Cleveland-Cliffs Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 8, 2025

Key Takeaways

  • Q1 results were unacceptable with an EBITDA loss driven by low steel prices, underperforming non‐core assets, and a disadvantageous slab supply contract.
  • Reshoring trends and Section 232 tariffs are boosting domestic automotive steel demand, enabling Cliffs to regain market share and target a $250–$500 million annual EBITDA lift beginning in H2 2025 and fully in 2026.
  • Operational optimization through the idling of six non‐core assets is expected to deliver over $300 million in annual cost savings, largely materializing in the second half of 2025.
  • Allowing the ArcelorMittal Nippon Steel slab contract to expire on December 9, 2025, should unlock approximately $500 million in annual EBITDA upside starting in 2026.
  • 2025 capital expenditures have been lowered from $700 million to $625 million, with strong liquidity and no major debt maturities until 2027 as the company prioritizes debt reduction.
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Earnings Conference Call
Cleveland-Cliffs Q1 2025
00:00 / 00:00

Transcript Sections

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Operator

Good morning, ladies and gentlemen. My name is Sherry, and I will be your conference facilitator today. I would like to welcome everybody to Cleveland Cliffs First Quarter twenty twenty five 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.

Operator

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 these 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 the 10 ks and 10 Q and the news release 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.

Operator

The company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found on the earnings release, which was published yesterday. At this time, I would like to introduce Lorenzo Gonsalves, Chairman, President and Chief Executive Officer. Thank you. You may begin.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Thank you, Sherry, and good morning, everyone. Our first quarter results were unacceptable with worse than expected EBITDA and cash flow, mostly due to underperforming non core assets. Underlying these weak results was the lagged impact of very low steel prices that we were exposed to during the second half of twenty twenty four and into the beginning of twenty twenty five. The implementation of across the board tariffs on foreign steel under Section two thirty two executed by President Trump on March 12 was the most relevant and necessary action to eliminate unfairly priced competition, the entire domestic industry, Cleveland Cliffs included, continues to suffer and we're starting to see a more consistent business environment and improved pricing in April and May. Besides pricing, our results over the past quarters have been significantly affected by three company specific issues.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

In order to bring back consistent profitability and free cash flow generation through the balance of 2025 and into 2026, these three issues must be resolved. Issue number one, underperformance from our core automotive end markets. Number two, loss making operations that are not core to what we do. And issue number three, a very disadvantageous is lab supply contract with ArcelorMittal Nippon Steel culvert. Let's address each one of these three issues.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

On the first one, the numbers speak for themselves on the automotive industry in The United States. In 2024, only 50% of the cars sold in The United States were actually made in The United States. Said another way, imported cars sold in our country basically split the market in half with domestically produced cars. No one would argue that we don't need automotive production in The United States and that it is okay to import cars instead of produce them here in The U. S.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Therefore, nobody should be surprised to see consequential policy work towards reshoring automotive production. The Trump administration has shown a strong support for both the American steel and the American automotive sectors. Fortunately, Cleveland Cliffs is situated right there at the crossroads of these two sectors that are so critical to The U. S. National and economic security.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Cliffs is not just a steel company that happens to make some automotive steel. Cliffs is the American steel company designed to supply domestically produced steel to the American automotive industry. The actions taken by the administration are squarely aimed at boosting the production of cars and trucks in The United States using steel produced in The United States. The best suppliers of steel for this current situations are the ones that are well established with the highest OEM marks for quality, reliability and delivered performance. As our automotive clients are now working to reassure their manufacturing footprint in The United States with a great sense of urgency, we are proactively engaging with these automotive customers and finding short term solutions for them.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

There is plenty of spare capacity to increase car production here in The United States right away. And we are already seeing some of our most important customers shift overseas production back to made in USA vehicles. We are enjoying meaningful success in working with both domestic and international auto OEMs in securing longer term automotive steel supply as they run their existing factories in The U. S. At higher utilization rates and make plans to build new plants to expand domestic automotive production.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

We have also gained back market share from our key automotive OEM accounts. At this point, it is very clear through our order book as well as a consequence of recently extended contracts with our well established clients that profound change are coming. Automotive remains a high margin business for Cliffs and we expect to see a benefit in the $250,000,000 to $500,000,000 EBITDA range annually is starting to incrementally materialize in the second half of this year and fully impacting our results in 2026. This brings us now to issue number two. We firmly believe that the Trump administration is spot on in its push to bring back manufacturing to The United States.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

And we know that in the long run, this will be good for the American steel industry and for Cleveland Cliffs. However, in the short term, we need to do everything we can to make sure that we remain cost competitive. In order to do so and to return to profitability, we are taking decisive actions to optimize our operating footprint. Several of the assets impact have been loss making for some time, but we have been absorbing these losses in anticipation of new business resulting from projects widely advertised, but never materialized supported by the infrastructure bill, the CHIPS Act and the IRA. Unfortunately, that never happened, creating a situation that we now need to fix.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

