Earnings Call: Q3 2020

Oct 23, 2020

Good morning, ladies and gentlemen. My name is Michelle, and I am your conference facilitator today. I would like to welcome everyone to the Cleveland Cliffs Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10 ks and 10 Q and news releases filed with the SEC, which are available on the company website. Today's conference call is also available and being broadcast at cleveland cliff.com. At the conclusion of the call, it will be At this time, I would like to introduce Lorenzo Gonsalves, Chairman, President and Chief Executive Officer. Please go ahead. Thank you, Michel, and good morning to everyone listening on today's call. Our 3rd quarter results are a clear demonstration of the resilience of our company and a positive confirmation of the timely actions we took during the Q2 to prepare our operations and our inventories for the recovery of our main market, the automotive industry. We were significantly affected in Q2 by the unprecedented shutdowns that took place throughout the entire auto sector for an extended period of time of more than 10 weeks. Conversely, the sharp recovery in automotive production starting in the 2nd month of Q3 made abundantly clear who are the real players for automotive and who are the ones that are less relevant as suppliers or not relevant at all. With that, our Q3 numbers speak for themselves. The $126,000,000 in adjusted EBITDA represents an over $200,000,000 recovery from Q2. During the most challenging days of the pandemic, we went on the offensive. We prepared our operations to be ready when the uptick in demand inevitably came and our clients would be back asking for just in time delivery. Our work in preparation for and ahead of the automotive sector restart gave us the excellent, still making cost performance we showed in Q3 as well as the sizable working capital release that contributed to our $150,000,000 free cash flow generation for the quarter. We use this cash flow to pay down debt, reducing our ABL balance by 100 and $50,000,000 in Q3. Since we closed the AK acquisition in March, we have cut our ABL balance in half from $800,000,000 to $400,000,000 As we have stated before, our number one priority with free cash flow is and will continue to be paying down debt. And with the robust cash flows anticipated for the coming years, we should be able to continue to consistently delever. Our good affected by a slower than usual shipment pace during the beginning of the quarter, particularly in July as well as elevated idle costs, reflecting Dearborn, Northshore and Mansfield is still being down in the early part of Q3. As such, with shipments at a healthy pace and idle costs fading, our financial performance should continue to improve as we progress towards the end of the year. With that, we expect closing 2020 on a high note with strong 4th quarter results. As we approach the end of 2020, our strong performance is not the only relevant thing we look forward to. Before the end of the year, we expect to close on our acquisition of substantially all the operations of Arsenal Metal USA. Our 3rd quarter results are a clear illustration of the power of base loads, volume and dilution of fixed costs in this industry. And in this regard, this deal will only help us improve our profitability. It has been a little less than a month since we made our announcement. And in that short period of time, our CLIF team has grown even more excited about the potential for optimization of all these assets under one roof. The combined footprints of legacy Cleveland Cliffs, AK Steel and ArcelorMittal USA are a steelmaker's dream when it comes to both quality and cost efficiencies. We are preparing for a smooth transition and to hit the ground running as soon as the deal close. Nowadays, people talk a lot in good news about technology. I cannot think of anything more technologically advanced than lithium, using explosives to pull iron ore from the ground in our mines in Michigan and Minnesota and then ending with scrap parts and components manufactured at our subsidiary precision partners using robotic operated equipment and delivering just in time to our automotive clients. We are doing exactly this and more, all within our footprint, from our taconite mines to our state of the art hot dip galvanizing lights and further downstream into our fully automated manufacturing facility for automotive parts. We fully recognize the responsibility that comes with becoming the largest flat gold steelmaker in North America. Going back 5 years ago, to my criticism of the irresponsible behavior of the major iron ore miner, I have long been a proponent of value over volume approach. Under my watch, flips has never been and will never be tempted by the stupidity of volume or volume stake. We will continue to manage our business in the most quality purpose and cost efficient way, always reaching for real value and return on invested capital. For now, are working through the regulatory approvals of our transaction, and we will certainly have more to discuss once we have closed the acquisition of ArcelorMittal USA in a couple of months. Another piece of excitement as we approach the end of the year is the upcoming start up of our state of the art direct