Cleveland-Cliffs Aims for $50/ton Cost Cut by 2025 with Asset Upgrades

Key Highlights from Cleveland-Cliffs Inc. (CLF) Q2 2025 Earnings Call

Cleveland-Cliffs Inc. delivered a strong performance in the second quarter of 2025, with several notable improvements across its financial and operational metrics. The company’s leadership provided detailed insights into its progress, future goals, and market outlook during the earnings call.

Management Perspective

The CEO, C. Lourenco Goncalves, highlighted that adjusted EBITDA for Q2 saw a significant increase of $271 million compared to the previous quarter. This improvement was attributed to higher shipment volumes and better operational efficiency, which helped reduce production costs. He also emphasized ongoing efforts to optimize the company's footprint, stating that these initiatives are already underway and will have a measurable impact in the second half of the year.

Goncalves reiterated the importance of maintaining Section 232 steel tariffs, arguing that their enforcement is crucial for supporting the domestic steel industry. He called for no exceptions or exemptions, stressing that this policy helps protect U.S. manufacturers. Additionally, he noted that while the company has seen growth in automotive steel shipments, there is still underutilized capacity in that sector.

The CFO, Celso L. Goncalves, provided further details on the Q2 results, pointing out that the quarter was driven by improved pricing, cost reductions, and record shipments. Shipments reached 4.3 million tons, an increase of 150,000 tons from the prior quarter. This allowed for more efficient mill operations, resulting in a $15 per ton decrease in unit costs. The average selling price rose by $35 per ton to $1,015, primarily due to higher index pricing, though this was partially offset by lower slab and plate prices.

The CFO also mentioned that the company's ability to source more coke internally has made Stelco a valuable contributor to the combined company. This advantage is expected to grow once the next coke contract expires.

Outlook and Financial Performance

Management reaffirmed its full-year 2025 target of reducing steel unit costs by $50 per ton, which remains on track. This cost reduction, combined with healthy HRC pricing, is expected to support growing EBITDA in the coming quarters. For Q3 2025, the CFO expects another $20 per ton reduction in costs compared to Q2, with even greater savings anticipated in Q4. However, some of the planned cost reductions were moved forward into Q2, affecting the initial expectations for Q3.

Shipments for Q3 are expected to remain at the 4.3 million ton level, with average selling prices guided by disclosed contract structures. The company ended the quarter with $2.7 billion in liquidity and no near-term maturities, indicating a manageable debt position that is expected to improve over time.

Proactive measures to reduce SG&A and capital expenditures for 2025 were also highlighted, with a total cut of $50 million. The CFO reported a cash outflow of $67 million for the quarter, mainly due to inventory reductions, but expects further working capital releases in the second half of the year.

Analyst Questions and Responses

During the Q&A session, analysts raised questions about the cadence of cost reductions, free cash flow generation, and potential capital allocation strategies. The CFO confirmed that the $50 per ton cost reduction target for 2025 remains intact, with expectations of a $20 per ton decline in Q3. Regarding CapEx, the CEO mentioned that the next blast furnace reline is scheduled for 2027, and the Middletown project will not pursue hydrogen due to availability constraints.

On the topic of free cash flow, the CFO noted that the company experienced a cash outflow of $67 million in Q2, but anticipates more working capital being released in the second half of the year. Analysts also inquired about Q3 average selling price and volume expectations, with the CFO indicating that these should remain similar to Q2 levels.

Sentiment and Market Positioning

Analysts maintained a neutral to slightly positive tone, acknowledging the company's operational improvements and expressing interest in forward-looking guidance. Management demonstrated increased confidence compared to the previous quarter, shifting from addressing underperformance to highlighting cost efficiencies and strategic initiatives.

Compared to the previous quarter, the focus of management has evolved from discussing turnaround actions to examining the sustainability of ongoing improvements, capital structure, and asset sale implications. The language used in guidance remained firm, with clear commitments to the $50 per ton cost reduction target and quarterly cadence.

Risks and Strategic Considerations

Despite the positive developments, the CEO emphasized the need for continued enforcement of Section 232 tariffs, warning that any exceptions could undermine the domestic steel industry. He also highlighted concerns about high interest rates impacting automotive demand, suggesting that a change in Federal Reserve leadership could lead to lower rates and a boost in the sector.

The CFO pointed out challenges related to imported steel penetration in Canada, which affects Stelco's pricing. However, internal coke sourcing and cost synergies are helping mitigate these pressures. The company also noted that asset sales will only proceed if they unlock value, with ongoing interest in noncore and idled facilities.

Final Thoughts

Cleveland-Cliffs delivered a strong Q2 performance, marked by a $15 per ton cost reduction, a $35 per ton increase in average selling prices, and record shipments. The company remains focused on its annual cost reduction target, proactive asset optimization, and effective working capital management. With confidence in further EBITDA growth and deleveraging, the company is well-positioned to continue driving shareholder value through strategic initiatives and market positioning.