Good morning, ladies and gentlemen. My name is Mariama, and I'm your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs 2019 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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-K and 10-Q and news release filed with the SEC, which are available on the company website. Today's conference call is also available and being broadcast at clevelandcliffs.com. At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I would like to introduce Keith Koci, Executive Vice President and Chief Financial Officer.
Thank you, Mariama, and thanks to everyone joining us this morning. Before getting into the discussion of our second quarter results and outlook, I wanted to briefly highlight the financial transaction we completed earlier in the quarter to improve our balance sheet. Shortly after we reported our last quarter results, we issued $750 million in unsecured notes due in 2027 at a five handle coupon. This new issue allowed us to both retire legacy notes coming due in two years and reduce the size of our largest debt maturity tower in 2025 by $600 million. With the transaction closed, we have no debt coming due until the year 2024. Also, our previous $1.4 billion maturity tower in 2025 was nearly cut in half and pushed out another two years to 2027. We accomplished all of this without a material change to our annual debt service expense.
Even though our balance sheet was already in excellent shape, we are and will always be on the lookout for opportunities like these to make it stronger. Now to our financial results. For Q2, we reported total company adjusted EBITDA of $249 million, a dramatic increase from $21 million in the first quarter, which is typical for the seasonality of our business as it is today, pre-HBI. Our mining and pelletizing segment generated $281 million in adjusted EBITDA, an impressive result driven by stronger than expected shipping volumes of 6.2 million long tons as our customers maintained a healthy appetite for pellets throughout the quarter. For the full year, we were able to maintain our pellet sales forecast of 20 million long tons.
Despite some reduction in nominations from one major client, our newly accomplished ability to produce and export meaningful tonnage of DR-grade pellets, coupled with better overall pricing in the seaborne market, were enough reasons for us to allow and maintain our forecast. Lourenco will discuss that in more detail later in this call. The remainder of our expected 2019 shipping volumes will be more back-loaded to the fourth quarter when the mills usually stock up before the annual winter freeze. During the second quarter, we hit a six-year high on pellet price realization with an average net back selling price of $113 per long ton. That was driven by the rapid increase of iron ore prices we have seen this year, which was good enough to more than offset the negative effect of falling domestic hot rolled coil prices throughout the quarter.
With HRC index pricing reaching a low of $510 per short ton during the second quarter, we had to make a sizable negative true-up adjustment to revalue pellets sold in prior periods. Conversely, because our sales contracts utilize full-year averages as indices and some contracts have quarter lag provisions, we have not fully benefited from the latest levels of iron ore pricing in our price realizations just yet. As iron ore prices continue to average up, and assuming the recent recovery in steel prices continues on its current upward trajectory, we would no longer be subject to negative true-ups and can expect even higher selling prices for our pellets in the future.
Our cash cost for the quarter was $67 per long ton, consistent with the guidance we gave last quarter, where we expected to be at the high end of our outlook range, due primarily to higher royalties and higher profit sharing. As a whole, all other major cost components, including labor, energy, stripping, recoveries, and materials, have remained consistent with our original forecast. We expect cash costs to remain steady at the Q2 level during the back half of the year. Another positive item for the second quarter was that due to the completion of our Northshore plant upgrade ahead of schedule, we were able to record a small volume of intercompany DR-grade pellets to our metallic segment.
Because of the early completion of the Northshore project and coupled with the anticipated ahead of schedule startup of the Toledo plant, we now plan on transferring more pellets to our facility this year than previously budgeted. We are increasing our DR-grade pellet intercompany sale expectation from 500,000- 800,000 long tons, all of which to take place in the third quarter. Because these pellets are for intercompany use, unlike our third-party commercial arrangements, these sales are recognized immediately after they are produced instead of when delivered, explaining why all 800,000 long tons will be recognized as sales in the third quarter. Accounting-wise, you can begin to see how the intercompany DR-grade sales are being treated in our financials. The margin we will generate by selling DR-grade pellets to ourselves should be roughly comparable to the industry high average margin of the rest of our merchant pellets.
We record the revenue and cost of goods sold associated with the transfer at the segment level, these intercompany sales are eliminated from our consolidated results. As such, in this quarter and next quarter, our corporate consolidated revenue and cost of goods sold will be lower than that shown in the mining and pelletizing segment, and the eliminated margin on intercompany sales will run through the corporate line item in our segment breakdown of EBITDA. Finally, once the HBI associated with these pellets is actually sold, you will see this margin re-included in our consolidated results and EBITDA. This will have the positive impact of removing some of the seasonality inherent in our pellet business, since we will be able to sell HBI throughout the winter.