We don't take these decisions lightly, knowing that approximately 2,000 employees were impacted by these operational changes. That said, these are necessary actions and we have made the following changes to our operations. First action, we fully idled our Minorca mine and partially idled our Hibbing Tekkonite mine both in Minnesota. These idles were necessary to rebalance working capital needs and consume excess pellet inventory that we produced in 2024, responding to the weak demand that plagued us during the final months of the Biden administration. Second action, we're idling the hot end at Dearborn, Michigan.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Dearborn Works has very modern downstream equipment with a PLTCM pickling line, turning cold mill and an extra wide automotive grade galvanizing line for exposed parts. These facilities will continue to operate with no interruption. Badia Born also has a stranded blast furnace BOF caster without a hot strip mill. We'll be replacing Dearborn current production of hot metal with the restart of our Cleveland No. Six blast furnace.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

We should be back in operation by the time the Dia blast furnace is idle. The mines and the Dia

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Born blast furnace idles are geared toward efficiency gains and these changes will not affect our ability to serve our OEM and service center customers. Outside of these, we still carry some legacy assets that are simply not competitive and loss making. We will be idling these assets, which are included in the next three actions. Third action, Estilto, Pennsylvania. Stilton is primarily an electric arc furnace rail mill.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Unfortunately, our rail customers prefer artificially cheap imported rail. In one case, the customer imports 50% of his needs from Nippon Steel, who is continuing to ship rail from Japan right through the Section two thirty two tariffs. That creates substantial pricing pressure for the domestic portion or the other 50% of the business that we share with other two domestic suppliers, both of them with more equipment than Stuttom. Fourth section, Gonshoe Hakken, Pennsylvania. Gonshoe Hakken is a high cost specialty plate finishing facility. We can perform the vast majority of the finishing work currently done at Konshahake in our EAF facility located in Coatesville, Pennsylvania. Fifth and final action, Riverdale, Illinois. Riverdale depends on liquid pig iron sent by railroad across the state line from Indiana, creating a significant cost disadvantage for the plant. There are several competitors for the Riverdale book of business, each of them with a more competitive cost profile.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

This action generates operational efficiencies related to logistics and fixed costs with no change in overall volume output. The Idol of Riverdale will allow us to keep the pig iron where it belongs at Indiana Harbor, a plant that currently has underutilized capacity in both steelmaking and rolling. With more tonnage of liquid pig iron available for internal use, we expect Indiana Harbor to be one of the biggest beneficiaries of the expected reshoring of automotive production into The United States. These last three operational change solidify our move away from three markets that have not been profitable for us, rail, specialty plate and high carbon steel sheet. The situation can always change, but for now this is the right thing to do.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Taken together, this change represents savings of over $300,000,000 annually, not including the reduction of associated overhead and improve the efficiencies at other operations. Very importantly, as we eliminate all this legacy inefficiency, it will become apparent that Cliffs is not a high cost steel producer. By using pellets and HBI, 100% made in USA in our steel plants at today's busheling scrap price, we produce hot rolled coil in our integrated mills for a cost that is very competitive when compared to any EAF flat rolled mini mill. This is why the EAF mini mules are lobbying hard to exempt pig iron from tariffs. They want to continue to enjoy a very unfair advantage by continuing to be able to buy dumped imported cheap pig iron from Brazil, Ukraine, South Africa, just like importers of steel prefer to buy cheap imported dumped steel over domestically produced steel.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

The level playing field rules should be applied to the EAF mini mills as much as it is applied to everyone else. And we fully expect that the EAF mini mills are treated by the Trump administration the same way all other importers of dumped stuff are treated. Issue number three is the contract with ArcelorMittal to supply slabs to their fifty-fifty joint venture with Nippon Steel in Calvert, Alabama. Most of you are aware that as part of our acquisition of Barcelo Middle USA in 2020, we signed a five year agreement to supply the Calvert hot strip mill with up to 1,500,000 tons of slabs per year, primarily from Indiana Harbor. This slab supply agreement has become exceptionally burdensome in the current environment.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

The contract price for these slabs is driven by the Brazilian FOB index that usually correlated with U. S. Flat rolled steel pricing. So when we guided to hot rolled sensitivities, this is lab volume was baked in. However, the correlation with HRC has been disrupted significantly.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Brazil rightfully so is now facing 25% tariffs in lieu of the previous Section two thirty two slab quota. With that, the buyer universe for their slabs in The U. S. Has shrunk and the Brazilian slab mills have had to look elsewhere for buyers in other markets, which led them to dump their slabs at lower prices. So, while the domestic flat rolled prices have gone up, our realized prices under this particular Brazilian price linked arrangement have declined, leaving us with a significant negative margin on this product that is reflected in our Q1 results.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

