Earnings Call: Q2 2019

Jul 19, 2019

Good morning, ladies and gentlemen. My name is Mariama, and I am 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 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 release filed with the SEC, which are available on the company Web site. 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 Kosey, 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 Q2 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 $750,000,000 in unsecured notes due in 2027 at a 5 handle coupon. This new issue allowed us to both retire legacy notes coming due in 2 years and reduce the size of our largest debt maturity tower in 2025 by $600,000,000 With the transaction closed, we have no debt coming due until the year 2024. Also, our previous $1,400,000,000 maturity tower in 2025 was nearly cut in half and pushed out another 2 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 $249,000,000 a dramatic increase from $21,000,000 in the Q1, which is typical for the seasonality of our business as it is today pre HBI. Our Mining and Pelletizing segment generated $281,000,000 in adjusted EBITDA, an impressive result driven by stronger than expected shipping volumes of 6 point 2,000,000 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 20,000,000 long tons. Despite some reduction in nominations from 1 major client, our newly accomplished ability to produce and export meaningful tonnage of Doctor grade pellets, coupled with better overall pricing in the seaborne market were enough reasons for us to allow and maintain our forecast. Lorenzo 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 4th quarter when the mills usually stock up before the annual winter freeze. During the Q2, we hit a 6 year high on pellet price realization with an average netback 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 $5.10 per short ton during the Q2, 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 Q2 was that due to the completion of our North Shore plant upgrade ahead of schedule, we were able to record a small volume of intercompany Doctor grade pellets to our metallics segment. Because of the early completion of the North Shore 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 Doctor grade pellet intercompany sale expectation from 500,000 to 800,000 long tons, all of which to take place in the Q3. Because these pellets are for intercompany use, unlike our 3rd 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 3rd quarter. Accounting wise, you can begin to see how the intercompany Doctor grade sales are being treated in our financials. The margin we will generate by selling Doctor 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, but 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. And 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. But 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'd like to say, with our HBI plant completed and in full production, free cash on an annualized basis will be EBITDA minus $220,000,000 Other than $100,000,000 of sustaining capital and $120,000,000 of debt service, all the rest of the EBITDA is free cash. Since we will continue to use our NOLs and not have to disperse any cash to pay taxes for the foreseeable future. And 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. Our price level is comparable to what we've seen this year and with HBI layered in, we would expect to generate about an annualized $1,000,000,000 in EBITDA, meaning that we would have around $800,000,000 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, and 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 is 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 commodity desks of several financial institutions and other so called experts, one after the other, have caused the iron ore benchmark price at a peak. And here we are today, 3 months later, with the IODEX more than 35% higher than that at $121.85 So one more time, there is no short term or medium term solution for the shortages in this 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 2nd quarter results would actually benefit from that. As always, we did not fight to take. Instead, we took advantage of the prevailing skepticism. We increased the size of the share repurchase program and bought back another $130,000,000 worth of Cliffs shares during the Q2, bringing the total amount spent to buy back shares to $300,000,000 since the inception of the program just 8 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. And 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 are through peak capital spend and producing HBI at nameplate, these 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 only 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 button for hot rolled steel prices in the United States. 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 6 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 4 or 5 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 2 of our mines in response. Since then, we have been actively mitigating this situation and taking preventive measures against the possibility of such problem occurring ever again. 1st, with the addition of our HBI plant, we have created new demand for almost 3,000,000 long tons of pellets per year. This new demand will, in good times, tighten the market and in bad times, provide us with volume with certain while paying ourselves at a healthy margin. 2nd, our new pellet contracts have more take or pay components that minimize nomination reductions, providing us with another layer of protection. 3rd, we now have more optionality and product flexibility. We can make standard, flux, super flux and Doctor 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. And 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 Seaway, in today's sport 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 Cliff's pellets outside of the United States. 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 start up date of the HBI plant. We are also scheduling a few vessels to the export market, including sales of both blast furnace and Doctor grade pellets to seaborne customers. As you can see from our consistent cost results, we will 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 steel maker is actually being covered by another Klipsch 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 5th 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 Q2 and the initial production of Doctor 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 of 2020 or 2 months ahead of the original schedule. At this time, I would like to personally thank and congratulate Craig Felizetti and all involved in the completion of the North Shore upgrade for their hardware I'm sorry, Steve Pozzi and all involved in the completion of the Northshore upgrade for their hard work, first for delivering a Doctor grade Peloton spec in the very first batch and 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 sticky 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 4 