In wrapping up my remarks, with less than a year left until the major capital spend on HBI is done, we are just on the brink of our much-anticipated, overwhelming cash flow generating position. It may be difficult for some to see right now, given we are still in peak capital spending mode on HBI. In less than 12 months, we'll be looking at a business that is set up to throw off enormous amounts of free cash. I like to say, with our HBI plant completed and in full production, free cash on an annualized basis will be EBITDA - $220 million. Other than $100 million of sustaining capital and $120 million of debt service, all the rest of the EBITDA is free cash, since we will continue to use our NOLs and not have to disburse any cash to pay taxes for the foreseeable future.
We are not even adding to this free cash number the cash coming from our future AMT refunds, which are real, as you all know. At price levels comparable to what we've seen this year and with HBI layered in, we would expect to generate about an annualized $1 billion in EBITDA, meaning that we would have around $800 million in free cash flow to return to shareholders, primarily via stock buybacks and increased dividends. On that positive note, I will turn it over to Lourenco.
Thank you, Keith. Thanks to everyone for joining us this morning. I'm going to pick up right where I left off in the last quarterly conference call with the same exact message I had last quarter regarding the current and future situation of supply and demand of iron ore. Welcome to the new normal. Get used to the new normal. There's no short-term or medium-term solution for the shortages in the seaborne iron ore market. With Cleveland-Cliffs' profitability closely tied to the iron ore market, we have a nice future ahead of us. This is exactly what I told you in the last call when the IODEX had just passed the $90 mark on its way up.
At that price level, or is likely above that number, the commodities desks of several financial institutions and other so-called experts, one after the other, have called the iron ore benchmark price at a peak. Here we are today, three months later, with the IODEX more than 35% higher than that at $121.85. One more time, there is no short-term or medium-term solution for the shortages in the seaborne iron ore market. Welcome to the new normal. Get used to the new normal. Despite our prediction during last quarter's call, and despite the iron ore price increasing day after day since then, the stock market had no conviction about how much or even if our second quarter results would actually benefit from that. As always, we did not fight the tape. Instead, we took advantage of the prevailing skepticism.
We increased the size of the share repurchase program and bought back another $130 million worth of Cliffs shares during the second quarter, bringing the total amount spent to buy back shares to $300 million since the inception of the program just eight months ago. Other than HBI, there was no better use of our capital than repurchasing shares, which we did at an average of $10 per share. Now, after buying back a total of 10% of our outstanding shares, our long-term shareholders own over 10% more of the company than they did just a few months ago. Without having to do a thing but stay long. Soon enough, when we're through peak capital spend and producing HBI at nameplate, this will be seen as an absolute no-brainer. As always, I thank very much all the sellers of the shares we bought back. You sold your shares very cheap.
Again, thanks for your gift to Cliffs' shareholders. Besides the new normal for iron ore prices, the other view that drives our moves going forward is that the current weakness in the domestic steel market is temporary. Actually, we are already seeing the recently announced steel price increases sticking, and we have conviction that we have already passed the bottom for hot-rolled steel prices in the U.S. As far as domestic steel prices, from now on, the trend is upward. Despite the low HRC price being an important part of the pricing formulas in our contracts, we were able to hit a six year high in pellet price realizations thanks to the IODEX performance. Just as we intended when we redesigned the new pellet contracts for Cleveland-Cliffs a few years ago.
Unlike four or five years ago, we are now much better protected to weather demand reductions related to speed bumps in the domestic steel sector. If you recall, in 2015, we had several of our customers curtailing production at their blast furnaces, and we were forced to idle two of our mines in response. Since then, we have been actively mitigating the situation and taking preventive measures against the possibility of such problem occurring ever again. First, with the addition of our HBI plant, we have created new demand for almost 3 million long tons of pellets per year. This new demand will, in good times, tighten the market, and in bad times, provide us with volume certainty while paying ourselves at a healthy margin. Second, our new pellet contracts have more take-or-pay components that minimize nomination reductions, providing us with another layer of protection.
Third, we now have more optionality and product flexibility. We can make standard, flux, superflux, and DR-grade pellets. We can access both the EAF metallics market or the traditional blast furnace market with quality specs for the full spectrum of needs. Finally, with the new normal in iron ore pricing, we have the export market as another high-margin outlet for our pellets. While we continue to first meet the obligations under our local supply agreements, in the event of nomination reductions, we can now sell to buyers overseas and still make decent money. Although the pellet premium hasn't moved much since the beginning of the year, pellets are much more expensive in the seaborne market by virtue of the increased IODEX. Remember, the pellet premium is the sum of the iron ore price with the pellet premium.