We have discussed possible remedies with ArcelorMittal, but a mutually acceptable solution has not materialized. At this point, as the expiration date of this lab contract is getting closer, the best solution for Cliffs is to let the clock run out on 12/09/2025. Based on the current market for slabs and HRC, we expect to see a benefit of approximately $500,000,000 in annualized EBITDA beginning in 2026 just by virtue of no longer having this onerous contract in place. Let me now touch on the Stealtho acquisition, which has proven to be well aligned with our non automotive commercial strategy. Stelco is the steel company of Canada and we from day one have taken deliberate steps to redirect Stelco sales into the Canadian market where they belong.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Stelco's operations offer an ideal platform to serve their home market with speed and efficiency. With Stelco's favorable cost structure, they can compete for and win any business in Canada. Previously, as a participant in The U. S. Market, Stelco was a major disruptor here in the Midwest of The United States.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

While Stelco has benefited from absorbing legacy Cliffs business in Canada, particularly in automotive, the strategic repositioning of Stelco as a Canadian supplier of steel to the Canadian market has given our U. S. Mills more business opportunities, ultimately allowing us to restart Cleveland Works No. Six blast furnace. On the strategic front, some of you have probably seen headlines about the uncertain future of our DOE supported strategic projects at Middletown and Butler.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

President Trump's administration clearly has different energy policy priorities than the Biden administration. That said, we are in direct dialogue with Department of Energy leadership on these awards and the agents wants to fully understand both projects and the benefits of each one. As it relates to the larger Middletown project, we are working with the government to explore changes to the scope to better align with the administration's energy priorities. Such a change in scope would entail a substantially lower cost project, one that does not assume availability of massive amounts of hydrogen and would instead rely on readily available and more economical fossil fuels. We will hopefully have more to share on this project in the near future, but it is fair to assume that the Middletown project as announced in 2024 will be substantially altered.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

As for the Butler project, the induction reheat furnace project is highly accretive with a favorable payback And at a $75,000,000 DOE grant amount, it is not something we feel at risk. Importantly, the Butler project directly supports The U. S. Energy dominance goals of President Trump's administration. As the only grain oriented electrical steel producing mill in The United States, ButlerWorks is critical to energy security in our country.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

This project will expand the capacity and capabilities of ButlerWorks in response to the evolving demands of the transformer industry. We are still big fans of this project for its economics, low capital burden and enhancement of our most profitable business, the production of GOL's grain oriented electrical steels. Lastly, the transformer plant at Wheaton, West Virginia. Cliffs needed a partner that could supply the technology and licensing required to produce transformers. With our partner currently having second thoughts about the Wirton location and also considering a smaller plant than the one we had originally envisioned, we have made the decision to no longer pursue this investment.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

I will now turn it over to Celso for his remarks.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Good morning, everyone. Q1 reflected much of the lagged impact of the challenging pricing environment from late twenty twenty four and pre Section two thirty two steel tariff environment in early twenty twenty five and the underperformance of non core assets that we're now idling. For the first quarter, we posted an adjusted EBITDA loss of $174,000,000 Total shipments in Q1 were 4,140,000 tons, consistent with our guidance to break above the 4,000,000 ton mark with a full quarter contribution from Stelco. Q1 price realization of $980 per net ton was only a slight improvement from Q4's '9 '70 '6 remaining weighed down by lower than expected realizations in fleet and spreads for cold rolled. The inclusion of Stelco into our results continues to help manage our weighted average unit costs, but the underperformance of non core assets in Q1 largely drove an increase in our unit costs of $15 per ton.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Quarters like Q4 twenty twenty four and Q1 twenty twenty five are completely unacceptable nor are they a reflection of our typical run rate for us. Between improved pricing and the three factors that Lorenzo laid out automotive recovery, idling of loss making assets and the end of the owner of slab contract, financial results should improve in the second half of twenty twenty five and then reset higher in 2026 as all of these factors become fully baked. The six separate asset idlings are the primary reason why we expect even greater cost reductions year over year. Our previous expectation was a $40 per ton year over year reduction in 2025 relative to 2024 and now we're at a $50 per ton year over year reduction. Because of the timing of the warrant notices, all of these reductions will come through in the second half of this year.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

On our last call, I indicated that with the inclusion of Stelco for every $100 increase in the HRC price on an annual basis, our yearly revenue would increase roughly $1,000,000,000 all things equal. And after factoring in changes like profit sharing and historical scrap correlations, this $1,000,000,000 impact would largely flow directly down to EBITDA. This correlation still applies assuming all things equal. However, the current environment has resulted in some unusual dislocations that have challenged the all things equal assumption for the equation. For example, as previously mentioned, while the HRC prices have rebounded here early in 2025, slab prices have not moved up in tandem as you would typically expect.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

