Why JPMorgan Is Bullish About Cleveland-Cliffs, Even If Steel Prices Fall

With the acquisitions of AK Steel and ArcelorMittal USA in 2020, Cleveland-Cliffs Inc CLF has emerged as the largest producer of steel in North America, according to JPMorgan.

The Cleveland-Cliffs Analyst: Michael Glick initiated coverage of Cleveland-Cliffs with an Overweight rating and a price target of $39.

The Cleveland-Cliffs Thesis: Even if steel prices decline in the second half of 2021, the “cash flow windfall” due to higher prices so far offers an opportunity to integrated steel companies to “de-lever, fund pensions, reposition the businesses for a low-CO2 world and generate returns through the cycle,” Glick said in the initiation note.

Cleveland-Cliffs is “fully integrated, with iron ore mining and pelletizing assets, a newly commissioned HBI plant in Toledo, steelmaking facilities including both BF/BOF and EAF facilities and advanced finishing capabilities,” the analyst wrote.

The company’s integrated model “provides a significant amount of tactical flexibility in the current environment,” he added.

“By operating at all ends of the value chain, Cliffs can optimize returns based on individual business conditions,” Glick stated. He expects Cleveland-Cliffs to generate double-digit free cash flow yields from 2021 through 2023, which means the company can reduce its leverage “to negligible levels by 2023.”

CLF Price Action: Shares of Cleveland-Cliffs had declined by 0.39% to $22.77 at the time of publication Wednesday.

(Photo by Karan Bhatia on Unsplash)