Just doing simple math on the IODEX and pellet premium, and assuming current freight charges to ship out of the CWA, in today's export market, we would be able to enjoy price realizations in the seaborne market similar to what we currently get from our long-term domestic clients. That effectively provides us with another accretive alternative source of demand for Cliffs pellets outside of the U.S. In fact, over the past months, we saw one of our customers pulling forward planned maintenance into this year and lowering its pellet nomination as a result. So far, we are offsetting these revisions by sending more pellets to our Toledo facility, which is actually necessary given the accelerated startup date of the HBI plant. We are also scheduling a few vessels to the export market, including sales of both blast furnace and DR-grade pellets to seaborne customers.
As you can see from our consistent cost results, we'll continue to produce these pellets in a reliable, safe, and environmentally friendly manner and should be able to accommodate revised pellet nominations without complication. Also, we can always assume that a portion of the demand not being served by this one steelmaker is actually being covered by another Cliffs customer, as we actually saw some incremental demand from another client. In any event, our strategic foresight to be ready for these scenarios is the reason why we are heading toward our fifth consecutive year of EBITDA growth, even with low domestic steel prices, offset by a new normal of robust IODEX and the scarcity of pellets in the seaborne market. We will be even more protected next year and going forward with the addition of HBI to our portfolio.
With the conclusion of our Northshore upgrade project in the second quarter and initial production of DR-grade pellets ahead of schedule, we were also able to push the conclusion of our Toledo HBI plant construction to an earlier startup. With that, we are now aiming to start commercial production of HBI no later than June 2020, or two months ahead of the original schedule. At this time, I would like to personally thank and congratulate Craig Filizetti and all involved in the completion of the Northshore upgrade for their hard work. Steve Pause and all involved in the completion of the Northshore upgrade for their hard work. First, for delivering a DR-grade pellet on spec in the very first batch. Second, for making possible an earlier startup in Toledo.
On that note, this past quarter was a productive one for us in Toledo. Among other accomplishments, we finished the stick built portion of the reactor tower, which currently stands 200 feet tall. From now on and over the next few months, we'll be using the largest crane currently in operation in America to finish the remainder of the tower and to complete the 450 ft tall structure. We're also moving our General Manager of Construction in Northshore, Steve Pause, to help the General Manager of Toledo, Craig Filizetti, and I have a combination of Batman and Batman taking care of the very end of the construction of Toledo, which we're very excited with. With project completion and commercial production now less than a year away, we have reached a spot where we have certainty and visibility on total spend.
We have always been working with a 20% construction contingency expectation, which is the usual standard for a project of this size. Now that we have clarity on completion, we are pleased to report that we only need to allocate about 13% as contingency. The primary items making up this allocation are additional infrastructure and additional soil stability work necessary to facilitate a bigger and more automated plant than originally planned, and most importantly, the extra labor costs driven by the advanced construction schedule. After allocating the contingency and assuming a bustling scrap price environment going forward, consistent with the last two years, the final IRR of the project calculates at a very good number of 26%. Private equity would kill for a 26% internal rate of return. That's our number. The rewards of our HBI plant are not just financial.
Those that closely follow the industry are well aware that the transition from blast furnaces to EAFs further enhances our already pristine environmental and emissions profile in the U.S. The steel is present in virtually everything. Despite several centuries of effort, the world has yet to identify a viable replacement for steel while producing and consuming steel at a pace that continues to accelerate. However, I made this point before and I will do it again, the world needs more steel, but the world also needs less pollution. I really hope that the current move we have been seeing in the capital markets toward environmental, social, and governance compliance to be real. If that proves to be the case, in the not-so-distant future, only ESG-compliant companies like Cleveland-Cliffs and countries like the U.S. will deserve the allocation of capital from sensible investors.
When that happens, China and other steel-making countries like India will not be able to continue to pollute the world environment as they do now, almost completely unchecked. Particularly in our space, once clean steel making is finally embraced worldwide, the future will be high-grade iron units, meaning high iron content ore, pellets, and metallics. This is what Cleveland-Cliffs is about. Any initiative we explore in the future will be centered on these core products, predicated by what we feel is an undeniable trend. Wrapping up, we are already benefiting from the new normal with a shortage in the iron ore market, particularly for pellets. Soon enough, we should benefit from the next trend, an overdue push to environmentally friendly steel making worldwide. With that, I'll turn the call back over to the operator for questions.