The fact that we have kept Stelco tons primarily in Canada and other factors like lower than expected plate and cold rolled correlations to hot rolled prices have also muted the impact of that $1,000,000,000 correlation for now. With that said, even with the HRC curve currently in the 800s, you can still expect meaningful EBITDA improvement in performance in the second half of twenty twenty five relative to the first half. Something that often comes up in moments like this is divestitures of non core assets and this is a very asset rich company. We have recently received several unsolicited inbounds from buyers interested in acquiring an array of assets in our portfolio. While there's no assurance that any of these opportunities will ultimately lead to any transactions, we're always open to pursue a deal if the value is right, if competitive dynamics are not disrupted and if the sale does not compromise our key competitive advantages.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

We also continue to take a serious look at capital expenditures and have further reduced our 2025 CapEx guidance from $700,000,000 to $625,000,000 mostly due to reduced sustaining CapEx at our idled assets and canceling of our capital deployment at Weirden. Beyond 2025, Lorenzo has laid out the status of our three strategic projects And based on that, it's fair to expect significant reductions in CapEx in 2026 and beyond as well, though we won't have exact numbers until our negotiations are more advanced. From an SG and A standpoint, we've also taken a closer look and taken action to reduce overhead costs and we're lowering our expected SG and A expense in 2025 from $625,000,000 to 600,000,000 From a balance sheet perspective, despite our elevated debt level, we have no meaningful debt maturities until at least 2027 and less than $700,000,000 in total bond maturities over the next four years. We remain in a healthy liquidity position following our latest well timed capital raise. We have approximately $3,000,000,000 in available liquidity and another $3,300,000,000 in secured capacity.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Our leverage metrics remain above target, but we'll continue to look to meaningfully reduce debt and leverage as we return to profitability and deploy 100% of our cash flow generation towards debt reduction. To the extent that our inbound inquiries lead to successful divestitures, we're also deploying cash proceeds from non core asset sales towards that reduction as well. American steel companies can compete and thrive as long as illegally dumped steel remains outside of our borders. President Trump's Section two thirty two steel tariffs are here just for that. Our priority now is to return to profitability and the strong free cash flow generation that we have delivered in the past.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Our focus is on serving our customers, reducing costs, optimizing our operating footprint, generating free cash flow and lowering our debt. With that, I'll now turn it over back to Lorenzo for his final remarks.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Thank you, Celso. It's clear to us that our rebound from these weak quarters is coming, mainly from our many self help initiatives, but also from the proper enforcement of the trade laws of The United States. The pathway back to healthy EBITDA and cash flow generation is not a burdensome mountain to climb, but rather a matter of execution on actions that are largely already in motion. With that, I'll turn it to Sherry for Q and A.

Operator

Thank Our first question is from Nick Giles with B. Riley Securities. Please proceed.

Nick Giles
Senior Research Analyst at B.Riley Securities

Thank you, operator. Good morning, everyone. My first question is around the $300,000,000 savings. This is encouraging to see. And so how should we think about the timing to achieve the full run rate of these savings?

Nick Giles
Senior Research Analyst at B.Riley Securities

And I was curious if there are ultimately any additional actions that could still be taken to improve your through cycle earnings? Thank you so much.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Good morning, Nick. I'm going to transfer that to Celso to answer. Go ahead, Celso.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Yes. Hey, Nick. Part of the reason that we took this action right now is if you think of the warrant notices, for example, it's a sixty day period. So if you think of when we took action, in sixty days you're into the beginning of the second half of the year. So that's when you'll see the full impact of the $300,000,000 in savings start to materialize.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

And just to give some more detail around that, as we noted, we also posted a presentation on our website by the way, which kind of lays out more of the details. But the majority of that $300,000,000 is related to the Cleveland Dearborn switch. That's about $125,000,000 And then you have $90,000,000 call it 90,000,000 to $100,000,000 is related to the Riverdale fixed costs, dollars 45,000,000 for ConchaHawk and about $30,000,000 for Stilton. And then the balance $20,000,000 or so is the Menorca inhibiting idols. But you should expect all of that to be realized here in the second half of twenty twenty five.

Nick Giles
Senior Research Analyst at B.Riley Securities

So this is super helpful. I really appreciate that. And my follow-up would be, you mentioned seeing it in the second half. So with that and with your incremental increase in cost savings of $10 per ton, Can you just remind us of how we should think about cadence on the cost side? Obviously, we'll see some improvement in ASPs as well in that could begin in 2Q.

Nick Giles
Senior Research Analyst at B.Riley Securities

So just curious how you would quantify those two buckets? Thanks a lot.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Yes. I mean from a kind of Q1 to Q2 sequential standpoint, you won't see a material impact. Cost should actually be up a little bit, call it $5 a ton from Q1 to Q2, because we're going to still have those non core assets in our portfolio. But later in the year is when you're to start to see a more meaningful impact from optimizing these footprint, the reduction of the fixed costs and then the reduction of the overhead. So we'll see a significant benefit in the second half relative to Q1 and Q2.

