Good morning, ladies and gentlemen. My name is Lashana, and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs Second 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 -- 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 its SEC, which are available on the company's website. Today's conference call is also available and being broadcast@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..

Thanks, Lashana and good morning to everyone. Over the past few months, our company has put on full display, the strong resilience that I have highlighted in the past. Despite dealing with a period of time in which our largest end market, the automotive sector was effectively closed. We are able to preserve and enhance our business.

Very early on and ahead of any official mandates or guidelines, we implemented initiatives to protect the health and safety of our employees. We then adjusted our footprint for both the sharp reduction in demand, as well as its gradual recovery. By taking down and then restarting 15 facilities over a 3-month period.

At the same time, we improved our strong liquidity position and preserve our healthy balance sheet. In addition, acting as fast as only Cleveland-Cliffs, Endo, we were able to find our way to create $181 million in equity by executing our perfectly timed liability management transaction.

Fast forward to today in the automotive sector back to more normal levels of activity, we have resumed production at all of our facilities that were temporarily idle except the North shore which will be back in operation next week. With that we are back on track.

And ready to fulfill our vision for the new Cleveland-Cliffs, which include our mines and pellet plants, AK Steel, AK tube, precision partners and our new HBI plant. With our HBI plant in operation later this year, we will be able to add mini mills to our portfolio of clients. And with that, we spread our exposure to other sectors beyond automotive.

As you know, Cleveland-Cliffs is essentially a supplier to the automotive industry, both directly through our subsidiary AK Steel and indirectly through our third-party clients for Blast Font pellets.

While we already are at the place where other new companies would like to be with more than 60% of our production and sales dedicated to automotive, our second quarter results where a direct consequence of the almost complete and sudden shutdown of the entire automotive sector and generating costs associated to I believe some of our assets, as unusual and unexpected as it was.

That's what happened in Q2. As the second half of the year progresses, the steel shipments will continue to improve and idle expense will fall back to zero. The second quarter did not change anything related to our strategy.

Our fully integrated footprint from captive iron ore mines through high tech carbon and stainless steels and auto parts gives us a unique technological advantage, no one else can have replicated. In the demanding business of supplying steel to the automotive industry, chemical and metallurgical consistency is critical. We can do this very well.

Because among other things we have our own iron ore production and are self-sufficient in in-house. We also have the right equipment to produce the highly specified materials.

Our automotive clients need, including blast furnaces and DOS for carbon steel, as well as electric arc furnaces and AODs or stainless steels and state of the art downstream facilities for both carbon and stainless steels.

Equally important, we also have the dedicated brain power and they are indeed capability to develop the skills of the future cars. And that's something others in this market will not be able to accomplish anytime soon, our clients know that. Our competitors do too. In the current U.S.

automotive industry, our level of technical capabilities is more important to our clients than it has ever been. One unique element of automotive demand in the United States has historically been the prevalence of fleet sales.

Such as rental cars, which in the past have accounted for about 20% of all new vehicles sold, different from retail clients, quick buyers do not care as much about the quality of the car. To them it's all about costs. So over the past three decade, we have seen costs not quality, become the primary value for many American carmakers.

However, this approach is quickly becoming consequated. Due to the pandemic, fleet sales are sharply down, whereas the retail car buyer has been largely unaffected, as sales to the American consumer of late have remained close to pre COVID projections. The American automotive market is now a consumer-driven market.

The pandemic has made car ownership trendy again and while fleets buy cars because they are cheap, people buy cars because they are reliable, cool and fun to drive. After decades of foreign competitors, gaining market share in the United States by recognizing this trend, American-based car companies are starting to fight back.

We finally have American car companies innovating again, after a long period having their launch eaten by global competitors. Tesla is the best example.

Knowing that a car exactly just one ton of steel on wheels, a theoretical $200 per ton price increase for highly specified galvanized steel would theoretically force an increase on the final price tag of the car by only $200. And no consumer would choose not to buy a car just because the car is now $200 more expensive.

Maybe fleet buyers would change their minds due to a $200 price increase per car but not individual consumers.

On the other hand, an equivalent price tax decrease of $200 would not be compelling enough to make anyone not planning to buy a car to decide to do so, but that would certainly drive all the qualified new suppliers out of business in United States and also in other countries such as Japan, Germany South Korea or France.

