Good morning, ladies and gentlemen. My name is Michelle and I am your conference facilitator today. I would like to welcome everyone to the Cleveland-Cliffs third 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 website. Today's conference call is also available and being broadcast at clevelandcliffs.com. After 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. Please go ahead.

Thank you, Michelle, and good morning to everyone listening on today's call. Our third quarter results are a clear demonstration of the resilience of our company and a positive confirmation of the timely actions we took during the second quarter to prepare our operations and our inventories for the recovery of our main market, the automotive industry. We were significantly affected in Q2 by the unprecedented shutdowns that took place throughout the entire auto sector for an extended period of time of more than 10 weeks. Conversely, the sharp recovery in automotive production is starting in the second month of Q3 made abundantly clear who are the real player to automotive and who are the ones that are less relevant as suppliers or not relevant at all. With that, our Q3 numbers will speak for themselves. The $126 million in adjusted EBITDA represents an over $200 million recovery from Q2. During the most challenging days of the pandemic, we went on the offensive. We prepared our operations to be ready when the uptick in demand inevitably came and our clients would be back asking for just-in-time delivery. Our work in preparation for and ahead of the automotive sector restart gave us the excellent steelmaking cost performance we showed in Q3, as well as the sizable working capital release that contributed to our $150 million free cash flow generation for the quarter. We used this cash flow to pay down debt, reducing our ABL balance by $150 million in Q3. Since we closed the key acquisition in March, we have cut our ABL balance in half from $800 million to $400 million. As we have stated before, our number one priority with free cash flow is and will continue to be paying down debt. And with the robust cash flows anticipated…

Thanks Lourenco. As you noted, our dramatic $208 million quarter-over-quarter improvement in adjusted EBITDA was driven by increased steel shipments to the higher-margin automotive business, better cost through increase production volumes and reduced idle costs and also driven by increased pellet prices. After excluding $22 million in one-time items such as acquisition costs, severance and inventory step-up amortization, our earnings per share was in positive territory for the first time this year. In the steel and manufacturing segment, our automotive carbon shipments increased 164% to 667,000 tons compared to 253,000 tons in the second quarter, driving the bulk of the improvement in our flat-rolled volumes. As noted on our last call, we expect fourth quarter shipments to climb even further and look similar to what was shipped by AK Steel in last year's fourth quarter. On the cost side, temporary idle costs in this segment were $39 million, which should be reduced to less than $10 million in the fourth quarter. Also, of our total SG&A of approximately $60 million in the quarter, $37 million of that flowed through this segment, with most of the remainder running through corporate. As for mining and pelletizing, sales volumes of 4.9 million long tons came in as planned and we expect to see an increase of about 10% into the fourth quarter as furnaces stock up ahead of the winter months. Pricing per long ton of $98 was supported by a higher IODEX, partially offset by a lower HRC average and lower pellet premiums. At current commodity prices, we would expect to see an increase in this rate in Q4, due primarily to the recent run-up in HRC. Our cost per ton improved quarter-over-quarter due to reduced idle costs. And with all of our mines back in operation, we should see more normalized…

Thanks Keith. Before I turn the call over to the operator for questions, I will remind you that as we work to close the ArcelorMittal USA acquisition, I am restricted from discussing the antitrust review process or providing any further guidance on our plans for the business and the operations to be acquired. So we ask in advance for you to delete these questions from your list. Outside of that, I am happy to discuss anything, deal-related or not. Clearly, we have a lot to be excited about as we approach the end of this year. The accelerating recovery in the automotive space, the commissioning of our direct reduction HBI plant and of course, the pending goal of our second transformational acquisition in less than a year. The combination of all three provides us with all the tools we need to accomplish our operational and financial goals. We look forward to continuing to surprise everyone to the upside on what we are willing to do and capable of doing with this great company. With that, I will turn it over to Michelle for Q&A.

[Operator Instructions] The first question comes from Lucas Pipes. Your line is open.

Hey, good morning Lourenco and great job this quarter. I wanted to…

Good morning.

…good morning. I wanted to start out with a big picture question. This week, we have heard from some of your peers about their desire to grow their auto volumes over the coming years. And as a market leader, are you concerned about a loss of share? Or conversely, would you say that there's even an opportunity for you to work together with these peers as you supply them with the metallics that they need to penetrate these auto markets? I would really appreciate your thoughts on this. Thank you.

