Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Michelle, and I am your conference facilitator today. I would like to welcome everyone to the Cleveland Clips third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the safe harbor protections of the Private Securities Mitigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on the company website. Today's conference call is also available and being broadcast at cleveland-cliffs.com. At the conclusion of the call, it will be archived on the website and available for replaying. The company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I would like to introduce Lorenzo Gonzalez, Chairman, President, and Chief Executive Officer. Please go ahead.

Lorenzo Gonzalez Thank you, Michelle, and good morning to everyone listening on today's call. Our third quarter results are a clear demonstration of the resilience of our company and a positive confirmation of the timely actions we took during the second quarter to prepare our operations and our inventories for the recovery of our main market, the automotive industry. We were significantly affected in Q2 by the unprecedented shutdowns that took place throughout the entire auto sector for an extended period of time of more than 10 weeks. Conversely, the sharp recovery in automotive production, starting in the second month of Q3, made abundantly clear who are the real players for automotive and who are the ones that are less relevant as suppliers or not relevant at all. With that, our Q3 numbers speak for themselves. The $126 million in adjusted deduct represents an over $200 million recovery from Q2. During the most challenging days of the pandemic, we went on the offensive. We prepared our operations to be ready when the uptick in demand inevitably change, and our clients would be back asking for just-in-time delivery. Our work in preparation for and ahead of the automotive sector restart gave us the excellence still making cost performance we showed in Q3, as well as the sizable working capital release that contributed to our $150 million free cash flow generation for the quarter. We use this cash flow to pay down debt, reducing our ABL balance by $150 million into three. Since we closed the key acquisition in March, we have cut our ABL balance in half from $800 million to $400 million. As we have stated before, our number one priority with free cash flow is and will continue to be paying down debt. And with the robust cash flows anticipated for the coming years, we should be able to continue to consistently deliver. Our good third quarter results were still negatively affected by a slower than usual shipment pace during the beginning of the quarter, particularly in July, as well as elevated idle costs reflecting Dearborn, North Shore, and Mansfield is still being down in the early part of Q3. As such, with shipments at a healthy pace and idle costs fading, our financial performance should continue to improve. as we progress toward the end of the year. With that, we expect closing 2020 on a high note with strong fourth quarter results. As we approach the end of 2020, our strong performance is not the only relevant thing we look forward to. Before the end of the year, we expect to close on our acquisition of substantially all the operations of ArcelorMittal USA. Our third quarter results are a clear illustration of the power of base loads, volume, and dilution of fixed costs in this industry. And in this regard, this deal will only help us improve our profitability. It has been a little less than a month since we made our announcement, and in that short period of time, our cliff scheme has grown even more excited about the potential for optimization of all disasters under one roof. The combined footprints of legacy Cleveland cliffs, AK Steel, and ArcelorMittal USA are ice-team makers' dreams. when it comes to both quality and cost efficiencies. We are preparing for a smooth transition and to hit the ground running as soon as the deal closes. Nowadays, people talk a lot about technology. I cannot think of anything more technologically advanced than literally using explosives to pull our own work from the ground in our mines in Michigan and Minnesota, and then ending with car parts and components manufactured at our subsidiary Precision Partners using robotic operations equipment and delivered just in time to our automotive clients. We are doing exactly this and more all within our footprint, from our taconite mines to our state-of-the-art hot-dip galvanizing lines, and further downstream into our fully automated manufacturing facilities for automotive parts. We fully recognize the responsibility that comes with becoming the largest flat-rolled steelmaker in North America. Going back five years ago to my criticism of the irresponsible behavior of the major iron ore miners, I have long been a proponent of value over volume approach. Under my watch, FLPS has never been and will never be tempted by the stupidity of volume for volume's sake. we will continue to manage our business in the most quality purpose and cost-efficient way, always reaching for real value and return on investment capital. For now, we are working through the regulatory approvals of our transaction, and we will certainly have more to discuss once we have closed the acquisition of ArcelorMittal USA in a couple months. Another piece of excitement as we approach the end of the year is the upcoming startup of our state-of-the-art direct reduction plant in Toledo, Ohio. We have completed all construction and installation and we have now entered into the final stage of commissioning the plant. At this time, we are pleased to inform you that we look forward to start producing HBI in a few more weeks. Our original plan to become a merchant seller of HBI remains the same. However, with our AK Steel existing footprint and the announced acquisition of ArcelorMittal USA, we plan to redirect a relevant portion of our HBI production to in-house utilization in our own EAFs, BOFs, and blast furnaces. Nevertheless, we should still have a meaningful tonnage of HBIs available to sell to select mini mill clients. For EAFs, the value proposition of this project is well known. Our 3% carbon content HBIs is a top-quality metallic seed stock without the impurities that come with scrap and without the complete disregard for environmental