Executive Summary / Key Takeaways

• Three distinct EBITDA catalysts—slab contract expiration ($500M), automotive recovery ($250-500M), and footprint optimization ($300M+)—are converging to create an $800 million to $1.2 billion annualized profit swing by 2026, yet the stock trades at a distressed 0.4x sales multiple that implies zero probability of success.

• Cleveland-Cliffs' vertically integrated model, anchored by five iron ore mines supplying 20% of U.S. pellet production, provides a structural cost advantage against scrap-dependent EAF competitors when busheling prices surge, creating a counter-cyclical moat that strengthens as commodity markets tighten.

• The company's aggressive balance sheet repair through non-core asset sales ($425M under contract), debt refinancing (extending maturities to 2034), and working capital reduction signals management's recognition that leverage remains the primary constraint on valuation multiple expansion.

• Execution risk dominates the investment thesis: the permanent closure of Steelton, Conshohocken, and Riverdale facilities must deliver promised savings, automotive OEM contracts must convert to higher-margin volumes, and the Stelco acquisition must overcome Canada's 65% import penetration that has rendered the Canadian market "disappointing."

• Trading at $13.03 with an enterprise value of $15.4 billion, CLF offers an asymmetric risk/reward profile where successful catalyst realization could drive 50-75% upside through multiple re-rating, while failure to generate positive EBITDA in 2026 would likely trigger covenant concerns given 1.4x debt-to-equity ratio and negative 4.9% gross margins.

Setting the Scene: From Iron Ore to Automotive Steel

Founded in 1847 and headquartered in Cleveland, Ohio, Cleveland-Cliffs Inc. spent 173 years as a pure-play iron ore miner before executing one of the most aggressive transformations in American industrial history. The 2020 acquisitions of AK Steel and ArcelorMittal USA (MT) created North America's largest flat-rolled steel producer, but the real strategic value lies in vertical integration that competitors cannot replicate overnight. Today, CLF controls the entire value chain from five iron ore mines in Minnesota and Michigan through pelletizing, direct reduced iron production, primary steelmaking, and downstream finishing operations that supply the most demanding automotive OEMs.

This integration matters profoundly in the current trade environment. While Nucor (NUE) and Steel Dynamics (STLD) depend on volatile scrap markets where busheling prices averaged $461 per long ton in Q3 2025, CLF sources the majority of its iron feedstock from company-owned mines at stable internal transfer costs. When Brazilian pig iron tariffs hit 50% on August 1, 2025, EAF competitors faced input cost inflation while CLF's blast furnace model actually strengthened its relative cost position. The company is the only major U.S. steel producer that produces less steel than the country consumes, creating a permanent arbitrage opportunity against imports.

The industry structure pits CLF's integrated blast furnaces against the EAF mini-mill model that dominates 70% of U.S. steel production. This isn't just a technological choice—it's a strategic bet on trade policy and automotive requirements. EAFs excel at producing commodity grades for construction and appliances, but automotive exposed parts demand the precise metallurgical control that only integrated mills with vacuum degassing and continuous annealing can deliver. CLF operates nine automotive-grade galvanized plants, five designed for exposed parts, giving it a 30% share of automotive shipments in Q3 2025 that commands premium pricing.

Technology, Products, and Strategic Differentiation

CLF's competitive moat rests on three pillars that EAF competitors cannot easily replicate: iron ore self-sufficiency, automotive-grade steel expertise, and critical materials production. The company's five mines produced enough pellets in 2024 to cover 100% of internal steelmaking needs while supplying third-party customers, creating a natural hedge against the 13% year-over-year increase in seaborne iron ore prices that squeezed non-integrated producers. This upstream integration translates directly to margin stability—when scrap prices spike, CLF's cost curve remains flat while Nucor and Steel Dynamics see immediate margin compression.

The automotive focus extends beyond commodity hot-rolled coil. CLF's $150 million bright anneal line commissioning at Coshocton Works in Q2 2025 enables production of premium stainless steel for high-end automotive trim and critical appliance applications, where ASPs run 15-20% above standard grades. More importantly, the company secured multi-year agreements with all major automotive OEMs covering higher volumes and favorable pricing through 2027-2028, locking in a recovery that management estimates will generate $250-500 million in annual EBITDA. These contracts reflect a structural shift as automakers reconsider aluminum substitution following the Q3 2025 fire at the nation's largest automotive aluminum mill, which revealed supply chain fragility and cost volatility.

Critical materials represent an underappreciated optionality. The Defense Logistics Agency's five-year, $400 million fixed-price contract for grain-oriented electrical steel (GOES) underscores CLF's strategic importance to national defense grid modernization. With only two domestic GOES producers, CLF's Butler project enjoys a $75 million DOE grant and produces material essential for transformers supporting EV charging infrastructure. The company is also exploring rare earth mineralization at sites in Minnesota and Michigan, aligning with the national strategy for critical material independence. While still early-stage, successful development could transform upstream tailings from a cost center into a revenue stream worth hundreds of millions.

