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Summary of Operations
Cleveland Cliffs (CLF) is a leading, American steel manufacturer. It employs a vertical operation, with enterprises that mine iron ore or acquire scrap metal. These raw materials are processed down the line into steel products, and excess raw materials are sold to other producers. Customers primarily use their products for:
Automobiles
Infrastructure and manufacturing, which includes electrical power
Distributors and converters
Other steel production
Additionally, most of these customers are North American. About 45% of sales are under fixed-price contracts that typically last a year.
Strategy
Their vertical model makes them self-sufficient among the community of steel manufacturers and gives them a competitive advantage. For example, when the semiconductor shortage reduced automobile production and thus steel sales there, they were able to redirect of their steel volume to other customers. Even so, they experienced a decline in revenues from a major event like COVID in 2020.
Nevertheless, the recent acquisitions, vertical model, strong relationship with employees, and ability to adapt to new products, make CLF a strong business.
Growth and the Future
There are many factors to consider here. On the one hand, government spending on infrastructure will directly benefit CLF, and as more of the worlds urbanizes and develops, more of the world will need CLF’s goods.
On the other hand, loosening of beneficial trade restrictions could let in cheaper steel products and capture part of their market. Increase in fuel costs (they rely heavily on fossil fuels for electrical needs) and the rise of lighter alternatives to steel in auto-manufacturing could depress sales.
These considerations in mind, modest growth seems possible.
Valuation
With recent acquisitions, annual free cash flow of $1.5 billion seems possible.
Growth Assumptions: 5%
Intrinsic Value Per Share: $27
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