50 foot tall structure. We're also moving our General Manager of Construction in Northshore, Steve Pozzi, to help the General Manager of Toledo, Craig Felizetti, and I have a combination of Batman and Batman taking care of the very end of the construction of Toledo, which we are 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 a clarity of 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 bushling scrap price environment going forward, consistent with the last 2 years, the final IRR of the project calculates at a very good number of 26%. Private equity would queue 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 United States. It still 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 United States 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 steelmaking is finally embraced worldwide, the future will be high grade iron units, meaning high iron content or pellets and metallics. This is what Cleveland Cliffs is about. And 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. And soon enough, we should benefit from the next trend, an overdue push to environmentally friendly steelmaking worldwide. With that, I'll turn the call back over to the operator for questions. Your first question comes from Lucas Pipes with B. Riley FBR. Your line is open. Hey, good morning, everyone, and congratulations on another very good quarter. Thanks Lucas. Good morning. Good morning. Lorenzo, I first wanted to ask on the CapEx side. So there were a couple of moving pieces. You mentioned the lower contingency of 13% versus the 20% previously, but then you increased this year, the way I understood it maintaining the total CapEx guidance for the project. Could you just kind of walk us through it? What are we expect 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, Luca. Thanks. Look, the budget continues to be $830,000,000 and we are actually giving a few good news. We're delivering a few number of good news regarding the project. 1st, we are now less than a year away from conclusion. With that, with the fact that we anticipate at least 2 months, the conclusion of the project and start up of the plant, it's time to allocate contingents. Based on our best estimate at this point, we don't need the entire 20% that we have been working with since the beginning of the project, fully 13%. So if you calculate the number of deals, something like $110,000,000 on top of the $830,000,000 that we are talking now. And the fact that we're spending more this year than we previously anticipated is very easy to understand. We are spending money this year that we're supposed to spend only next year. So things that were in January, February of next year are now in December, November, October of this year. So we need to bring up these expenses upfront because we are ahead of schedule. So that's the difference in 2019 CapEx. And as far as 2020 will be the balance. So calling the 830 plus the contingencies as the number for completion. No matter if we do a little more in 2019 or a little less in 2020, we're still doing the same thing. So that's the entire story. Got it. Okay. That's helpful. Thank you for that. And then the 26% IRR, does that include any of the benefit that you would capture on the mining and pelletizing side? So you mentioned you're going to tighten the pellet market as well. And then 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? Yes. Thanks for asking the clarification. And the answer is no. We are considering the 26 percent we are calculating the 26% IRR after paying for the Doctor grade pellets that we are delivering from Northshore to Toledo at market price. If you include the benefit of the production of Doctor grade pellets and you account for the Doctor grade pellets cost, the IRR would be way above 30%, But that would be disingenuous, Lucas, because we also spent $91,000,000 or $92,000,000 at Northshore to create that capability. So I don't have from the top of my head the IRR combined, including both projects, but I assume that will be in the low 30%, 31%. But then I need to add the CapEx that was spent there as well. So I'm just staying with the CapEx of Toledo and I'm considering the price of feedstock paid at market price, not at cost, includes profit. Perfect. Got it. 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 questions. First on CapEx, I'm wondering how quickly after you reach commercial production you think you can get that to reaching kind of nameplate capacity? Good morning, Alan. Nameplate will be a target for 2021. 2020 will be the year that we are 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 exotics countries that are enemies of the United States by and large like Russia. So we can't wait to take these guys out of the market very quickly. So 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 1, 2021, we'll be in nameplate pace already. So you should consider that 2020 will be whatever it will be and 2021 will be nameplate. Okay, understood. And more near term, obviously, a very strong set of sales volumes for this quarter. And I think Keith made the comments 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 Q3 volume at $5,500,000 or more. In Q4, something above $6,000,000 Let's call between $6,000,000 and $6,200,000 So these are the numbers. And then I say, oh, but you're not adding up to 20. Yes, because we at the same token that we are expecting the number just mentioned to you in Q3, weather is staying the way weather is right now. We should do better than that. And 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 for another by another client that increased their nomination. So far so good. But 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 the lakes are actually we have so much water in the lakes that we can move the boats above and beyond what was the draft line before. And we're really taking advantage of that because we have depths in the lakes that are favoring transportation. Drop denomination right now can be a suicidal 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. So 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, but the clients are more exposed. And they need to take that into consideration when making their decisions on changing nominations. That's very clear. And 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. Because 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, Lorenzo. Hey, Keith. Congratulations again on the progress at Toledo. Thank you very much. I just want to ask about jump all over, I'm sorry. But so you're exporting a few pellets, both sort of regular pellets and Doctor grade pellets out of Quebec City. What's your sort of netback math on getting that to Europe? It's very similar to the current after freight, currently in the domestic market. If we pricing is factored into the range. So we 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. So if iron ore is give or take 120, the pellet premiums give or take 65 or 70 and your freight is X netting back to you, you're getting about 110 or 112 