Cleveland-Cliffs drops after seeing 'softer Q4' amid volume cuts, higher costs

Shares of iron ore miner Cleveland-Cliffs (CLF) are falling after reporting third quarter earnings per share of 18c, widely missing analyst expectations of 32c per share. Q3 EPS included an $89M, or 29c per diluted share, loss on extinguishment of debt, and a $32M, or 11c per diluted share, gain from discontinued operations. This compares to a net loss of $28M, or 12c per diluted share, recorded in Q316. The iron ore miner reported consolidated revenues of $698M, an increase of 26% compared to the prior year's third-quarter revenues of $553M. Analysts were expecting quarterly revenue of $671.94M. Cost of goods sold for the quarter increased by 15% to $538M compared to $468M reported in the Q316. CEO COMMENTARY: Cleveland-Cliffs CEO Lourenco Goncalves said, "We are very pleased with our accomplishments so far this year, in which we became a much more profitable company, substantially improved our debt profile and now pay a lot less in interest expense. With the third quarter numbers in the books, we have already outperformed in three quarters of 2017 the results of the entire 2016." Mr. Goncalves added, "On top of that, during the third quarter, we acquired the remaining 15% of the Tilden Mine, and now own 100% of all active and idled iron ore mining assets in the State of Michigan. The acquisition will allow us to become a 20 million long ton pellet supplier in 2018." CUTS OUTLOOK: The company reduced its FY17 production and volume expectations by 500,000 tons to 18.5M long tons. The reduction in sales volumes is attributable to a significant reduction in pellet nomination by a large customer, partially offset by increased export sales. Additionally, Cliffs' full-year 2017 Asia Pacific Iron Ore sales and production volume expectations were each reduced by 500,000 metric tons, to 10.5M metric tons of sales and 11 M metric tons of production. The reductions were driven by operational decisions reflecting current market conditions and quality ore availability. For 2018, Cliffs expects Asia Pacific Iron Ore sales and production volumes of 11M tons. Due to unfavorable exchange rate movements and lower production volumes, Cliffs' full-year 2017 cash cost of goods sold and operating expense expectation has been increased to $36 -$41 per metric ton. This assumes a full-year average exchange rate of 77c U.S. Dollar to Australian Dollar. CONFERENCE CALL COMMENTS: A distinct highlight of Q3 was the adjusted EBITDA of $154M, a 149% increase over the prior-year quarter. "Through nine months of this year, we've already generated more EBITDA than we did in all 4 quarters for 2016 and 2015," said Lourenco Goncalves, the company's CEO, speaking on the company's Q3 earnings call. Goncalves pointed out that production costs have been rising and guided toward costs per long ton towards the high-end of the $55 to $60 guidance range on a full year basis. SEES Q4 LOWER: Citing cost impacts from higher profit sharing based on its workforce, higher energy rates and higher maintenance costs, along with an unexpected downward revision from a key customer, the company sees a softer fourth quarter than anticipated. "However, these short-term negative impact should last only one quarter. Next year sales forecasts remains intact, and the first half of 2018 should be a strong one," added the CEO during the company conference call. PRICE ACTION: Shares of Cleveland-Cliffs are down 4.3% to $712 per share in late-day trading. OTHERS TO WATCH: Other names in the iron ore space include Vale (VALE) and BHP (BHP).