Nick Giles
Senior Research Analyst at B.Riley Securities

I'll jump back in the queue, but continue best of luck.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Thank you, Nick. Appreciate it.

Operator

Our next question is from Albert Rellini with Jefferies. Please proceed.

Albert Realini
Albert Realini
Senior Equity Research Associate at Jefferies

Hey, good morning, Laurence and Seltzer. Thank you for taking my question. Morning, on Slide 10, just the impacts on Selco from the steel tariffs. Just wondering any kind of would that coincide with any kind of changes to the planned synergies or maybe planned kind of EBITDA impact from Stelco on an annual basis?

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

That's a very good question, Albert. It's we have to qualify when we talk about tariffs, which tariffs we're talking about, because we by design, we acquired Stelco with the decision already made in our minds that we will take Stelco out of the domestic American domestic market as a disruptor like they were here, particularly in Cleveland and Chicago here in the Midwest. So the Section two thirty two tariffs on steel were just a consolidation of what we're already doing. So not a change in our game plan. And also, it impacts other competitors from Canada that also do the same thing.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

And the Section two thirty two create a situation that's completely impossible for any other Canadian trying to sell in the domestic market. That is our baked in our plan not to sell Canadian steel produced at Stelco inside The United States. So no change on that other than facilitating the competition against other Canadians inside The United States. However, the broader tariffs that hit Canada impacted our clients. And then our clients were impaired in terms of selling their product to The United States.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

That was not part of our plan, absolutely not. Nobody saw that coming. Otherwise, I would not have be so eager to buy stock if I knew that Canada would not be treated like a friend. So I do believe on the other hand that this situation is completely temporary. I see the Carney Trump meeting as a step in the right direction in terms of normalizing the relationship between The United States and Canada, then there's no other way to go.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

We are tied by the hip and we cannot go without each other. We need each other and we should continue to work that way. Section two thirty two, it's a different animal. But tariff is in general, we'll have to be reworked and it's clear that the USCA, the WSCA treat that I have always said that what's needed we will be working and we will be working in short order. Did I answer you, Yes.

Albert Realini
Albert Realini
Senior Equity Research Associate at Jefferies

That's clear. Thank you, Lorenzo.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Thank you.

Operator

Our next question is from Winder with Bank of America. Please proceed.

Lawson Winder
Lawson Winder
Analyst at Bank of America

Thank you, operator. Good morning, Lorenzo. And it's also nice to hear from you both and thank you for the update. Could I ask about your assumptions around the increase in domestic auto production and whether there's any portion of that that might be assumed to be a decline in imports from Canada? And the reason I'm asking is, is there some risk that should we go should Canada go back to being exempt from an auto production point of view? Is there some risk around that outlook?

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Look, when I say normalization of trade The U. S. And Canada, auto is included because there are parts that are produced in Canada that are necessary to assemble a car in The United States. I think this part has already been litigated by the car manufacturers and they already got some relief. As a matter of fact, we're starting to see a much more benign behavior on from the auto OEMs regarding the opportunity to use parts, particularly parts from Canada and also from Mexico, but particularly parts from Canada.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

So this is in the making and the car manufacturers are doing a good job in negotiating with the Trump administration. And we are seeing the benefits. So we're extremely excited with the new opportunities in delivering more steel to the car manufacturers here in The United States. Let's face it Lawson, even if the number of cars sold in The United States or in North America for that matter are lower in the near future as a result of the restrictions that were applied by President Trump, the overall number of cars produced in The United States will increase. And that's for us is what matters.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

For us suppliers of steel, that's what matters. Let's put numbers on that. 16,000,000 cars sold, let's call 8,000,000 cars produced here and 8,000,000 cars imported from somewhere. If the number goes from eight to 12, for the car manufacturers, a reduction from 16 to 12 in cars sold. For us suppliers of steel, particularly Eclipse, it's an increase of 50% for 8,000,000 cars to 12,000,000 cars.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

And that's what I'm preparing my company for. This will happen and I'm being very conservative in my numbers. We are preparing Cleveland Cliffs to be by far the biggest beneficiary of the increasing production of cars in The United States, because we are a well established producer of steel for the automotive industry.

Lawson Winder
Lawson Winder
Analyst at Bank of America

Okay. Fantastic. That's very helpful. And then if I could follow-up on the question on the quarterly bridge also, just on ASP and cost. You mentioned cost could be up.

Lawson Winder
Lawson Winder
Analyst at Bank of America

I just I didn't catch if you said the ASP, if that would be up. So I was just basically what I'm trying to get at is to understand like directionally or magnitude wise, how much are we going to be up in terms of EBITDA in Q2 versus Q1?