on your netback for realizations? Yes. The range that we provided stands regardless of selling everything domestically or selling a portion exporting. Okay. Okay, great. Thank you. And then 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 debt value, current level of debt, which is $2,200,000,000 roughly, is that the right level of debt for Cliffs going forward once Toledo is up and running? Or do you want to see it a little higher or a little lower? Okay. This thing of right level of debt is very tricky. And in the past, when we had to really clean up the balance sheet and do things that put a target of $1,000,000,000 which we kind of got to because I got to $1,300,000,000 but I spent $300,000,000 buying out my partners at 2 of the operations and buying land in Nashwauk, you recall that. And now we also spend another $300,000,000 in share buybacks. So it's a moving target. The fact of the matter is we are extremely and that was what Keith Kuz was explaining. We are extremely comfortable at this point because as soon as we have HBI up and running, our EBITDA minus $220,000,000 is free cash. And 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. So that's what we are heading to here. We are not going to spend more than $100,000,000 in CapEx a year after we have HBI done and up and running. And remember, HBI needs the HBI plate needs a lot less CapEx than concentrating pelletizing, pellet plants in a mine. So it's a different animal as far as maintenance CapEx. So $100,000,000 a year is actually rich, but let's consider $100,000,000 And then we have $120,000,000 interest expense that's pretty much it for the foreseeable future. Remember, we don't have anything to address until 2024. So EBITDA minus to $220,000,000 that's the money that we have available to pretty much give back to the shareholders every year. And there's no M and A or other expansion plans that you'd allocate cash to on the top of mind? Well, not today. I can say never. We are always looking for opportunities, but these opportunities are far 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. That was our I explained that before I started. So we are always analyzing this M and A things, M and 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 basis. And I'm more than comfortable. I'm super excited about the fact that very soon we are going to be producing HBI. So 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, $300,000,000 Now one research analyst called the buyback of another company much bigger than us. They acquired back $127,000,000 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. But anyway, if $127,000,000 for that huge company is strong execution, dollars 130,000,000 for us is miraculous execution. So 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. It's only $0.05, 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%. So, yeah, how many companies in our space delivers a 2.4% yield on dividends and this is growing. This will continue to grow. This money belongs to the shareholders, to the loan shareholders. And especially in a company like ours, with 0 chance of having a balance sheet problem or like we had 5 years ago, risk of bankruptcy and things like that. And 70,000,000 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, but I continue to boil them like frogs in a pan full of water. It is low, but 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 you said in the pellet premium up to 67.5. Are European steel makers 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. So I don't know. And 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 like a lot of they love free trade. They are the free traders. So they believe that tariffs should not exist to protect the domestic market against the bad players like China and others. So now that we have protection here in the United States, the Chinese steel that continues to grow and continues to increase the Chinese output needs a home. And apparently, they are finding a home in Europe, right place, because they love free trade. So I'm enjoying seeing Chinese still going to Europe. So 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. Lorenzo, 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. Yes. 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 or the sum of the price of ore, no matter if it's IODEX 62% or the benchmark price for 65% plus a pellet print. The way we envision here in our contracts is the 62 plus correction for iron content plus pellet print. That's a price. So if the IODEX appreciated from $90 to $120,185, let's call $120,000,000 just to facilitate my calculation. So appreciate the $30 The pellet premium theoretically could go down $30 and I'm still in the same spot. And of course, the pellet print didn't go down $30 the pellet print went down $3 So plus 30 minuteus 3, it's a plus 27. So we're good. So it's not a pellet premium thing. And 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, there'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 scrap as feedstock, like here in the United States, like in Canada, in few other countries, like Japan, like in others. So Jeff Amor, did you answer your question? Yes, that was very helpful. 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? Yes. 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. And I have been executing accordingly to what I say. So look, with the go back 4 months, 5 months, we're in July right now. So go back 4 months. At that time, any steelmaker in the world should have a moment of reckoning and say, oh my gosh, I don't know if prices are going up and my steel prices are not great. Better find a way to increase the steel prices. But no, the steel makers, they prefer to get stuck with that thing of, I control what I can control, I don't control, I cannot control. Okay. Okay. So now in Q2, you are going to enjoy your own inability to see reality. And 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. So 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. But anyway, that's a different conversation. Great. Thank you very much, Lorenzo. Good luck going forward. Thank you very much. Your next question comes from Nick Jarmoszuk with Stifel. Your line is open. Hi, good morning, Laurence or Keith. Good morning, Nick. With the North Shore project, what is the Doctor pellet production capacity now? 3,500,000 long tons per year. Okay. And all of that will be consumed by the Toledo plant? No. The Toledo plant is 1,900,000 metric tons a year, and we need at that goal something like 2,700,000, 2,800,000 long tons of pellets taking yield into consideration. So we always have, if you produce an offshore at capacity with Doctor grade pellets, we will always have like 700,000 to 800,000 tons a year of Doctor grade pellets that we plan to sell to select clients that we have ongoing relationships. We are not going to supply anyone that will produce HBI to compete against us. So that's not going to happen. I'm going to supply someone that will put I already told me