Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Donna and I am your conference facilitator today. I would like to welcome everyone to Cleveland Cliffs' third quarter 2026 earnings conference call. All lines have been placed on mute to prevent 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 Litigation 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 being broadcast at Clevelandcliffs.com. At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results excluding certain special items. Reconciliations for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I would like to introduce Lourenco Goncalves, Chairman and Chief Executive Officer. Please go ahead.

Thank you, Donna. And good morning, everyone. Three months ago, we told you that the earnings recovery at Cleveland Cliffs was becoming visible. Today, the recovery is firmly underway. Our Q3 adjusted EBITDA was $612 million, more than double the $286 million we generated in Q2. All three of our major profit drivers improved. Shipments increased. Selling prices rose in line with our expectations. And costs performed better than we had guided. One thing that has become very clear over the past year is that a healthy domestic steel industry happens when trade laws are enforced and Wayne Ford producers are no longer allowed to dump steel into our markets without consequences. Today, the United States has a much more rational trade environment, and the result is exactly what you would expect. Stronger domestic production, higher utilization rates, More investment in steel facilities and more confidence from both steel producers and steel consumers. Every conversation about reshoring manufacturing, rebuilding infrastructure, expanding energy production, strengthening the electrical grid, or supporting national defense starts with steel. At Cleveland Cliffs, We mine iron ore, produce pellets, and also produce HBI. And we produce steel from scratch with a 25,000-person workforce that spans some of the most important industrial communities in the United States. The trade policies of the Trump administration are helping create the conditions needed for companies like ours to continue investing in those communities and expanding domestic production. What the Trump administration has done on trade is not just good for Cleveland Cliffs, it's good for America. As a consequence of the renaissance of manufacturing in the United States, we are currently selling steel under the best price environment in three years. and these are the prices we need to run a thriving business that grows employment, pays its workers well, reinvests in people and equipment, and protects our critical supply chains and national defense. The most important and positive development for Cleveland Cliffs since our last call has been the strength of our 2027 round of contract negotiations with our clients. The largest portion of our steel volume consists of tons sold to service centers and end users under annual fixed price or index-linked contracts. These agreements cover every segment of light flat-rolled steel consumption outside automotive. All these contracts reset on January 1st of next year, and nearly all of these customers were more still under contract in 2027 than in 2026. Suffice to say that we have been very successful in renewing these contracts. In aggregate, the improvements should generate more than $1 billion of year-over-year EBITDA improvement before even contemplate changes of the underlying pricing index. More importantly, our customers are not fleeing to imported steel. Actually, we are finally operating within the United States with a fair commercial structure that is critical to sustaining a healthy business, allowing us to reinvest in our facilities and in our people. The strong contract renewal environment and the good health of our well-maintained equipment have created a compelling opportunity to maximize the value of our existing asset base. With that, we are postponing the Burns Harbor sea blast furnace reline from mid-2027 to April 2028. Our President and Chief Financial Officer, Celso Goncalves, will be talking about that on his prepared remarks. We have several other similar ongoing projects, bigger and smaller, the most critical being The Modernization of Middletown Works. This past quarter, we officially completed the re-scoping of our $1 billion modernization project for Middletown. This revised project was commemorated with a visit by Vice President J.D. Vance to his hometown of Middletown, Ohio, and to our flagship automotive-grade steel plant Middletown Works. The new scope entails a $1 billion investment, including $500 million of support from the Department of Energy, and will modernize one of the most important steelmaking facilities in the country, while maintaining uninterrupted production throughout the construction period. The project includes a state-of-the-art blast furnace rebuild, advanced material handling infrastructure, artificial intelligence enabled process controls, and a new cogeneration facility that will capture blast furnace gas and convert this off-gas into electricity and steam for on-site use. Our work on this re-sculpted project has already begun and we expect to be completely done in the first quarter of 2030. Other notable projects on the agenda in the coming years that fit into our reinvestment master plan include the coke plant rebuilt at Burns Harbor, a blast furnace stove rebuilt at Stelco in Canada, and the Grain-Oriented Electrical Steel Expansion Goals at Butler Works. Two weeks ago, we hosted the Secretary of Energy, Chris Wright, the Assistant Secretary of Energy, Audrey Robertson, and the Undersecretary of Commerce, William Kimmet, in Butler, Pennsylvania, where we discussed the importance of projects like these in supporting the manufacturing and energy dominance agenda of the Trump administration. They all recognize the importance of protection against unfair trade, and we are confident