Cleveland-Cliffs aims for 2.5x or better leverage ratio from now on

By Devika Patel

Knoxville, Tenn., April 23 – Cleveland-Cliffs Inc. has a new stated target to maintain net debt at less than 2.5x the company’s trailing 12 months’ adjusted EBITDA.

As of March 31, Cleveland-Cliffs’ net debt was $3.6 billion, well below the target level.

Adjusted EBITDA was $414 million in the first quarter of 2024, compared to $279 million in the fourth quarter of 2023 and $243 million in the first quarter of 2023.

“From a leverage standpoint, we are implementing a more shareholder-friendly leverage target of 2.5x net debt to last 12 months’ adjusted EBITDA, allowing ourselves even more flexibility for aggressive shareholder returns,” executive vice president and chief financial officer Celso L. Goncalves said on the Cleveland-based flat-rolled steel producer’s first quarter ended March 31 earnings conference call on Tuesday.

“We have made a lot of progress on the balance sheet over the past few years.

“As of the end of 2023, we outperformed our prior net debt target level of $3 billion, but the rating agencies gave us no credit for the massive debt reduction last year and kept our ratings unchanged.

“If the agencies are just going to keep our ratings where they are now, we might as well give ourselves the flexibility to buy back more stock,” he said.

“At 2.5x net debt to EBITDA, there is also no risk of a ratings downgrade from where we currently are.

“We have flexibility up to 3x or 3.5x before risking any downgrade.

“By self-imposing the 2.5x threshold on ourselves, we are just allowing for more flexibility while remaining comfortably within the spectrum of our existing ratings category.

“This new leverage target just gives us the ability to continue to execute open market share buybacks and, even if we deploy the entire $1.5 billion program throughout this year, our net leverage would still be comfortably well below 2.5x,” he said.

The same leverage target would also apply in the event of potential future mergers or acquisitions, but the company does not have any M&A activity currently planned.

“This new leverage target also applies in the context of M&A,” Goncalves said.

“Any acquisition situation would also be limited to pro forma net leverage at the same self-imposed 2.5x target level.

“Obviously, any M&A that we do will come with meaningful EBITDA contribution, significant synergy realization and increased scale that will be viewed by the rating agencies and bond investors as a credit positive.

“For the avoidance of doubt, we are not currently performing due diligence on any M&A opportunity that would prohibit us from buying back stock today,” he said.

The company’s balance sheet is strong, Goncalves said, with no maturities until 2027.

“Our balance sheet continues to be in great shape with near record liquidity and no secured bonds in our capital structure for the first time since 2017,” he said.

“During the quarter, we launched the redemption of our final tranche of secured debt that was also our nearest dated bond maturity.

“With no debt maturities until 2027, we now have a three-year maturity run way that gives us even further comfort with our new target level.

“This is the best shape our capital structure has been in since Lourenco took over the company 10 years ago,” Goncalves said.

The company ended the quarter with $4 billion of total liquidity.

Cash and cash equivalents were $30 million as of March 31, compared to $198 million as of Dec. 31.

Long-term debt was $3,664,000,000 as of March 31, compared to $3,137,000,000 as of Dec. 31.

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