reduction and we have now entered into the final stage of commissioning the plant. At this time, we are pleased to inform you that we look forward to start producing HBI in a few more weeks. Our original plan to become a merchant seller of HBI remains the same. However, with our AK Steel existing footprint and the announced acquisition of ArcelorMittal USA, we plan to redirect a relevant portion of our HBI production to in house utilization in our own EAF, DOF and blast furnace. Nevertheless, we should still have a meaningful tonnage of HBI available to sell to select medium milk clients. For EAS, the value proposition of this project is well known. Our 3% carbon content, HBI, is a top quality metallic feedstock without the impurities that come with scrap and without the complete disregard for environmental compliance embedded in imported pig iron from the usual sources in Russia and in Brazil. The metallization and cargo content of our HBI are very similar to the foreign pig iron that a number of American EAF based steel companies import to the tune of 5,000,000 metric tons per year. However, our direct reduction process uses pellets as feedstock instead of dirty cedar and natural gas as reductant instead of coke or charcoal, making our HBI much more environmentally friendly than foreign cigars. Our HBI also has a superior logistics advantage over imported TIGAR. We will deliver HBI to our clients in sync with their consumption rate and without imported pig iron's significant freight cost component or multi month lead time. While we use our HBI in house at Cleveland Cliffs in our own EA apps, We've also used a portion of our HBI in our blast furnace to improve furnace productivity, reduce cook rate and cost associated to cook consumption and very importantly, to reduce carbon emissions. Equally relevant, Cleveland Cliffs is a buyer of scrap and our HBI may also be used in our own BOS as coolant to reduce our scrap costs every time the cost of the scrap we buy in the market justifies such yield. Thanks to not having signed any long term contracts with our HBI client, we were able to keep all this optionality to the benefit of Cleveland Glyphs and to the benefit of certain select EAF based steel companies with which we have been working for several months and which will soon start receiving our HBI. Said another way, we fully expect our HBI to become as early as next year in 2021, a positive differentiating factor between our own blast furnaces and the blast furnaces of other integrated steel mills with no access to HBI as well as a positive differentiating factor between the mini mills that will be our clients for HBI and the other. Back to our Q3 results, I would like to highlight a few items, starting with the 80% increase in flat rolled volumes to 1,100,000 tons. The increase was almost entirely driven by the automotive market, which made up 73% of our sales. I will repeat, 73% of our sales. This number was 63% in 2018 and 66% in 2019 and is now 73% in Q3 of 2020. It pays off to be able to produce all types of material for automotive plants, particularly exposed parts. As you all know, our subsidiary company, AK Steel, has been supplying exposed parts to the automotive industry for a long, long time and from several different locations. And due to our equipment and our technological capabilities, this is actually natural for us to produce the high end material. We don't need to go out of our way to do it. It also helps to be able to deliver material on time every day and to provide second to none technological support from our state of the art R and D center and to be able to produce parts and components in house. In summary, we already are where others are trying really hard to get to. Our position around the effects of the pandemic on increased automotive demand have come to fruition. Public transportation, air travel and ride sharing are no longer considered safe by consumers. Instead, private car ownership is growing and traveling by car is trendy again for individuals and families. The U. S. Automotive seasonally adjusted annual rate increased from 8,600,000 units in April to 16,400,000 units in September, even while fleet sales remained down 30%. The recovery in car sales is consumer driven and shows no signs to end anytime soon. As it also follows people's migration from concentrated natural areas to suburban living. We are working closely with our automotive clients to keep up with this increased demand and to help them replenish their inventory. We see it at just 50 day sales outstanding, a 9 year low. The inventory situation is even more dramatic for the truck and SUV market, which, by the way, account for about 83% of our sales to automotive clients. After their initial restarts in May, the OEMs did not really hit their stride from its 2 ordering standpoint until mid August. So our 1,100,000 tonne shipping volume still reflects a little lag for the first half of the third quarter. That said, our clients have been doing well since then. This trend has also been evident in our downstream business, particularly with Precision Partners, whose sensing capabilities are in high demand. In sum, as we are very pleased with the timing of our acquisition of AK Steel and our current role