At this time, I would like to remind everyone, in order to ask a question, please press star then one on your telephone keypad. We'll pause for a brief moment to compile the Q&A roster. Your first question comes from Lucas Pipes with B. Riley FBR. Your line is open.
Hey. Good morning, everyone. Congratulations on another very good quarter.
Thanks, Lucas. Good morning.
Good morning. Lourenco, I first wanted to ask on the CapEx side. There were a couple moving pieces. You mentioned, the lower contingency of 13%, versus the 20% previously. You increased this year, well, the way I understood it, maintaining the total CapEx guidance for the project. Could you just kind of walk us through it? What should we expect for 2020 in terms of capital spending, and where would we see the benefit of the lower contingency? Thank you.
Okay, Lucas, thanks. The budget continues to be $830 million. We are actually giving a few good news. We are delivering a few number of good news regarding the project. First, we are now less than a year away from conclusion. With that, with the fact that we anticipate at least two months, the conclusion of the project and startup of the plant, it is time to allocate contingents. Based on our best estimate at this point, we do not need the entire 20% that we have been working with since the beginning of the project, only 13%. If you calculate, the number will be something like $110 million on top of the $830 million that we are talking now. The fact that we are spending more this year than we previously anticipated is very easy to understand.
We are spending money this year that we were supposed to spend only next year. Things that were in January or February of next year are now in December, November, October of this year. We need to bring these expenses up front because we are ahead of schedule. That is the difference in 2019 CapEx. As far as 2020, it will be the balance. Calling the $830 million+ the contingency as the number for completion, no matter if we do a little more in 2019 or a little less in 2020, we are still doing the same thing. That is the entire story.
Got it. That is helpful. Thank you for that. The 26% IRR, does that include any of the benefit that you would capture on the mining and pelletizing side? You mentioned you are going to tighten the pellet market as well. I see opportunity for higher prices when you sell intercompany versus some of the contracts you have out there. Would that benefit be captured in the 26% IRR?
Yeah. Thanks for asking the clarification. The answer is no. We are calculating the 26% IRR after pay for the DR-grade pellets that we are delivering from Northshore to Toledo at market price. If you include the benefit of the production of DR-grade pellets, and you account for the DR-grade pellet cost, the IRR would be way above 30%. That would be disingenuous, Lucas, because we also spent $91 million or $92 million at Northshore to create that capability. I do not have, off the top of my head, the IRR combined, including both projects, but I assume that will be in the low 30s, 30%, 31%. Then I need to add the CapEx that was spent there as well. I am just staying with the CapEx of Toledo, and I am considering the price of feedstock paid at market price, not at cost.
Includes profit.
Perfect. Got it. Okay. That's very helpful. I will turn it over for now and continued best of luck. Thank you.
Thanks, Lucas.
Your next question comes from Alan Spence with Jefferies. Your line is open.
Hi. Good morning, and thanks for taking my question. First, on CapEx, I'm wondering how quickly after you reach commercial production you think you can get that to reaching kind of a nameplate capacity.
Good morning, Alan. Nameplate will be a target for 2021. 2020 will be the year that we're going to finish the plant. We are going to do a lot of trials with the clients that we continue to discuss with. The clients will progressively fall in love with the product. We know that that will happen. That will be the first step. The second step, they'll get rid of pig iron from Russia, pig iron from Ukraine, these exotic countries that are enemies of the United States by and large, like Russia. We can't wait to take these guys out of the market very quickly. That's the route we're going to do, and that's the work we're going to do in 2020. We plan to do all that during 2020 to a point that when we hit January 1st, 2021, we will be in nameplate pace already.
You should consider that 2020 will be whatever it will be, and 2021 will be nameplate.
Okay. Understood. Thank you. More near- term, obviously a very strong set of sales volumes for this quarter, and I think Keith made the comment earlier about kind of being the remainder of the year a little bit more back end weighted. How should we think about sales volumes in Q3 versus Q4?
We are expecting a Q3 volume at 5.5 million or more. In Q4, something above six. Let's call between 6 and 6.2. These are the numbers and then you say, "Oh, but you are not adding up to 20?" Yeah, because at the same token that we are expecting the number just mentioned to you in Q3, weather staying the way weather is right now, we should do better than that. Q4 is always an unknown because we never know when winter will hit. I think that the biggest point to consider right now, Alan, if you allow me, is that any dramatic drop of nomination that the clients put on us right now, by the way, abundantly clear, full disclosure so far, no dramatic decline in the nominations. Only a decrease in nomination from one client, partially offset by another client that increased their nomination.