Lucas, that's a great question. And again, we are - like I said in my prepared remarks, we are supplying more than 3 million tons, close to 3.5 million tons to automotive to date. The acquisition of ArcelorMittal USA obviously will increase dramatically this number. So we are already a big supplier to automotive and we will become a bigger supplier to automotive. Others are coming and trying to grow market share, rightfully so, totally understandable. They need metallics. We will have metallics for some. We are going to have metallics for everybody. It would be a competitive process. Let's see who is going to pay the price to be an environmentally compliant supplier to the automotive industry and who are the ones that will insist with pig iron from Brazil or pig iron from Russia, importing the pollution from these two countries into the United States. Let's see for how long we, as a country, will tolerate this type of bad behavior. So there's a lot of things in place at this point. The important thing is that automotive supplies rely on relationship, quality, on-time delivery capability and the capabilities to support future development. All these things that we have been doing for a long, long time and it will be further enhanced as we acquired ArcelorMittal USA. So it will be an interesting thing to see and it's a dynamic market. There's a room for all the good players. We are going to provide feedstocks to the ones that want to play in an environmental compliant way. We will be glad to compete in a level playing field. We hate bad competition, but we cheer good competition. That should help you.

Very helpful, Lourenco. And just to follow-up on this, you mentioned there won't be kind of enough metallics for everyone. In light of that, has there been maybe increased increase, specifically as it relates to pig iron. Obviously, there's been Ashland in the past. Now you have a broader portfolio of potential assets to choose from, as it relates to pig iron. Any updated thoughts on that?

Yes. Look, we are - after the acquisition of ArcelorMittal USA, Lucas, we are going to have a total of 10 blast furnaces. And today, we have three. And of the three that we have, one is down, it's Ashland. So we are going to be buying assets that have other blast furnace that are down right now and they are probably in a better position to produce pig iron, if and when we decide to do so. If we are going to do it or not, to be seen. I am not going to be producing pig iron to compete against those pig iron from countries that pollute, that's for sure. That's 100%. So if the value proposition is there, we will produce. But don't forget, we are going to have some HBI, because not all HBI will be consumed enough. We plan to reduce, for sure, HBI for our own EAF. We plan to, for sure, use HBI for our own blast furnaces. We are not going to sell HBI to blast furnace companies. So we are going to be the only ones with access to this feedstock. And that being said, we will have a lot of HBI to sell. I want to start with HBI, see how the market behaves and then we will make a decision regarding pig iron.

Very helpful. Thank you, Lourenco. And then really quickly, just switching topics. I wondered if you might be able to shed some light on potential proceeds from asset sales? Should we be thinking tens of millions of dollars or hundreds of millions of dollars of potential cash proceeds? Any color would be appreciated. Thank you.

I will let Keith answer that. Keith, please go ahead.

So as far as - you are talking about asset sales, Lucas?

Correct. Yes.

Well, right, at this point in time, we’re really – we are not contemplating anything along those lines. What we are buying and what we have now is all considered to be core for what we want to do going forward. So if anything were to come up and become non-core, we would do exactly what we have done in the past, which would just be pay down the ABL. But we really don't have anything on the horizon, and it's premature to speculate on the asset base. We are very happy with what we see so far and I wouldn't anticipate any significant, if at all, any divestitures.

Very helpful. Lourenco and Keith, I really appreciate it and keep up the great work. Thank you.

Thanks, Lucas.

And your next question will come from Seth Rosenfeld. Your line is open.

Hi, Lourenco and Keith, thank you for taking our questions today. If I can start out, please, with a question on the outlook for your steel sales to automotive customers. Obviously, this time last year, the AK business was under different management. And as the steel market was under quite a bit of stress back then today, you are in control of these assets and the steel market is in much better shape. Can you walk us through how you view the outlook for automotive contract negotiations going forward? I know this have been touched on in the past and particularly an area of focus for being paid for the value to their customers. What would you expect as feasible, I guess, going into 2021, please?

Seth, contract negotiations with the automotive clients is an ongoing thing. We don't have a date at which we settle a contract. We have been negotiating. Of course, contracts that we are renegotiating as we speak, are easier to renegotiate than contracts that we negotiated a month ago or two months ago or three months ago, because the market in the COVID backdrop are a lot more constructive than they were at one or two or three months ago. So that's pretty much as much color I would give to you. I am not going to go further than that, because that will involve disclosing things that are not really things that we like to disclose.

Okay. Very fair. If I can ask a second question, please, on HBI. Thank you for the color on both the ramp-up in Q4 and also the customer mix you are targeting. Can you give us an updated sense of the ramp-up schedule as you expect volumes to hit more capacity over what time horizon, please? And if we can expect, if you are going to speak, going into 2021, would you expect a particular portion of those fees internally? Or would you first target third party sales?