compliance embedded in imported pig iron from the usual sources in Russia and in Brazil. The metalization and carbon content of our HBI are very similar to the foreign pig iron that a number of American EAF-based steel companies import to the tune of 5 million metric tons per year. However, our direct reduction process uses pellets as feedstock instead of dirty sinters, and natural gas as reductant instead of coke or charcoal, making our HBIs much more environmentally friendly than pouring cigars. Our HBI also has a superior logistic advantage over imported cigars. We will deliver HBI to our clients in sync with their consumption rate and without imported cigars' significant freight cost component or multi-month lead time. Why will we use our HBI in-house at Cleveland Cliffs in our own EAFs? We will also use a portion of our HBI in our glass furniture to improve furnace productivity, reduce coke rate and costs associated to coke consumption, and very importantly, to reduce carbon emissions. Equally relevant, Cleveland Cliffs is a buyer of scrap, and our HDI may also be used in our own VOF as coolant to reduce our scrap costs every time the cost of the scrap we buy in the market justifies such use. Thanks to not having signed any long-term contract, with our HBI client, we were able to keep all this optionality to the benefit of Cleveland Cliffs and to the benefit of certain select EAF-based steel companies with which we have been working for several months and which will soon start receiving our HBI. In another way, we fully expect our HBI, to become, as early as next year, in 2021, a positive differentiating factor between our own blast furnaces and the blast furnaces of other integrated steel mills with no access to HBR, as well as a positive differentiating factor between the mini mills that will be our clients for HBI and the others. Back to our third quarter results, I would like to highlight a few items, starting with the 80% increase in flat-boiled volumes to 1.1 million tons. The increase was almost entirely driven by the automotive market, which made up 73% of our sales. I will repeat, 73% of our sales. This number was 63% in 2018 and 66% in 2019 and is now 73% in Q3 of 2020. It pays off to be able to produce all types of material for automotive life, particularly exposed parts. As you all know, Our subsidiary company, AK Steel, has been supplying exposed parts to the automotive industry for a long, long time and from several different locations. And due to our equipment and our technological capabilities, it is actually natural for us to produce the high-end materials. We don't need to go out of our way to do it. It also helps to be able to deliver material on time every day and to provide second-to-none technological support from our state-of-the-art R&D center and to be able to produce parts and components in-house. In some, we already are where others are trying really hard to get to. Our predictions around the effects of the pandemic on increased automotive demand have come to fruition. Public transportation, air travel, and ride sharing are no longer considered safe by consumers. Instead, private car ownership is growing, and traveling by car is trendy again for individuals and families. the U.S. automotive seasonally adjusted annual rate increased from 8.6 million units in April to 16.4 million units in September, even while fleet sales remained down 30%. The recovery in car sales is consumer-driven and shows no signs to end anytime soon. as it also follows people's migration from concentrated metro areas to suburban living. We are working closely with our automotive clients to keep up with this increased demand and to help them replenish their inventory. We see at just 50-day sales outstanding, a nine-year low. The inventory situation is even more dramatic for the truck and SUV market, which, by the way, accounts for about 83% of our sales to automotive clients. After their initial restarts in May, the OEMs did not really hit their stride from a school ordering standpoint until mid-August. So our 1.1 million tons shipping volume still reflects a little black for the first half of the third quarter. That said, our client has been doing well since then. This trend has also been evident in our downstream business, particularly with precision partners whose stamping capabilities are in high demand. In sum, as we are very pleased with the timing of our acquisition of AK Steel and our current role in the automotive market, we are also excited with the acquisition of ArcelorMittal USA. Going forward, we intend for the high-margin automotive space to remain our core commercial focus. On the mining and pelletizing side, our better-than-anticipated cost reduction and the strong iron ore prices in the international market were the reasons for our good Q3 results for our legacy business. The pricing indexes that act as a proxy for this business and the volatility associated with these indexes have always been a double-edged sword. making predictability of our cash flows a difficult thing. Once the ArcelorMittal USA acquisition is complete, we should be able to secure in-house demand for 90% of our pellet output, significantly reducing the unpredictable influence of commodity prices. The one index that stands out most is the pellet premium. which has been contaminated beyond repair by incompetent players in the market. Once the acquisition of ArcelorMittal USA closes, this particular index will be meaningless to our results. And that's a good thing. Regardless, after the closing of the acquisition of ArcelorMittal USA, our legacy iron ore business will be as critical as ever for our performance and should continue to provide us a competitive advantage in the form of high-quality in-house, custom-made health. As a combined company, we will continue and truly emphasize our commitment to sustainable steelmaking. We are a relevant player in the most environmentally friendly steel industry in the world, the American steel industry. We feed our integrated steel plants with pellets and soon also with natural gas reduced HBI. Going forward, we plan to provide enhanced disclosures on our carbon emission reduction and overall environmental performance through our upcoming sustainability reports. With that, I will turn it over to Keith Guse before my closing remarks. Keith, please.

