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Cleveland-Cliffs to Offer Senior Notes to Fund HBI Project


Cleveland-Cliffs Inc. CLF announced plans to offer to sell $275 million total principal amount of its convertible senior notes due 2025 (or up to a total of $316.25 million total principal amount of convertible notes in case the underwriters fully exercise their over-allotment option), in a registered public offering, subject to market and other conditions.

In a separate release, the company also declared plans to offer to sell $400 million total principal amount of its senior secured notes due 2024.

The convertible senior notes due 2025 are expected to mature on Jan 15, 2025, unless they are redeemed, repurchased or converted at a prior date. The notes will be convertible at the option of the holders in particular circumstances and during certain periods into common shares, cash or a combination thereof, at the company’s election. The company will determine conversion rate, interest rate and other terms at the time of pricing of notes offering.

The company expects the offering of secured notes due 2024 to be exempt from the registration requirements of the Securities Act of 1933. The notes will be severally, jointly, unconditionally and fully guaranteed on a senior secured basis by considerably all of Cleveland-Cliffs’ material domestic subsidiaries and will be secured by a first-priority lien on considerably all of Cleveland-Cliffs’ assets and the assets of the guarantors and a second-priority lien on the ABL Collateral (junior to a first-priority lien for the benefit of the lenders under Cleveland-Cliffs’ senior secured asset-based credit facility).

Cleveland-Cliffs plans to use the net proceeds from the notes offering along with the net proceeds from its convertible notes offering, to finance a significant portion of its hot briquetted iron (“HBI”) capital project as well as for general corporate purposes.

Shares of Cleveland-Cliffs have moved up 14.8% in the past six months, underperforming the industry’s 17.6% growth.

Cleveland-Cliffs, in October, reduced its sales volume expectation for its U.S. Iron Ore unit for 2017 by 500,000 tons to 18.5 million long tons, due to considerable reduction in pellet nomination by a large customer, which was partly offset by higher export sales. Further, the company expects iron-ore cash cost of goods sold and operating expense to be in the range of $55-$60 per long ton, which remain unchanged from previous expectations.

For 2017, Cleveland-Cliffs projects sales production volume of 10.5 million metric tons for the Asia Pacific Iron Ore operation, which represents a decrease of 500,000 metric tons from previous forecast owing to operational decisions. The company increased expectations for iron-ore cash cost of goods sold and operating expense to the range of $36-$41 per metric ton due to unfavorable exchange rate movements and reduced production volumes.

Cleveland-Cliffs should benefit from its pellet supply contracts with its U.S. iron ore customers which will help it to mitigate the impact of fluctuation in seaborne iron ore pricing.

The company also remains focused on de-leveraging its balance sheet. Its net debt was roughly $1.4 billion at the end of the third quarter, down from around $2 billion at the end of the year-ago quarter. Cleveland-Cliffs expects to cut net debt to below $1 billion by the end of 2017. This would lead to a reduction in its annualized interest expense.

Zacks Rank & Stocks to Consider

Cleveland-Cliffs currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space are Westlake Chemical Corporation WLK, Daqo New Energy Corp. DQ and Kronos Worldwide Inc. KRO. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Westlake Chemical has an expected long-term earnings growth rate of 10.6%. Its shares have moved up 73.5% year to date.

Daqo New Energy has an expected long-term earnings growth rate of 7%. Its shares have surged a whopping 143.7% year to date.

Kronos Worldwide has an expected long-term earnings growth rate of 5%. Its shares have rallied 127.4% year to date.

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