Just to name a few of the countries that are home for steel companies with technological expertise to supply all the needs and demands of the automotive industry of the presence and of the future. Our goal with the new Cleveland-Cliffs is to be able to recover the value loss in the supply chain over the course of the last several years.

For decades, the steel companies have allowed highly specified skills carrying a lot of technology and value to the clients to be treated and prices as commodities, as if anyone would be able to produce and supply the same materials. That's simply not true.

In order to continue to invest and support the challenges of the automotive industry of the future, the steel suppliers, Cleveland-Cliffs included, must realize a return on their investment and we will.

One problem we have been fighting, since we acquired AK Steel, is the proliferation of gossip and deliberate attempts to influence the market, all these guys as news that go around the steel market these days.

In this parallel universe of misinformation, the steel news are always one step away from flooding the market with unnecessary and unwanted products. Prices of scrap and steel products are always going down. Or if not, we will go down soon. And HRC is a proxy for everything else in the steel business.

Well, I'm pleased to inform that HRC as defined by the CRUs, AMMs and plants of the world is commodity grade steel and has nothing to do with automotive. It's a fine product for many applications like in the energy market, but not for automotive steel.

In fact, we, at Cleaveland-Cliffs and AK Steel, do not care much about HRC, because hot rolled is just a small fraction of the product mix we sell. As far as carbon steals, what you really care about is automotive-grade galvanized steel. And other products used in high-end applications such as exposed parts.

Our goal with future contract renewals will be to make it very clear and over the course of the next years, we start receiving the proper value for what we do for our automotive clients. We have already won the hardest battle of this war.

Because our customers love our products, and our ability to deliver high-quality consistently and on time, as demonstrated by the awards we recently received from General Motors as Supplier of the Year for the third year in a row.

The next phase is translate this support into higher margins, which we will be implementing and accomplishing in due course. As you may recall, we did the same thing with the iron ore pricing, back when I started at Cliffs. Back in 2015, the big players in Australia and Brazil were all stake with a completely irrational race to the bottom.

And iron ore pricing was forecasted by every “predictor” to stay below $40 per metric ton in perpetuity, we eclipse, we’re the ones who called out the underlying observant of such a reckless attitude toward pricing. Ultimately rationality was restored to the market.

Since then we have enjoyed appropriate prices and the current number above $110 per metric ton is no longer a surprise. We are pleased that the recent recovery in manufacturing activity and demand has allowed us to bring our temporarily idle assets back to operation.

The most exciting restart however is that of the construction of our Toledo HBI plant, despite the new COVID related restrictions on the number of workers allowed on-site, we're able to come up with a solution to start producing HBI before the end of this year.

Due to these restrictions we will need another four months to complete construction and the start operation, but the intensified demand for locally sourced or base metallics mean finding away to restart construction sooner rather than later, a top priority for us over the last couple of months.

Last but not least, I would like to provide a brief update on the achievements of the synergies we committed to get when we acquired AK Steel back in March. We announced last quarter that we had already set in motion the $120 million in synergies that we expected to realize within one year.

As of today I'm pleased to announce that we have identified and set in motion a total of $151 million in synergies exceeding our original target by $31 million. These additional synergies have come from a deeper understanding of our real needs at the overhead and operational levels, four months into the acquisition of AK Steel by Cleveland-Cliffs.

I will now pass it over to Keith Koci for a discussion on our quarterly results before giving my final remarks and opening the call for Q&A. Keith..

Thanks Lourenco. As you noted our second quarter results reflected the full impact of the COVID-19 pandemic on the volume and cost side of each business segment.

On a positive note, due to the contracts we have in place and the value-added nature of what we supply overall pricing for both our steel and iron ore products was not impacted by the demand environment.

Our quarterly consolidated adjusted EBITDA loss of $82 million was driven by lower than typical steel shipments, as well as $150 million in cash idle costs that were incurred as a result of the several facilities that were temporarily taken down during the quarter.

In the steel and manufacturing segment as expected the most significant impact on shipments was from our automotive carbon side, which were about 250,000 tons for the quarter, down 65% compared to last year's second quarter. However momentum began to pick up by the end of Q2.

And over 70% of the auto carbon shipments we recorded in the quarter went out in June or 177,000 tons. That rate has accelerated into July as we expect to record about 210,000 tons in auto carbon shipments and that is further evidence that the second quarter was truly an anomaly.