in the automotive market, we are also excited with the acquisition of ArcelorMittal USA. Going forward, we intend for the high margin automotive space to remain our core commercial footprint. On the mining and pelletizing side, our better than anticipated cost reduction and the strong iron ore prices in the international market were the reasons for our good Q3 results to our legacy business. The pricing indexes that act as a proxy for this business and the volatility associated with these indexes have always been a double edged sword, making predictability of our cash flows a difficult thing. Once the Arsenal Orbital USA acquisition is complete, we should be able to secure in house demand for 90% of our valid output, significantly reducing the unpredictable influence of commodity price. The one index that stands out most is the pellet premium, which has been contaminated beyond repair by incompetent players in the market. Once the acquisition of ArcelorMittal USA closes, this particular index will be meaningless to our results, and that's a good thing. Regardless, after the closing of the acquisition of ArcelorMittal USA, our legacy ROI business will be as critical as ever for our performance and should continue to provide us a competitive advantage in the form of high quality, in house, custom made cell. As a combined company, we will continue and truly emphasize our commitment to sustainable steelmaking. We are a relevant player in the most environmentally friendly steel industry in the world, the American steel industry. We feed our integrated steel plants with belt and soon also with natural gas reduced HBI. Going forward, we plan to provide enhanced disclosures on our carbon emission reduction and overall environmental performance through our upcoming sustainability reports. With that, I will turn it over to Keith Cossi before my closing remarks. Keith, please. Thanks, Lorenzo. As you noted, our dramatic $208,000,000 quarter over quarter improvement in adjusted EBITDA was driven by increased steel shipments to the higher margin automotive business, better cost to increase production volumes and reduced idle costs and also driven by increased pellet prices. After excluding $22,000,000 in one time items such as acquisition costs, severance and inventory step up amortization, our earnings per share was in positive territory for the first time this year. In the Steeda manufacturing segment, our automotive carbon shipments increased 164% to 667,000 tons compared to 253,000 tons in the 2nd quarter, driving the bulk of the improvement in our flat rolled volumes. As noted on our last call, we expect 4th quarter shipments to climb even further and look similar to what was shipped by AK Steel in last year's Q4. On the cost side, temporary idle costs in this segment were $39,000,000 which should be reduced to less than $10,000,000 in the 4th quarter. Also, of our total SG and A approximately $60,000,000 in the quarter, dollars 37,000,000 of that flowed through this segment with most of the remainder running through corporate. As for mining and pelletizing, sales volumes of 4,900,000 long tons came in as planned and we expect to see an increase of about 10% into the 4th quarter as furnaces stock up ahead of the winter months. Pricing per long ton of $98 was supported by a higher IDEX, partially offset by a lower HRC average and lower pellet premiums. At current commodity prices, we would expect to see an increase in this rate in Q4 due primarily to the recent run up in HRC. Our cost per ton improved quarter over quarter due to reduced idle costs and with all of our mines back in operation, we should see more normalized levels in Q4. Margin eliminations for the Q3 were $29,000,000 which we expect to look similar in the 4th quarter as we restock pellets at AK Steel ahead of the winter months. This amount should then normalize to close to breakeven throughout next year, to close to breakeven throughout next year, absent the impact of the ArcelorMittal USA acquisition. On the CapEx side, of our $96,000,000 in capital spend during the quarter, about $46,000,000 was related to the HPI plant and about $14,000,000 was capitalized interest with the remainder in sustaining from approximately $535,000,000 to 500,000,000 was capitalized interest with the remainder in sustaining capital. We expect another $125,000,000 in CapEx spend for the remainder of the year, lowering our full year expectation from approximately $535,000,000 to $500,000,000 Our immense level of free cash flow generated during the quarter boosted our total liquidity to $1,200,000,000 between our cash and ABL availability. Along with improved performance across the board, we saw favorable working capital changes of $187,000,000 during the quarter. Due to the recovery in business levels we have seen, we expect to invest in working capital in the Q4 as well as make contributions to SERP and pension plans, but still expect a free cash flow positive back half of the year as predicted last quarter, which has been further enhanced by favorable market developments. In closing, the actions we took during the most challenging period of the pandemic are enabling us to benefit from an improved demand environment and working capital release. The robust