Why Cleveland-Cliffs shares plunged 10% in early trade today


What happened

Shares of iron ore producer and steelmaker Cleveland cliffs (NYSE: CLF) fell just over 10% at the start of trading on February 9. Within an hour of the start of the trading day, the stock was still down around 9%. There were three relevant news here.

So what

First, Cleveland-Cliffs announced after the market closed on February 8 that it was selling 20 million shares. The money raised from the sale is intended for debt reduction efforts. However, this move will dilute current shareholders, a situation that is generally not welcomed by investors. Second, he also announced that ArcelorMittal (NYSE: MT) would sell 40 million shares it owns following the sale of North American steel assets to Cleveland-Cliffs. Cleveland-Cliffs will not see any of this money. It is not shocking that a sale of this magnitude puts downward pressure on the stock.

Image source: Getty Images.

And then, today, the company announced a billion dollar debt sale. The proceeds are to be used to repay debt maturing between 2021 and 2025, effectively pushing those maturities back to 2029 and 2031. This is likely a net positive, but not enough to offset the blow from the stock sale.

Now what

The balance sheets are important and Cleveland-Cliffs has made some aggressive acquisitions to create a steel company. Now he’s trying to keep up with the cost of those moves, which left the steel and iron ore maker with a debt ratio of more than five times. It’s good that the company is tackling its debt problems, but investors clearly weren’t too happy with the company’s efforts here today.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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