I would like to welcome everyone to the Cleveland-Cliffs First Quarter 2020 Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. The company reminds you that.

Certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially.

Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on the company's 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 Lourenco Goncalves, Chairman, President and Chief Executive Officer.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Thank you, Julian, and good morning everyone. I hope everyone listening on today's call is safe and healthy. Back to my remarks, I want to begin with a note of appreciation for our employees throughout the entire company.

I couldn't ask for more dedicated people to navigate through the crisis with me. You have been deemed essential by the states where we operate in. And you have always been essential to the long-term health of our company. We appreciate how well you have adapted to this new situation and how aligned we are and the importance of workplace safety throughout our several operating locations.

Because of you, as they [Phonetic] are inside of this pandemic, we will emerge stronger, safer, healthier and more productive. It is remarkable, what we have accomplished during these challenging times we have been through. As you may know, we have navigated through crisis before, while this situation right now is a bit different, it certainly has not taking us out of our comfort zone. Actually this is our comfort zone, because differently from when the tide is high making all boats float, this is a time when management really matters.

As I will lay out on this call, we have acted promptly and appropriately and we will continue to do so. More importantly, nothing we have seen or done over the past two months has changed our perception on the combined company we envisioned prior to the acquisition of AK Steel by Cleveland-Cliffs.

We have acquired a steel company with highly concentrated exposure to high-end markets and very little exposure to sales of commodity steel products, particularly HRC.

Among these high-end markets, the most important for our company is the automotive sector, a market which all the steel companies would like to become part of and we already are a major league player, supplying virtually all auto manufacturers in United States.

Also, we are the sole producers of electro steels in North America, and that's a crucial national secured item. A concept, we have been able to communicate in Washington, D.C., since we acquired AK Steel, as one from by the recently announced Section 232, investigation, self-initiated by the Department of Commerce.

We are also self-sufficient in iron ore pellets. Our most important feedstock, and very importantly, we do not depend on scrap. Our feedstock that will be gas at the other side of this crisis.

Shutting down manufacturing, particularly automotive manufacturers and continuing to operate the steel mills particularly [Indecipherable] steel mills, created unprecedented situation in our country.

The scrap is being consumed, but it's not being generated. When our HBI plant comes online soon we will have another relevant product to sell and on either way we capitalize on our strength. Before anything else, I would like to call your attention to our first quarter results. Had AK Steel being under our control for the entire quarter, our reported adjusted EBITDA would have been $61 million. This includes the results from both legacy Cliffs and AK Steel and the period prior to the acquisition.

Those that follow Cliffs know that Q1 has always been our lowest on each quarter due to the seasonality associated to the shutdown of the Great Lakes during the winter months. From now on, with AK Steel in the mix, the impact of seasonality on our results is substantially reduced.

During the fourth week post acquisition, the most significant development impacting our business occur with digitally all of the automotive manufacturing plants we serve and now seen full shut downs. As you may recognize even before the acquisition of AK Steel by Cleveland-Cliffs, our largest end market has always been the automotive industry, through AK Steel and through our other major pellets plant ArcelorMittal. And because most of our exposure to automotive steel product is on a just-in-time basis, we had to make immediate adjustments through a large portion of our production. These adjustments included, ideally production at Dearborn Works. Stopping operations at all precision partner plants, significantly curtailing AK Steel production and implementing an extended outage at one of our electric arc furnace plant Mansfield Works. All of these facilities are meaningful suppliers of the automotive sector, while we are still away [Phonetic] from normal. We have been encouraged by the timing and pace of production restarts announced across the automotive industry.

If the automotive manufacturers continue to restart production as planned, as they actually have already is started to do, our operations will normalize throughout the balance of the second quarter, delivering products to our customers, more reliably than before.

In fact, one item for improvement we uncovered during the due diligence process at AK Steel, why is the status of it just-in-time inventory. Why we do not believe AK Steel just-in-time inventory was worse than the competitors inventory positions. It was definitely not as good as we believe it should be.

In a normal world, with no coronavirus and business as usual, we had planned to fix this issue throughout the entire year 2020 and by the end of the year, we would have our inventories in better shape.

One silver lining of this automotive shutdown was that, it allowed us to accelerate our execution on this issue. And I can confidently say that we are now only two months after the acquisition in a comfortable position to deliver our steel with perfect to reliability on adjusting time. As soon as the automotive plants are back in full force, they will be amazed that how much AK Steel has changed and how ready we are for the requirements.

The automotive production stoppages will ultimately circle [Phonetic] back to our raw materials operation. As such, we foresee definitely idle the AK's metallurgical coal mine in Pennsylvania. Later on in April, we then temporarily idled Cliffs, North Shore until then iron ore mines, which account for two-thirds of our annual pellet production. Due to the timing of the crisis, hitting at the end of the winter, our blast furnace clients were in serious need of pellets for inventory replenish even if their immediate intent was to keep their blast furnaces on idle.

With that our sales to our two major third-party pellet customers, ArcelorMittal and Algoma have actually persisted at a healthy rate since the Great Lakes reopened at the end of March. Even better our take or pay volume for these merchant agreements, give us a lot of certainty for future pellet sales and our primary demand reduction comes from our own facilities, Dearborn in Toledo.

The idling of our mine facilities will actually allow us to reduce some pellet inventory and we will contribute in large part to be approximately $100 million inflow from working capital release in the second quarter, a number we made public when we publicly released our extreme distress that case scenario last months. While most of our facility idles are temporary, one that we will remain permanent is the Dearborn hot strip mill. We anticipate returning to production very soon or most of Dearborn Works, but when it resumes Dearborn should be viewed as two separate facilities. A hot hand to produce slabs, including blast furnace, BOF shop and continuous casting and a best-in-class finishing facility, including the modern PLTCM between lines on the cold rolling mill and the galvanized block. The Dearborn finishing pursued, which we consider to be at par with our flagship Rockport Works. We'll utilize as feedstock hot rolled coils produced in our Middletown hot strip mill. One thing we found in due diligence is that the Dearborn hot strip mill was the weak link of the client. Given the strength and capabilities of the Middletown Works hot strip mill, the Dearborn hot strip mill is not necessarily and suboptimal to operate.

With this reconfiguration, we can now optimize our powerful Middletown hot strip mill by adding Dearborn's slabs to the in-house [Indecipherable]. We estimate this improvement will save us several million dollars in annual costs even after of course considering the additional freight to moves slabs and coils between the two plants.

Going forward, our wholly-owned subsidiary AK Steel will have the following plant configuration. A single one fully integrated steel mill in Middletown, Ohio. Two, Alaska 26 steel mills in Butler, Pennsylvania and Mansfield, Ohio. One is slab reducing plant in Dearborn, Michigan. Two is still finishing plants, primarily dedicated to automotive carbon steels and other high-value added applications in Rockport, Indiana and Dearborn, Michigan.

Two, finishing plants dedicated to the stainless and electric steels located in Zanesville, Ohio and [Indecipherable] Ohio. Two, ERW plants, Electric Resistant Welded plants dedicated to the production of tubular components for automotive and other high-end application, operating as AK Tube LLC in Walbridge, Ohio in Columbus, Indiana. And then highly technologically developed plant dedicated to provide engineering hot and cold stamped and assemblies for the auto sector operating as precision partners each - each one is strategically located in close proximity to the automotive assembly line that they supply with their engineered hot and cold stamped and assemblies. They are situated in Canada across the board from Detroit in Kentucky and in Alabama.

As for our Toledo HBI plant, leading up to the shelter in place orders from the State of Ohio, we were in constant dialog with Governor Michael Weinstein in front for the ultimate and rightful outcome that all of our operations should be considered essential. As part of those conversations I offered up that construction at our Toledo, HBI side. Which involved hundreds of contractors working within close proximity with one another could be suspended. While this was a prudent move from a cash preservation standpoint, I am eager to resume construction at the Toledo plant as soon as possible.

With the extended outage of the entire automotive industry there has been no busheling scrap being generated in our country. This unprecedented step has tightened the market considerably and we now believe that the actual demand for our HBI will be even better than the good demand we are anticipating before dependent.

This brings us to the discussion of our liquidity. Needless to say, our liquidity position has been a top priority. We have been running a number of markets scenarios in testing their ultimate impact on liquidity differently from what is probably the outside there's perception. Our still new assets generally carry a pretty low fixed cost position in the range of only 20% to 25% of our overall operating costs. What this means is that in extended idle scenarios our cost obligation to maintain our no operating facilities, we significantly reduced. If those were to continue for long periods of time even this fixed cost begin to slowly fall off. As you may have seen trails to raising additional capital, we published our extreme stress test and net liquidity analysis.

This scenario contemplates among other things, automotive plants remaining shut down through the end of June and only 6 million light vehicles being produced between April 1st and the end of the year. Even in this hypothetical extreme situation we always still have plenty of liquidity. That said, because of all the uncertainty in front of us at that time we thought it was best to raise some additional capital as liquidity shows, as such, we made the decision to use our secured debt capacity, we issued $400 million in secured notes.

While the interest rate on the new issue is not ideal, we knew going in that buying this insurance policy would not be cheap. However, due to the ample support from long-term bond investors that know well that management matters most in times of crisis. We were able to price our due at a coupon that turned out to be better than the initial indications actually much better.

As of today, May 11, we have more than $1.2 billion in total liquidity which also includes an additional and additional new $150 million FILO tranche on our ABL. This worsening last out FILO tranche was another pockets of liquidity that we quietly added in the early stages of this crisis, in a transaction we completed in late March. Thanks, to our great relationships with our banking group and their commitment in full support to our company. Those who have been following us know that I'm always looking for opportunities to reduce our debt that and improve our capital structure. With our liquidity position shot up as a result of the previous secured debt transaction we then use a chunk of our remaining secured capacity to repurchase $736 million of our unsecured debt, which we did being a lot less than the $736 million actually at a 25% discount to par, taking advantage of the prevailing trade Levels of our bonds in the market. This liability management, transaction alone was reduced to cut our total debt by $181 million. We are firm believers that all of the debt in our structure is worth, it's part of it. So we will always look for opportunities to take advantage of bonds trading at a discount. As I said before, I don't fight to take and if there is an opportunity to create equity value out of thin air, I'll take. This same play book helped us navigate through the 2015, 2016 downturn in the industry. After all these proactive and decisive moves on the financial side, we have done and we have a very manageable debt profile with a four year maturity window, no financial covenants and plenty of liquidity. While automotive demand has driven most of our production adjustments. We continue to serve our others to end markets. Throughout the pandemic we said and continue to sense product to the infrastructure manufacturing appliance and electric power markets. Regarding electric closed deals our most recent success is on the political front. Despite AK Steel being the only producer of grain oriented electrical steels or GOES in the United States and in North America. The profitability of this business has been under pressure with legacy stand-alone AK Steel recording negative EBITDA in the second half of 2019 from the production in sales of electrical steels. This was a direct consequence of the actions taken by bad players in the marketplace. Developing ways to circumvent Section 232 tariffs on steel coils by re-routing dump to GOES coils to Mexico and to Canada where the steel is cut into smaller pieces. This smaller pieces called lamination and cores where immediately sent tariff free into the United States taking advantage of Mexico's and Canada's they would trade in steps. Without action by the federal government to level the playing field 1,450 jobs at Butler Works in Pennsylvania and Zanesville Works in Ohio were at risk. Fortunately, I have been dealing with officials in the Department of Homes, the USGR and in Commerce, who understand the national security importance of this critical feedstock for the production of transformers used in our countries electric grid. I'm pleased to acknowledge the decisive action taken by Secretary of Commerce, Wilbur Ross last week with his audit to have the DLC self-initiating of Section 232 investigation covering the key electrical steel products impacted by this circumvention. The expedited and positive outcome of this process is critical to save the jobs of the employees of these two operations in Pennsylvania and Ohio. At this point, we believe it's abundantly clear in Washington, D.C. that a viable electrical steel business for Cleveland-Cliffs is the only way to resolve these very real national security issue. We look forward to an expedite and positive conclusion of this Section investigation self-initiated by the DLC. As you can see, we have made all the necessary moves possible to stay through this crisis, while at the same time we are integrating our newly acquired company. It hurts me that I haven't been able to be on the plant force with my fellow employees. But we have made it to work very well so far. This environment has actually helped our integration in many ways as we have come together more closely interface of our diversity. Our new Cleveland-Cliffs employees from AK Steel have adapted to our way of doing business and as conditions improve, we have a lot to be excited about. As for our outlook for the remainder of this year, clear given the impacts on both the steel side and the mining side, the speed and pace that which automotive restarts continue to occur, will be the most important factors driving our EBITDA performance this year. Based on our direct communication with our clients and the orders they have already released it to us. We expect the vast majority of automotive production in our country to resume this week and next week. And make no mistake, the automotive business in this country will recoup, particularly with the new trend generated by the coronavirus pandemic against the previous widespread use of [Indecipherable] service providers and back in favor of privately owned vehicle. As private cars are perceived rightfully saw as sanctuary these from infection driving their own vehicles is what millennials want to do now. Car ownership is trending again and that includes SUVs and pickup trucks, which consumed a lot of steel produced by AK Steel and a lot of parts supplied by precision partners and AK Tube. April sales volume was not nearly as bad as we initially expected. And there has been significant growth in car sales being consummated online without the buyer even just the our car dealer showroom. We expect all of these trends to continue, and very soon to be a well-recognized by the media and by investors in general. With that, I will now pass through it over to Keith Koci before giving my final remarks. Keith?

Keith A. Koci - Executive Vice President, Chief Financial Officer

Thanks, Lourenco. I will begin with a discussion of some of the cost cutting and cost deferral measures we have implemented, before briefly touching on our first quarter results, which as you know were previewed with the market on April 15th.

This environment has pushed us to sharpen our pencil from a cost standpoint, and we have already taken meaningful actions across the board. Regarding the $120 million in year one synergies and permanent cost reductions we committed to achieve when we announced the AK Steel acquisition. I am pleased to announce that we are already there with the initiatives we have already set in motion throughout the company. You will see a portion of the run rate savings associated with these actions in our Q3 numbers and the full impact on our Q4 results way ahead of the first anniversary of the acquisition of AK Steel in March 2021.

As for temporary cost reductions and deferrals, the most significant cost reductions are understandably coming from our idled plants and operations. As Lourenco noted, we have a high variable cost structure, which allows us to ratchet down spending substantially during the idle period. Most of the steelmaking cost structure consist of raw materials, which are nearly all eliminated in an idled scenario with the exception of a few take or pay arrangements. Energy is another piece that comes down quite a bit. Most of the fixed cost portion comes from the labor side, we're in the event of a plant idle. We continue to pay a portion of employee wages and health care for a period of time.

We have also sharply reduced our capital expenditures. Right now we are only incurring CapEx on sustaining and permission to operate projects at our facilities. In our stress case this runs at about $15 million a month, not including capitalized interest.

Our total CapEx in the first quarter was $140 million, $112 million of which was related to the HBI plant. We will still incur some HBI spend in the second quarter for work performed prior to the suspension of the work. Under construction until construction returns, we will be running at the minimal sustaining rate, between our steel and mining operations we have already deferred approximately $100 million 2020 sustaining capital not including HBI.

Our total company-wide CapEx will range from $250 million to $350 million for the last nine months of the year, depending on the timing of HBI construction restart. We have implemented pay deferrals ranging from 10% to 40% for our salary workforce and our temporarily suspending the 401(k) match. As you also know, we suspended our future dividends, which represented about $100 million per year on a pro forma basis cash outflow going forward.

We are also benefiting from the acceleration of AMT refunds we expected to receive half in 2021 and half in 2022 and are now expected to be received this year, likely in the second quarter. In addition, we've been able to defer pension payments of $51 million to early next year and can differ remaining employer social security payments for the end of 2021 and 2022.

As for our results we reported adjusted EBITDA of $23 million for the first quarter, which is mostly driven by the mining and pelletizing business. Results from our new steel and manufacturing segment only include the last 19 days of March, which as you know is when the pandemic effect to began to impact our end customers. The stub period EBITDA for steel and manufacturing of negative $11 million is a no way indicative of 8-Ks performance in a regular environment, it just happened to coincide with the beginning of automotive shutdowns. Leading up to that point as Lourenco noted AK Steel actually generated $38 million in adjusted EBITDA, which does not show up in our results other than the opening balance sheet.

Overall, during this tough period, we reported $218 million of total sales, of which $120 million or 55% were still automotive customers. Of the remaining sales 25% was to distributors and converters and 20% was to infrastructure and manufacturing markets. As a reference, AK Steel generated $1.2 billion of revenue between January 1st and March 12th, the day before we close the out position.

Our Mining and pelletizing results were solid for an always-light first quarter on the back of $2.1 million long tons of pellet sales. The completed acquisition of AK Steel resulted in the accelerated - acceleration into sales of certain inventory produced previously for AK Steel, which is why the volume number came in higher than last year's first quarter.

The reported segment EBITDA of $82 million included about $30 million of eliminated margin from those intercompany sales to our steel and manufacturing segment. You will notice, we also had several items related to the acquisition that were carved out to arrive at adjusted EBITDA, including acquisition costs of $23 million. Severance costs of $19 million as well as recognition of inventory step-up of $23 million, which impacted steel and manufacturing cost of goods sold.

We also realized a $3 million gain related to repurchase of some of AK Steel's bonds at a discount. It should be noted that this gain will be significantly larger in the second quarter as a result of the $181 million in discounts captured in our latest financing deal. As Lourenco noted, our business outlook will be heavily dependent upon the rate of automobile production during the last nine months of the year, we have implemented a new, more stable priced intercompany contract for pellets between our mines and our Dearborn and Middletown plants, which remove the influence of commodity prices, but we will still transfer at a market rate with comparable margins to last year.

As a result of this, the sensitivities to commodity prices in our mining and pelletizing segment will be much less relevant than what we've provided historically. To conclude, all of these initiatives and benefits, combined with the additional capital raise completed in April have led us to a very comfortable liquidity position that Lourenco described.

I will note that we implemented our cost cutting measures in a way that does not jeopardize the great condition of any of our assets and does not cut anything related to worker safety, which remain of the highest importance to us.

On that note, I'll turn it back to Lourenco to wrap up our prepared remarks.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Thanks, Keith. To make it abundantly clear our vision for Cleveland-Cliffs has not changed and the addition of AK Steel, AK Tube and precision partners to our company has dramatically enhance our ability to execute. The deal closed just two months ago, and despite of the setback of the COVID-19 pandemic. We have already achieved at least two great things. One, as Keith disclosed a few minutes ago, the $120 million we had committed as year one synergies will be achieved way ahead of sched and we are confident that final number will be fairly higher than the $120 million.

And two, we are able to move the Department of Homes to self initiate a self of Section 232 investigation on cores and laminations of grain oriented electrical steel and that's a real game changer in comparison with what was out there prior to our acquisition of AK Steel. I came to Cleveland Cliffs in 2014 to implement a strategy supported by one fundamental fact, the United States economy is the most reliable and the most resilient in the entire world. For the past six years, we have developed our business having this core belief in mind and we all know that this pandemic will ultimately back, what's most important for us right now is that the safety of our workers, and the health of our company are being protected for the long term.

Cleveland-Cliffs generates good paying middle-class jobs for Americans. And we do that, while we enable supply chain for products that need to our daily lives, without depending on China or any other foreign countries that through the deliberate actions or by means of the passive aggressive in action could inflict damage to the United States into our great people. After we make it through this crisis we as Americans should look back and humbly assess what you could have done differently. When we do so, I truly expect that the public in January and investors in particular, we'll have a better appreciation for real companies like [Indecipherable].

With that, I'll turn it back to Julian for Q&A.

Question & Answers

Operator

Thank you. [Operator Instructions] Your first question comes from Lucas Pipes from B. Riley FBR. Your line is open.

Lucas Pipes - B. Riley FBR, Inc - Analyst

Hey, good morning everyone and congratulations on closing the transaction during these difficult times. And then also taking aggressive actions to also liquidity and of course to protect the safety of your workers. But Lourenco I wanted to ask on the liquidity side, you provided the extreme test case scenario. I think it was 120 million of burn per month and then you commented in your prepared remarks of the belief that things are kind of getting better faster than you thought. So I wondered if you could update us on where you would see kind of the cadence of cash and liquidity over the course of this year? Thank you.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Thanks, Lucas. Good morning. Look, the numbers correct. The number that you mentioned and that was the number we use when we released our stress test case scenario. This being said, our stress test case scenario was anticipating no automotive production, all the way through the end of June and only cars being back in production in July. We also, we're anticipating a very low number of only 6 million cars being produced between the 9 month comprehended between April 1 and December 31st. So we are way ahead of that. Several of our automotive clients have already restarted, Mercedes, BMW, Hyundai. Toyota and Honda coming back today during the remainder of [Indecipherable] will be back on the May 18 week and we are going to start seeing numbers normalizing early in June. So I'm at this point, I'm really anticipating brief normal pretty fair level of automotive production in the second half of the year, that I think to reconsider that people really reluctant to enter in a new bus or a lift right now, because they don't know who was the last person inside, other metropolis outside of the United States are recorded people really walking away from public transportation. So we are going to see a renewed interest in car ownership. This morning on CNBC, the Chairman, CEO of Automation was basically begging for the car manufacturers to come back to operation start replenishing his inventory - because his inventories are going down, they are going down fast. Well, I'm sure he investing fine, the interview on the YouTube. So anyway, we are very optimistic. Another thing that is we back on the balance sheet. I think that we're seeing how the company is doing right now or some did very recently, we did it very early. And again, so we are the first ones in and out we're done. We're not going to do anything anymore because we did what we had to do. So, right now, my main concern is when we are going to restart HBI, because I want to take advantage of the scrap certain shortage that will be the new normal in the domestic marketplace in the United States.

Lucas Pipes - B. Riley FBR, Inc - Analyst

That's - that's very helpful. Thank you. Then I wanted to turn over to the electrical steel side and I wondered if you could provide some color as to how big this market is in the United States. What your current capacity is and then but the capacity utilization i.e. your production has been over the last few years and also kind of in the context of this if the disclosures this morning as we kind of all kind of update our models here on the following the pro forma models AKS plus Cliffs. Is this kind of the level of liquidity we should - we should expect. Sorry, the level of disclosure, we should expect going forward? Thank you.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Okay. So let me start with electrical steel I have been there. I'll have Keith to answer the liquidity disclosure stuff like that. So the market for electrical steels in United States, in give or take 250,000 tons a year and that's more or less AK Tube capacity in our [Indecipherable] in Butler, Pennsylvania in the finishing plant in Waynesville, Ohio. We have the technology, the technology has been out before, historically is a well-known technology that is by means of strange effects ended up in the hands of the Chinese, the Koreas and the Japanese and then they start on to cutting these market here in the United States by don't be grain oriented electrical steels GOES into the United States, that Section 232 Canada and then the clients - some of the clients found a way to circumvent because you know, everybody is at least very, very they are confident COVID-19 situation. Everybody was addicted in low prices and looking at the other side, how those price were being achieved. So they started moving small machines to good cores and lamination across the board. So we saw Canada across the board from Detroit into Mexico, Matamoros across the border from Brownsville, Texas. And so the cores start instead of coming through the United States, start going to Canada is going to Mexico. And then got in the cores and lamination consent by truck back into the United States, tariff free, maybe Mexico, maybe in Canada, beautiful. The only problem is that need neither Mexico more Canada produce a pound of electrical steel. So we're able to explain that very clearly to the USGR, Robert Lighthizer, to the Director of Manufacturing of the White House, Dr. Peter Navarro and to the Secretary of Commerce, Wilbur Ross. I think that - I think that for us here is basically the full. The electrical steel business in due diligence for us was mine was $40 million EBITDA. So shutting down the electrical steel business is our immediate $40 million EBITDA improvement in our company. But that would put more than 1,400 people in Pennsylvania and Ohio out of a job. So, 1,400 good families using good paying jobs in Pennsylvania and Ohio were being displaced for the wrong reasons. So, I will make more than $40 million out of this situation, but might both my baseline is it the Department of Commerce, which by the way, I fully expect that I will win this case, but they are self-initiated so they got and they will do it fast. But as soon as less would likely, as soon as the DOC concludes positively this thing, we're going to have a pretty profitable business and we still have a lot of that players to deal with, but all of [Indecipherable] for now is that your due diligence we accounted for an improvement of $40 million in EBITDA by shutting up, but then we are able to do the right thing and I appreciate the Trump administration for listening and understanding where the problem is and how we can fix it and we are acting and I believe that they were fast. I have huge confidence in the Secretary of Commerce, Wilbur Ross to do the right thing. I know that the USGR ambassador, Bob Lighthizer will work on the backlash if any strong our passive aggressive friends to the north, Canada and friends to the south, Mexico and the passive aggressive guys who end up shutting down, shutting down the complaints and life is good, and we're going to go back to have a profitable business and supply this very serious national security issue that was cores and laminations and grain oriented steels for the electrical grid of the country. Look did I go through what you like to hear about the electrical steels.

Lucas Pipes - B. Riley FBR, Inc - Analyst

Very helpful. I appreciate that. Very helpful.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

So I'll have Keith finishing with the disclosure. Keith, please dive.

Keith A. Koci - Executive Vice President, Chief Financial Officer

Sure. Hey, Lucas. Yeah, I think in the queue you have the, you have the disclosure of you'll see $1.8 billion in rough terms on the borrowing base $200 million letters of credit and $800 million borrowed at the end of March –that's how - that's the breakdown on the…

Lucas Pipes - B. Riley FBR, Inc - Analyst

And in terms of the segment disclosures, especially around the steel side is that also what we should expect going forward?

Keith A. Koci - Executive Vice President, Chief Financial Officer

That is correct, yes.

Lucas Pipes - B. Riley FBR, Inc - Analyst

Okay. Okay, great. I really appreciate all the information that. Best of luck and thank you very much.

Keith A. Koci - Executive Vice President, Chief Financial Officer

Thanks, Lucas.Your next question comes from Matthew Fields from Bank of America. Your line is open.

Matthew Fields - Bank of America - Analyst

Hey, Lourenco. Hi, Keith. Hope you and your families are doing well. Just a couple of housekeeping ones first for me, so, thanks for mentioning, I guess you would have earned $61 million of EBITDA in the first quarter. How do you owned AK, the whole time to that I guess is about $38 million of EBITDA that you didn't own in the first quarter. So is, if we're trying to do a sort of a pro forma last 12 month EBITDA is at about $855 million on a combined basis?

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Before Keith chime in. I'd like to Keith to do it. But before he chimes in, I would like to mention one thing. This is just a mathematical exercise. Remember, we have already reduced so many, so much in terms of costs from the case you overheard. We have already executed on so many actions in terms of reducing the cost base. But this is just a pro forma exercise to show how much Q1 could have looked like, but again this before, we cut, what we have already cut and in Q1, but we just did that, I turned of course…

Matthew Fields - Bank of America - Analyst

No, I appreciate that this is before the $120 million of synergies, and then all that steps that you've taken?

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Absolutely. Okay so, Keith, please go ahead.

Keith A. Koci - Executive Vice President, Chief Financial Officer

Yeah. That said numbers, that's about correct. That makes sense.

Matthew Fields - Bank of America - Analyst

Okay. Thanks. And then you've given the EBITDA and sort of CNTA levels and pro forma for the upsized issue that you did in April. Is that mean that you're out of secured capacity at this point?

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Not true. We still have secured capacity. But it doesn't mean that I'm going to use it. So I have no plans at this point to issue any debt or any equity, zero, we're done. We have, way more liquidity then we need to run this company and I'm glad that after they issue up the high-yield bonds secured debt $400 million. I was able in a matter of 48 hours to turn and do the second transaction that was liability management and we cut almost $200 billion in debt just by using the, the accused [Phonetic] to buy other bonds tense on the dollar, because you know investor, want investors, sometimes they have their own problems with their investors. They are coping with the general public or the smaller firms making withdraw so that force them to sell. So we are there to buy, don't plan to take. But I think at this point that there is no reason for us to do anything mining equity - neither in equity nor in debt, but we do have some subgroups capacity left.

Matthew Fields - Bank of America - Analyst

Okay, great. And then on the working capital side obviously, first quarter is your big use of working capital and then seasonally you get traditionally a big release of working capital in the second quarter, given all the sort of actions that have gone with your footprint in idling and then potentially restarting is that kind of - do we anticipate that's going to be a similar trend this year or is it going to be working capital. Just can sort of completely off this - this year given the circumstances?

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Well, we have some positives on the working capital side, remember the other day, they're pelletizing plants and we are still delivery built. We're just depleting our inventory that will have a positive impact on working capital. So we're working on that front as well. So Keith, you want to chime in on that as well please.

Keith A. Koci - Executive Vice President, Chief Financial Officer

Yeah, sure. Yeah. And you're right. This is - it will be a tough year to really get and get it arms around working capital prediction, but as Lorenzo mentioned we are generating cash here in the second quarter with pellet. Pellet inventory is coming down. We're obviously generating cash on receivables as well in the second quarter. So we will see cash flow coming in that way. And then as we ramp up production late in the quarter year and into the, into the third quarter, we're going to end up consuming some cash. So I mean, our best guess right now is a neutral year in working capital, give or take you know, $50 million to $100 million. But it's, it really depends on the timing and how robust the customers come back, but we're overall looking at a neutral year right now with the caveat that it's very, very difficult to predict.

Matthew Fields - Bank of America - Analyst

I appreciate that. I know that there's just a lot going on and it's changing quickly. One of your blast furnace supply peers noted in there that the 10-Q that ArcelorMittal USA, I guess is trying to declare force majeure on a supply contract, can you just give us a general sense of your confidence in the volumes that there are sort of nominated for ArcelorMittal, U.S. in 2020?

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Yeah, look that, I don't know what peer comment on that, but people that are outside they - everybody has a mouth, so they can say whatever they want. It doesn't mean that they know what they're talking about, that's number one. Number two is that, there is no change in terms of the, the nomination for us of what Mittal or outside of the normal pattern. And number three, remember that not only ArcelorMittal, the other contracts are won like Dofasco, they all have minimal levels of take or pay. So even in the unlikely and unexpected event because the worst is over, I assume that there is still years, I've seen the same thing we are seeing at Cleveland-Cliffs, at AK Steel. We are on the way back. So they need to do pellets to replenish their inventories and now as soon as they come back to replenish or some of the brands. They need pellets to run, they will be above their minimum take or pays. But we are already above the minimum take or pays with the pace that you're supplying right now. So, people talk too much, just ignore.

Matthew Fields - Bank of America - Analyst

Okay. Thanks. And then one last one.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

If you don't get for me, Keith or of sales or above, I guess you don't…

Matthew Fields - Bank of America - Analyst

Okay. Last one, just a sort of a bigger picture. Just can you sort of opine on why you think that there has been this divergence between iron ore in that call on the seaborne market, you know, iron ore held up remarkably well on that calls down, 30%-35% this year. Is it all supply, is it all you know, some different customers India versus China just what's your thinking on that?

Lourenco Goncalves - Chairman, President and Chief Executive Officer

It's the same thinking that I have in 2014, 2015 and 2016. When that was very vocal about what was going on with iron ore. Full like I - I used to see back then in 2015, 2016. Well, is a lot less concentrated then iron ore. I always concentrated basically in two countries and [Indecipherable]. Rio Tinto, BHP, Fortescue in Australia, Vale in Brazil done. So this four own it and they don't call, they don't go over their phone. They don't have Zoom to make a video conference and set price, that's not the way it works. But because they have the same type of cost structures in Australia, they operate out of the same force in the same geographical area and Cuba [Phonetic] and Vale is out there in Brazil with lower costs, but higher freight at the end of the day, they all for that way on the same direction, more or less at the same levels and at the same time, the only difference being they influence of the, the respective currencies, the Aussie dollar and the Brazilian real.

As far as coal we have a much more diversified, diversified market. You have a much more supply and demand driven situation. As far as iron ore as long as that [Indecipherable] do not want the price will go down, price will not get down. And I like I always said before we take the bad CEOs [Indecipherable] like Rio Tinto did, like BHP did and Vale did and Fortescue - Fortescue did not need that, but the other thing, definitely need a deadly Rio Tinto being the worse and thanks -[Indecipherable] first one to act. Things got fixed in our own, but in terms of wholesale a lot more out of anybody's hands going to be more into the market the supply demand and percentage.

Matthew Fields - Bank of America - Analyst

That's very helpful. Thanks. Thanks again and good luck with the continued integration.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Thanks, Matt.

Keith A. Koci - Executive Vice President, Chief Financial Officer

Thanks, Matt.

Operator

Your next question comes from Seth Rosenfeld from Exane BNP Paribas. Your line is open.

Seth Rosenfeld - Exane BNP Paribas - Analyst

Good morning. Thank you for taking my questions today.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Good morning.

Seth Rosenfeld - Exane BNP Paribas - Analyst

If I may, I believe in your. Thank you. I believe in your prepared remarks, you commented on, there may being a new supply agreement in place between the pelletizing and AK Steel business, I heard you correctly. And can you just clarify on what if any impact that will have on price realizations for the pelletizing business and also cost structure for steel making. I mean just to clarify it. Will that still be on a fully arm's length basis. I'll start [Indecipherable]? Thank you.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Yeah, we, we said that - that, it will still be commercial based, but it will be less influenced by the ups and downs of the commodity and the product in the marketplace, so to be more, a more stable numbers steel market through that's exactly what we said in our prepared remarks.

Seth Rosenfeld - Exane BNP Paribas - Analyst

Okay. Just to dive into a bit more. Can you confirm, is that going to be a fixed price contract, the cost plus structure for the AK Steel business or will it still be tied like historically from those inputs we've discussed in years past?

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Look, Seth, it is what we explained and we're not going to elaborate much more, you are going to come with a negative. view [Indecipherable]. So there is no efforts to clarifying things for you. So, go ahead and likely report and say that I missed on this and that, that's what's going to happen. No, I'm not going to give you any more information, that's enough. Do you have any other question?

Seth Rosenfeld - Exane BNP Paribas - Analyst

Okay. Yes, I do. My other questions for you today was on the HBI business and if you can give us a bit of color on and what market environment you planned on restarting the CapEx to build out and then perhaps the range for expected ramp up timeline, obviously the scrap market strengthened a great deal in recent weeks, can you touch on what would mean for potential pricing, if you've had more recent discussions with your potential, yeah, yeah customer?

Lourenco Goncalves - Chairman, President and Chief Executive Officer

You called the HBI plant once we don't make - remember that?

Seth Rosenfeld - Exane BNP Paribas - Analyst

Yes. I still remember that very, very well.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Okay, okay. Cool. Okay, and my wife is still [Indecipherable]. Our HBI plant in Toledo has not made a little. So we are fine. We are only 3 months away from completion of running the plant and as soon as we finished and customers who reach that will be three months will be done and producing HBI, we are going to have on that a very successful product to sell. I was not planning on any the scrap shortages in the United States, actually the EAF industry in the United States is predicated on one thing that's really America, there's a lot of scrap available being generated all the time in the United States. This being said that changed because manufacturing down. Automotive is down. So the scrap generation is down and this busheling scrap generation is further down. So the HBI that was fantastic, would be even more fantastic but what would be the price that you're going to sell. You are going to know after we report the first quarter of sales. I did not cut deals at fixed price going in. There are others that say the things, they still consider more they are talking, this - the metallic's market, it's a transactional market. You know that, but you keep asking the same question knowing the answer. No. We do not have any fixed contract with fixed price quarters with any clients because that's not the way that market functions. So we are going to play in the market that exists already and we are going to sell our product extremely well. And now that we have AK Steel, it will be even more [Indecipherable] and we are going to be the company that will be totally independent from feedstock, our own feedstock, because then I have our own pellets, I have our own HBI and we're going to sell the company that are eager that are following, they are putting pressure on us to come back and finish because they need, then they need deadly, but all the rest in terms of numbers. Well, the number, whatever, whatever numbers we want in your model, because I'm not going to give it to you.

Seth Rosenfeld - Exane BNP Paribas - Analyst

Okay, thank you very much. I hope you - that thing goes very well and I hope this scrap price stays high without all of your auto customers being shut down.

Operator

Your next question comes from Phil Gibbs from KeyBanc Capital Markets. Your line is open.

Philip Gibbs - KeyBanc Capital Markets. - Analyst

Hey, thanks. Good morning. I had a question on the pricing, and the pricing in the mining side was really robust and even higher dramatically year-on-year. And I know the pricing isn't necessarily link for what it used to be linked to, but just trying to - trying to gauge the bridge as we move on even to the rest of the year? Thanks.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Keith, you want to take that.

Keith A. Koci - Executive Vice President, Chief Financial Officer

Yeah, yeah. Sure, Phil. Yeah. In the first quarter, we had a, a positive impact from the, from the acquisition we accelerated deferred revenue related to a legacy contract that had an impact on the, on the price that, that more than offset the kind of a negative one-time true up on HRC for the first quarter. So you had offsetting effects that kind of netted to about $2, just to give you a little help. I mean, based on current commodity prices we would kind of see around is something in the low '90s in terms of the selling price and on pellets for the year based on current prices and depending on how things move, but that's where we're at right now, Phil.

Philip Gibbs - KeyBanc Capital Markets. - Analyst

You're saying low, low '90s in terms of what you'd beginning on realizations today, not a yearly average. I just want to be clear on that?

Keith A. Koci - Executive Vice President, Chief Financial Officer

That's the, that would be the yearly average based on today's commodity prices.

Philip Gibbs - KeyBanc Capital Markets. - Analyst

Okay, so 1Q and then the rest of the year. Okay. Great and Lorenzo on the side of side of HBI, I know the project was stopped due to COVID now you're - now you're looking to restart the construction. Any thoughts on when you realistically that can be done with having to get people back on site in up and running and just some timing and what one-year term hurdles or lack thereof, there could be?

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Yeah, look out; we are going to restart that plant, the construction of that plant sometime in the second half. That this point still is very difficult for me to tell you when exactly when because one point, the point that you have just mentioned, which we believe we have a good plan. So in place to execute on that, but so we know what we believe we can, we can bring people and put them to work without creating any health or safety issues or the demand and Lehman for working the construction. So that part has been addressed, and we believe we have it resolved. On the other hand, I also have to be mindful that we are going to have to remobilize. We're going to have to redo things that we have all in place at that point. So I don't know how long it will take to bring these people back to the site and to have everything moving again. But one thing I would tell as soon as we have that onsite, it's three months and will be up and running, and HBI will be one of our best success stories to have both. But there would [Indecipherable] we don't have exact point in time. Yet, we are going to be able to bring these people back. I don't regret because at the end of the day, I will negotiate with government at the very beginning of the pandemic, I would like to keep my other plants in Ohio open and govern the rightfully so I was very concerned about the first impact and I could explain and convince him about the, the countermeasures that we developed on the slide and we put in place that now being adopted everywhere in terms of flexi glass separating operating points, social distancing forced on with painted spots on the four of the plants or stuff like and these became the norm after we did. And but I could not really in, in all earnest justify keeping up construction site, site open when you clearly have had we had no plans for not having 2-3 people on top of each other. Doing things, especially when we're realigning for any electrical equipment on. So now we do, we are ready, but I don't have time yet, because now we need to remobilize and that you take a little while, but we definitely we'll restart in the second half and we'll hopefully still be producing HBI made in Toledo in 2010 to be seen.

Philip Gibbs - KeyBanc Capital Markets. - Analyst

Lorenzo, my last one here is just what did you see the automotive order book at AK Steel starting to get better clearly the weakness started happening in late March and early April was the probably the darkest days, it sounds like, but what I guess when or when did the one of the bounce off the bottom happen in your mind and what's, what's gotten you excited along those lines? Thanks.

Lourenco Goncalves - Chairman, President and Chief Executive Officer

Look, we are already seeing the orders come and we are already seeing the release for just in time coming in. So it's already happening. Each plant is different moving - each car manufacturer is different, each plant is different, but the general trend is that we are starting with one shift and then going to two shifts and then going to full capacity and I believe that we're going to be at full capacity in the second half that's what the trend is showing right now. And there is a lot more to reinforce social business in a car manufacturer than anywhere else. We are seeing Tesla, big fight with the California right now, because of that. So and though we don't, we don't have that in Michigan. We've don't have that in Alabama and intend to see and not replace that we, we sell steel to car manufacturers in the Texas. So, we're in good shape. But it will pick up fast. The main concern was all people not buy car, no they. Consumer is buying cars. So, cars are moving out of their box. There's a lot of financial incentives to sell cars right now. The dealerships already asking for replenishment. So, the pressure is on and I believe that much earlier than we either we ourselves anticipated, we are going to see the automotive business in this country normalized. And I also believe that with the anti-Uber trend we are going to see a lot more car ownership than we have seen before. And that will be a fantastic positive that again we are not anticipating by will, but we will take it and will take advantage. So I think we are - we out of time. So with that I will send it back to Julian to wrap up the call. Again thank you very much for being with us. And I, as always, we will continue to keep you posted and we will continue to inform you about development. Thank you very much and have a great week.

Operator

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CLEVELAND-CLIFFS INC

Q1 2020

Earnings Transcript

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