recovery we foreshadowed last quarter is evident in our Q3 results and we expect further improvement in the Q4. With that, I will turn it back to Lorenzo. Thanks, Keith. Before I turn the call over to the operator for questions, I will remind you that as we work to close the Rascelomero USA acquisition, I am restricted from discussing the antitrust review process or providing any further guidance on our plans for the business and the operations to be acquired. So we ask in advance for you to delete these questions from your list. Outside of that, I am happy to discuss anything, deal related or not. Clearly, we have a lot to be excited about as we approach the end of this year. The accelerating recovery in the automotive space, the commissioning of our direct reduction HBI plan and, of course, the pending code of our second transformational acquisition in less than a year. The combination of all three provides us with all the tools we need to accomplish our operational and financial goals. We look forward to continuing to surprise everyone to the upside on what we are willing to do and capable of doing with this great company. With that, I'll turn it over to Michelle for Q and Your first question comes from Lucas Pike. Your line is open. Hey, good morning, Lorenzo, and great job this quarter. Good morning. Good morning. I wanted to start out with a big picture question. This week, we have heard from some of your peers about their desire to grow their auto volumes over the coming years. And as a market leader, are you concerned about a loss of share? Or conversely, would you say that there's even an opportunity for you to work together with these peers as you supply them with the metallics that they need to penetrate these auto markets? We'd really appreciate your thoughts on this. Thank you. Lucas, that's a great question. And again, we are like I said in my prepared remarks, we are supplying more than 3,000,000 tons, close to 3,500,000 tons to Automotive 2 ks. The acquisition of Barcelona Middle U. S. A. Obviously will increase dramatically this number. So we are already a big supplier to automotive and will become a bigger supplier to automotive. Others are coming and trying to grow market share by fully sold, totally understandable. They need metallics. We will have metallics for some. We don't have metallics for everybody. It could be a competitive process. Let's see who is going to pay the price to be an environmentally compliant supplier to the automotive industry and who are the ones that will insist with pig iron from Brazil and pig iron from Russia importing the pollution from these two countries into the United States. Let's see for how long we as a country will tolerate this type of bad behavior. So there's a lot of things in play at this point. The important thing is that automotive supply rely on relationship, quality, on time delivery capability, R and D capabilities to support future development. All these things that we have been doing for a long, long time, and it will be further enhanced as we acquired ArcelorMittal in the U. S. A. So it will be an interesting thing to see. And it's a dynamic market. There's room for all the good players. We are going to provide feedstock to the ones that want to play in an environmental compliance way, we'll be glad to compete in a level playing field. We hate that competition, but we share good That's good, Matthew. Very helpful, Lorenzo. And just to follow-up on this. You mentioned there won't be kind of enough metallics for everyone. In light of that, has there been maybe increase to increase specifically as it relates to pig iron? Obviously, there's been Ashland in the past. Now you have a broader portfolio of potential assets to choose from as it relates to Tigard. Any updated thoughts on that? Yes. Look, we are going after the acquisition of Barcelona Middle USA, Lucas, we are going to have a total of 10 restaurants. And today, we have 3. And of the 3 that we have, 1 is down, is Ashland. So we are going to be buying assets that have other blast furnace that are down right now, and they are probably in a better position to produce pig iron if and when we decide to do so. If we are going to do it or not, to be seen. I'm not going to be producing piggy iron to compete against dump piggy iron from countries that produce. That's for sure. That's 100%. So if the value proposition is there, we will produce. But don't forget, we are going to have some HBI because not all HBI will be consumed in half. We plan to use for sure HBI for our own EAF. We plan to for sure use HBI for our own best practices. We are not going to sell HBI to best plans companies. We are going to be the only ones with access to this feedstock. And that being said, we will have a lot of HPI to sell. We'll start with HPI, see how the market behaves and then we'll make a decision regarding PIGRAS. Very, very helpful. Thank you, Lorenzo. Then really quickly, just switching topics. I wondered if you might be able to shed some light on potential proceeds from asset sales. Should we be thinking tens of 1,000,000 of dollars or 100 of 1,000,000 of dollars of potential cash proceeds? Any color would be appreciated. Thank you. I'll let Keith answer that. Keith, please go ahead. So, as