that they will not waver from this critical policy. We don't believe and we don't anticipate that a surge of imports could be coming into the United States anytime soon. Imports remain approximately 35% to 40% below the level that existed before the implementation of Section 232 National Security Steel Tariffs of 50% for the product and derivative products. Besides the tariff itself, transportation expense, long lead times, current exposure, and the risk that material will arrive into a different market than the one in which it was ordered are some of the problems to be faced by the brave that still try to import steel into the United States. Those factors create a meaningful risk premium. None of our customers have revolted. And in fact, it's quite the opposite. Intelligent customers understand the operational cost of an unreliable supply chain. A lower quoted price offered by a trading company has little value if the product arrives late, fails qualification, or cannot be replenished when production schedules change. We expect strong trade enforcement to remain a lasting feature of the American steel market. Because the underlying problem has not changed. Global steelmaking overcapacity remains enormous, and the state-subsidized production continues to seek an outlet. Moving to Canada, the improvement in the hot-rolled market for stelco that I discussed on last quarter's call has accelerated. It took the US market roughly 12 months to see a $400 improvement to the spot price of hot-rolled coil. It took the Canadian market only 4 months to see a similar improvement. The significant improvement we have experienced in our hot-rolled business was a direct consequence of the TRQ system Implemented by the Canadian government. The Canadian domestic market without protection is a lot more exposed than any other country in the world. And that's the reason we have been advising the Canadian government on what we believe needs to be done to finish what they have successfully started. The galvanized steel business in Hamilton, Ontario which represented less than 20% of our Stelco output is still at risk. We met in person in Ottawa a number of times to explain the Fortress North America solution supported by the entire Canadian steel industry, not only by Stelco, but we were not successful. Three months ago, In our Q2 investors conference call, we spoke about possible negative consequences of inaction, potentially putting at risk the jobs of stale co-workers, in case the Canadian government continues to ignore our requests. Unfortunately, we were not heard. Instead of a real solution, at the very last minute, The Canadian government offered us what they called financial support. But that's not what Stelco needs. What Stelco and Stelco workers really need is a market to sell galvanized steel. And government money cannot buy a market for galvanized steel. On the other hand, if the Canadian government uses the power they already have and have the ability to unilaterally exercise to block or severely reduce imports of galvanized steel into the Canadian market, Stelco can immediately bring back all the temporarily laid-off workers because that would immediately give us a market to sell and the ability to produce galvanized steel. One more time, the domestic market for galvanized steel in Canada is not big enough to accommodate two Canadian producers of galvanized steel, Stelco and ArcelorMittal do Fasco, and also an avalanche of imports that have not been adequately reduced by Canada's tariff rate quota system. Cleveland Cliffs invested 3.4 billion Canadian dollars less than two years ago to acquire Stelco, and Stelco was supposed to be an immediately accretive investment for Cleveland Cliffs. A couple months later, and for reasons clearly beyond our control or ability to predict, Stelco became a negative contributor to Cliffs' results. A situation that persisted for more than a year. Fast forward, we found a way to steer Stelco out of trouble and into a profitable path, all while waiting as long as possible to avoid the idling of the galvanized line, at a significant cost, because that business with insufficient volume was not profitable. During the many months when Hamilton's galvanizing lines were unprofitable, we were aggressively advocating for stronger measures in Canada to bring about Fortress North America. Unfortunately, more restrictive quotas for galvanized steel never materialized, leading to these limited temporary layoffs at Stelco. Notwithstanding all the attention that Stelco's limited layoffs have drawn, it's important to emphasize that Stelco is finally profitable. The enhanced TRQs implemented by the Canadian government in December 2025 and updated in June 2026 worked well for hot-rolled steel. but Stelco would be even more profitable if dumped galvanized steel imported into Canada would no longer be tolerated. The last piece of the puzzle to be addressed by the Canadian government is galvanized steel and then we would be able to bring the workers back and restart production at the galvanizing department in Hamilton, Ontario. A final point to address today. Back in the United States, our contract negotiations with the USW have extended past the original deadline, which is not uncommon. The negotiation remains professional, respectful, and productive, and I personally have a great deal of admiration for the union leadership and the workforce they represent. Our objective remains the same as it has always been, reach an agreement that recognizes our employees for their contributions while ensuring Cleveland Cliffs remains strong, competitive and well-positioned for the long-term success. I have no doubt we'll get there. and our American employees represented by the USW will be rewarded for the success we expect to have together in the coming years. With that, I will turn it over to the President and Chief Financial Officer of Cleveland Cliffs, Celso Goncalves, for his remarks.