Financial Performance & Segment Dynamics

The financial narrative of 2024-2025 reads like a turnaround playbook in real-time. Q4 2024 marked the trough, with an $81 million EBITDA loss driven by the weakest steel demand since 2010 (excluding COVID) and automotive shipments hitting post-pandemic lows. Q1 2025's unacceptable $174 million EBITDA loss forced management's hand, triggering the most aggressive footprint optimization in company history. By Q3 2025, adjusted EBITDA improved to $143 million, a 52% sequential increase that demonstrates the operating leverage inherent in the integrated model.

Segment performance reveals the strategic pivot in progress. The Steelmaking segment generated $4.56 billion in Q3 2025 revenue, up 3.2% year-over-year, despite a 3.9% decline for the first nine months. The 4.9% increase in steel shipments to 4.03 million tons combined with a $17 per ton sequential ASP improvement to $1,032 shows pricing power returning as automotive mix improved from 26% to 30% of total shipments. This mix shift matters because automotive steel carries 300-400 basis points higher margin than commodity grades sold through service centers.

The Other Businesses segment, while small at $173 million in Q3 revenue, grew 15.3% year-over-year, driven by tubular and tooling operations that provide customer solutions with higher margins than commodity steel. Stelco contributed 9% of total sales in Q3, but its real value lies in coke synergies—using excess Hamilton coke production in U.S. mills contributed $120 million of identified synergies that will be fully captured by year-end 2025. This integration benefit partially offsets the "disappointing" Canadian market performance, where 65% import penetration reflects the Canadian government's "completely unwilling" stance on dumping enforcement.

Cash flow tells a cautionary tale. Nine-month operating cash flow of $105 million and free cash flow of negative $590 million reflect the working capital build from idling facilities and inventory rebalancing. However, liquidity remains adequate at $3.1 billion total, with no near-term maturities after the September 2025 refinancing extended debt maturities to 2034. The company reduced its CapEx budget to $525 million from $700 million and SG&A to $550 million from $625 million, demonstrating capital discipline while maintaining critical growth investments like the Coshocton bright anneal line.

Outlook, Management Guidance, and Execution Risk

Management's guidance frames 2025 as a transition year and 2026 as the inflection point where all catalysts converge. The December 9, 2025 expiration of the ArcelorMittal slab contract represents a $500 million annualized EBITDA benefit starting in 2026. This contract, priced against the Brazilian FOB index, became "onerous" as tariffs disrupted the historical correlation between slab and HRC pricing. Reclaiming this 1.5 million tons of annual capacity for internal automotive sales will boost margins by eliminating a loss-making pass-through arrangement.

Automotive recovery provides the second catalyst. Management anticipates $250-500 million in annual EBITDA benefit as OEMs increase U.S. production to avoid tariffs on imported vehicles and parts. The average age of U.S. light vehicles reaching an all-time high of 12.8 years supports replacement demand, while Section 232 tariffs at 50% create a 24% price premium for domestic HRC over imported alternatives. CLF's nine automotive plants stand ready to capture this demand, with management noting that aluminum's participation in automotive bodies is "shrinking" as OEMs trial conforming parts using CLF steel on equipment originally designed for aluminum.

Footprint optimization delivers the third catalyst. The permanent idling of Steelton (rail), Conshohocken (specialty plate), and Riverdale (high carbon sheet) facilities, combined with the Minorca mine closure and Dearborn Hot End idling, targets over $300 million in annual savings. Q3 2025 was the first full quarter reflecting these changes, with unit costs declining $20 per ton sequentially and management confirming the $50 per ton year-over-year reduction target remains "firmly on track."

Execution risk centers on three variables. First, the Cleveland #6 blast furnace restart must successfully replace Dearborn's hot metal production without cost overruns. Second, Stelco must pivot from exporting 65% of production to the U.S. toward exclusively serving the Canadian market, a strategy that requires government action on dumping that has been absent to date. Third, the company must complete $425 million in non-core asset sales to fund debt reduction, with data center developers showing interest in idled facilities' power and water infrastructure.

Risks and Asymmetries

The thesis breaks if steel demand fails to recover as management projects. A 1% decline in North American light vehicle production would erase $100 million of the anticipated automotive EBITDA benefit, while a 10% drop in HRC prices would impact revenue by $1 billion annually. The company's high operating leverage cuts both ways—Q3's 52% EBITDA margin expansion demonstrates the upside, but Q1's $174 million loss shows how quickly fixed costs overwhelm profitability when volumes fall.