So far so good. The biggest change with this company right now from the client's perspective is if they start dropping the nomination right now when the sun is up in the sky and the weather is good and we have so much water in the lakes that we can load the boats above and beyond what was the draft line before. We're really taking advantage of that because we have a depth in the lakes that are favoring transportation. Dropping nomination right now can be a suicidal move because I'm going to start moving pellets into Toledo, I'm going to start moving pellets to Quebec City to export, and we will comply with all nomination arrangements and all commitments that we have with the clients.
I'm just not going to be as fast as in the past to go back when they have a change of mind. They might need to wait, and that is a problem. I don't know if you follow the convoluted explanation, but I'm just showing you that at this point, we're a lot more protected against fluctuations in nominations within the contracts. The clients are more exposed, and they need to take that into consideration when making their decisions on change in nominations.
That's very clear. Just a quick clarification, the Q3 number, is that inclusive of the 800,000 tons you'll sell internally?
Yes, sir. Yes.
Okay. All right. Thank you very much.
Physically we need to use the same fleet, the same port, the same handling equipment, so yes, that's correct.
Okay. Thank you very much.
Thank you.
Your next question comes from Matthew Fields with Bank of America. Your line is open.
Hey, Lourenco. Hey, Keith. Congratulations again on the progress at Toledo.
Thank you very much, Matthew.
A couple things. I just want to ask about, going to jump all over, I'm sorry. You're exporting a few pellets, both sort of regular pellets and DR-grade pellets out of Quebec City. What's your sort of net back math on getting that to Europe?
It's very similar to the current after freight, the current in the domestic market. Pricing is factored into the range. Because of the current favorable conditions to export, price-wise, we can net back more or less the same thing, even though we are paying extra freight.
If iron ore is give or take $120, the pellet premium's give or take $65 or $70, and your freight is X netting back to you're getting about $110 or $112 on your net back for realizations?
Yeah. The range that we provided stands regardless of selling everything domestically or selling a portion exporting.
Okay. Great. Thank you. You mentioned that your capital allocation is kind of going to be, once we're at nameplate in 2021 and beyond, capital allocation will be primarily for dividends and share buybacks. Does that mean kind of the current level of debt, which is $2.2 billion roughly, is that the right level of debt for Cliffs going forward once Toledo's up and running? Or do you want to see it a little higher or a little lower?
Look, this thing of a right level of debt is very tricky. In the past, when we had to really clean up the balance sheet and do things, I put a target of $1 billion, which we kind of got to because I got to $1.3 billion, I spent $300 million buying out my partners at two of the operations and buying land in Nashwauk, you recall that, Matt. Now we also spend another $300 million with share buyback. It's a moving target. The fact of the matter is, that was what Keith Koci was explaining. We are extremely comfortable at this point because as soon as we have HBI up and running, our EBITDA - $220 million is.
Free cash
Free cash. What do you do with free cash in a company like Cliffs? You give it back to the shareholders through share buybacks, through increased dividends, through special dividends. That's what we are heading to here. We are not going to spend more than $100 million in CapEx a year after we have HBI done and up and running. Remember, the HBI plant needs a lot less CapEx than a concentrating pelletizing pellet plant and a mine. It's a different animal as far as maintenance CapEx. $100 million a year is actually rich, but let's consider $100 million. We have $120 million in interest expense. That's pretty much it and for the foreseeable future. Remember, we don't have anything to address until 2024.
EBITDA - $220, that's the money that we have available to pretty much give back to the shareholders every year.
There's no M&A or other expansion plans that you'd allocate cash to on the top of mind?
Well, not today. I can't say never. We are always looking for opportunities, but these opportunities are few and far between. It's very difficult to exceed the returns of debt and share repurchase at this point. Remember, we made an economical decision to buy back stock. I explained that before I started. We are always analyzing these M&A things, M&A possibilities. We are always analyzing against alternative uses of capital. We're not going to grow just to be bigger. I'm comfortable with the size. I'm comfortable with what I'm doing. I'm comfortable with my industrial bases, and I'm more than comfortable, I'm super excited about the fact that very soon we are going to be producing HBI. I don't need size to feel better.