In addition the bulk of the idle cost recorded for the quarter came from this segment which will be substantially reduced in Q3 as all temporarily idled facilities including the Dearborn blast furnace last week have resumed operations.

As for mining and pelletizing sales volumes of 4.8 million long tons remains solid due to the take-or-pay arrangements we have in place and our customers need to replenish inventories that were depleted during the winter. Pricing per long ton also held in the mid-90s as the strong IODEX performance offset weaker HRC prices and pellet premiums.

Our cost per ton was impacted by idle expense, which will be mitigated in future quarters now that Tilden has resumed operations and Northshore is slated to restart next week. Because our blast furnaces are still working through pellet inventory sold to them prior to the acquisition.

Most of our one million long tons of intercompany sales were eliminated from corporate EBITDA translating to about $32 million in negative margin. Net inventory will begin to be released in the third quarter though we will still show some eliminated margin through the end of the year.

Quarterly SG&A expenses were $62 million of which $28 million flowed through corporate EBITDA and most of the remainder through our steel and manufacturing segment. Our full year 2020 SG&A expectation has come down substantially to about $210 million, which represents about a 50% reduction from what the combined company would have reported last year.

A clear illustration of the synergy achievement as described by Lourenco. On the CapEx side of our $145 million in cap spend during the quarter about $90 million were HBI payments for work done in Q1. The remainder was sustaining capital and capitalized interest.

We expect another $250 million in capital spend for the remainder of the year with about $110 million of that related to the completion of HBI. We maintained our healthy liquidity throughout the pandemic and we currently have above $1.1 billion available to us between our cash balance and ABL availability.

We received our second $60 million AMT tax refund of the year on July 14. Based on our current business projections as well as the anticipation of over $100 million in working capital related cash inflows, we expect to generate positive free cash flow in the second half of the year which factors in the HBI CapEx.

This would allow us to exit the year at a higher liquidity level than where we were at the end of Q2. In closing, we have weathered through the most stressful periods of the pandemic and taken the necessary actions to preserve our strong financial position, which allowed us to maintain the desired comfort necessary to restart our Toledo HBI project.

We expect a fairly strong second half of the year, which should ultimately amount to our second quarter pandemic driven results to be viewed as a blip in history and in advance of a robust recovery.

Lourenco?.

Thank you, Keith. Just like the American economy our company has already proven. It's non-resilient. The pandemic has changed a lot of things, but not the need for our high-end products and an increasingly discerning marketplace.

We are ready to look past the impact of customer shutdowns and look into the future where our competitive advantage we always present. With that, I'll turn it back over to Lashana for questions please. .

[Operator Instructions] Your first question comes from the line of Lucas Pipes with B. Riley FBR. .

Hey. Good morning, everyone..

Good morning, Lucas..

So Lourenco I appreciated your comments on commodity grade steel versus your highly specialized steel products. And I guess, we will see your second quarter carbon price in the 10-Q pretty soon.

But would you be able to walk us through your carbon steel prices and costs in the second quarter? And where you would expect them to go in the second half of the year? Thank you very much..

Well, we do not have a lot of exposure to commodity type of pricing because as you know Lucas our contracts are set in stone for one-year time frames. And therefore, the prices that we are basically selling to the automotive clients these days. And I'm talking two-thirds of our business plus. So it's a lot.

Were set in place a long time ago in a different price environment. So we're not going to forecast any numbers towards the second half of the year, but the price are still good. The prices are still in good shape. What happened in Q2 was all demand related they shut down.

The last time that, we had something similar to what happened in the automotive industry was doing World War II just to give you an idea. So it was a complete shutdown. It was – it came without a lot of anticipation or advice. So we are past that. June, the last month of second quarter were positive. We have stainless in the mix.

The stainless was not very effective. We have electrical steels in the mix. Electrical steels are not very effective. We have a lot of positive things, but automotive was really bad.

Going forward, we are seeing automotive in very close to normal levels big common factors were in three shifts and production levels are in the second half will be back to normal. And that will change dramatically the footprint. We’re going to be able to show the power of the combination of Cleveland-Cliffs..

Thank you for that, Lourenco. And hone-in on the second half, great to hear that there will be cash flow positive.

Are you able to at this point to provide some sort of range? Are we talking 50 million more than less than that kind of a rough ballpark? And I believe Keith mentioned, the ATM refinance was obtained in July, any other kind of discreet cash items that we should consider for the second half of this year to get to that free cash flow positive number? Thank you..