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Yes, sure. Hey, Lawson. Yes, so I mentioned cost should be up about $5 a ton from Q1 to Q2, but ASP should be up much higher than that, call it about $40 a ton from Q1 to Q2. And if you break down kind of from product by product, the quarterly lag contracts are way better call it they're up call it $200 a ton in Q2 relative to Q1. The monthly lag contracts will be up about $100 a ton.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

And spot pricing right now is generally much higher for The U. S. Business. So those are the sort of the biggest drivers of that $40 a ton ASP increase from Q1 to Q2.

Lawson Winder
Lawson Winder
Analyst at Bank of America

Yes. That's great color. Thank you very much, Seltzer. Thank you, Lorenzo.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Thank you.

Operator

Our next question is from Alex Hacking with Citigroup. Please proceed.

Alex Hacking
Alex Hacking
Equity Research Analyst - Metals & Mining at Citigroup

Yes, thanks. Good morning. Seltzer, you referenced the possibility of asset sales. I guess a couple of questions around that. Like one, can you remind us of what debt covenants that you have? And then secondly, on the asset sales side, to the extent that you can discuss this, I'm not sure if you can, like what kind of magnitude would we be talking about? And what potential assets would we be talking about? Thank you very much.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Yes, sure. Good morning. So all of our covenants are springing covenants. So there's nothing that we are too worried about. The leverage ratio does increase on our borrowing base by 25 basis points when you're over four times levered.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

So we're experiencing that now. But other than that, there's nothing that we're concerned about. And then in terms of asset sales, like I mentioned, we have a lot of assets that are non core. We're a very asset rich company. I'm not going to go into specifics of which ones, but we have received unsolicited inbounds and we're talking assets that could bring several billion dollars of potential value. So to the extent that those materialize and we're able to sell those for cash, all that cash will be used to pay down debt as well. And we have a capital structure just kind of while we're on it that is kind of predesigned for deleveraging as you know, right? The ABL can be easily paid down with no breakup fees. And all of our bonds are staggered.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

We don't have any meaningful maturities. And some of those bond tranches are actually callable at par with no penalty either. So there's a lot of avenues that we can deploy cash towards should we be successful in selling those assets.

Alex Hacking
Alex Hacking
Equity Research Analyst - Metals & Mining at Citigroup

Okay. Thanks. That's clear. And just a follow-up. I mean, these transactions that could potentially be announced the next few months or it's longer lead time than that? Thank you.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Some of them are in advanced stages. I think there's some that we could announce still this year. Some are going to take longer. And like I said, nothing's guaranteed, but it's nice to see that there's a lot of inbound interest.

Alex Hacking
Alex Hacking
Equity Research Analyst - Metals & Mining at Citigroup

Okay. Thanks. Best of luck.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Thank you.

Operator

Our next question is from Bill Peterson with JPMorgan. Please proceed.

Bill Peterson
Bill Peterson
Equity Research at JP Morgan

Yes. Hi. Good morning, Lorenzo and Salsa, and thanks for taking our questions. Maybe rounding out the second quarter guidance, how should we think about shipment profile within the guidance?

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Yes. So hey, Bill. Good morning. Shipments should be up slightly from Q1 from the 4,100,000 tons. We're bringing back C6 by the time Dearborn is idled.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Auto volume should increase from Q1 to Q2. So I'd say a slight uptick in Q2 relative to Q1. And then mix should also be pretty similar to Q1.

Bill Peterson
Bill Peterson
Equity Research at JP Morgan

Okay. Yes. Thanks for that. And then I guess coming to Wierton, but also maybe a broader sort of question around GOES. I guess can you provide more detail on what changed given prior indications that equipment had been ordered and I guess the partnership had been arranged?

Bill Peterson
Bill Peterson
Equity Research at JP Morgan

Is there a chance that this could come back into the fray and actually could fire? Or is it pretty much not going to happen? And then on GOES directly, maybe outside of the commentary on Wirtan, how should we think about demand trends and shipments in that given that still seems that there's some pretty long lead times across the transformer space?

