Cleveland-Cliffs Inc. (CLF) Earnings

Management highlights

### Core Operational & Financial Progress - After several quarters of projected improvement, Cleveland Cliffs returned to positive free cash flow in Q2 2026, and tripled adjusted EBITDA sequentially from Q1 2026. - Three previously targeted core improvements (automotive volume recovery, footprint optimization, and expiration of the uneconomic ArcelorMittal slab supply contract) have all materialized, with stronger-than-forecast results paired with current market pricing. - Finishing lines, which operated at suboptimal utilization for two years, are now back to healthy utilization levels, driving favorable unit cost improvements. ### Automotive Market Position - Cleveland Cliffs is the leading automotive steel supplier in the U.S., earning top supplier awards from Toyota and General Motors in 2026. Q2 2026 automotive steel shipments hit their highest level in two years, returning to 2023 peak volumes. - Gains are driven by the company's multi-year contracting strategy, reshoring of U.S. automotive production, and supply chain disruptions that have negatively impacted competitors. ### Policy & Trade Benefits - Management credits U.S. Section 232 trade policies as the most effective U.S. industrial policy in a generation, which has accelerated domestic manufacturing investment, lifted domestic steel utilization, and driven large-scale reshoring of manufacturing to the U.S. - Cleveland Cliffs is uniquely positioned to meet growing domestic demand for steel across automotive, electrical infrastructure, and defense sectors due to its full integrated domestic footprint (mining through downstream manufacturing). - The U.S. Department of Energy is supporting capital projects to improve energy efficiency: the Butler Works induction reheat furnace upgrade (on track for 2028 completion) will increase high-end grain-oriented electrical steel production, and the Middletown blast furnace reline (due by 2030) will add on-site electricity generation from blast furnace gas. - All potential outcomes of ongoing USMCA renegotiations are expected to benefit domestic steel producers, as all proposed changes strengthen domestic content and origin rules that favor North American steel production. - Canada extended its tariff rate quota system through June 2027, which has improved hot-rolled steel pricing, but further trade protections are needed to support Canadian galvanized steel production. ### Other Operational Updates - The company has achieved best-in-class total recordable injury rates over the past three years after rolling out consistent Cleveland Cliffs safety standards across all acquired operations, resulting in meaningful reductions in workers' compensation and related costs. - Collective bargaining agreement renewal negotiations with the United Steelworkers Union have started with a constructive and productive opening. - Celso was formally appointed President and CFO to the Board of Directors, reflecting his existing leadership role; the CEO plans to remain in his position for several more years with Celso serving as his second-in-command. - The company is implementing AI-based cost reduction initiatives in partnership with Palantir, which are already starting to deliver operational efficiency improvements.

Guidance

- Q3 2026 adjusted EBITDA is guided to ~$575 million, which would be the company's strongest quarter in three years; this guidance expects Q3 adjusted EBITDA to more than double Q2 2026 levels. - Q3 2026 steel shipment volumes are expected to exceed 4.3 million tons, with half of the 300,000 ton sequential shipment increase coming from higher automotive volumes; average selling price is expected to increase an additional $55 per ton, and unit costs are expected to decrease by $10 per ton. - Even with typical seasonal holiday slowdowns factored in, Q4 2026 adjusted EBITDA is expected to outperform Q3 2026, with further earnings improvements projected for 2027. - The majority of $400 million in total proceeds from completed property sales are expected to be received in the second half of 2026. - Management expects to reach its target leverage ratio of below 2.5x by this time next year (Q2 2027), driven by operating cash flow and asset sale proceeds dedicated to debt paydown. - Resetting a large portion of lower-priced fixed-price contracts in 2027 is expected to deliver a $500 million year-over-year EBITDA improvement. - Further cost improvements are expected beyond Q3, driven by higher production utilization, optimized mill scheduling from Palantir AI initiatives, and efficiency gains from planned blast furnace maintenance.