Keith Guse Thanks, Lorenzo. As you noted, our dramatic $208 million quarter-over-quarter improvement in adjusted EBITDA was driven by increased steel shipments to the higher margin automotive business, better cost to increased production volumes, and reduced idle costs, and also driven by increased pellet prices. After excluding $22 million in one-time items such as acquisition costs, severance, and inventory step-up amortization, our earnings per share was in positive territory for the first time this year. In the steel and manufacturing segment, our automotive carbon shipments increased 164% to 667,000 tons compared to 253,000 tons in the second quarter, driving the bulk of the improvement in our flat rolled volumes. As noted on our last call, we expect fourth quarter shipments to climb even further and look similar to what was shipped by AK Steel in last year's fourth quarter. On the cost side, temporary idle costs in this segment were $39 million, which should be reduced to less than 10 million in the fourth quarter. Also, of our total SG&A of approximately $60 million in the quarter, $37 million of that flowed through this segment, with most of the remainder running through corporate. As for mining and pelletizing, sales volumes of 4.9 million long tons came in as planned, and we expect to see an increase of about 10% into the fourth quarter as furnaces stock up ahead of the winter months. Pricing per long-ton of $98 was supported by a higher IDEX, partially offset by a lower HRC average and lower pellet premiums. At current commodity prices, we would expect to see an increase in this rate in Q4 due primarily to the recent run-up in HRC. Our cost per ton improved quarter over quarter due to reduced idle costs And with all of our mines back in operation, we should see more normalized levels in Q4. Margin eliminations for the third quarter were 29 million, which we expect to look similar in the fourth quarter as we restock pellets at AK Steel ahead of the winter months. This amount should then normalize to close to break even throughout next year, absent the impact of the ArcelorMittal USA acquisition. On the Camp X side, Of our $96 million in capital spend during the quarter, about $46 million was related to the HBI plans, and about $14 million was capitalized interest with the remainder in sustaining capital. We expect another $125 million in CapEx spend for the remainder of the year, lowering our full year expectation from approximately $535 million to $500 million. Our immense level of free cash flow generated during the quarter boosted our total liquidity to $1.2 billion between our cash and ABL availability. Along with improved performance across the board, we saw favorable working capital changes of $187 million during the quarter. Due to the recovery in business levels we have seen, we expect to invest in working capital in the fourth quarter, as well as make contributions to SERP and pension plans, but still expect a free cash flow positive back half of the year, as predicted last quarter, which has been further enhanced by favorable market developments. In closing, the actions we took during the most challenging period of the pandemic are enabling us to benefit from an improved demand environment and working capital release. The robust recovery we foreshadowed last quarter is evident in our third quarter results, and we expect further improvement in the fourth quarter. With that, I will turn it back to Lorenzo.