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

Yes, Lucas. Yeah the $60 million is part of it. We're also anticipating about $100 million release out of inventory during the second half of this year. That's going to be a contributor to the positive free cash flow.

It's we're not going to disclose the exact amount but your $50 million to $100 million is probably about right on what we're looking at right now and positive free cash flow for the second half. We'll wait to see how things go. And there's definitely some potential for some upside to that too as the automotive market recovers..

That's very helpful. I appreciate that and best of luck. Thank you..

Thanks, Lucas..

Your next question comes from the line of Scott Schier with Clarksons..

Hi. Good morning, everyone..

Good morning, Scott..

Following up on a few of Lucas’s questions.

Could you provide any kind of color or commentary around kind of your auto contracts and any early talks or expectations for how 2021 is shaping up?.

We are in an ongoing process, because we supply so much to automotive that we are always in an ongoing process of negotiating with automotive. We of course do not as you know Scott, do not supply a color or detail on any commercial endeavors that we are doing it and taking care of with clients. But overall, it's very positive.

The clients understand our position. The clients are getting more and asking for more, not for less from AK Steel. We are the one-stop shop. We can produce great structural steels directly through AK Steel and indirectly through AK Tube. We can provide auto parts to PPHC, Precision Partners.

We can provide carbon steels, galvanized electro-galvanized, we expose parts not – no exposed parts. So they like that a lot. So we are in great shape as far as conversations with our great clients, and we are adding new. It's not just the traditional ones.

We have being very upfront and very open to entertain conversations and deals with the likes of Tesla and Nikolai and Rivian and several other new names that are coming and we are very happy also that our traditional customer base like General Motors and Toyota and Ford and Volkswagen and others 1are going in the same direction.

So we are looking to the future. And it's not a thing that we are going to go in month-by-month or quarter-by-quarter basis. This is strategic. That's where we are at. And not all car manufacturers will survive, but some will.

And one thing I will tell you Scott, we from Cleveland-Cliffs and AK Steel will be there with all these folks particularly the ones that are not price driven. Lightly the ones that understand that if they really want to compete and win in the stock marketplace they need to partner with us. They need to make money we need to make money.

The times of imposing price decrease to steel mills are over as far as the United States of America. We are not going to allow that to happen through Cleveland-Cliffs and AK Steel. We don't want to go out of business like several mills in Europe are going out of business. We're not going to do the same thing with ourselves.

But the good news is that the new wave of cars who are coming in the new wave of car builders that are starting to gain momentum here in the United States. They have this technological mindset. That's exactly where we are..

Okay. That's very helpful. I appreciate that color. Switching gears, are you able to kind of provide any expectations around second half EBITDA, especially on the AK steel side? Specifically in terms of volumes for the second half.

Now that some auto manufacturers are getting back to three shifts or you're expecting a return to a more normal run rate of volumes by the end of the year?.

Yes. Look I think we provide a lot of color regarding what's happening in the second semester, but Keith, you want to elaborate a little bit on the number..

Sure. Yes. We won't disclose an EBITDA forecast, but we will -- we are counting on about 85% of normal in terms of automotive volume for Q3 and we're looking to 100% of normal by Q4. That's what we've got baked in that free cash flow assumption..

Okay. Great. I appreciate that. And thanks for taking my questions. Looking forward to seeing rest of the year. .

Thank you so much, Scott..

Thanks, Scott..

Your next question comes from the line of Matthew Fields with Bank of America..

Hey, Lorenzo and Keith. Lorenzo your comments on the fleets were interesting earlier in your prepared remarks. Obviously, we're seeing problems with the rental cars and Hertz has had a big issue with trying to reject their fleet contracts through their restructuring.

How do you view kind of the consumer able to or not able to make up for the lack of they’re buying this year and maybe next year? How does that sort of play out into the overall SAR picture?.

Yes. We have to see how these things will play Matt, because despite of all these new trends the overall consequence for us as steel suppliers has been a positive, because the demand is there so much so that you're seeing.

They are running full capacity or close to full capacity in several cases add full capacity in a few kits already at full capacity. So they are unaffected so far. And we are not the only one supply the automotive industry. So I can only give you the perspective of equivalent lifts from the point of view of milestone this year of AK Steel.