Yes. We are approaching production right now because commissioning is happening as we speak. So we will start producing 1.8% carbon, which is the first product that we are going to produce. And all the 1.8% product will be consumed in-house. And this will be for a couple of months. As we start next year, we will be already transitioning from the 1.8% carbon to the 3% carbon. That's the product that we would like to put in the marketplace. So we should start having products for clients at the beginning of the second quarter. That's what we are anticipating. And by the way, Seth, you have been pushing towards or you don't have context, you don't have the context. Now you understand, it was by design and it was all done based on the plan. We were able to buy AK Steel. We were able to agree on a deal with ArcelorMittal USA. So apparently, you can cut contract every time we want, every time we decide to do so. But at this time around, we like the transactional nature of the market. That's why we kept all this optionality for us. I hope now that everything is clear, you were able to connect the dots why we didn't have the long term contracts.

Yes. That's clear, Lourenco. Thank you. And just one final question, please, if I can, an accounting question on the upcoming Mittal transaction. Obviously, there was some confusion on kind of the deal announcement on the different type of pension accounting in yourselves and Mittal, within the $1.5 billion or $3.1 billion of pension liability. When the deal closes in Q4, can you confirm how you expect to account for the pension liability? Would it be closer to Mittal's reported $3.1 billion or to the economic value that you reported of $1.5 billion, please?

First of all, there is no confusion on that. These are different approach to the same thing. That's abundant to clear. But I will let Keith explain a little bit on that. Keith, please.

Yes. Sure, Seth. So as Lourenco mentioned, yes, it's really, it's the accounting valuation, which is, as we all know, is on a pretax basis and done consistently and applied for the accounting rules for comparability amongst companies. And then, of course, we used an economic approach to arrive at the value of the equity of AM USA. So as far as what we would expect, if all else being equal, if all assumptions that were put into the accounting numbers at AM USA, if all those assumptions remain the same, then we are going to get the same accounting results that they got. And that was roughly a $3 billion liability on the balance sheet. And then you have an offsetting $700 million plus deferred tax asset on the asset side of the balance sheet. So it's two different purposes. But we would expect really to come out in accordance with GAAP with a similar outcome.

Yes. The important thing right there, Seth, is that not to try to find something that doesn't exist. This transaction involves two parties that are very sophisticated steel makers, the Mittals and ourselves. Give us credit for that. So we know what we are doing. We understand the numbers and they do too. And it's a clear win-win situation. Actually, the verdict of the market is just that. Since the announcement of the deal, the stock that appreciates the most in our space is Cliffs and the second is MT, Mittal. So the market has spoken. And so there is no such a thing, oh, Mittal pulled one on Cliffs or oh, Cliffs pulled one on Mittal. No, that's not the case. The Mittals actually, they are ArcelorMittal, will stay as a meaningful shareholder of Cliffs, at least for a while. And so there's no such a thing. And I hope you understand. There's no win-win without someone losing. So we also, at least from my perspective, we know what we are doing and we know where we are going, so who is going to be the ones losing for us to win. But between Cliffs and ArcelorMittal, the two participants in this transaction, it's all win. And we are both very well aware of the numbers and the impact on valuation. Accounting is a different story. How we pay for, how we meet our financial commitments, it's very well known. Keith Koci and I have been doing this together for more than 15 years.

That's great. Thank you so much.

All right. Welcome.

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

Hi Lourenco. Hi Keith.

Hi Matt.

Hi Matt.

Maybe just a housekeeping one first. So I appreciate the guidance you gave on cash flow, working capital. Dovetailing with the comments from last quarter where you said $100 million working capital positive, it implies an $85 million roughly give back in the fourth quarter, which you kind of alluded to along with pension contribution. Can you just give us a little clarity on the sort of quantum of those two cash items, please?

Yes. I am sorry. We are looking at a $50 million. $50 million pension payment. It's really due on January 2, but it will get, because it's a federal holiday, we will have to make it on December 31. That gets pulled back in. And as far as the inventory and working capital potential build in the fourth quarter, it remains to be seen how that is. I mean, in a normal fourth quarter, we might see that build because we are putting some pellets in front of the AK furnaces and you might see in a normal year, you might see the OEMs slow down a little bit in December. But there are some indications that not all OEMs are going to slow down. So while we are saying there is a bit of a chance for a build in Q4, it's also possible that that number can be close to zero. If the OEMs pull consistently all the way through the holidays, we will probably not build much in the way of inventory in Q4.

Okay. Great. That's very helpful. And then great progress paying down the ABL. I understand you want to keep that open to help fund the equity portion and the working capital efficiency for ArcelorMittal USA transaction. But what's the trade-off in your mind between paying down ABL and sort of buying back sort of discounted bonds in the marketplace at this point?

