Cleveland-Cliffs Inc.

2021 relative to normalized levels, particularly during the period between Thanksgiving and the end of the year when the COVID Omicron variant began to spread around the world. Additionally, service centers and distributors pulled even less tons than usual during this already typically weak period in late November and December. Remaining steadfast in our disciplined supply strategy and based on this rebound we expected and are already seeing from our automotive clients this year, we elected to move up several operational maintenance outages originally planned for 2022 into the fourth quarter of 2021. These actions reduced our sequential quarter-over-quarter steel production by 675,000 crude tons in Q4, ultimately also impacting our unit costs. Partially offsetting the volume and cost impacts were higher selling prices in Q4, which rose by approximately $90 per ton from 1334 to our highest level of the year of $1423 per net ton. This is also only an early indication of the success we have achieved in renewing our fixed price sales contracts, as only a portion of our contract renewals were already in place during Q4 of 2021. Remember, the majority of our renewals were not in place until January 1st of 2022. As this year progresses, the selling prices we report every quarter going forward will continue to demonstrate the successful renewal of these fixed price contracts, and that will be even more evident if the index HRC price continues to drop. For context, if we applied the contracts we have in place now in 2022 to the fourth quarter of 2021, holding all else constant, our Q4 2021 adjusted EBITDA would have been nearly $500 million higher. This level of fixed contracts is the key differentiator in favor of Cleveland Cliffs relative to all other steel makers in the United States and gives us significant visibility into our cash flows for 2022. Despite the lower shipments and additional inventory build, we generated $900 million of free cash flow in Q4 of 2021. Of this $900 million, we used $761 million to acquire FPT and used the remaining $150 million or so to pay down debt. So in other words, with only one quarter's worth of free cash flow, we were able to pay for a meaningful acquisition and still had enough cash flow left over in the quarter to pay down some debt. Now, speaking of our debt, we have already accomplished a lot more than we originally expected in terms of improving our leverage. We keep a close eye on our overall debt levels on a dollar basis. but we also look at our overall leverage on a total debt to last 12 months adjusted EBITDA basis. With total debt and LTM adjusted EBITDA at essentially the same level, at the end of 2021, we are at a total leverage of only one time. By next quarter, our LTM adjusted EBITDA will likely be even higher, which will continue to further reduce our overall leverage metrics. As a reminder, our leverage was over four times in 2019. pre-COVID and before our transformation. While overall leverage is in great shape, we will continue to simplify our capital structure by paying down debt, replacing existing bonds with cheaper ones, and extending debt maturities. The significant free cash flow we anticipate in 2022 should allow us to pursue the dual goals of repurchasing shares and reducing debt. We have already redeemed our convertible notes in 2022, and several other tranches of our bonds become callable this year at pre-negotiated prices, including the two tranches of secured notes we issued in 2020. We fully intend to redeem or refinance these notes at some point in 2022. As expected, last year we built a substantial amount of working capital, which should be worked down throughout this year. Given this increased collateral base, we were able to take advantage of these asset levels and upsized our ABL facility last quarter, increasing our available liquidity by $1 billion to our current level of $2.6 billion. On another very important note on the balance sheet, our net pension and OPEB liabilities saw a $1 billion reduction during Q4, primarily due to actuarial gains and strong asset performance leading to a $1.3 billion or nearly 30% net reduction during 2021. Also importantly, in the rising rate environment that we are in today, we have meaningful potential for further pension and OPEB liability reductions. Just for reference going forward, for every 50 basis point increase in our discount rate, our expected liabilities would decline by about $500 million, all things equal. Looking ahead, Even under today's pessimistic HRC futures curve, we would expect higher overall average selling prices in 2022 than we saw in 2021, when HRC averaged $1,600 per ton. On the cost side, we expect to see increases related to energy and materials, with the largest annual change in coal and coke. Countering this, we have been offsetting our coke usage by increasing the usage of HBI in our blast furnaces and increasing the percentage of scrap in the charge of our BOFs. Our CapEx budget for this year is $800 to $900 million, an increase from the previous year primarily due to an additional reliability in environmental projects, inflation, and the realign of one of our Cleveland blast furnaces, which will be out for over 100 days during Q1 and Q2. The full year of DDNA should be about $900 million. Exclusive of one-time items, our 2022 SG&A expense should be around $520 million, which includes higher wages and also $40 million of FPT overhead. Now that we have effectively exhausted our tax NOLs, our cash tax rate should be in the 15% to 20% range, with our book tax rate at 21%. With that, I will turn it over to our CEO, Lorenzo Goncalves.