So far so good. The ones we are selling to are buying and they are buying more and they're asking for more and things are picking up good. I'm not so sure about competition because I don't know. That's not my thing. We are -- we brought capacity back at the right time. For instance, the Dearborn platforms is back with 22 years.

We were able to bring it back in a very uneventful process, fantastic jobs of our people in Dearborn and our technological team at blast furnaces including help from people from media account. So, great technological capability, hats off for the blast furnace guys to bring back that point so smoothly in Dearborn.

But we made changes in our footprint already like the definitive idling of the hot strip at Dearborn. Now, we have only one integrated company. We are going to have hot strip in Middletown in the second half that we run at full capacity -- nominal capacity -- hasn't run at full nominal capacity for a long, long time.

So, we adjust our footprint already to supply the market that we have. But the overall market is not taken care by AKC alone, others participate. And as far as I know some other integrated deals are really hurt. But we're in good shape. .

All right. Thanks. And then Keith you mentioned that the SG&A levels are kind of way down from the combined companies.

I guess is that a big part of the additional synergies you were able to find? Or can you give us sort of a little breakdown about that $150 million of synergies kind of by bucket? What are the big chunks of those -- of that number?.

Yes sure Matt. The $151 million right now you've got about $69 million that would be in the SG&A category. $82 million is cost of goods sold. So, breaking it down, $81 million in total for like public company duplicate overheads, $56 million in asset optimization, and another $14 million for -- coming from the supply chain.

The actual -- so the reductions in SG&A are really dramatic. You're seeing the synergy piece of it is really probably only about half of it. There's a couple of other factors that are going into that. We do have some accounting classification changes on the expense side.

So, some a sizable chunk of the SG&A costs that were being charged to SG&A last year by 8-K are now under the Cliffs methodology are being inventory and run through cost of goods sold. So, you're also seeing that as a factor. And then the third factor is just the fact that costs are obviously down for other reasons.

The synergies are what we consider permanent cost reductions. The other cost reductions are just the ones that come down as a result of having a year where we're profits are lower. So, you've got lower incentive compensation. You've got lower travel cost because of the COVID. So, there's a number of other factors hitting it as well.

Did that help you Matt?.

Yes, that's great.

And then is there any additional pull-through through precision partners included in that number? Or is that still yet to come?.

Yes, we are starting to see some movement in that direction. But Q2 was not -- definitely not the moment to execute on that because as you know well Matt the end market was shut down. Actually precision partner was the first one to shut down and the first one to come back. But the work has been done. I'll give an example.

Tesla that was not a traditional client of AK to in the past. Is working with us both with the precision parts and the case still. So we're working all together. There's no parcel part of the panel. So we are doing a lot of things and I'm mentioning Tesla because everybody is interested in Tesla, but it's happening with other manufacturers as well.

So, we are very excited with executing the plan that we put together for this combined company. And we are going to be delivering on these results a lot shorter period of time than people believe. .

Okay, great. Thank you. And then last one for me. Assuming you have no more secured capacity which hopefully you can confirm that.

What's the plan if there's any or the outlook on any debt reductions in the back half of the year if you have some cash coming in from AMT or working capital release? Do you think there's some target or strategy on kind of being able to buy back more unsecured debt at a discount for the back half of 2020?.

First of all, we have now one thing in place that allows us to continue to reduce debt without necessarily buying back debt on the market. That's ABL. I'm sure you'll notice that we paid down the ABL in Q2. Despite of -- despite of all the difficulties so far in Q2, we were able to pay down the ABL with cash.

And any excess cash flow generated will be used primarily to continue to pay down the ABL. That's the first thing. Second thing is that as far as the security capacity that you mentioned, keep in mind that 2024 secured will start to be available for us to redeem come in January very close to par at 102.5.

So that's our next target not in our treasury portfolio to address outside of the ABL. We have a plan -- we have a plan and we will continue to execute the plan. We've created the cushion -- the 5-year discussion that we normally do, I normally do in my companies. Deal with metals -- with Cliffs and going now with the new Cliffs.

So we have a plan we'll continue to execute. Everything is lined up. And we will restore the security capacity as soon as we take down the '24 at the right time. And it will be done at the right time. But again, I would like to insist on that. The primary source of the inducing that right now is paying off the ABL and that's where the cash will go. .