I feel very good the way we are, and I'll feel even better if I start returning money to the shareholders in a more massive way. We are returning a lot, $300 million. One research analyst called the buyback of another company much bigger than us, they acquired back $127 million. He called that a strong execution. I did not even know that buying back stock was execution, but execution for me is operating and selling stock. Anyway, if $127 million for that huge company is strong execution, $134 million for us is miraculous execution. We are returning a lot of money to the shareholders on that. Our dividend increased 20%. It's funny when some naysayers try to dismiss our dividends. "Oh, it's only $0.05.
Oh, it's just $0.06." Well, it's at $10, that was the prevailing stock price until the stock corrected, finally correct to a number that is still very low, but it's a lot better than $10. Our yield is 2.4%. How many companies in our space delivers a 2.4% yield on dividends? This is growing. This will continue to grow. This money belongs to the shareholders, to the long shareholders. Especially in a company like ours, with zero chance of having a balance sheet problem or like we had five years ago, risk of bankruptcy and things like that. 70 million shares short? Oh my gosh, I have a ready source of free money from these shorts. It's right there. They probably don't realize, I continue to boil them like frogs in a pan full of water.
It's slow, one day they'll realize that it's not a warm pool, it's their deathbed.
Fair enough. One last one for me, please. Just bigger picture. With IODEX kind of at $120, like we said, in the pellet premium up to $67.5. Are European steelmakers really paying $185, $190 a ton for pellets? Are they demanding concessions? At what point do they start to really push back or even sort of idle blast furnaces?
Look, I don't have an answer for you on that. I haven't sold pellets to an European steelmaker in a long time, I don't know. Actually the export opportunities that we're envisioning right now are not even in Europe. I believe, honestly, Matt, that Europe is the next playground for China. They love free trade. They are the free traders. They believe that tariffs should not exist to protect the domestic market against the bad players like China and others. Now that we have protection here in the U.S., the Chinese steel that continues to grow and continues to increase the Chinese output needs a home. Apparently, they are finding a home in Europe. Right place, because they love free trade. I'm enjoying seeing Chinese steel going to Europe. I don't know the answer to your question.
Okay. Thanks very much, and congratulations again.
All right. Thanks, Matt.
Your next question comes from Scott Schier with Clarksons. Your line is open.
Good morning, everyone, and congratulations on a very strong quarter. Lourenco, could you talk a little bit more about your outlook for the pellet premium going forward? We've seen such a compression of the quality spread recently. I'd be interested to hear your thoughts on when this will return to a more normal level.
Look, that's a very good question. Look, you should never lose track to the fact that the pellet price is not the pellet premium. The pellet price is the sum of the IODEX with the, or the sum of the price of ore, no matter if it's IODEX 62%, or the benchmark price for 65%, plus a pellet premium. The way we envision here in our contracts is the 62+ correction for iron content, plus pellet premium. That's a price. If the IODEX appreciated from $90- $120, $185, let's go 120 just to facilitate my calculation. Appreciated $30. The pellet premium theoretically could go down $30 and I'm still at the same spot. Of course, the pellet premium didn't go down $30. The pellet premium went down $3. +30, -3, it's a +27.
We're good. It's not a pellet premium thing. People get really stuck in these details of how the prices are calculated and this and that. At the end of the day, other than China, that's always faking, always lying, always pretending, always polluting. Everybody else that buy pellets, they pay a lot more for pellets because they must comply with environmental regulations that will not allow them to use crap as feedstock. Like here in the U.S., like in Canada, and a few other countries like Japan, like in others. They pay more. Did I answer your question?
That was very helpful. Thank you. Just to follow that up on iron ore pricing in general, do you expect supply-demand conditions to ease from here and pricing to move lower, or do you see the $120 a ton level as the new normal?
I have been calling this new normal for some time. I am surprised that I am still kind of the only one. That makes my life really easy because I just need to execute accordingly to what I say. I have been executing according to what I say. Look, go back four months, five months. We're in July right now. Go back four months. At that time, any steel maker in the world should have a moment of reckoning and say, "Oh, my gosh, iron ore prices are going up, and my steel prices are not great. Better find a way to increase the steel prices." No, the steel makers, they prefer to get stuck with that thing of, "I control what I can control. I don't control what cannot control." Okay.
Now in Q2, you are going to enjoy your own inability to see reality. Going forward, welcome to the new normal. Get used to the new normal. We are not going to do any Amazon Prime Day. We are going to continue to charge full price for the pellets. If you don't increase your prices, you're going to be squeezed. That's my message to my clients and to the clients of other iron ore miners, because they don't talk to their clients like that. They are a lot more politically correct than me. Anyway, that's a different conversation.