Thanks, Keith. Before I turn the call over to the operator for questions, I will remind you that as we work to close the ArcelorMittal USA acquisition, I am restricted from discussing the antitrust review process or providing information any further guidance on our plans for the business and the operations to be acquired. So, we ask in advance for you to delete these questions from your list. Outside of that, I am happy to discuss anything geo-related or not. Clearly, we have a lot to be excited about as we approach the end of this year. The accelerating recovery in the automotive space, the commissioning of our direct reduction HDI plan, and, of course, the pending close of our second transformational acquisition in less than a year. The combination of all three provides us with all the tools we need to accomplish our operational and financial goals. We look forward to continuing to surprise everyone to the upside on what we're willing to do and capable of doing with this great company. With that, I'll turn it over to Michelle for Q&A.

At this time, if anybody has a question, please press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. Your first question comes from Lucas Pike. Your line is open.

Hey, good morning, Lorenzo and great job this quarter. I wanted to good morning. I wanted to start out with a big picture question this week. We have heard from some of your peers about their desire to grow their audit volumes over the coming years. And as a market leader, Are you concerned about a loss of share? Or conversely, would you say that there's even an opportunity for you to work together with these peers as you supply them with the metallics that they need to penetrate these auto markets? We'd really appreciate your thoughts on this. Thank you.

Lucas, that's a great question. And again, we are, like I said in my previous remarks, we are supplying more than three million to us, close to 3.5 million. million tons to automotive today. The acquisition of Barcelona Middle USA obviously will increase dramatically this number. So we are already a big supplier to automotive and will become a bigger supplier to automotive. Others are coming and trying to grow market share rightfully so, totally understandable. They need metallics. We will have metallics for some. We will have metallics for everybody. It will be a competitive process. Let's see who is going to pay the price to be an environmentally compliant supplier to the automotive industry, and who are the ones that will resist with pig iron from Brazil and pig iron from Russia importing the pollution from these two countries into the United States. Let's see for how long we as a country will tolerate this type of bad behavior. So there's a lot of things in play at this point. The important thing is that automotive clients rely on relationship, quality, on time delivery, capability, R&D capabilities to support future development. All these things that we have been doing for a long, long time, and it will be further enhanced as we acquire the ArcelorMittal USA. So it will be an interesting thing to see. And it's a dynamic market. There's room for all the good players. We are going to provide big stock to the ones that want to play in an environmentally compliant way. We'll be glad to compete in a level playing field. We hate bad competition, but we cheer good competition. That's good message.

Very helpful, Lorenzo. And just to follow up on this, you mentioned there won't be kind of enough metallics for for everyone. In light of that, have there been maybe increased increase, specifically as it relates to pig iron? Obviously, there's been Ashland in the past. Now you have a broader portfolio of potential assets to choose from as it relates to pig iron. Any updated thoughts on that?

Yeah, look, we are going to, after the acquisition of Barcelona Middle USA, because we are going to have a total of 10 blast furnaces. And today we have three. And of the three that we have, one is down, is Ashland. So we are going to be buying assets that have other blast furnaces that are down right now. And they are probably in a better position to produce pig iron if and when we decide to do so. If we are going to do it or not, to be seen. I'm not going to be producing pig iron to compete against dumped pig iron from countries that pollute. That's for sure. That's 100%. So if the value proposition is there, we'll produce. But don't forget, we're going to have some HBI, because not all HBI will be consumed in half. We plan to use, for sure, HBI for our own EAFs. We plan to, for sure, use HBI for our own glass plants. We are not going to sell HBI to glass plants companies. We are going to be the only ones with access to this big stock. And that being said, we will have a lot of HBI to sell. We're going to start with HBI, see how the market behaves, and then we'll make a decision regarding HBI.

Very, very helpful. Thank you, Lorenzo. Then really quickly, just switching topics, I wondered if you might be able to shed some light on potential proceeds from asset sales. Should we be thinking tens of millions of dollars or hundreds of millions of dollars of potential cash proceeds? Any color would be appreciated. Thank you.

I'll let Keith answer that. Please go ahead.

So as far as talking about asset sales, Lucas,

Correct.

Well, right at this point in time, we're not contemplating anything along those lines. What we're buying and what we have now is all considered to be core for what we want to do going forward. So if anything were to come up and become non-core, we would do exactly what we've done in the past, which would just be pay down the ABL. But we really don't have anything on the horizon, and it's premature to speculate on it. on the asset base. We're very happy with what we see so far and I wouldn't anticipate any significant, if at all, any divestitures.