Lorenzo Goncalves Thank you, Celso, and good morning, everyone. Our first full calendar year as the new Cleveland Cliffs was an absolute success, and we could not have accomplished all the great results we were able to accomplish without the hard work and commitment of our 26,000 employees, approximately 20,000 represented by the USW, the UAW, the machinists, and other unions. We believe in manufacturing in the United States and in good paying middle class jobs. We really appreciate the work of each one of our employees and the unions representing them. We could not have done all that without you. As great as 2021 was for Cleveland Cliffs, we would have done even better. if the automotive industry had resolved their supply chain problems. The shortage of microchips cut their opportunity to build 18 million cars or more in 2021, and the automotive sector ended the year with a much smaller 13 million units. When we at Cleveland Cliffs realized in the third quarter of 2021 that our automotive clients were still not performing up to the level that they were guiding us to build inventories for them, we then made the decision to move up to Q4 some important maintenance jobs originally scheduled for the first four months of 2022. That decision albeit correct, has clearly impacted our Q4 results. Now, with the first month of 2022 behind us, we are starting to see improved delivers to our automotive clients. While it is just a one-month data point, delivers to automotive clients in January were stronger than each of the previous three months, October, November, and December. And our adjusted VITA in January was a solid $588 million. Furthermore, as the microchip shortage improves during 2022, the automotive companies will need a lot more steel this year than in 2021. This steel comes primarily from Cleveland Cliffs. We are, by a huge margin, the largest supplier of steel to the automotive industry in the United States. Let's make this abundantly clear to our investors. There is no other steel company, integrated or mini-mill, in the U.S. or more broadly in North America capable of supplying all the specs and all the tonnage we supply the American automotive industry. Cleveland Cliffs already has all the equipment and technological capabilities that other companies are only now spending several billions of dollars to try to replicate by building new melt shops and new galvanizing lines. We typically sell 5 million tons of steel directly to automotive manufacturers and also sell another 2 to 3 million tons through intermediaries. Put another way, almost half of our steel sales ends up in automotive functions. Another interesting fact, Even though we have not deliberately tried to grow our automotive market share in 2021, we have actually increased our market share through tons resourced by our clients. While the clients do not tell us why they are taking the order away from another steel company and reassigning the specific item to Cleveland Cliffs, we can only assume that these other steel companies are not meeting the automotive industry's high standards. That's probably why these competitors have to invest several billions of dollars to play catch up. Cleveland Cliffs does not have to spend this type of money and will not. With our CapEx needs in 2022 relatively low, and strong confidence in our cash flows, we are very comfortable putting in place the $1 billion share buyback program just announced. Another differentiating feature of our way of doing business is the predictable pricing model that we have in place with automotive and team plates. and some select clients in other sectors as well. This feature eliminates the worst cancer in our industry, which is self-inflicted volatility. Going forward, we will work with more clients to move sales under this model. Real clients don't need indexes. They need reliable suppliers and fair prices. We currently sell about 45% of our volumes under annual fixed price contracts, by far the highest in our industry, and we want this number to continue to grow. The harm caused by the volatility of steel pricing is most damaging for smaller service centers who live out of their inventory values. Ironically, These same folks are the ones who create volatility in the first place, panic buying, double and triple ordering when supply is tight, and then halting purchases altogether when inventories are temporarily adequate, perpetuating a never-ending cyclicality. We are convinced that it is in everyone's best interest to limit volatility in our industry, And that's not only desirable, but also feasible. That's why we are moving away from sales to smaller players, further concentrating on the larger clients, which already make up the vast majority of our sales. At this point, all important clients of Cleveland Clips are being offered index-free deals to continue to do business with us. Marrying stable costs with stable prices up and down the supply chain can create a much healthier business environment for steel in the United States. Another ongoing important matter for the future of Cleveland Cleves is our commitment to ESG. That was evident with our purchase of FPT, the national