Matt, look, this thing of buying back bonds at a discount in the market right now, I think that this ship has sailed. This was an opportunity that we took advantage in 2015, 2016 and a few times after that. But this was when we had a big opinion in the market that Cliffs would not survive. So there was really a deep discount that would really make the transaction a very interesting transaction for us. At this point in time, I don't see that, to be honest with you. So you have our bonds really trading and very strong. And okay, we might identify a tranche here and there, but not really meaningful from the big scheme of things. So there are other ways to skin that cat and we will be addressing at the right time. But buying bonds, cents on the dollar, that's not something that would be available for us at this point. I don't think so. Everybody understands that we are a company that will continue to grow and our bonds should be value at par.

That's a fair point. We read a couple of things about maybe Nippon potentially selling their stakes in those Indiana JVs to you as part of the overall Arcelor transaction as to Indiana joint ventures. Can you comment on that at all?

I cannot. Beyond what's in the public disclosures, the answer is no. We have that completely squared out. And what I have informed about that is in the press release that we did. But we respectfully are waiting for Nippon Steel to manifest their position and we will act accordingly.

Okay. And then just a comment you made earlier, which I thought was kind of interesting. You talked about the transaction as being a win-win. But when you have win-win, somebody loses. Maybe you could just sort of talk about how you see the industry evolving and sort of winners and losers as a result of your transaction with Arcelor?

I will talk about the winners, Cleveland-Cliffs and ArcelorMittal.

All right. It's a fair point.

The losers, time will tell. But they are out there. And they now have competition. Because before, some were dying on their own. Some others were just flying above the radar. For the ones that were sort of dying on their own, they will continue to die on their own. And for the ones that are flying with no competition, now they have competition. But the good ones will survive, the bad ones will not. And we will see.

All right. Thanks very much. I appreciate it. And good luck in closing the transaction.

Thanks Matt.

Thanks Matt.

Your next question will come from Phil Gibbs. Your line is open.

Hi. Good morning.

Good morning Phil.

Lourenco and company, the iron ore pricing in 3Q was strong, pretty consistent with the first half of the year. Obviously, iron ore prices were good and hot-rolled prices toward the end of the quarter clearly got better. Were you taking any true-up positively or negatively in the third quarter? Because clearly, the HRC true-up never came, given the recovery?

Go ahead Keith, please.

Yes. Actually, Phil, yes, the HRC came kind of late in the quarter. So there really wasn't probably, actually it had an offsetting impact on the rate for the quarter. The IODEX is what ran earlier in the quarter and gave us a positive true-up. We always true-up every quarter. We are required to do so. And the net true-up for Q3 was up, I think, roughly $10 million, $20 million affecting the rate, not in a tremendous way, but it had an impact on rate. Based on the pricing we are seeing right now in commodity pricing, we could see a minor small true-up again in Q4, but we are only four weeks into the quarter and we will see how the rest of the quarter plays out.

Okay. So a few bucks a ton positive true-up in 3Q. And I think you said pricing a little bit above the third quarter and the fourth. Is that right?

That's right. If commodity prices stay where they are today and run even for the rest of the year, we would get another small increase in rate for the fourth quarter.

Okay. Terrific. And the idling costs that you were carrying when you said those are, I think you said those are lapsing, right, in the fourth quarter for the mining side and then we are almost through a big slug at AK? Is that correct?

That's right. What we are left with is about $10 million in the quarter for the steel and manufacturing side. And that's really just a normal level. That has nothing to do with volume. It has nothing to do with COVID. That's just, you are going to get $10 million in any quarter just due to routine maintenance. So you can effectively say it's done in Q4. But there's always a little bit for just routine scheduled maintenance from time-to-time, half a day a here, quarter a day there, that kind of thing.

And then last question, Lourenco. HBI, when it gets up and running, given your position, I think there's some water access there from what I remember. Is there an ability to get material into Canada pretty easily if you need to do that?

We don't see the reason for that. In our own locations, we have consumption. And the clients that have been working with us and I will not disclose any new clients, I would just mention one that because he has mentioned probably, Steel Dynamics have been working with us for some time. Steel Dynamics will get HBI. So I think we are going to consume everything in the United States.

Okay. Thanks very much. Great work.

Thank you.

Thanks Phil.

Your next question will come from Alex Hacking. Your line is open.

Yes. Thanks Lourenco and Keith. I just want to follow-up on the HBI. Maybe I missed it, but have you quantified the volume that you are going to take internally? What's that with Mittal?

I am sorry, the volume what?