far as he's talking about asset sales, Lucas? Correct. Well, right at this point in time, we're really we're not contemplating anything along those lines. What we're buying and what we have now is all considered to be core for what we want to do going forward. So if anything were to come up and become non core, we would do exactly what we've done in the past, which would just be pay down the ABL. But we really don't have anything on the horizon and it's premature to speculate on the asset base. We're very happy with what we see so far and I wouldn't anticipate any significant, if at all, any divestitures. Very helpful. Lorenzo, Keith, really appreciate it and keep up the great work. Thank you. Thanks Lucas. And your next question will come from Seth Rosita. Your line is open. Hi Lorenzo and Keith. Thank you for taking our questions today. If I can start out please with a question on the outlook for your steel sales automotive customers. Obviously, this time last year, the AK business was under different management and up to the steel market was under quite a bit of stress back then. Today, you're in control of these assets and the steel market is much better shape. Can you walk us through how you view the outlook for automotive contract negotiations going forward? I know that something you touched on in the past has particularly an area of focus for being paid for the value of your customers. What would you expect is feasible, I guess, going into 2021, please? Seth, contract negotiations with the automotive clients is an ongoing thing. We don't have a date in which we reset our contract. We have been negotiating. Of course, contracts that we are renegotiating as we speak are easier to renegotiate than contracts that we negotiated a month ago or 2 months ago or 3 months ago because the market in the COVID backdrop are a lot more constructive than they were 1 or 2 or 3 months ago. So that's pretty much as much color I would give to you. I'm not going to go further than that because that would involve disclosing things that are not really things that we like to disclose. Okay. Very fair. If I can ask a second question, please, on HBI. Thank you for the color on both the ramp up in Q4 and also the customer mix that you're targeting. Can you give us an updated sense of the ramp up schedule as you expect the volumes to hit full capacity over what time horizon, please? And if we can expect if you can just speak going into 2021, would you expect a particular portion of those fees internally? Or would you first target third party sales? Yes, we are approaching production right now because commissioning is happening as we speak. So we will start producing 1.8% carbon, which is the first product that we are going to produce, and all the 1.8% product to be consumed in house. And this will be for a couple of months. As we start next year, we'll be already transitioning from the 1.8% carbon to the 3% carbon. That's the product that we'd like to put in the marketplace. So we should start having products for clients at the beginning of Q2. That's what we anticipate. And by the way, sir, you have been pushing toward, oh, you don't have context, you don't have context. Now you understand it was by design and it was all done based on the plan. We were able to buy a case deal. We were able to agree on a deal with Barcelona in Sao USA. So apparently, we can cut contracts every time we want, every time we decide to do so. But at this time around, we like it the transactional nature of the market. That's why we kept all this optionality for us. I hope now that everything is clear, you were able to connect with us, why we didn't have the wrong sanctions. Yes. That's clear, Lorenzo. And just one final question, please, if I may, an accounting question on the X-ray Nattel transaction. Obviously, there was some confusion behind the deal announcement on the different pension accounting in yourselves and Mattel between the $1,500,000,000 or 3,100,000,000 dollars pension liability. When the deal closes in Q4, can you confirm how you expect to account for the pension liability? Would it be closer to Mittal's reported 3.1% or to the economic value that you reported at 1.5%, please? First of all, there's no confusion on that. These are different approach to the same thing that's abundantly clear. I'll let Keith explain a little bit on that. Keith, please. Yes, sure. So as Lorenzo mentioned, yes, it's really it's the accounting valuation, which is, as we all know, is on a pretax basis and done consistently and applied for the accounting rules, the comparability amongst companies. And then, of course, we used an economic approach to arrive at the value of the equity of AM USA. So as far as what we would expect, all else being equal, if all assumptions that were put into the accounting numbers at AM USA, If those all those assumptions remain the same, then we're going to get the same accounting results that they got. And that was roughly $3,000,000,000 liability on the balance sheet. And then you have an offsetting $700,000,000 plus deferred tax asset on the asset side of the balance sheet. So it's 2 different purposes, but we would expect really to come out in accordance with GAAP with a similar outcome. Yes. The