Alright. That’s very helpful. Thank you and good luck in the back half, guys..

Thanks a lot, Matt..

Thanks, Matt..

Your next question comes from the line of Alex Hacking with Citi. .

Yes. Good morning. I have a couple of questions on Toledo.

Could you remind us of your expectations for sales there next year? And then also kind of remind us where you stand in terms of offtake with customers? I know you had a lot of previous discussions and then also in terms of how those discussions have evolved in terms of the potential pricing structure? Thank you..

Toledo next year we'll be running to achieve nominal capacity. If we are going to be able to achieve that by the end of the year remains to be seen. Remember, when we were planning to start in June recovered we knew that would ramp-up in the second half of the year and 2021 would be nominal capacity.

Now we're going to be starting at the very end of the year, so more likely in December. So to make sure that we do everything properly and we don't trip over ourselves, we can't assure that we are going to be running at 1.9 million tonnes next year. But we -- if we don't get to 1.9 million, we're going to get really close.

Because we -- on the other hand we don't believe that the ramp-up will be a long one. We have enough knowledge about our plant and about our processes to know that the ramp-up will be smooth. As far as offtake with clients, I have already explained that we too many times.

HBI sells into the metallics market, into the scrap-based market and that's not how the clients work. I addressed that in 2017, when I did not I elected not to cut long-term deals to do project finance. And the route of issuing bonds and issuing other financial instruments and doing that without having project finance.

So we are 100% confident that we are going to sell that product and sell that product at the right price.

More than that Alex, we already developed the procedures to use HBI as coolant in the BOFs particularly the off-spec material that will be generated as we ramp up the plant and we will use that both in Middletown and [indiscernible] and we also have the procedures to use in our highly sophisticated EIS at both Butler and Mansfield our own plants and that will be theme spec material.

So off spec in BOF on spec in our EAF we have the procedures we can even work with our clients to develop the right way to melt HBI and we are going to be very successful on that. And as far as our prices and levels of pricing, you'll see when it's the right time, but it will be very profitable and HBI will be a big contributor to our EBITDA..

Okay. Thanks, Lourenco. And just a follow-up if I may. Thanks for the color.

How much of that 1.9 million could you potentially consume internally then?.

250,000 to 300,000 in a steady-state year would be a very conservative number. And we will do that not because we want to just make the material disappear. It's because as you may know it still is a buyer of scrap. So we are going to be saving money by doing that. And we're not going to be doing anything to jeopardize our ability to generate EBITDA.

So we will not be -- for that material not be having the same impact on the HBI side, but we're going to have a positive impact on the cost side of the AK steel facilities that I mentioned. So it's cost advantageous to do that. But the numbers in the ballpark of 250,000 tons. The rest of it will be sold in the marketplace.

We have a lot of interest coming from the usual consumers in the EAF side. And we are not planning to sell to the blast furnace side, because we don't want to give the competition the advantage that we will enjoy in our costs by using [indiscernible]..

Okay, perfect. Thank you so much, and good luck in the second half..

Thanks..

Your next question comes from the line of Matt Vittorioso with Jefferies..

Good morning. Thanks for taking the question, and thanks for the color on the plan there at AK Steel around not treating your product as commodities.

I'm wondering, how do you think about pushing price around your steel products at AK Steel relative to some of the aluminum competition? How does like Novelis and some of the other aluminum guys factor into that equation?.

Well, aluminum has been trying to become a mainstream material in car for a long, long time. And except for the F-150, they have never succeeded on pretty much anything that they tried. The biggest problem with aluminum is called the consumer. Consumers of F-150 with aluminum don't like the car.

That's the fact that -- we have evidence of that, so for never really advanced beyond the F-150. And as far as I know there are no plan for that. Another example of the failure of aluminum is the fact that the Tesla s was aluminum. And the Tesla 3 is spread dominantly almost everything.

So no matter how we skin the cat, aluminum will continue to be want to be. No matter what any aluminum company will say they will continue to be outside looking in. And the technological developments they are talking about make steel better than aluminum. And from the overall cost standpoint for the car a lot better.

So I don't have any problems with alumina on the automotive..

Okay. And then similar question on the iron ore side, I guess just relative to competition. I mean, a lot of the great work you did on the iron ore contracts I suppose is a function of your position in the market in North America. How do you think about I guess some of the U.S.

steel iron ore pellets freeing up as they close some of their blast furnaces and look to market their iron ore into the market? And then if you had any comments or thoughts on the implied valuation of that deal with Stelco that was announced a little while ago that would be interesting as well..