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Yes. The demand for Goldsboro continues to be red hot. And that plant will be built somewhere and by the partner alone, because what I don't like about joint ventures is that when you have a joint venture, the partner has a say, particularly in a fifty-fifty joint venture. And I can't build the plant alone. I don't have the licensee and I don't want the IP.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

And we are not Chinese, we don't steal IP from anyone. So I need the partner to work with me. So if the but if the partner wants to retreat deals, then I'm out. And the location and size for me are very important, because location implies throughput and also the size implies the number of jobs that we are going to be offering in Huerta. And the Wirtam location for me is sacred, because that's where everything started for me.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

That said, the biggest motivation for me is to sell more brand oriented electrical steels. And that commitment is there. That commitment is there. I'm going to supply when they go ahead by themselves with a project, hopefully in Wheaton. And for me, it's I mean, if it's I'm out if it's not Wirtam.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

So but they will do they'll build the plant. They are fully committed to build a plant. And I will be supplying them and signing a long term supply agreement because they can't import anymore, dumped grain oriented electrical steels from Japan or from Korea or from China. So they have to buy from me, but I will be right there to sell to them at market prices. And if they want to go to Uyter, the plant is still available.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

And we will transact in a very friendly way with the partner and have them building the plant there. But they say that they're going to build. They just having second thought about location size. So I don't believe that size is an issue because we start small and then we grow. But location for me is sacred.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

For me it's Wilton or I'm out. I'm going to just be a supplier of grain oriented electrical steels and they have peace of mind on that. I'm in for that. I hope the color helped Bill.

Bill Peterson
Bill Peterson
Equity Research at JP Morgan

No, definitely helps. Thanks for sharing the insights, Lorenzo and Celso and good luck navigating this current environment we're in.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Thank you.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Thanks, Bill.

Operator

Our final question is from Timna Tanners with Wolfe Research. Please proceed.

Timna Tanners
Managing Director - Equity Research at Wolfe Research, LLC

Yes. Hey, good morning. Wanted to ask if you could walk us through any exit costs or severance costs related to the actions at the different locations now including maybe Wierton and the other ones that you called out?

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Hey, Timna. So cash charges related to the idles in the near term are pretty minimal, call it $15,000,000 in Q2. What we will have is some non cash accounting charges in Q2. Those should be close to call it 300,000,000 And those are mostly related to impairment, some employment accrual costs. And then we'll have kind of ongoing continued employment charges similar to what we have with Weirden, but that's kind of how you should think about it going forward.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

And then from kind of an ongoing idle cost, those should also be minimal less than $5,000,000 per year for all of the idle actions.

Timna Tanners
Managing Director - Equity Research at Wolfe Research, LLC

So that severance costs aren't a big cost hit either then?

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Correct. Yes.

Timna Tanners
Managing Director - Equity Research at Wolfe Research, LLC

Okay. And then one more if I could. On the CapEx comment you had for future years also coming down, can you remind us where you stand with any blast furnace relines that I believe you've called out in the past? Any timing updates on those please?

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Yes. We'll continue to rely on blast furnace. Blast furnace are necessary. Blast furnace are here to stay like they there to stay in Japan, to stay in Korea, there to stay in Europe, there to stay in Brazil. They are here to stay.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

And we are going to continue to compete against the EAFs. Like I said, with all the idols, all the non contributors, non core assets that we're shutting down, our cost to produce hotbed is extremely competitive with any EAF mini mills. So we're going to prove that going forward now that I got rid of the non contributors. So this will be visible and you should expect that. And we are actually strengthening our position as supplier of automotive And we will continue to deliver the results to the automotive industry that we delivered in the past, especially now that I prepared the company to be able to compete in cost in an equal footing by unloading these non core assets.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

As long as we have a level playing field, of course, I don't want to allow my competitors to import dumped pig iron, because it's dumped the same way steel is dumped, pig iron is dumped. And if you don't allow dumped, steel should not allow dumped pig iron. Otherwise, it's not a level playing field. Ours is 100% our feedstock is 100% made in USA. We have an HBI plant that is made in USA, to produce HBI made in USA.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

So anyway, that's the landscape, lot of competition. I'm a competitor. I wanted to compete and I'm going to win.

Timna Tanners
Managing Director - Equity Research at Wolfe Research, LLC

Okay. Sorry, I was just asking about blast furnace reline costs. I understand your question.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Yes, we're going to reline blast furnace. We will reline blast furnace. Blast furnace of Middletown will be relined. Now that the project is changing its scope. Blast furnace at Birds Harbor will be realigned.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

We just realigned one in Cleveland. So we'll continue to rely on blast furnaces. This is not a it's a it's out of question. It's beyond consideration. It's part of the ongoing business.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

And the next one, if you want to know when the next one will be, will be in 2027, because we operate well. So we can prolong the life of our blast furnace by operating more conservatively and doing Short Creek and things like that that are normal operation blast furnaces. And the next one is 2027, we'll continue to do Reliance. Reality is back. La la Land is gone.

Timna Tanners
Managing Director - Equity Research at Wolfe Research, LLC

Okay. Thank you.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

You're welcome.

Operator

We now have additional questions. Our next question is from Carlos De Alba with Morgan Stanley. Please proceed.

Carlos de Alba
Carlos de Alba
Analyst at Morgan Stanley

Yes. Good morning, Laurence and Jean. So a couple of questions. One follow-up on CapEx. Any updates as you analyze or revise potentially your plans on what to do with the two projects that you have received from support from the different grants that the government put out.

