WASHINGTON – Q3 earnings season continues this week with good, bad and ugly results. Which leads to today’s story. Prior to the Great Recession, Cleveland-Cliffs (trading symbol: CLF) was a big, swinging hot materials stock. The shares were known for their volatility and for paying a great dividend. At least in good economic times.
This (obviously) Cleveland, Ohio-based mining firm specialized in providing loads of taconite pellets – best described as a type of semi-refined, high iron-content ore – to the world’s steel industry.
In its current form, Cleveland-Cliffs is much smaller now and well-along on its road to recovery from the Great Recession. But its shares can still get as volatile as hell. CLF investors – including yours truly – found that out yet again this week. The company reported great Q3 earnings. Low-priced CLF shares soared, percentage-wise. And then crashed, resulting in a surprisingly bad stock trip. Quite the Q3 shocker.
Buying and selling the volatile shares of Cleveland-Cliffs Inc.
I’m in and out of these shares from time to time. I want a foot hold in the Materials Sector. But, in the current tariff-laden environment, I don’t want to hold too heavy a position.
Cleveland-Cliffs seemed a good way to go. Its general customer is the steel industry: not always the best place to park your hard-earned investment dollars. But at the moment, both sectors are at least moderately protected by tariffs and the Trump administration’s vigorous anti-dumping efforts against China and other iron ore and steel pirates.
Another reason I revisit these shares from time to time? A bit of nostalgia for times past. To avoid student debt back in the day (what a concept!) I worked summers sailing in the Great Lakes Merchant Marine fleet. Steel and mining companies floated an armada of long, ungainly ore freighters primarily to load various types of iron ore and transport that ore to the cities whose steel mills needed the product.
These ships, ranging in length from several hundred to 1,00 ft., are always called “boats” in the Great Lakes region.
How stuff is mined and made by America’s invisible Deplorables
The iron ore boats would load up on ore primarily from the Duluth-Superior and Silver Bay ports on Lake Superior; or somewhat less often from smaller ports like Escanaba and Marquette, Michigan, whose harbors were on Lake Michigan and Lake Superior respectively.
These heavy cargo loads would then travel in the cargo holds of Cleveland-Cliffs’ boats and other vessels from these “upper” ports down to “lower” ports like Detroit, Michigan; Toledo, Lorain, Cleveland and Ashtabula, Ohio; and Buffalo, New York. There, the contents were offloaded into railcars, which hauled the ore off to the many steel mills associated with these Great Lakes cities and other relatively nearby locales.
The economic ups and downs of Cleveland-Cliffs
Cleveland-Cliffs – or “Cliffs” as we’d call the company for short – also branched out internationally, taking over iron ore operations in Canada and Australia and branching into coal mining and hauling as well. This was still big business in the 1960s and 1970s and remained so into the new century. Although the US steel business itself was in general decline. But Cliffs made up for that by becoming a large presence in the international iron ore and coal markets.
But then we had the Great Recession, which caused America to overreact and elect its first-ever globalist, warmist and likely Marxist president. Not only did the Great Recession devastate what heavy industry remained in the US. When it came to putting together his faux “economic recovery” effort, Barack Obama made sure to tell both heavy industry, and coal miners in particular, that their sun was setting. And fast. Particularly for coal.
Caught with its business pants seriously down, Cliffs was devastated and very nearly went bankrupt. Those swell dividends investors loved were swiftly canceled. The stock – once priced over $100 per share – tanked like the iron ore-laden SS Edmund Fitzgerald. And the company peeled off the bulk of its international expansions at bargain basement prices.
They wisely exited coal entirely, given the devastation the Obama administration visited on that economic sector. They also exited Australian mining and sold off a poorly thought-out investment in at least one huge Canadian ore-mining complex.
Adjusting to hard times under a socialist government regime in The Swamp
Cliffs survived, first as “Cliffs Industries,” and then later reclaiming its old Cleveland-Cliffs moniker. New management painfully but steadily cleaned up the horrendous debt mess that caused its shares to hover for years near the status of a penny stock. And lately, the company has actually become profitable again as we just learned, re: Q3. Even better, Cliffs recently restored at least a tiny piece of its once big dividend as well.
Giving short-schrift to Cleveland-Cliffs shares
Cliffs’ still cheap shares (dollar wise) have been fitfully recovering. But the shares still suffer the pernicious influence of a massive short position. It probably arose from the hatred for the stock that grew during the Obama interregnum. These stalwart perma-shorts stand today at roughly 35% of the company’s outstanding shares, which continues to put tremendous pressure on them, even when its balance sheet looks pretty good for a resources company.
Which is why we got back in, below $7 per share for the most part. We were encouraged by the company’s great Q2 numbers earlier this year and felt that even though the economy is clearly backing off at least a bit, Q3 numbers were likely to look respectable as well. And they were, as Vladimir Zernov (a Russian??!!) wrote in ZeroHedge earlier this week.