Very helpful. Lorenzo, Keith, really appreciate it and keep up the great work. Thank you. Thanks, Lucas.

And your next question will come from Seth Rosenthal. Your line is open.

Hi, Lorenzo and Keith. Thank you for taking our questions today. If I can start out, please, with a question on the outlook for your steel sales automotive customers. Obviously, this time last year, the AK business was under different management, and the steel market was under quite a bit of stress back then. Today, you're in control of these assets, and the steel market is in much better shape. Can you walk us through how you view the outlook for automotive contract negotiations going forward? I know this is something you've touched on in the past, particularly an area of focus for being paid for the value of your customers. What would you expect is feasible, I guess, going into 2021, please?

Seth, contract negotiations with the automotive clients is an ongoing process. we don't have a date in which we resettle contracts. We have been negotiating. Of course, contracts that we are renegotiating as we speak are easier to renegotiate than contracts that we negotiated a month ago or two months ago or three months ago because the market and the COVID backdrop are a lot more constructed than they were one or two or three months ago. So that's pretty much as much color I will give to you. I'm not going to go further than that because that would involve disclosing things that are not really things that we like to disclose.

Okay, great. If I can ask a second question, please, on HBI. Thank you for the color on both the ramp-up in Q4 and also the customer mix that you're targeting. Can you give us an updated sense of the ramp-up schedule as you expect the volumes to hit full capacity over what time horizon, please? And if we can expect, if you're going to speak, you know, going into 2021, would you expect a particular portion of those fees internally or would you first target third-party sales?

Yeah, we are approaching production right now because commissioning is happening as we speak. So we will start producing 1.8% carbon, which is the first product that we are going to produce, and all the 1.8% product will be consumed in-house. And this will be for a couple months. As we start next year, will be already transitioning from the 1.8% carbon to the 3% carbon. That's the product that we'd like to put in the marketplace. So we should start having products for clients at the beginning of the second quarter. That's what we're anticipating. And by the way, Seth, you have been pushing towards, oh, you don't have context, you don't have context. Now you understand it was by design, And it was all done based on the plan. And we were able to buy AKC. We were able to agree on a deal with Darcelon, the USA. So apparently we can cut contracts every time we want, every time we decide to do so. But at this time around, we liked the transactional nature of the market. That's why we kept all this optionality for us. I hope now that everything is clear. you were able to connect the dots while you didn't have the long-term consequences.

Yes, that's clear, Lorenzo. Thank you. And just one final question, please, if I may, an accounting question on the upcoming hotel transaction. Obviously, there was some confusion at the time of the deal announcement on the different pension accountings in yourselves and Mittal, between the $1.5 billion or $3.1 billion of pension liability. When the deal closes in Q4, can you confirm how you expect to account for the pension liability? Would it be closer to Mittal's reported $3.1 billion or to the economic value that you reported of $1.5 billion?

First of all, there's no confusion on that. These are different approach to the same thing that's abundantly clear. But I'll let Keith explain a little bit on that. Keith, please.

Yeah, sure. Sure. So as Lorenzo mentioned, yeah, it's really, it's the accounting valuation, which is, as we all know, done on a pre-tax basis and done consistently and applied for the accounting rules for comparability amongst companies and then Of course, we used an economic approach to, you know, to arrive at the value of the equity of AMUSA. So as far as what we would expect, if, you know, all else being equal, if all assumptions that were put into the accounting numbers at AMUSA, if all those assumptions remain the same, then we're going to get the same accounting result that they got. And, you know, that was, you know, roughly $3 billion there. liability on the balance sheet, and then you have an offsetting, you know, $700 million plus deferred tax asset on the asset side of the balance sheet. So, you know, it's two different purposes, but we would expect really to come out, you know, in accordance with GAAP with a similar outcome.