important thing, Chad, not to try to find something that doesn't exist. This transaction involved 2 parties that are very sophisticated deal makers. The middles and ourselves give us credit for that. So we know what we are doing. We understand the numbers and they do too. And it's a clear win win situation. Actually, the verdict of the market is just that. Since the announcement of the deal, the stock that appreciates the most in our space is good. And the second is MT, metal. So the market has spoken. And so there is no such a thing of Mittal, hold 1 on clips or all Cliffs hold 1 on Mittal. No, that's not the case. The Mittal is actually, the Rorsch Vaudeville, will stay as a meaningful shareholder uplift, at least for a while. And so there's no such a thing. And I hope you understand, there's no win win without someone losing. So we also, at least from my perspective, we know what we are doing and we know where we are going. So who is going to be the one losing for us to win? But between Chris and Marcelo Amil, the 2 participants in this transaction, it's Alba who win. And we are both very well aware of the numbers and the impact on valuation. Accounting is a different story, how we pay for, how we meet our financial commitments. It's very well known. Hiscos and I have been doing this together for more than 15 years. Your next question comes from Matthew Fields from Bank of America. Hey, Lorenzo. Hey, Keith. Hi, Matt. Hey, Matt. Maybe just a housekeeping one first. So appreciate the guidance you gave on cash flow working capital. Dovetailing with the comments from last quarter where you said $100,000,000 working capital positive, It implies an $85,000,000 roughly give back in Q4, which you kind of alluded to, along with pension contribution. Can you just give us a little sorry. We're looking at about $50,000,000 Yes, dollars 50,000,000 pension payment. It's really due January 2, but it will get because it's a favorable holiday, we'll have to make it on December 31. That gets pulled back in. And as far as the inventory and working capital potential build in the Q4, it remains to be seen how that is. I mean in a normal Q4, we might see that build because we're putting some pellets in front of the 8 ks furnaces and you might see in a normal year, you might see the OEMs slow down a little bit in December. But there are some indications that not all OEMs are going to slow down. So while we are saying there is a bit of a chance for a build in Q4, it's also possible that that number can be close to 0. If the OEMs pull consistently all the way through the holidays, we will probably not build much in the way of inventory in Q4. Okay, great. That's very helpful. And then great progress paying down the ABL. I understand you want to keep that open to help fund the working capital efficiency for our Oslo and Middle U. S. Transaction. But what's the trade off in your mind between paying down ABL and sort of buying back sort of discounted bonds in the marketplace at this point? Matt, look, this thing of buying back bonds at the discount in the market right now, I think that this ship has This was an opportunity that we took advantage in 2015, 2016 and a few times after that. But this was when we had a big opinion in the market that Greece would not survive. So that was really a deep discount that would really make the transaction a very interesting transaction for us. At this point in time, I don't see that, to be honest with you. So we have our bonds really trading very strong. And okay, we might identify a tranche here and there, but not really meaningful from the scheme of things. So there are other ways to scheme that cat, and we will be addressing at the right time. But buying bonds on the dollar, that's not something that will be available for us at this point. I don't think so. Everybody understands that we are a company that will continue to grow and our bonds should be very high. That's a fair point. We read a couple of things about maybe Nippon potentially selling their stakes in those Indiana JVs to you as part of the overall Arcelor transactions of 2 Indiana joint ventures. Can you comment on that at all? I cannot. Beyond what's in the public disclosures, the answer is no. We have that completely squared out. And what I had to inform about that, it's in the press release that we did, but we are, respectfully, accordingly. Okay. And then just a comment you made earlier, which I thought was kind of interesting, you talked about the transaction as being win win, but when you have win win, somebody loses. Maybe you could just sort of talk about how you see the industry evolving and sort of winners and losers as a result of your transaction with Arcelor? I will talk about the winners, Cleveland Cliffs and ArcelorMittal. All right. That's a fair point. Time will tell. But they are out there and they now have competition. Because before, some were dying on their own, some others were just flying above the radar. For the ones that were dying on their own, they will continue to die on their own. And for the ones that were flying with no competition, now they have competition. But the good ones will survive, the bad ones will not, and we'll All right. Thanks very much. Appreciate it and good luck closing