Carlos de Alba
Carlos de Alba
Analyst at Morgan Stanley

Would those be considered to maybe cancel them or delay them or at least do them in a more smooth way so that the CapEx is preserved the cash is preserved? And the second question has to do with the imports and the Section two thirty two. What is your sense as to the benefit of cutting all the quotas going to zero and just keep the rates at 25%? Because what we're hearing is that some foreign countries that before weren't on quotas and now are not, are being quite aggressive in trying to send an appeal into The U. S, which in the past, they were not able to do. Thank you.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Yes. Hey, Carlos. It's Sosso here. Let me comment on the CapEx first and then Lorenzo can talk about the tariffs. But we talked about this a little bit on the prepared remarks, but maybe it wasn't fully clear or you didn't catch it.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

But the DOE related CapEx stuff is still sort of in flux just given negotiations. But the bottom line is that it's going to be changed and it's going to be significantly lower than what we were talking about before. And then just some metrics around CapEx for this year. We're lowering our guidance to $625,000,000 total from our previous $700,000,000 And that 2025 guide is inclusive of the $30,000,000 that we're spending on Butler. And then we're not moving forward with Weirton anymore, which saves us $50,000,000 of CapEx in 2025.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Then when you combine everything that we discussed in the prepared remarks related to Middletown, you can conclude that 2026 CapEx and beyond are going to be much lower than we had already earlier anticipated. And then as Lorenzo mentioned, the Burnt Harbor reline, which we previously had slated for 2026 is now going to be in 2027. So those are the main sort of changes to our CapEx expectations.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Yes. Regarding the Spectrum February, you are talking about quarters and they were saying that you're if I caught if I got what you were saying, you are hearing that quarters are coming. Is that what you said Carlos?

Carlos de Alba
Carlos de Alba
Analyst at Morgan Stanley

Yes. No, sorry, Lorenzo. What I'm saying is that since the quotas have been removed, a lot of foreign countries that in the past were capped, obviously, defined as still a good percentage in The U. S. Are now being very aggressive because the 25% existed before, they still can make a profit, but with no limit of how much they can import.

Carlos de Alba
Carlos de Alba
Analyst at Morgan Stanley

They keep calling traders to send material into The U. S.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

Yes. The biggest situation right now with the Section two thirty two is that are the countries that are selling through the tariffs. Let's take the example of Vietnam offering hot rolled duty paid at the port at $700 and something. That's crazy. This is a country that doesn't even deserve a trade agreement, because they did not get the underlying message of the administration.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

The underlying message of the administration is don't dump, because you're not going to be treated well if you continue to dump. It's not like a 25% I can accommodate. My government will subsidize me to be able to go through that 25. That's not the message. The message is stop dumping.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

So I hope I really hope that the Trump administration does not negotiate a very friendly deal with Vietnam, because Vietnam is screw up in the market as they always do. The other example is Japan. Nippon Steel is selling rail through the tariffs. These things have consequences. And it's not like the case of going to the government and say, you know what, Trump administration, now we need for rail, we need 50% or 100% tariffs, because it's clear that Nippon still has no limits.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

They will go through the end. If I go to 100%, they will sell through the tariffs. How they do that? I don't know. Maybe Morgan Stanley should know.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

How Japan can do that? How Nippon Steel can continue to be so profitable selling at so low prices? What's the mystery? They are capitalist market, right? So when the banks don't question that.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

I have never seen a report questioning how do they make money. So anyway, it's not my problem. At least it's not my problem anymore, because like I said, dumping has consequences. I don't shut down a mill that has been in operation for a couple of centuries producing rail in The United States lightly. But I do what I have to do.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

And we did, it's done. And it's a direct consequence of Nippon Steel selling rail through the tariffs despite of Section two thirty two. Did I answer your question, Yes.

Carlos de Alba
Carlos de Alba
Analyst at Morgan Stanley

Thank you, Lorenzo, and thank you, Cesar, for the clarification.

Lourenco Goncalves
Lourenco Goncalves
Chairman, President & CEO at Cleveland-Cliffs

All right.

Celso Goncalves
Celso Goncalves
EVP and CFO at Cleveland-Cliffs

Thanks, Carlos.

Operator

We have reached the end of our question and answer session. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

Executives
Analysts
    • Nick Giles
      Senior Research Analyst at B.Riley Securities
    • Albert Realini
      Senior Equity Research Associate at Jefferies
    • Lawson Winder
      Analyst at Bank of America
    • Alex Hacking
      Equity Research Analyst - Metals & Mining at Citigroup
    • Bill Peterson
      Equity Research at JP Morgan
    • Timna Tanners
      Managing Director - Equity Research at Wolfe Research, LLC
    • Carlos de Alba
      Analyst at Morgan Stanley
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