Canadian operations represent a binary risk. If the Canadian government remains "completely unwilling" to address 65% import penetration, Stelco will continue generating sub-par returns on the $1.2 billion acquisition price. However, if Ottawa implements dumping duties similar to U.S. Section 232 tariffs, Stelco's EBITDA could improve by $150-200 million annually, creating upside not reflected in guidance.

Leverage remains the critical constraint. With $15.4 billion enterprise value and net debt of approximately $8 billion, CLF's 1.4x debt-to-equity ratio limits financial flexibility. The company must generate positive free cash flow in 2026 to avoid covenant issues, making the $800 million EBITDA improvement not just aspirational but essential. Any slippage in catalyst timing or magnitude could force equity issuance at distressed valuations, diluting shareholders and derailing the turnaround narrative.

Competitive Context and Positioning

CLF's 14% North American market share positions it as the second-largest flat-rolled producer behind Nucor's 25%, but the comparison highlights strategic divergence. Nucor's 11.5% operating margin and 4.6% ROA reflect the EAF model's cost advantage in stable scrap markets, while CLF's negative 3.0% operating margin and negative 4.5% ROA demonstrate the integrated model's vulnerability to cyclical downturns. However, CLF's vertical integration provides a counter-cyclical advantage—when scrap prices surge, Nucor's margins compress while CLF's remain stable, allowing market share gains in automotive segments where EAFs cannot meet specifications.

Steel Dynamics' 10.5% operating margin and 5.6% ROA show similar EAF advantages, but its lack of iron ore mines creates supply chain vulnerability that CLF exploits. The 50% tariff on Brazilian pig iron, which EAFs use as a scrap supplement, disproportionately impacts STLD and Nucor while CLF's blast furnaces consume internally produced pellets. This dynamic explains why CLF's management lobbies to maintain pig iron tariffs while EAF competitors seek exemptions.

U.S. Steel (X) and ArcelorMittal represent the integrated peer group, but both trail CLF's automotive focus. U.S. Steel's 1.0% operating margin and 1.9% ROA reflect aging assets and energy market exposure, while ArcelorMittal's 4.1% operating margin and 1.9% ROA show global diversification that dilutes North American profitability. CLF's 30% automotive shipment mix materially exceeds both peers, creating pricing power that partially offsets its cost structure disadvantage.

Valuation Context

Trading at $13.03, CLF's $7.4 billion market capitalization and $15.4 billion enterprise value represent 0.4x trailing sales and 0.8x enterprise value to revenue—multiples that price the company as a distressed commodity producer with no path to recovery. The price-to-book ratio of 1.2x suggests the market values assets at only a modest premium to their accounting value, reflecting skepticism about the company's ability to generate returns above its cost of capital.

Peer comparisons highlight the valuation discount. Nucor trades at 1.2x sales and 1.3x EV/revenue with a 23x P/E, while Steel Dynamics commands 1.4x sales and 1.6x EV/revenue at 23x earnings. Both competitors enjoy premium valuations due to their EAF model's superior returns. CLF's negative 9.0% profit margin and negative 25.3% ROE justify some discount, but the magnitude suggests the market assigns zero probability to management's $800 million EBITDA improvement target.

The valuation becomes more compelling when considering potential 2026 EBITDA. If all three catalysts materialize at the low end of guidance ($800 million total), CLF would trade at approximately 5x EV/EBITDA—a 50% discount to Nucor's 10.5x and Steel Dynamics' 14.6x. At the high end ($1.2 billion), the multiple falls to 3.3x, implying either massive multiple expansion potential or a deep margin of safety if execution falters. The company's $3.1 billion liquidity provides a two-year runway to realize these improvements without external financing, making the risk/reward profile asymmetrically attractive for investors willing to bet on management's execution.

Conclusion

Cleveland-Cliffs stands at a rare inflection point where self-help initiatives and policy tailwins could generate $800 million to $1.2 billion in annual EBITDA improvement by 2026. The vertical integration that burdened the company with high fixed costs during the 2024 downturn now positions it to capture disproportionate upside as tariffs, automotive recovery, and cost reduction converge. Trading at 0.4x sales with a clear catalyst path, the stock offers compelling upside for investors who believe management can execute the most complex turnaround in the steel industry's recent history.

The investment thesis hinges on flawless execution of facility closures, successful automotive contract conversion, and stable steel demand through 2026. Failure on any front would likely trigger covenant concerns given the company's 1.4x debt-to-equity ratio and negative cash flow generation. For investors, the critical variables are the timing of the slab contract expiration benefit, the pace of automotive volume recovery, and the completion of non-core asset sales to de-risk the balance sheet. If these pieces align, CLF's valuation discount to EAF peers will close rapidly, rewarding patient capital with outsized returns in an otherwise mature industry.