leader in prime scrap, which was completed in the fourth quarter. The integration of FPT has gone remarkably well, and we're grateful for the buy-in of the 600 employees of FPT that are now employees of Cleveland Cliffs. Since closing the deal on November 18, we have made substantial moves securing a number of additional sources of prime scrap uptake, most notably the largest automotive stamping plant in the country. This particular stamping plant alone generates more than 150,000 tons of prime scrap per year. Our agreement replaced an incumbent scrap company who had been servicing this stamping plant for decades, even before this scrap company was acquired by a mini mill several years ago. Our deal was made possible with a compelling proposition. This automotive manufacturer buys the steel primarily from Cleveland Cliffs. And now we can feed their scrap directly back to our steelmaking shops. This is not just recycling steel. It's a real closed loop. A closed loop is a key piece of our automotive clients' environmental strategy, as well as a key piece of our own environmental strategy at Cleveland Clips. On the carbon emission side, we continue to lower our usage of coal and coke by increasing the utilization of HBI as a significant part of the burden in our blast furnaces. While our flagship direct reduction plant in Toledo was originally built to supply third parties EAFs with HBI, This HBI is now being exclusively used in-house within Cleveland Cliffs. The vast majority in our blast furnaces play a central role in lowering both our coke rate and our CO2 emissions. Furthermore, we are currently working with Linde, our largest supplier of industrial gases, to implement the utilization of hydrogen in Toledo. As you may know, our state-of-the-art direct reduction plant was originally designed and built with the possibility of using up to 70% of hydrogen in the mix as reduction gas. we expect to report on the usage of hydrogen and the production of the first hydrogen-reduced HPI still in 2022. The same goes for our iron ore pellets, another key competitive advantage we have and a driver of lower emissions relatively to foreign competition that uses primarily sinter feed ore. in their blast furnaces. Going forth, we will be limiting the tonnage of iron ore pellets we sell to third parties. Iron ore is a finite resource, and the time and cost it takes to get permits and extend life of mine is incredibly cumbersome. In addition, iron ore pellets are scope one emissions for Cleveland Cliffs. but they are Scope 3 emissions for the clients who sell them to. Unfortunately, Scope 3 emissions are not accounted for, not counted in anyone's reduction targets. And surprisingly, at least for now, no one really seems to care about Scope 3 emissions. Therefore, producing fewer tons of pellets automatically reduces our Scope 1 emissions And that's good enough for us, at least until Scope 3 becomes a topic of concern. Also, with the use of additional scrap in our BOFs, our iron ore needs are not as high as before, and we no longer need to run our mines full out. When determining where to adjust production, our first look is at our cost structure. Because we are now able to produce diagrate pellets at Menorca, and mainly due to the ridiculous royalty structure we have in place with the Mesabi Trust, we will be idling all production at our North Shore mine starting in the spring, carrying through at least to the fall period, and maybe beyond. At North Shore, no production, low shipments, low royalty payments. We also acknowledge that our strategy to stretch hot metal by adding increased amounts of scrap to the BOFs is working extremely well. With more scrap in the BOFs, we need fewer tons of hot metal to produce the same tonnage of liquid steel. As a consequence, the North Shore Isle could go longer than currently planned. As another consequence of our strategy of hot metal stretching, we have dramatically lowered our needs for coke and coal. We already announced last quarter that we idled our coke belly at Middletown. Now that our coke needs have been reduced even more, in the second quarter of 2022, will also permanently close our Mountain State carbon coal plant. This action will not only further improve our carbon footprint, but will also save us approximately $400 million in capex originally planned for this facility over the next few years. Even though jobs are going to be eliminated at Mountain State Carbon, We have enough job openings at other nearby Cleveland police facilities, and we can ensure all good employees will have other employment opportunities within our company. On that note, the last piece of our environmental strategy relates to how we operate our eight blast furnaces. Our have presence in highly specified automotive-grade materials, particularly exposed parts, necessitates the use of blast furnaces. EAFs continue to be unable to demonstrate that they can compete and produce the entire spectrum of specs demanded by the car manufacturers. Numbers don't lie. That's the main reason why All the major steel suppliers located in countries with a strong presence of automotive manufacturing, like in Japan, in