The important thing is that not to try to find something that doesn't exist. This transaction involves two parties that are very sophisticated dealmakers, the middles and ourselves. Give us credit for that. So we know what they're doing, we understand the numbers, and they do too. And it's a clear win-win situation. Actually, the verdict of the market is just that. Since the announcement of the deal, The stock that appreciates the most in our space is Clips. And the second is MT, Metal. So the market has spoken. And so there is no such a thing, oh, Metal pulled one on Clips, or, oh, Clips pulled one on Metal. No, that's not the case. The details actually, the Arsenal middle, will stay as a meaningful shareholder of Cliffs, at least for a while. And so, there's no such a thing. And I hope you understand, there's no win-win without someone losing. So we also, at least from my perspective, we know what we're doing and we know where we're going. So who's going to be the one losing for us to win? But between Cliffs and Oswald Miller, the two participants in this transaction, it's all a win. And we are both very well aware of the numbers and the impact on valuation. Accounting is a different story. How we pay for, how we meet our financial commitments, it's very well known. Keith Goss and I have been doing this together for more than 15 years.

It's clear. Thank you very much.

All right. You're welcome.

Your next question comes from Matthew Fields from Bank of America. Your line is open.

Hey, Lorenzo. Hey, Keith. Hi, Matt. Hey, Matt. Maybe just a housekeeping one first. So appreciate the guidance you gave on cash flow, working capital. You know, dovetailing with the comments from last quarter where you said 100 million working capital positive, it implies an $85 million roughly give back in fourth quarter, which you kind of alluded to, along with pension contribution. Can you just give us a little clarity on the sort of quantum of those two cash items, please?

Yeah, we're looking at about a $50 million. Yeah, $50 million pension payment. It's really due January 2nd, but it'll get, because it's a federal holiday, we'll have to make it on December 31st. That gets pulled back in. You know, and as far as the inventory and working capital potential build in the fourth quarter, it remains to be seen how that is. I mean, in a normal fourth quarter, we might see that build because we're putting some pellets in front of the AK furnaces and we're And you might see, in a normal year, you might see the OEMs slow down a little bit in December. But there are some indications that not all OEMs are going to slow down. So while we are saying there is a bit of a chance for a build in Q4, it's also possible that that number can be close to zero. If the OEMs pull consistently all the way through the holidays, we will probably not build much in the way of inventory in Q4.

OK, great. That's very helpful. And then, you know, great progress paying down the ABL. I understand you want to keep that open to help fund the equity portion and the working capital deficiency for ArcelorMittal U.S. transaction. But what's the tradeoff in your mind between paying down ABL and sort of buying back sort of discounted bonds in the marketplace at this point?

Ben, look, this thing of buying back bonds – at the discount in the market right now. I think that this ship has sailed. This was an opportunity that we took advantage in 2015, 2016, and a few times after that. But this was when we had a big opinion in the market that cliffs would not survive. So that was really a deep discount that would really uh make the transaction a very interesting transaction for us at this point in time i don't see that to be honest with you so we you have our bonds really trading uh and very strong and uh okay you might identify a a trunch here and there but not really meaningful from the big scheme of things so there are other ways to scheme that cat and we will be addressing at the right time but buying bonds sent from the dollar That's not something that will be available for us at this point. I don't think so. Everybody understands that we are a company that will continue to grow, and our bonds should be very well at par.

That's a fair point. We read a couple things about maybe Nippon potentially selling their stakes in those Indiana JVs to you as part of the overall Arcelor transaction, those two Indiana joint ventures. Can you comment on that at all?

I cannot. Beyond what's in the public disclosures, the answer is no. We have that completely squared out. And what I had to inform about that, it's in the press release that we did. But we are respectfully awaiting for Nippon Steel to manifest their position, and we will act accordingly.

Okay. And then, you know, just a comment you made earlier, which I thought was kind of interesting, you know, you talked about the transaction as being win-win, but when you have win-win, somebody loses. You know, maybe you could just sort of talk about how you see the industry evolving and sort of winners and losers as a result of your transaction with Arcelor.

I'll talk about the winners. Cleveland Cliffs and ArcelorMittal.

All right, that's a fair point.

time will tell but they are out there and they now have competition because before some were dying on their own some others were just flying above the radar for the ones that were dying on their own they will continue to die on their own and for the ones that were flying with no competition now they have competition but you know the good ones will survive the bad ones will not All right.

Thanks very much. Appreciate it. And good luck closing the transaction.

Thanks, Matt.

Thanks, Matt.

Your next question will come from Phil Gibbs. Your line is open.

Hey, good morning.

Morning, Phil.

