly printed dollars and inflation, or debt—is of secondary importance, perhaps only marginally affecting people’s incentives. The costs of expanded government outlays will be incurred through the shift of resources from private-directed uses to public-directed uses.

By declaring that his “Build Back Better” agenda has no costs, President Biden must be confused—if he truly means what he has been saying. He may think that the dollars expended for an expanded array of welfare recipients will come only at the expense of the “rich.” Not so at all. Those transferred dollars will enable the recipients to buy goods they could not otherwise buy, which means they can pull resources away from the production of the variety of goods that ordinary Walmart (and Home Depot and Kroger) shoppers, many with far less-than-privileged means, would have bought.

 


Richard McKenzie is an economics professor (emeritus) in the Merage Business School at the University of California, Irvine. His latest book is The Selfish Brain: A Layman’s Guide to a New Way of Economic Thinking (2021).

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