the transaction. Thanks, Matt. Thanks, Matt. Your next question will come from Phil Gibbs. Your line is open. Hey, good morning. Good morning, Phil. Lorenzo and Company, the iron ore pricing in 3Q was strong, pretty consistent with the first half of the year. Obviously, iron ore prices were good and hot rolled prices toward the end of the quarter clearly got better. Were you taking any true up positively or negatively in the Q3 because clearly the HRC true up never came given the recovery? Go ahead, Keith, please. Yes. Phil, yes, the HRC came kind of late in the quarter. So there really wasn't probably it was actually had an offsetting impact on the rate for the quarter. The IODEX is what ran earlier in the quarter and gave us a positive true up. We always true up every quarter. We're required to do so. And the net true up for Q3 was up, I think, roughly $10,000,000 $20,000,000 affecting rate not in a tremendous way, but it had an impact on rate. Based on the pricing we're seeing right now and commodity pricing, we could see a minor small true up again in Q4, but it's only 4 weeks into the quarter. We'll see how the rest of the quarter plays out. Okay. So a few bucks a ton positive true up in 3Q and I think you said pricing a little bit above the 4th excuse me, a little bit above the Q3 and 4th. Is that right? That's right. If commodity prices stay where they are today and run even for the rest of the year, we would get another small increase in rate for the Q4. Okay, terrific. And the idling costs that you were carrying when you said those are I think you said those are lapsing, right, in the Q4 for the mining side? And then we're almost through a big slog at 8 ks. Is that correct? That's right. What we're left with is about $10,000,000 in the quarter for the steel and manufacturing side. And that's really just a normal level. That has nothing to do with volume, has nothing to do with COVID. That's just you're going to get $10,000,000 in any quarter just due to routine maintenance. So you can effectively say it's done in Q4, but there's always a little bit for just routine scheduled maintenance from time to time, half a day here, quarter day there, that kind of thing. And then last question, Lorenzo. HBI, when it gets up and running, given your position, I think there's some water access there from what I remember. Is there an ability to get material into Canada pretty easily if you need to do that? We don't see the reason for that. We in our own locations, we have consumption. And the clients that have been working with us, and I will not disclose any new clients. I'll just mention one that because he has mentioned publicly Steel Dynamics has been working with us for some time, Steel Dynamics will get HBI. So I think we are going to consume everything in the United States. Phil. Your next question will come from Alex Hacking. Your line is open. Yes. Thanks, Lorenzo and Keith. I just want to follow-up on the HBI. Maybe I missed it, but have you quantified the volume that you're going to take internally? What's the I'm sorry, the volume what? The volume of HBI that you would consume internally. Yes. Look, if you need to have a number right now, I would say that we are going to have at the very least 1,000,000 to 1,100,000 tons to sell to the market. So the balance would be consumed internally. Okay, perfect. Thank you. And then at the very least, because 1.9 is our nominal capacity. So I'm anticipating using internally a pretty big chunk, but we still have a lot of HBI to sell. Okay. And then I just want to follow-up around your comments around the environmental credentials of your automotive steel. I mean, your point is well taken that your HBI product has significant environmental advantages over imported pig iron. But is I mean, is your assertion that when we look at the whole Scope 1, Scope 2 emissions profile of your automotive steel that it would be superior to that of EAF automotive steel? Thanks. Well, let's think. When we talk scope 2, electric appliances in general, and we say that because we have electric appliances. And after we acquire Eso Lomitau, we'll double the number of EAFs that we have from 2 to 4. So we are very familiar with that. We buy electricity from the grid. And the grid in the United States is not a grid that is on solar or wind or even nuclear. It's basically natural gas and it's still a lot of old school thermal coal. So that's why scope 2 for electricity is, and that's got funds to buy that electricity. So we buy 2 to produce HBI, and we use natural gas. We are not going to be using hydrogen anytime soon in direct reduction or blast furnaces, not here, not in Europe, not in China, not in Japan, not anywhere just because the technology still doesn't exist. So our plant natural gas base will be state of the art when we start to from the environmental standpoint as well, when we start producing very soon. So I think we are very well situated to continue with our blast furnaces because we use pellets. We will be using HBI and therefore, we will be reducing coke rate. When you reduce coke rate, because the HBI is already reduced, so we don't need coke to reduce. You only need coke to produce heat. So that reduced the need for coke. You are reducing the need for coke, you are reducing C. When you reduce C, you are reducing the generation of CO2. So that's how the HBI thing works. On the other hand, EAF not only have electrodes that are graphite and graphite is key, but the EAF injects O2 to produce CO2. And that's why our HBI will have 3% because our less carbonate clients ask for higher cargo content. We can produce less, but they like 3%, so be it 3% it is. That's what the client wants. So when push comes to shove, I am not seeing that much of an advantage between the current EIS injecting CO2, generating CO2 and blast furnaces that today already use pellets and will be using HBI. So it will be a pretty interesting thing to see. And even more important, the Americas to market is 70% EAF, 30% blast furnace BOS and altogether in 2019, 88,000,000 tons. China alone has 10% of €1,000,000,000 in EAF. That's 100,000,000 tons. So if EAF was a solution, China would not repeloop it. However, China has 90% blast furnaces and all the blast furnaces are cincter and third, sinter. So 900,000,000 tons of steel in China are produced under the worst possible scenario. Nevertheless, the minor the major miners in Australia and Brazil, the Experiotinco Fortescue, but they all have targets for scope 3 and periscope 3 emissions are all, almost all, in China. So how come they commit to China? China can't cut excess capacity, but China will cut their scope 3 their emission just because they are scope 3 emission for the mine, not going to happen. So there's a lot of conversation, long story short, Alex. There's a lot of conversation, but very little action on this environmental thing. The good news is that we start in 2021, not 2030, not 2,050, not 2,050, I'm talking 2021, that's next year, we're going to be using HBI in our HBI in our vessel, then 2022, then in 2023, then in 2024. When you get to 2030, we're going to be doing this for 10 years. So we're going to be way ahead when others will get there. I hope you got the picture. Because it's hard to condensate in a a very good question, but to condensate the answer in a few minutes. I appreciate your thoughts, Lorenzo, and I take your point. It's a very nuanced discussion with a lot of facets and not easy to condense. So thank you. Thank you. And our final question for today will come from Karl Blunden from Goldman Sachs. Your line is open. Hi, good morning. Thanks for the time. I guess some things that have changed since the last time we spoke just, I guess, a month or 2 ago that the steel market is looking stronger, your operating progress is pretty clear in the 3Q results. Maybe some thoughts and you'll have some decisions that you can make regarding cash deployment and optimal leverage over time. Just be interested in your thoughts about what the right level of leverage for the business is going to be, including those legacy liabilities as you ramp up the combined company. Yes. Look, Carl, everything we do in this company is geared toward reducing the leverage. Even the ArcelorMittal transaction is deleveraged. Think about that. Prior to the acquisition, we're 4.3x levered. After the acquisition, because we are using stock and because of the structure of the acquisition, it's going to be 3.6 times. And that was when we announced. Now we announced the results. We already paid down the ABL. And since we announced the acquisition of AK, we paid the ABL in half from 800,000,000 to 400,000,000 dollars So we'll continue to deleverage. And EBITDA generation will be all deployed to pay down debt. So there is no second news. There is no, oh, but why did you do this or why you can do that? We're not going to do anything. We're going to pay down debt. And we are going to continue to protect equipment, the book CapEx and all these things are taken into consideration. But the use of excess cash flow will all go towards reducing that. So you should expect us to be below 3x very soon, and then we'll go from there. So the next target is to bring leverage below 3 times. All right. That's helpful. Maybe this is too specific. But when you think about the trade offs between secured and unsecured debt price versus flexibility around covenants and so on, is there guideposts we should think about in terms of what your priority is there? Yes. Another great thing that we are acquiring together with ArcelorMittal assets, we are improving dramatically our security capacity. But we are also trading in a trend that will allow us to issue unsecured debt easily and at a very low coupon. So all things considered, we are in the right spot in terms of continuing to use our all of our expertise in the debt markets and to continue to make the right moves in terms of improving our capital structure and reducing our leverage. That's very helpful. Thanks very much. Thank you. We have no further questions in queue. I turn the call back over to the presenters for closing remarks. Thank you very much for your interest in Brindle and Cliffs. Next time we speak, we will be a bigger company. And we are very excited, very much looking forward to speak with you after the acquisition of ArcelorMittal USA close. Thank you so much, and have a great rest of the week. Bye now. Thank you, everyone. This will conclude today's conference call. You may now disconnect.