Thank you and good morning, everyone. Three months ago, we guided to an expectation of $575 million of adjusted EBITDA for Q3 of 2026, and today we reported $612 million. As we wrap up 2026, we expect to generate $715 million in Q4, and looking ahead to 2027, under prevailing market conditions, We could realistically reach an average of more than $1 billion of adjusted EBITDA per quarter in 2027. Q3 was our strongest quarterly result in three years. The third quarter of this year showed what happens when price, volume, mix, and cost all move in a favorable direction, as adjusted EBITDA increased by $326 million sequentially from Q2. Fuel shipments were 4.2 million net tons compared with 4 million net tons in the second quarter. Third quarter 2026 automotive shipments were the highest since the third quarter of 2023. That occurred even though North American automotive production declined sequentially from the second quarter of this year. Shipment levels are expected to remain strong in Q4. albeit with the typical slower behavior seen around the holidays and more difficult cold weather periods. Average net selling price during the quarter was $1,177 per ton, an increase of $53 per ton sequentially, as we benefited from rising market pricing in both the US and Canada. We expect a similar level of improvement from Q3 to Q4, as we continue to see improvements in pricing and work through our backlogs. Index pricing in the US has increased by roughly $40 per ton each month for most of this year, and we do not see any signals in our order book pointing to a slowdown of this pace. Customers are more focused on securing volume than price at the moment. Unit cost performance in Q3 was excellent. as cost declined by $17 per net ton during Q3, exceeding our previous guidance and serving as the primary driver of our adjusted EBITDA beat. As an integrated mill operator, the secret sauce of unit cost performance is running the mills at full utilization, and our strong order book has allowed us to do that. We have been running our mills harder than at any time in several years, and the maintenance outages scheduled for Q4 are much needed. We give all the credit to our operators for bringing these mills to their full potential and keeping pace with the strong order book throughout the year. Even with the typical seasonality and maintenance outages common in all fourth quarters, we expect our Q4 adjusted EBITDA performance to exceed our Q3 performance by approximately $100 million. with an expectation of $715 million in adjusted EBITDA. That step change is shaping up to be substantially larger into Q1 of next year as pricing momentum continues and new sales contracts take effect. Given this strong momentum going into 2027, we are postponing the Burns Harbor sea blast furnace reline from mid-2027 to April, 2028. The decision is a direct consequence of the effectiveness of the targeted maintenance and short-term capital we have already deployed to extend the current campaign of the Seablast Furnace. By safely pushing out the reline, we can capitalize on a highly favorable commercial environment, preserve valuable production capacity during a period of strong demand and pricing, and enhance cash generation while maintaining operational reliability. We will still be utilizing some 2027 CapEx toward the pre-work on this project, but the actual 90-day outage has been moved into 2028. Moving the Burns Harbor Sea Furnace Reline into 2028 also preserves approximately 500,000 tons of production that had not been included in our original 2027 plan. We are also happy to report that our coal contract negotiations have concluded at rollover pricing for 2027. Coal and coke are the largest raw material components of our cost structure, so seeing this piece stable year over year gives us a lot more comfort in our outlook. Looking at 2027 in total and using the forward curve as our pricing guide, we expect 2027 to be our best year since 2021. which remains the all-time record year for adjusted EBITDA at Cleveland Cliffs. The slide deck that we released this morning shows the realistic path to more than $4 billion of adjusted EBITDA in 2027 under market conditions similar to those that we experienced this past quarter. That path includes the strength already visible in the second half of 2026, higher fixed price contract resets, and lower discounts on index-linked agreements. Last but not least, as Lourenco has already talked about today, Stelco should become a larger contributor to Cleveland Cliffs consolidated results as backlogs convert to shipments. The result of all this will be very robust cash flow generation going forward, substantially greater than what we have showed in Q3. As previously foreshadowed, Q3 was working capital intensive, which temporarily limited cash inflows during the quarter. This will begin to change starting in Q4, as the working capital build will decline and the expected proceeds from property sales come in. On that front, we closed one small asset sale in the third quarter, but most of the major properties we have for sale are all contracted to close in Q4. Some of these buyers have been granted extensions due to obstacles related to the local communities or power supply. but many of these situations have been sorted through over the past few weeks. All of this cash will be used to deliver our balance sheet. The hot world market conditions in both the United States and now in Canada have granted us an incredible opportunity to pay down debt very quickly. We have become more confident in our ability to reduce leverage below our two and a half times target by the middle of next year and we have no intention of stopping at that point. Paying down debt will remain our number one allocation of free cash flow even after we have reached that leverage target. Strategically, we continue to be very comfortable as a standalone entity. We don't need technological help from anyone from the outside to take good care of our automotive customers or grain-oriented electrical steel clients, let alone other customers in less demanding sectors. We have made this point very clear in our still ongoing discussions with POSCO. I will refer you to the POSCO Holdings Form 6-K filed with the SEC on September 30, 2026 for their disclosures on our MOU and their own update regarding the status of our partnership discussions. We are entering 2027 with momentum that continues to build, not fade. We have a world-class workforce, irreplaceable blast furnaces and other unique assets, and a business that is positioned at the center of America's industrial future. If the United States wants to manufacture, build infrastructure, expand energy production, and strengthen national security, it needs a strong domestic steel industry, and Cleveland Cliffs remains uniquely positioned to help make that happen. We like where we stand today, we like where we're headed, and we remain focused on executing every day. Thank you for your continued support of Cleveland Cliffs. Donna, with that, please go ahead and open the line for questions.