I have no opinion on the -- their deal with Stelco and it would not be appropriate to comment on that. But as far as the pellet market here in the United States everything is playing exactly as we plan, we at Cleveland-Cliffs. Let me recap. Our contract with our biggest client, ArcelorMittal goes through 2026.

So it's totally out of risk for Cleveland-Cliffs. The contract is extremely well done. And we are happy. They are happy, life is good. The second biggest client is AK Steel. And I don't need to comment on that. I'll just emphasize that we are not going to consume many fellows rather than Cleveland-Cliffs. The third client is Algoma.

And Algoma by design will let the -- to Addendas expire by 2020 because we needed the pellets to feed our HBI plant. So is happening as planned. One contract will continue all the way through 2024.

And through other contracts, will expire by the end of the year because we have a better use and a more profitable use of this pellet speeding our plant in Toledo to produce HBI. So again going as planned. And the rest is the extra capacity that we built to produce DR grade pellets which we thought that we would find a good market for Wharton.

I'm pleased to inform you that we already have a multiyear contract to supply the excess of DR grade pellet production to a very good company and a very good operator of HBI plant in Trinidad. So we're in great shape with that. So we're replacing bottom line. We have replaced our bond with Nucor. That's a hell of a good trade back for us.

And replacing base the one of the new pellets that we supply Algoma in Canada with highly specified a grade pellets coated pellets to Nucor in Trinidad, that’s fantastic. .

Okay. And maybe one last very big picture question. I mean a lot of the conversations we have related to your company and just the broader steel industry is, how do we think the sort of share in the domestic steel market shifts between EAFs and blast furnaces over the coming decade.

Do you have any big picture thoughts? It seems like EAFs kind of shot up to 2/3 of the market fairly fast, but maybe it's plateauing a bit.

Any high-level thoughts on how you see that playing out going forward? And I guess to some extent your HBI product maybe aids the EAF in some -- to some extent as they're able to produce better products with your pure iron inputs.

But just high-level thoughts on that would be helpful I think for the market?.

Matt you already answered your own question. You said that right. They did the – their blast furnace operation did a fantastic job in – during the last – let call, 30 years to grab the market share that was available to them.

And they did in a very well-executed plan taking advantage of their flexibility, the fact that they are nimble, the fact that they can do a lot of things for a lot less cost. And that's all great. Now when we push them to shove, we are getting to that last stretch that technology matters.

The R&D support matters, the ability to produce the skills that their equipment doesn't allow them to produce, matters. And we are going to continue to defend that NIC as you can understand from my speech here. And we are not going to even use price.

Because we are so confident that what we do is differentiated that we will continue to explain and educate on that. We know a lot of EAFs that are extremely competent and if you pay attention to the landscape, you are going to see that not everybody is – not everybody is due dynamic in the EAF. This is two great companies, great operators.

But you go beyond that, we might find a CMC that's also a good company and then we will start to have some difficult to identify and find the good operators. On the other hand when you look to the automotive footprint throughout the entire world, you are going to see that in Japan, Nippon Steel, JFE they are blast furnace operators.

Why is that? Japan has a lot of scrap. Why Japan doesn't migrate to EAFs and give a Nippon Steel and JFE a run for their money in the automotive business? I will answer the question because they can't. Same thing with South Korea, with POSCO.

POSCO is by and large for the automotive business a blast furnace steel mill, even though they have been in use likely due to at AK Steel. So things are not as simple as you read in the gossip press, so let's take one step back and look exactly what kind of steels we are talking about.

We are talking about steels that we cannot produce through the EAF route. Some they can and they are doing and they are doing a good job and then they are growing their participation. But the limit is there. Will our HBI help them? Yes, marginally. But what we can do today with pig iron, they will not be able to do much better with our HBI.

More efficiently yes; more effectively yes with a better never chemical composition, absolutely. But this will not be a differential for them. The differential will be that they will have a supplier in the country instead of having to import from Ukraine or Russia or whatever.

So we are pretty much at the top of what was the transition to EAFs to blast furnaces. And guess what, there's a new operator in the EAF, in the blast furnace sector called Cleveland-Cliffs that is our comparable warrior, understands the business, understands the technology involved to produce steels for cars.