Drax 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 Dear Grace Dells to anyone in the Midwest. So it's not going to happen. But I will supply other companies. Like in the past, we supply Nucor in Trinidad. We supply ArcelorMittal in Canada. So these are the ones we are looking for always looking for long term partnerships that could be good for us like North Africa, Middle East, places like that. Places that are basically were left in the rain with the problems that happened in Brazil. So there's an opportunity there right now. Okay. And 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 Doctor grade. So at this point, we haven't moved any blast furnace pellets just yet, just the air grade. So we'll see. Look, if there is no cancellation, there's no reduction in denomination. Going forward, that will stop and redirect the pellets to the domestic market. Domestic market will always be my first priority. But we are just preparing ourselves to the event that nomination cuts will come and then I will not come in and say, I can only control what I can control. No, I can 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. So 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. But if you ask me tomorrow, I might say 500. In one leak, it would be 100 or 1,000,000. I don't know yet. As these pellets are transported from like Lake Superior through the locks and through Quebec City, are they damaged? Does the quality degraded any from all the handling or no? Pellets don't like handling. So every time you unload a pellet and you load again, you generate fines, you create issues. So 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. But 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. 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 we will get to the port in China and unload it 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 it will be sold through a mill. So how many times this pellet was loaded and unloaded, generating fines and generating problems. So ours will not be different. But the good thing is that our pellets are high quality, so they resist a lot more to this type of deterioration. But you are right, the pellets in general don't like that. And then 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. Yes. We've got another $117,000,000 coming and it's just broken out over the next 3 years. So you can see like $58,000,000 will come in 2020 and then following after that you've got like $28,000,000 each year after that. So Okay. And that's the balance of it? Right. That's correct. Okay. That's all I had. Thank you. Thank you. 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 for 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? Yes. Look, each contract is different. Each contract with different clients is different. For example, there is one client that has a lag in their country. So this client hasn't seen any huge price increase because he is still being charged based on the price of iron ore back in March, April, May. So very soon, he will be paying April, May June and so on and so forth. So and that's one client that has this lag. So all things considered, things will continue to improve for us. And we believe that as the steel price recover, we should also have help from that. So that's how we see it. Right. And 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 a quick question on the Why would you expect that hold on, hold on, hold on. 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 Yes, but you said that could offset weaker oil prices. And it would be very comfortable for me to just agree with you, but I have to call you out on that because I spent I have been spending a lot of time in this call explaining why there is no weakness ahead in iron ore prices. But people disagree. That's why we buy cheap stock in the marketplace. So Deutsche Bank, I haven't checked the commodity deck of Deutsche Bank these days, but do you know the price deck of your bank? I'm not even 100% sure, but excuse me, Lorenzo, 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. So we are on the same page. I apologize for that. That was confusing. No, no. Just 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, let's take it depends on the advantage, it varies with the client, but 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 Heights. They are in Delta high. They will be receiving our HBI continuously by truck. So they will not have to carry any inventory on their site because we are going to deliver pretty much just in time. And the only freight that they will 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 United States, unloaded in Quebec City and then 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. And you keep adding these things here compared with a freight truck. So it's huge freight advantage. And our plan is to share this advantage with the client, not to give it away, but to share with the client. So the client will not have to pay the humongous freight to bring big iron from exotic places. And on the other hand, we are not going to give the entire advantage. We will share a lot with the clients. So 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 HBI, historical HBI. It has a lot more mechanical resistance. It has 3% carbon content, which is pretty close to pig iron. So it will be like pig iron, just better. And it will have a logistics advantage that is second to none. And as far as quality, one thing that we're going to have, we're going to have HBI being produced from iron ore from one mine, that's the Babbit mine and one pellet plant, that's the Northshore plant. So only Paul Carson out of Northshore will be producing Doctor grade pellets for Toledo. So that's the type of narrow quality that Mirallurgis are looking for. So 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 per 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. And then my last question, just you're coming into a position of strength like you've never seen before guiding to roughly $1,000,000,000 of EBITDA against cash needs of only $220,000,000 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? And have you seen any kind of M and A interest towards Cliffs over the past few months? Look, we are for sale in the stock exchange every day. And our price, 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 stability. They are very interesting being the low cost producer of the world. And now they're paying the price for that. Instead of seeing 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 in fires and lots of stuff that are all a consequence of a cost cutting environment that I have been throughout the 5 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. So focus on cost is important, but can't be the main focus. So the answer to you is no. So despite the opportunity, the ones that could buy clips, they're not going to pay the price that I will 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. And 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.