South Korea, in Europe, and here in the United States, are not mini mills operating EIFs. They are all integrated steel mills with blast furnaces and VOFs. Cleveland Cliffs is the one here in the United States. And we do not use a sinker. We use only pellets and HBI in our blast furnaces, enabling us to establish the new world benchmark in low coke rate and low emissions. This is particularly relevant when our automotive clients with a worldwide presence compare Cleveland Cliffs against their other well-known automotive steel suppliers from countries like Japan, South Korea, Germany, Austria, Belgium, or France, among others. Our full control over the entire supply chain from pellets to HBI to prime scrap creates a huge differentiation in favor of Cleveland Clips. one that is impossible to replicate in Asia or in Europe. That said, we also produce a lot of steel that goes to less quality intensive end uses. A blast furnace reline is a capex heavy undertaking, albeit totally expected in our multi-year projections. Under this evaluation process, We also take into consideration other upgrades to the upstream hotend, as well as the capital related to extending the life of mine of our iron ore mines. With all that, in some cases, the capital requirements of a new EAF compared to the avoidance of reinvesting in a blast furnace reline and its associated supply chain could come out close to a wash. particularly because we at Cleveland Cliffs already have the rolling and coating capabilities in place. If and when that happens, the wash or better, we might consider an EAF as a replacement to a blast furnace relay in the future. One final piece on the environmental to note. Of all CO2 emissions generated in the United States, The emissions related to the production of steel represent just 1% of the total. One more time, just 1%. This number is 15% in China and 7% worldwide. But here in the United States, it is just 1%. The steel industry in the United States is the most environmentally friendly in the entire world. Meanwhile, transportation, particularly affected by automotive tailpipe emissions, is responsible for 29%, while energy is responsible for another 25%. This is where the importance of steel made in USA is most significant as our very small emissions footprint again, just one percent, will play a critical role in improving the emissions of these two sectors, which combined are responsible for more than 50 percent of all CO2 emissions in the United States. For one, Cleveland Cliffs has been preparing for the transition from ICE to electric vehicles long before EVs rapid adoption. And we have the right skills necessary to meet the automotive industry target of 50% EV adoption by 2030. On the energy side, we need more renewables like solar and wind. and both are still intensive. Cliffs is the only producer in the United States of the electrical steels needed for the modernization of the electrical grid, which received $65 billion in funding under the recently passed infrastructure bill. Our non-oriented electrical steels, we call it NOS, is used for motors in both hybrids and BEVs. The infrastructure bill also includes another $7.5 billion in a market for charging stations for electric vehicles. Each charger uses approximately 50 pounds of GOS, grain-oriented electrical steel, and we are talking about half a million of charging stations, plus the equivalent amount of transformers to tie down these charging stations into the grid. With all that, and no other producer of goods or news in North America other than Cleveland Cliffs, in 2022, we have a more than full order book for electrical steels. And that's just the beginning of the EV revolution, which will certainly progress between now and 2030. With all we at Cleveland Cliffs are doing related to carbon emissions, I can't believe so many companies are being given a free pass by the investment community despite not doing much more than just saying they will be carbon neutral by 2050. What I have just laid out here are real, concrete, undeniable measures to reduce emissions. And we are implementing them all company-wide at Cleveland Cliffs. We will continue to be able to track our progress in 2022, 2023, 2030, and beyond. And we will watch how much others will actually do here in the United States and abroad. The future, and specifically 2022, is clearly bright for Cleveland Cliffs. Underlying demand remains strong. Infrastructure-related spending has started, particularly regarding electrical steels. And the cheap shortage affecting the automotive has begun to ease, leading to meaningful pent-up demand for cars and trucks. That should benefit Cleveland Cliffs a lot more than any other steel company in the United States. In the meantime, we will take full advantage of the market's lack of appreciation or lack of understanding of our business by buying back our stock, all to the benefit of our lawyer shareholders. I will now turn it over to the operator for Q&A.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for a participant using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question is from Lukias Pipes with B Riley Securities. Please proceed.