Has the R&D capability? I am absolutely impressed with the depth of knowledge that I found at AK Steel in both the R&D department and product development departments. And we are going to continue to leverage that to pair with our ability to supply feedstock to that great company. And that's how the business will go going forward..

Helpful, Lourenco. Thank you..

Thank you, Matt..

Your final question comes from the line of Phil Gibbs with KeyBanc Capital..

Hey, Lourenco, Keith good morning..

Good morning, Phil..

Thanks for taking my question. And I apologize if you talked about this already but the synergy number I think was north of $150 million.

How much of that did you achieve in the second quarter? And how much relative to that that number on an annualized basis do you have to go?.

Yes. We were at – in June we had a run rate of $84 million. So we picked up $7 million alone in the month of June. So for the quarter it was about $17 million. By the beginning of Q4, we should be at that $120 million that we talked about on the last call and the full $151 million will kick in by January 1, 2021..

You were going to say something. Lourenco, I am sorry. No, I thought you’re going to say something Lourenco. That’s all..

No, no..

So when we think about it you've got a full $150 million next year Keith and this year given what you've realized so far and what you expect to realize in the second half.

Is that that gets you somewhere around $50 million plus or minus?.

Yes that's pretty close Phil, yes like $65 million or something like that for the current year somewhere..

Okay..

A little more than that we to be like in the $65 million to $70 million level..

$65 million to $70 million.

So you're getting that extra juice in next year's numbers in terms of the synergies having them for a full year and then also stepping them up?.

That's correct. .

Where did you find more?.

Look, the more we integrate, and the more we understand, the more we develop the way we do business, with AK inside the footprint, the more we can do things. I'll give an example that was not part of our original plan. AK Tube now is part of the commercial effort of AK Steel 100% and AK Tube was treated as a separate company.

We are in the process of doing the same thing with precision partners, not to the point that precision partners, will become a department of AK Steel because that's what AK Tube is right now. But the level of integration mix for things that we did not predict coming from the outside to see that we can do these things in the real lag.

Another thing is that, due to our ability to absorb new things in our office in Cleveland or actually we still don't have our people back in the office, but our home offices in Cleveland. We continue to reduce the same things, in West Chester.

So the time and the knowledge of the new corporation make for this process of absorbing synergies to become kind of a natural thing. And things are coming in a very exciting way.

Another point that I need to clarify is that, with the combination of AK Steel into Cleveland-Cliffs, we are able to redo a number of big contracts with serious advantages for the company money wise. And that's also a big portion of what this number -- this boosted number is coming from.

Because now we have a much bigger -- give an example, railroad transportation. And we created things that were not part of our original plant, the fact that, we no longer have hot-strip new and Dearborn made for more transport, between Dearborn and Middletown. And that it's not a good thing.

But it is a good thing because in the big scheme of things we are saving a lot of money and we are optimizing our Mirotone Mill. But with that we're able to redo the entire thing with Railroad transportation. And we were able to enjoy a lot of a lot of costs in this SG&A and not even just SG&A contract type of expenditures..

Then just as a follow-up and again I apologize if I missed this, in terms of your pellet shipments this year in the business, was there an update in terms of what you think that will be? And then sub-question, assuming 450 in hot-band and 110 iron ore, in the current pellet premium.

Where does that put you for pricing in the back half as well? Thanks..

Keith, do you want to take that?.

Yeah. We really had -- we didn't really give guidance on pellets. And what we put out so far. But we see the pellet shipments should -- Q3 should be very similar to Q2 maybe slightly improved. And then, we should see a pickup in Q4 as well as we normally see as the blast furnaces need to stock up before the lots closed for the winter.

So that's, that's kind of the volume output. If pricing were to stay where it is today, we'd end up the year probably in the low 90s, on a pellet price. And you might see a true-up in Q3. So maybe Q3 would be a little bit lower, but it would average out to low 90s for the full year rate, if prices stay where they are today..

Very helpful. I appreciate it. Thanks so much..

You bet..

Thanks, Phil.

Operator?.

There are no additional questions, at this time..

All right. Thank you very much. Appreciate it. And it was a pleasure to be with you guys on the phone today. It is an exciting time for Cleveland-Cliffs. Thanks for your interest. And we all keep in tack. You all have a great day. Thank you. Bye now..

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect..