Cleveland-Cliffs Inc. (CLF) | The Buildout — AI Infrastructure
The Verdict
Cleveland-Cliffs is a vertically integrated North American steel producer focused on value-added sheet products, particularly for the automotive industry. It mines iron ore, makes pellets and direct reduced iron, processes ferrous scrap, and turns it into steel and downstream stamped, tooled and tubular parts. Its relevance to the AI build-out is indirect: it sells grain-oriented electrical steel into the grid and transformer chain — the product family management says it alone makes in the U.S. — and runs an internal Palantir AI program aimed at mill costs, not revenue. The company reports no AI revenue line.
| Market Cap | — |
| Revenue (TTM) | $19.2B |
| Revenue Growth | +4.0% |
| EBITDA Margin (TTM) | 2.4% |
| Net Debt | $7.6B |
| Earnings Beats | 4 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Management is resetting 'a large portion' of its fixed-price contracts — the base for its estimated ~$500M year-over-year EBITDA improvement in 2027.
- Management says Cleveland-Cliffs is the only U.S. producer of grain-oriented electrical steel; Butler Works adds 25% GOES capacity by 2028.
- Automotive shipments hit a two-year high in Q2 2026, coating volumes returned to 2023 levels, and GM and Toyota have recognized Cliffs with supplier awards.
- Free cash flow turned positive in Q2 2026 for the first time in two years, helped by a ~$55M working-capital release.
- Debt paydown is the stated top capital-allocation priority, with no maturities until 2029 and an asset-sale program under contract for ~$400M.
What We’re Watching
- The Q3/Q4 guide is 'largely just the curve,' so it is levered to HRC prices the company does not control.
- The FY2026 $10/ton cost-decline commitment went silent; Q2 unit costs rose and Q3 is guided down only $10/ton.
- The 2027 reset's split between fixed-price contracts and Stelco went unresolved in the analyst Q&A.
- Canadian galvanizing lines are at risk absent further trade protection, and the footprint decision carries employment consequences.
The thesis reads as strengthening on the evidence: the materiality scan calls this a genuine multi-variable inflection rather than a one-quarter blip, with revenue, EBITDA, free cash flow, pricing, volume and cost all moving favorably at once, and management converting several quarters of 'future earnings power' talk into claimed delivered results. Two contractual levers carry much of the forward case, and both depend on outcomes management does not fully control. The open question is whether Q3 2026 adjusted EBITDA lands near the guide and the fixed-price reset is signed in the November–December 2026 window — and whether leverage reaches sub-2.5x by mid-2027.
Earnings Beat
Cleveland-Cliffs reported Q2 2026 revenue of $5,226M, up from $4,922M in Q1, with gross margin of 3.7%. Adjusted EBITDA was $286M — management's best quarter in two years — tripled from $95M in the first quarter. Free cash flow turned positive for the first time in two years. Shipments of just over 4 million tons came with an average selling price up $76 per ton, and automotive shipments were the highest in two years.
| Metric | Q2 FY2026 | Q1 FY2026 | Q2 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $5.2B | $4.9B | $4.9B | +5.9% |
| Gross margin | 3.7% | -1.7% | -4.2% | +790bps |
| EBITDA | $276M | $52M | −$105M | −362.9% |
| EPS | $-0.25 | $-0.42 | $-0.97 | −73.8% |
| Adjusted EBITDA | $286M | $95M | n/a | — |
| Free cash flow | $73M | -$477M | n/a | — |
After several quarters of talking about the future earnings power of this company, we can finally point to tangible evidence that the progression we have been forecast is now reality.— Lourenco Goncalves, CEO, 2026-07-23
Management tone: Management shifted from aspirational to evidence-based framing. The CEO said the company had spent 'several quarters … talking about the future earnings power of this company' and could now 'point to tangible evidence.' Managers said the three turnaround factors — automotive volume, footprint optimization and the expired uneconomic slab contract — had materialized, and described finishing lines as back to healthy utilization. They issued a quarterly EBITDA guide with results for the first time, citing the magnitude of the change. They were direct on the guide's assumptions ('largely just the curve') but reframed the fixed-price reset split and gave no quantification of the Palantir AI cost benefit.
Management Guidance
Management guided Q3 2026 adjusted EBITDA to ~$575M ('which would be our strongest quarter in 3 years'), shipments above 4.3M tons, ASP up another $55/ton and unit costs down $10/ton. Q4 adjusted EBITDA is guided above Q3 at the current HRC curve, with holiday seasonality — Thanksgiving week and the last 10 days of the year — already baked in. For 2027, management estimates a ~$500M year-over-year EBITDA improvement from resetting a large portion of fixed-price contracts, with further gains from Stelco and Palantir AI. The assumptions: pricing 'largely just the curve,' plus the contract resets and coal, energy and other costs 'effectively consistent.'
Trajectory
Revenue went $4,734M (Q3 2025) to $4,313M (Q4 2025), then rose to $4,922M in Q1 2026 (+14.1% QoQ) and $5,226M in Q2 2026 (+6.2% QoQ). Gross margin moved from -4.4% in Q4 2025 to 3.7% in Q2 2026, and EBITDA (operating income plus D&A as reported) from $26M to $276M. The drivers management cites: average selling price up $76 per ton in Q2, automotive shipments at a two-year high, footprint optimization, and the expiry of the uneconomic slab supply contract. Q2 unit costs rose quarter-over-quarter on an inventory lag and maintenance outages.
The Model
The model projects FY+1 revenue of $21,738M and EBITDA of $1,587M (7.3% margin), rising to FY+2 revenue of $23,500M and EBITDA of $2,514M (10.7% margin). The near term is anchored by the Q3 2026 adjusted EBITDA guide and a guided Q4 step-up, plus pricing, cost reductions and contract resets. FY+2 leans on the estimated fixed-price contract reset, higher volumes and operating leverage — what management describes as 'even more improvements to come' beyond commodity pricing.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $18.6B | $21.7B | $23.5B |
| YoY Growth | — | +16.8% | +8.1% |
| EBITDA | −$223M | $1.6B | $2.5B |
| EBITDA Margin | -1.2% | 7.3% | 10.7% |
Projections are the median of 5 independent model runs. The model’s revenue sits 9.4% above analyst consensus.
Management guided Q3 2026 adjusted EBITDA to ~$575M ('which would be our strongest quarter in 3 years'), shipments above 4.3M tons, ASP up another $55/ton and unit costs down $10/ton. Q4 adjusted EBITDA is guided above Q3 at the current HRC curve, with holiday seasonality — Thanksgiving week and the last 10 days of the year — already baked in. For 2027, management estimates a ~$500M year-over-year EBITDA improvement from resetting a large portion of fixed-price contracts, with further gains from Stelco and Palantir AI. The assumptions: pricing 'largely just the curve,' plus the contract resets and coal, energy and other costs 'effectively consistent.'
What Could Go Right — and Wrong
- Q3 2026 adjusted EBITDA lands at or above the guide and Q4 exceeds it.
- The fixed-price contract reset is signed through the November–December 2026 window, adding a contract-mechanical layer to 2027.
- The Dearborn blast furnace (>2M tons) is restarted on OEM reshoring commitments.
- Property sales deliver the ~$400M proceeds in the second half of 2026, helping leverage reach sub-2.5x by mid-2027.
- Palantir AI cost savings are quantified, making the 2027 cost side more underwritable.
- The HRC curve rolls over, taking the 'largely just the curve' guide down with it.
- The fixed-price reset underdelivers or is delayed past the November–December 2026 window.
- The withdrawn FY2026 $10/ton unit-cost decline is not reinstated or replaced.
- A Canadian footprint decision disrupts operations and carries negative employment consequences.
- Leverage fails to reach sub-2.5x by mid-2027, keeping capital allocation in debt-paydown mode.
Looking Ahead
The next twelve months are a test of delivery. Q3 and Q4 2026 results show whether the adjusted EBITDA guide and the Q4 step-up land, and whether the $10/ton Q3 cost reduction holds. Through the second half of 2026, property-sale proceeds are expected and the fixed-price contract reset negotiations run into November–December. Management targets sub-2.5x leverage by mid-2027. The USW labor negotiation, the POSCO, HBI and FPT processes, and Middletown DOE finalization remain open items.
- Q3 2026Q3 2026 results — Test the adjusted EBITDA guide and >4.3M-ton shipments.
- H2 2026Property-sale receipts — ~$400M expected; major sales 'under contract' with earnest money.
- H2 2026Fixed-price contract resets — November–December talks for an estimated 2027 uplift.
- 2027Burns Harbor reline — Blast furnace reline 'coming next year' for efficiency gains.
- mid-2027Leverage target — Management targets sub-2.5x leverage.
Financials
Annual Summary
| Metric | FY2024 | FY2025 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $19.2B | $18.6B | $19.2B | -3.0% |
| Gross Margin | 0.0% | -4.5% | -0.7% | 453bps |
| EBITDA | $195M | −$223M | $466M | -214.4% |
| EBITDA Margin | 1.0% | -1.2% | 2.4% | 221bps |
| Net Income | −$754M | −$1.5B | −$876M | -95.2% |
| Free Cash Flow | −$590M | −$1.0B | −$857M | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)-0.7%
- EBITDA Margin (TTM)2.4%
- Net Margin (TTM)-4.6%
- ROIC-4.1%
- FCF Conversion-183.9%
- SBC / Revenue0.0%
The Company
Cleveland-Cliffs is a vertically integrated North American steel producer focused on value-added sheet products, particularly for the automotive industry. It makes hot-rolled, cold-rolled, coated, plate, stainless and electrical steel, and management describes it as 'the only producer of grain-oriented [steels]' — the electrical steel used in transformer cores, the product family most plausibly tied to AI-driven grid demand, though management frames it around the grid, not AI. There is no disclosed AI revenue.
The company is vertically integrated from mining iron ore, making pellets and direct reduced iron, and processing ferrous scrap through primary steelmaking and downstream finishing, stamping, tooling and tubing. It primarily operates through one reportable segment — Steelmaking — alongside tubular, tooling and stamping, and European distribution operations. Its plants include Burns Harbor, Cleveland, Indiana Harbor and Middletown; tubular mills at Walbridge, Ohio and Columbus, Indiana; and 10 tooling and stamping plants across Ontario, Alabama, Kentucky and Tennessee. It employs about 25,000 people.
Business Segments
Competitive Landscape
Cleveland-Cliffs describes the steel industry as 'highly competitive and cyclical,' with imports and global overcapacity as persistent pressures. Management argues its integrated model is hard to replace in automotive sheet, pointing to GM and Toyota supplier awards, and says it is 'the only producer of grain-oriented [steels].' The source names Nucor, Steel Dynamics, United States Steel, ArcelorMittal and POSCO as competitors, largely through the supply-chain wiring rather than filings. ArcelorMittal — a former Cliffs slab customer — is adding U.S. flat-rolled and electrical-steel capacity at Calvert, a medium-term watch item. Trade policy, chiefly Section 232, shapes the competitive field.
- NucorNamed as a competitor (wiring-map inference); also listed as buying Cliffs' iron ore pellets/HBI (inference).
- Steel DynamicsNamed as a competitor (wiring-map inference); also listed as an iron ore pellets/HBI customer (inference).
- United States SteelNamed as a competitor (wiring-map inference); Cliffs' Stelco holds an option to buy 25% of U.S. Steel's MinnTac mine.
- ArcelorMittalFormer slab customer, now primarily a competitor; the slab supply contract has ended. Its Calvert EAF reaches full capacity in H2 2026, a second EAF is in detailed engineering, and its Calvert electrical-steels project is progressing.
- POSCOA strategic-dialogue counterparty (MOU signed Q3 2025), described in the 10-K as 'Korea's largest steelmaker and the world's third largest steelmaker outside of China'; listed as a GOES competitor by inference.
Supply Chain
Cleveland-Cliffs sits at the front of the industrial chain, mining iron ore and making steel for automakers, distributors and industrial customers. Its input suppliers are disclosed but unnamed in the 10-K, and no neighbor transcript in the evidence names Cliffs directly.
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