Lorenzo and Company, the iron ore pricing in 3Q was strong, pretty consistent with the first half of the year. Obviously, iron ore prices were good, and hot roll prices toward the end of the quarter clearly got better. Were you taking any true-up positively or negatively in the third quarter? Because clearly the HRC true-up never came, given the recovery.

Go ahead, Keith, please.

Yeah, actually, Phil, yeah, the HRC came kind of late in the quarter, so there really wasn't probably – it actually had an offsetting impact on the rate for the quarter. The IODX is what ran earlier in the quarter and gave us a positive true. We always true up every quarter. We're required to do so. And the net true up for Q3 was up, I think, roughly $10 million, $20 million affecting rate in a – not in a tremendous way, but it had an impact on rate. Based on the pricing we're seeing right now, commodity pricing, we could see a minor, small true-up again in Q4, but we're only four weeks into the quarter. We'll see how the rest of the quarter plays out.

Okay. So a few bucks, it's on positive, true-up in 3Q, and I think you said pricing a little bit above the third quarter and the fourth. Is that right?

That's right. If commodity prices stay where they are today and run even for the rest of the year, we would get another small increase in rate for the fourth quarter.

Okay, terrific. And the idling costs that you were carrying when you said those are – I think you said those are lapsing, right, in the fourth quarter for the mining side. And then we're almost through a big slug at AK. Is that correct?

That's right. What we're left with is about $10 million in the quarter for the steel and manufacturing side. And that's really just a normal level. That has nothing to do with volume. It has nothing to do with COVID. You're going to get $10 million in any quarter just due to routine maintenance. Right. You can effectively say it's done in Q4, but there's always a little bit for just routine scheduled maintenance from time to time, half a day here, quarter day there, that kind of thing.

And then last question, Lorenzo. HBI, when it gets up and running, given your position, I think there's some water access there from what I remember. Is there an ability to get material into Canada pretty easily if you need to do that?

We don't see the reason for that. In our own locations, we have consumption, and the clients that have been working with us, and I will not disclose any new clients. I'll just mention one that because... He has mentioned publicly Steel Dynamics has been working with us for some time. Steel Dynamics will get HBI. So I think we are going to consume everything in the United States.

Okay. Thanks very much. Great work. Cool. Thanks, Phil.

Your next question will come from Alex Hacking. Your line is open.

Yeah, thanks, Lorenzo and Keith. I just want to follow up on the HBI. Maybe I missed it, but have you quantified the volume that you're going to take internally? What's the volume of HBI that you would consume internally?

Yeah, look, if you need to have a number right now, I would say that we are going to have at the very least 1 million to 1.1 million tons to sell to the market. So the balance will be consumed internally. okay perfect thank you and then at the very at the very least because you know 1.9 is our nominal capacity so um so i'm anticipating using internet a pretty big chunk but we will still have a lot of hbi to sell okay thanks and then i just want to follow up around you know your comments around

the environmental credentials of your automotive steel. I mean, your point is well taken that, you know, your HBI product is, you know, significant environmental advantages over imported pig iron. But it's, you know, I mean, it's your assertion that when we look at the whole, you know, scope one, scope two emissions profile of your automotive steel, that it would be, you know, superior to that of EAF automotive steel. Thanks.