Segment performance

Segment breakdown by product/geography was not explicitly provided in the prepared remarks. Overall consolidated Q2 2026 results: adjusted EBITDA of $286 million (best quarterly result in two years), total steel shipments of just over 4 million tons, and a return to positive free cash flow after two consecutive years of negative free cash flow. The average selling price increased $76 per ton quarter-over-quarter due to lagged contract pricing adjustments and a richer product mix driven by high automotive volumes. Unit costs increased quarter-over-quarter due to Q2 maintenance outages and the inventory lag effect from prior periods. Stelco (Cleveland Cliffs' Canadian subsidiary) has seen improved pricing and performance on the hard-rolled side, but finishing/galvanizing operations remain underperforming due to insufficient Canadian trade protections; Stelco currently operates at full volume capacity.

Risks & headwinds

- Without additional Canadian trade protections against dumped imported steel, the long-term competitiveness of Stelco's galvanizing lines in Hamilton, Canada remains at risk; the company may reorient Stelco production away from galvanized steel toward higher-margin hot-rolled steel if sufficient protections are not enacted, which would impact Canadian employment. - A restart of the idled Dearborn blast furnace (2 million tons of annual automotive steel capacity) is contingent on long-term certainty of automotive reshoring trends and sustained trade policy enforcement; without clear customer commitment to permanent domestic production, the company will not move forward with the restart, keeping capacity tight for automotive clients. - All forward-looking results are subject to risks and uncertainties that could cause actual outcomes to differ materially from guidance, as outlined in the company's SEC filings on Forms 10-K and 10-Q. - The company will need to maintain steady free cash flow generation to reach its leverage target, and any deterioration in market conditions or steel pricing could delay deleveraging.

Analyst Q&A

• Q: When will non-auto and auto fixed price contracts reset, and can management confirm that resets will result in higher pricing? What is the outlook for fourth quarter cost reductions? /

  A: Non-auto contract reset negotiations begin in earnest in H2 2026 and conclude by early December for 2027. The previous round of contracts was negotiated at much lower price levels, so significant higher resets are a foregone conclusion. For auto contracts, Cleveland Cliffs is now the clear market leader with strong customer recognition, and new trade rules eliminate offshore sourcing alternatives, so auto contracts will also reset to substantially higher prices. Management expects further quarter-over-quarter cost reductions in Q4, driven by higher production utilization and Palantir AI-driven operational improvements.

• Q: What is the current state of pricing at Canadian subsidiary Stelco, and how does Stelco factor into the $500 million projected 2027 EBITDA uplift? /

  A: Stelco is already at full volume capacity. The 40% pricing gap between Canadian and U.S. steel prices has largely closed for hot-rolled steel after Canadian policy changes, though galvanized steel pricing in Canada still remains depressed due to ongoing dumping. If Canada does not implement additional galvanized trade protections, Cleveland Cliffs will shift Stelco production toward more profitable hot-rolled steel, which will have a positive financial impact for the company even if it reduces Canadian employment.

• Q: What is required for Cleveland Cliffs to restart the idled 2 million ton per year Dearborn blast furnace capacity, and what is the capital intensity of this potential project? /

  A: The Dearborn blast furnace is purpose-built for automotive grade steel. A restart depends entirely on sustained automotive reshoring to the U.S. and long-term certainty that current trade policies will remain in place regardless of future election outcomes. Cleveland Cliffs already has excess capacity in other non-automotive segments that is performing well, so the company is in no rush to restart and will only move forward once automakers demonstrate clear long-term commitment to permanent domestic production.

• Q: What is driving the expected Q4 2026 improvement over Q3 2026 guidance even with typical seasonal headwinds? What is the starting price level for 2027 fixed contract resets? /

  A: Management has strong visibility into contracted volumes and lagged pricing for Q4, and has already fully factored in typical seasonal shipment reductions from holiday shutdowns into its expectation of improved EBITDA. Contracts negotiated for 2026 were signed at ~$800 per ton, while current spot pricing is ~$1,150 per ton, creating a large natural uplift from resets that is already reflected in the $500 million projected EBITDA gain. Clients can no longer threaten to use cheaper imported steel as leverage in negotiations due to trade enforcement, so the company expects mature, realistic negotiations that deliver mutually viable margin levels.