Cleveland-Cliffs Inc. (NYSE:CLF) shares slipped more than 10% after its latest quarterly earnings highlighted pressures in the steel market.
During the third quarter of 2024, the company saw a decline in EBITDA, increased net debt, and a reduction in capital expenditure plans amid challenging conditions in the automotive sector.
The steel producer reported Q3 earnings before interest, taxes, depreciation, and amortization (EBITDA) of $124 million, close to consensus estimates but substantially lower than the previous quarter’s $323 million.
Analysts at Jefferies noted that Cleveland-Cliffs’ performance was impacted by a 7% drop in average steel product selling prices compared to Q2 and weaker-than-expected automotive demand, which led to the temporary idling of the Cleveland #6 blast furnace.
The company’s free cash flow for the quarter was negative at $235 million, attributed to a net loss of $230 million. This drove net debt, excluding pension and other employee benefit liabilities, from $3.4 billion to $3.7 billion, translating to a leverage ratio of 3.3 times trailing twelve-month EBITDA, well above Cleveland-Cliffs’ target of 2.5 times.
Analysts expect the recently completed Stelco acquisition to further increase net debt, though the additional low-cost production from Stelco is expected to support EBITDA growth over time.
In light of rising debt levels, Cleveland-Cliffs is reprioritizing its strategic investments, with a renewed focus on debt repayment.
Jefferies believes this strategy, along with anticipated synergies from Stelco and operating cost reductions, could improve free cash flow and bolster the company’s balance sheet in the coming quarters.