The volume of HBI that you would consume internally?

Yes. Look, if you need to have a number right now, I would say that we are going to have at a very least one million to 1.1 million tons to sell to the market. So the balance would be consumed internally.

Okay. Perfect. Thank you.

And then that's the very least, because 1.9 is our nominal capacity. So I am anticipating using internally a pretty big chunk. But we will still have a lot of HBI to sell.

Okay. Thanks. And then I just want to follow-up around your comments around the environmental credentials of your automotive steel. I mean, your point is well taken that your HBI product has significant environmental advantages over imported pig iron. But I mean it's your assertion that when we look at the whole Scope 1, Scope 2 emissions profile of your automotive steel, that it would be superior to that of EAF automotive steel? Thanks.

Well, let's think. When I talk Scope 2, electric arc furnaces in general and we say that because we have electric arc furnaces and after we acquire ArcelorMittal, we will double the number of EAFs that we have from two to four. So we are very familiar with that. We buy electricity from the grid. And the grid in the United States is not a grid that is on solar or wind or even nuclear. It's basically natural gas and it's still a lot of old school thermal coal. So that's why Scope 2 for electricity. Electric arc furnace buys that electricity. So we buy too to produce HBI. And we use natural gas. We are not going to be using hydrogen anytime soon in direct reduction or blast furnaces, not here, not in Europe, not in China, not in Japan, not anywhere, just because the technology still doesn't exist. So our HBI plant, natural gas based, will be state-of-the-art when we start to, from the environmental standpoint as well when we start producing very soon. So I think we are very well situated to compete with our blast furnaces because we use pellets. We will be using HBI and therefore we will be reducing coke rate. When you reduce coke rate because the HBI is already reduced, so we don't need coke to reduce, we only need coke to produce heat. So that reduces the need for coke. You are reducing the need for coke, you are reducing C. When you reduce C, you are reducing the generation of CO2. So that's how the HBI thing works. On the other hand, EAF not only have electrodes that are graphite and graphite in C but the EAF inject O2 to produce CO2. And that's why our HBI will have 3%…

I appreciate your thoughts, Lourenco. And I take your point. It's a very nuanced discussion with a lot of assets and not easy to condense. So thank you.

Thank you.

And our final question for today will come from Karl Blunden from Goldman Sachs. Your line is open.

Hi. Good morning. Thanks for the time. I guess some things that have changed since the last time we spoke just, I guess, a month or two ago is that the steel market is looking stronger. Your operating progress is pretty clear in the 3Q results. So maybe some thoughts and you will have some decisions that you can make regarding cash deployment and optimal leverage over time. I would just be interested in your thoughts about what the right level of leverage for the business is going to be, including those legacy liabilities as you ramp-up the combined company?

Yes. Look, Karl, everything we do in this company is geared towards reducing the leverage. Even the ArcelorMittal transaction is deleveraged. You can think about that. Prior to the acquisition, we are 4.3 rimes leveraged. After the acquisition, because we are using stock and because of the structure of the acquisition, we are going to be 3.6 times. And that was when we announced. Now we announced results. We already paid down the ABL. And since we announced the acquisition of AK, we paid the ABL in half, from $800 million to $400 million. So we will continue to deleverage. And EBITDA generation will be all deployed to pay down debt. So there is no second news. There is no, oh, but why did you do this or you can do that. We are not going to do anything. We are going to pay down debt. And we are going to continue to protect the equipment and do CapEx and all these things are taken into consideration. But the use of excess cash flow will all go towards reducing debt. So you should expect us to be below three very soon. And then we will go from there. So the next target is to bring leverage below three times.

All right. That's helpful. Maybe this is too specific but when you think about the trade-offs between secured and unsecured debt price versus flexibility around covenants and so on, is there a guidepost we should think about in terms of what your priority is there?

Yes. Well, another great thing that we are acquiring together with the ArcelorMittal assets, we are improving dramatically our secured capacity but we are also trading in a trend that will allow us to issue unsecured debt easily and at a very low coupon. So all things considered, we are in the right spot in terms of continuing to use all of our expertise in the debt markets and to continue to make the right moves in terms of improving our capital structure and reducing our leverage.

That's very helpful. Thanks very much.

Thank you.

We have no further questions in queue. I turn the call back over to the presenters for closing remarks.

Thank you very much for your interest in Cleveland-Cliffs. Next time we speak, we will be a bigger company. And we are very excited, very much looking forward to speak with you after the acquisition of ArcelorMittal USA closes. Thank you so much and have a great rest of the week. Bye now.

Thank you everyone. This will conclude today's conference call. You may now disconnect.