Great. Thank you very much, Lourenco. Good luck going forward.
Thank you very much.
Your next question comes from Nick Jarmoszuk with Stifel. Your line is open.
Hi, good morning, Lourenco, Keith.
Morning, Nick.
Question for you. With the Northshore project, what is the DR pellet production capacity now?
3.5 million long tons per year.
Okay. All of that will be consumed by the Toledo plant?
No. The Toledo plant is 1.9 million metric tons a year, and we need, at that something like 2.7 million, 2.8 million long tons of pellets, taking yield into consideration. We will always have, if you produce Northshore at capacity with DR-grade pellets, we will always have like 700,000- 800,000 tons a year of DR-grade pellets that we plan to sell to select clients that we have ongoing relationships.
Okay.
We are not going to supply anyone that will produce HBI to compete against us. That's not going to happen. Are you going to supply someone that will put I already told Midrex and Tenova, go sell in another territory, because right here in the United States, you have a problem. I'm not going to supply any DR-grade pellets to anyone in the Midwest. It's not going to happen. I will supply other companies, where like in the past, we supplied Nucor in Trinidad, we supplied ArcelorMittal in Canada. These are the ones. We are always looking for long-term partnerships that could be good for us, like North Africa, Middle East, places like that.
Okay.
Places that are basically were left in the rain with the problems that happened in Brazil.
Understood.
There's an opportunity there right now.
Okay. With the tons that the company is exporting, can you give us what the volumes are between regular blast furnace pellets, and if there are any HBI pellets in there as well?
We don't have this breakdown just yet because we just started moving pellets to Quebec City, and we started moving DR-grade. At this point, we haven't moved any blast furnace pellets just yet, just DR-grade. We'll see. Look, if there is no cancellation, there's no reduction in nomination going forward, that will stop, and redirect the pellets to the domestic market. Domestic market will always be my first priority. We're just preparing ourselves to the events that nomination cuts will come, and then I will not come here and say, "Oh, I can only control what I can control." No, I can't control stuff like that. I can't control what they will do, but I can control what I will do depending on what they do. That's called the strategy and execution. We do that a lot here.
As of today, what are you expecting the export volumes to be?
As of today, 300,000 tons.
Okay.
If you ask me tomorrow, I might say 500. In one week, could be 100 or 1 million. I don't know yet.
As these pellets are transported from Lake Superior through the locks and through Quebec City, are they damaged? Is the quality degraded any from all the handling or no?
Pellets don't like handling. Every time you unload a pellet and you load again, you generate fines, you create issues. Pellets don't like to be moved from point A to point B and then loaded again. That's not a thing that we like to do. That's actually the nature of the beast. All these pellets that move in the seaborne market, they move a lot. I'll give an example. A Brazilian producer will produce pellets in Minas Gerais, then move the pellets to the port, and then load on a vessel, and then the vessel will go through seaborne, and then it'll get to the port in China and unloaded and put in a storage at the port, and then someone will grab that pellet and move to a closer storage to the mill, then to be sold to a mill.
How many times this pellet was loaded and unloaded, generating fines and generating problems. Ours will not be different. The good thing is that our pellets are high quality, so they resist a lot more to this type of deterioration. You are right. The pellets in general don't like that.
Last question on the AMT refund. Could you remind us what the refund schedule is over the next several years?
I'll let Keith answer that, Nick. Yeah.
We've got another $117 million coming. It's just broken out over the next three years. You can see, like $58 million will come in 2020. Following after that, you've got like $28 million each year after that, so.
Okay. That's the balance of it?
Right. That's correct.
Okay. That's all I had. Thank you.
Thanks, Nick.
Your next question comes from Sean Wondrack with Deutsche Bank. Your line is open.
Hi there. Nice quarter, and I was impressed to see that you've accelerated the timeline on the HBI plant. Just a couple from me this morning. You mentioned earlier something about having not fully benefited from the iron ore price realization. Can you just clarify what you mean by that?
Yeah. Look, each contract is different. Each contract with the different clients is different. For example, there's one client that has a lag in their contract. This client hasn't seen any huge price increase because he's still being charged based on the price of iron ore back in March, April, May. Very soon, he will be paying April, May, and June, and so on and so forth. That's one client that has this lag. All things considered, things will continue to improve for us. We believe that as the steel price recover, we should also have help from that. That's how we see it.
Right. The steel price recovery, that should help offset, even if there is a little bit of weakening in the iron ore price, just given where steel prices are. Just quick question on HBI.