Well, let's think. When you talk scope two, electric arc furnaces in general, and we say that because we have electric arc furnaces, and after we acquire ArcelorMittal, we'll double the number of EAFs that we have from two to four. So we are very familiar with that. We buy electricity, Alex, from the grid. And the grid in the United States is not a grid that is on solar or wind or even nuclear. It's basically natural gas and it's still a lot of old-school thermal cool. So that's why it's called tube for electricity. Electric plants buy that electricity. So we buy tube to produce HVAC and we use natural gas. We are not going to be using hydrogen anytime soon in direct reduction or blast furnaces, not here, not in Europe, not in China, not in Japan, not anywhere, just because the technology still doesn't exist. So our HBI plant, natural gas days, will be state of the art when we start to, from the environmental standpoint as well. when we start producing very soon. So I think we're very well situated to compete with our blast furnaces because we use pellets. We will be using HBI, and therefore we'll be reducing coke rate. When you reduce coke rate, because you know, the HBI is already reduced, so we don't need coke to reduce. We only need coke to produce heat. So that reduces the need for coke. You are reducing the need for coke, you are reducing C. When you reduce C, you are reducing the generation of CO2. So that's how the HBI thing works. On the other hand, EAF not only have electrodes that are graphite and graphite in C, but the EAF injects O2 to produce CO2. And that's why our HBI will have 3%. because our electric clients asked for higher cargo content. We can produce less, but they like 3%, so be it. 3% it is. That's what the client wants. So when push comes to shove, I am not seeing that much of an advantage between the current EAFs injecting CO2, generating CO2, and blast furnaces that Today, already used pellets and will be using HDI. So, it will be a pretty interesting thing to see. And even more important, the American steel market is 70% EAF, 30% blast furnace VOF, and altogether, in 2019, 88 million tons. China alone has 10% of 1 billion in EAF. That's 100 million tons. So if EIF was the solution, China would not be polluted. However, China has 90% blast furnaces, and all the blast furnaces are sintered and dirt sintered. So 900 million tons of steel in China are produced under the worst possible scenario. Nevertheless, the major miners in Australia and Brazil, BHP, Rio Tinto, Fortescue Valley, they all have targets for scope three, and their scope three emissions are all, almost all, in China. So how come they commit with China? China can't cut excess capacity, but China will cut their scope three, their emissions, just because there are scope three emissions for the miners, not going to happen. So there's a lot of conversation, long story short, Alex. There's a lot of conversation, but very little action on these environmental things. The good news is that starting 2021, not 2030, not 2050, not 2060. I'm talking 2021. That's next year. We're going to be using HBR in our bloodstream. then in 2022, then in 2023, then in 2024. When you get to 2030, we're going to be doing this for 10 years. So we're going to be way ahead when others will get there. I hope you got the picture, because it's hard to condensate a very good question, but to condensate the answer in a few minutes.

I appreciate your thoughts, Lorenzo, and I take your point. It's a very nuanced question. discussion with a lot of facets and not easy to condense so thank you thank you and our final question for today will come from carl blunden from goldman sachs your line is open hi good morning thanks for the time i guess some things that have changed since the last time we spoke just i guess a month or two ago that the steel market's looking stronger your operating progress is pretty clear and it's reached your results so maybe you know some some thoughts And you'll have some decisions that you can make regarding cash deployment and optimal leverage over time. Just be interested in your thoughts about what the right level of leverage for the business is going to be, including those legacy liabilities as you ramp up the compliance company.

Yeah, look, Carl, everything we do in this company is geared toward reducing the leverage. Even the ArcelorMittal transaction is the leverage. Think about that. Prior to the acquisition, we're 4.3 times the leverage. After the acquisition, because we're using stock and because of the structure of the acquisition, we're going to be 3.6 times. And that was when we announced. Now we announced the results. We already paid down the ABL. And since we announced the acquisition of AK, we paid the ABL in half, from 800 meters to 400 meters. So we'll continue to do leverage. And that generation will be all deployed to pay down debt. So there's no second use. There's no, oh, but why you could do this or you could do that. We're not going to do anything. We're going to pay down debt. And we are going to continue to protect the equipment and do capex and all these things are taken into consideration. But the use of excess cash flow will all go to work. reducing debt. So you should expect us to be below three very soon, and then we'll go from there. So the next target is to bring leverage below three times.

All right. That's helpful. Maybe this is too specific, but when you think about the trade-offs between secure and unsecured debt price versus flexibility around covenants and so on, is there a guidepost we should think about in terms of what your priority is there?

Yeah, another great thing that we are acquiring together with the ArcelorMittal assets, we are improving dramatically our security capacity. But we are also trading in a trend that will allow us to issue unsecured debt easily and at a very low coupon. So all things considered, we are in the right spot. in terms of continuing to use all of our expertise in the debt markets and to continue to make the right moves in terms of improving our capital structure and reducing our leverage. That's very helpful. Thanks very much. Thank you.

We have no further questions. Thank you. I turn the call back over to the presenters for closing remarks.

Thank you very much for our interest in Cleveland Cliffs. Next time we speak, we'll be a bigger company, and we are very excited, very much looking forward to speak with you after the acquisition of ArcelorMittal USA Cliffs. Thank you so much, and have a great rest of the week. Bye now.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.