A Russian’s prognostications? Via ZeroHedge?
“Cleveland-Cliffs (CLF) has just reported its third-quarter results. This is an especially interesting release since the stock has been under pressure ever since it reported impressive second-quarter results. The reasons for Cliffs’ recent downside include downside in the iron ore market, downside in the steel market, trade wars and recession fears…
“Cliffs reported revenues of $556 million and net income of $91 million, or $0.33 per share, easily beating analyst estimates. In the third quarter, the company produced 5.16 million tons of [taconite] pellets at a cash cost of $63.20 per ton. The realized price per ton was $95.65, down from $112.64 per ton in the second quarter. Lower pellet premiums and lower HRC (hot rolled coil) prices were the reasons for this material decline.
“The company commented: ‘We believe the currently weak steel prices in the United States are temporary, and the cyclicality associated with our business should be largely mitigated as we start-up HBI (hot briquetted iron plant – author) next year. With that, Cliffs is well-positioned to become an even stronger free-cash-flow generating enterprise, with limited cash needs and the ability to return even more capital to our shareholders.’”
Good news is bad
Hooray for Cliffs! At Wednesday’s 9:30 a.m. opening bell, CLF shares took off like a rocket. They blasted skyward more than 3% in a matter of minutes. But then, the sellers and short-sellers promptly reversed the rally. The company’s shares dropped off the, umm, cliff, faster than our friend Wile E. Coyote on a defective Acme rocket. The shares took that dive on seriously heavy volume as well. So what the hell happened?
Zernov has an idea. (Italics below are mine.)
“… the market continues to underestimate Cliffs’ cash-generating performance and fails to recognize that the period of heavy capex [capital expenditures on the new HBI plant] will be over by the second half of the next year. It is true that U.S. steel prices were suffering a major downside move since August, but I see no logical reason why Cliffs is much more conservatively valued than steel producers like AK Steel (AKS) or U.S. Steel (X). As history tells us, Cliffs’ share price performance on the earnings day is almost impossible to predict regardless of the actual results.However, the report once again shows that Cliffs is a fundamentally sound company. Assuming the support around $6.80 holds, current levels are interesting not only for longer-term entries but also for speculative swing trading positions.”
The trading carnival in CLF continues
I agree, and I bought more shares near Wednesday’s low to average down a bit. What I think happened Wednesday is this. When the stock took off near the open, that move launched a short-lived but intense short-squeeze, with X% of that huge short position heading for the exits out of fear that this cheap stock would soar way out of proportion to its current price.
But, as I noted, that short-squeeze was very, very short term. Once the big boyz cleared the amateurs out, the professional shorts stood firm. In fact, it looked like they decided to short the shares again. Whoever kept selling shares drove them down at one point from the daily high of $7.36 to a low of $6.59. At which point, they bounced back up to $6.76 again at the close. Sadly, they still closed down on an otherwise good day for their Q3 earnings report. But the surprising selloff proved a tremendous disappointment no less. At least to moi.
The stock of Cleveland-Cliffs is trying to recover again today. It got as high as $7.15 at one point Thursday morning before the shorts and Nervous Nellies batted it down again. As we try to wrap today’s article up around 12:30 p.m. ET, the shorts have battered the shares back down again to about $6.96. They’ve accomplished this with half the trading volume today as opposed to the over 25 million shares CLF traded Wednesday when they reported those stellar Q3 earnings.
Waiting for a profitable trade. Or for Godot
We’re hanging in there. Until the steel-dumping and tariff situation clears, we could still have some issues with this stock, even after a fine Q3 earnings report. But in point of fact, the company now has minimal debt, efficient production, and its new plant, scheduled to open next year, will supply an even higher-quality product to its customers and should prove a profit-driver from the get-go.
I’m not sure what it will take to dislodge the huge number of stubborn shorts. The Q3 numbers should have dispelled all doubt. But they did not.
Perhaps we’ll have to wait for an Senate no-vote on the incoming fake Trump impeachment effort. Or a win (guaranteed unlikely by the NYT, the WaPo and the deranged Morning Joe crew) by Trump in next November’s elections. A continuation of Trump’s pro-steel policies for another 4 years might finally loosen the shorts’ choke-hold on the otherwise worthy and underpriced shares of Cleveland-Cliffs.
I, for one, sure as hell hope so.
But remember: That’s not investment advice, fans. This remains my (relatively) learned opinion as a onetime active, dirty and sweaty participant in a complicated raw materials industry. With Q3 positive but already fading in the distance, we next await Q4. Fingers crossed.
Have a good one.
– Headline image: Taconite pellets, a semi-refined iron ore product produced by Cleveland-Cliffs
for the company’s numerous steel-producing customers. (Photo via Cleveland-Cliffs website.)