Are you expecting weakness in iron ore prices?
No, I'm not saying that. I'm just saying that, as an investor, when you're thinking about it, coming off this very low steel price should only provide you additional upside to basically price.
Yeah, you said that could offset weaker ore prices and it will be very comfortable for me to just agree with you, but I have to call you out on that because I have been spending a lot of time in these calls explaining why there's no weakness ahead in iron ore prices. People disagree. That's why we buy cheap stock in the marketplace. Deutsche Bank, I haven't checked the commodity desk of Deutsche Bank these days, but do you know the price deck of your bank?
I'm not even 100% sure, but, excuse me, Lourenco, I don't think the price of iron ore is going down. That's not what I'm trying to say here.
Okay. All right. Okay. We are on the same page.
I apologize for that if that was confusing.
No, no. No need to apologize.
Okay, cool. The freight advantage. When you think about supplying new customers around the Midwest with HBI, could you just, big picture, what is your freight advantage of supplying them versus Russia or Venezuela or any of these other countries that have been shipping DRI or pig iron to those clients as of now?
Look, the advantage varies with the client. Let's take one that's really easy to understand. North Star BlueScope. North Star BlueScope will be a big buyer of our HBI. We are in Toledo, Ohio. They are in Delta, Ohio. They will be receiving our HBI continuously by truck. They will not have to carry any inventory on their site, because we are going to deliver pretty much just in time. The only freight that they'll pay is truck freight. If they were buying from Russia, that material would have to be transported from point of production to port in Russia, then loaded in a vessel, then sail to the U.S., unloaded in Quebec City or New Orleans, and then loaded in a vessel to bring to the site. That would be a barge up the Mississippi or a train from ports to Delta, Ohio.
You keep adding these things there compared with a freight truck. It's huge freight advantage.
Right.
Our plan is to share this advantage with the client. Not to give it away, but to share with the client. The client will not have to pay the humongous freight to bring pig iron from exotic places. On the other hand, we are not going to give the entire advantage. We'll share a lot with the client, we are going to be very price competitive. We are going to be very quality competitive. Our HBI is not the HBI of the past. It's not historical HBI. It has a lot more mechanical resistance. It has 3% carbon content, which is pretty close to pig iron. It will be like pig iron, just better, and it will have a logistics advantage that is second to none.
As far as quality, one thing that we're going to have HBI being produced from iron ore, from one mine, that's the Babbitt mine, and one pellet plant, that's the Northshore plant. Only Paul Carson out of Northshore will be producing DR-grade pellets for Toledo. That's the type of narrow quality that metallurgists are looking for. The operators of these EAFs will have something as far as feedstock that they don't know yet. As soon as they start receiving material for trial, they will become excited. The same way the operators of blast furnace are always excited about our blast furnace pellets.
Great. Thank you for that explanation. That's very helpful. My last question, just, you're coming into a position of strength like you've never seen before, guiding to roughly $1 billion of EBITDA against cash needs of only $220 million. You're basically going to have cash to do whatever you want in terms of dividends, share buybacks, debt reduction. Given that kind of backdrop and the lack of supply security for iron ore in the U.S., are you worried about Cliffs as a company becoming an acquisition candidate? Have you seen any kind of M&A interest towards Cliffs over the past few months?
Look, we are for sale in the stock exchange every day. Our stock price has been absurdly low for an extended period of time. In the meantime, the ones that could theoretically, balance sheet wise, could make a move and make an offer to buy Cliffs, they were all involved in what I used to call the Brazilian Australian Championship of the Stupidity. They were very interested in being the low-cost producer of the world. Now they're paying the price for that. Instead of looking into buying a company like Cliffs, they are concerned about fixing the disaster that was made first by Samarco and then by Vale. They're also coping with a few problems at the port and fires and lots of stuff that are all a consequence of a cost-cutting environment that I have been throughout the five years explaining.
Mining business is not a cost-based business. It's a different ballgame. It's value use, it's margin, it's in using money to maintain your facilities and mines. Focus on cost is important, but can't be the main focus. The answer to you is no. Despite the opportunity, the ones that could buy Cliffs, they're not going to pay the price that I would demand to sell the company because they are busy taking care of their own problems at this point.
Right. That makes sense. Thank you very much for all the clarity there and, good luck next quarter.
Thanks a lot. With that, we are going to turn the call back to the operator to wrap up and I appreciate the interest and we will keep in touch. Thanks a lot.
This concludes today's conference call. Thank you for joining us today. You may now disconnect.