Total Revenue to decrease in the near term, due to lower iron ore output and freight revenue, along with lower price realization
CLF has added $0.78 billion in revenue between 2016 and 2018, mainly driven by an increase in iron ore volume sold and premium pricing for its high-grade ores.Though freight revenue decreased in 2018, strong iron ore sales have driven healthy revenue growth.However, CLF is expected to lose about $0.13 billion over the next two years, driven by a drop in iron ore prices and lower shipments, along with loss of revenue from the sale of the Asia-Pacific operations.
To understand segment-wise revenue performance in detail, please refer to the following analysis-Cleveland-Cliffs' Revenues: How does CLF make money?
Breakdown of Cleveland-Cliffs' Total Expenses
COGS as % of revenue sharply improved from 82% in 2016 to 65% in 2018, mainly due to increase in volume sold and a 40% rise in price per ton during this 2-year period. However, due to projection of lower volume, the high fixed mining and exploration cost would be attributed to a lower volume, thus increasing cost per ton sold, whereas lower revenue (compared to 25% growth in 2018) is expected to lead to COGS as a % of revenue to increase sharply from 65% in 2018 to ~83% in 2019.
COGS & Direct Expenses as % of Revenue
Though SG&A expense increased in 2018, as a % of revenue it has seen a decrease over last 2 years due to healthy revenue growth. However, SG&A expense is set to increase in 2019 primarily due to increased employment costs, including severance and incentive-based compensation, and initial cost related to the new HBI (hot-briquetted iron) plant. With revenue remaining almost flat, SG&A as % of revenue is set to increase marginally from 5% in 2018 to 5.6% in 2019.
SG&A Expense as % of Revenue
Interest expense as a % of revenue has sharply dropped from 12.5% in 2016 to 5.1% in 2018, due to debt restructuring activities of 2017. The metric is expected to further decrease in 2019 to 4.9%, driven by increase in capitalized interest related to the HBI production plant and upgrades at the Northshore plant, and debt restructuring of 2018. However, very low revenue growth is expected to stop CLF from replicating a sharp decrease in the metric as was seen in 2017 and 2018.
Interest Expense as % of Revenue
Loss from debt extinguishment decreased in 2018 due to much lower redemption of notes compared to the prior year. However, with redemption of all of the outstanding 4.875% Senior Notes due 2021 and the $600 million repurchase of our 5.75% Senior Notes due 2025 completed during the second quarter of 2019, loss from debt redemption as a % of revenue is expected to increase from 0.3% in 2018 to 3.5% in 2019.
Loss/(Gain) on Debt Extinguishment as % of Revenue
CLF has reported tax benefits over recent years due to large valuation allowance in the US and losses incurred in Luxembourg, which has more than offset the US statutory tax rate. Based on management guidance, the company is expected to report tax benefits in the near term as well.
Income Tax Expense/(Benefit) as % of Revenue
CLF's other income increased sharply in 2018 due to income from discontinued operations, which refer to the APAC business which was divested in mid-2018. Other income is expected to drop in 2019 in the absence of APAC reporting.
Other Expenses/(Income) as % of Revenue
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