Earnings Call Transcript
Cleveland-Cliffs Inc. (CLF)
Earnings Call Transcript - CLF Q2 2022
Operator, Operator
Good morning, ladies and gentlemen. My name is Kevin, and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs Second Quarter 2022 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 protection of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on the company website. Today’s conference call is also available and being broadcast at clevelandcliffs.com. At the conclusion of the call, it will be archived on the website available for replay. The company will also discuss results including 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 Celso Goncalves, Executive Vice President and Chief Financial Officer.
Celso Goncalves, CFO
Good morning, everyone. Our second quarter marked the continued execution of our key capital allocation objectives, including the largest free cash flow-driven debt reduction in company history. During the quarter, we generated $633 million in free cash flow on $1.1 billion of adjusted EBITDA. This cash generation in Q2 is more than double what we generated in Q1, even after paying around $300 million of cash taxes in the second quarter. Consistent with our stated priorities, we used this cash to aggressively pay down debt and opportunistically buy back stock. During the quarter, we fully redeemed the remaining $607 million of our most expensive secured notes, well in advance of their maturity, and took advantage of volatility in the debt markets to attack other tranches of bonds in the open market, repurchasing another $307 million in principal outstanding notes at an average discount of 8% to par. These repurchases focused on our 2029 and 2031 guaranteed unsecured bonds, as well as our 2026 secured notes. On the revenue front, our volumes and selling prices were both up sequentially from Q1 to Q2, leading to a record quarterly sales revenue of $6.3 billion. Our Q2 steel selling price averaged $1,487 per net ton, representing an over $40 quarter-over-quarter increase, primarily driven by substantially higher slab prices sold to other steel mills, favorable April fixed price sales contract renewals, as well as continued robust spreads for cold rolled, coated, and plate products sold on an index basis. Looking ahead in the third quarter, although pricing will likely be impacted by falling commodity index prices, lower spot prices will be heavily mitigated by our industry-leading use of fixed price contractual arrangements. Our next round of fixed price contract resets will occur on October 1, with roughly 1.7 million annualized tons up for renewal. Given our unique product offering and technical capabilities, we expect to see continued substantial increases in fixed contract prices in this upcoming renewal, even with the recent downtrend in commodity steel prices as a backdrop. From an operating standpoint, our Q2 adjusted EBITDA was down sequentially quarter-over-quarter, primarily due to the increased costs that we foreshadowed on our last earnings call. With over 200 million MMBTUs of annual consumption, Cleveland-Cliffs is one of the largest direct consumers of natural gas in the U.S. Even though we're meaningfully hedged at all times, we still experienced a substantial impact from elevated natural gas prices throughout the entire quarter. Other rising input costs included electricity, scrap, and alloys, as well as higher repair and maintenance spending. The cost increase was also driven by higher idle costs, up nearly $200 million from Q1, which was driven in large part by the expanded scope of the outage at our Cleveland Works facility. Along with the reline of blast furnace number 5 in Cleveland, which is generally only done once every 20 years, we took advantage of the downtime to perform other important repairs and maintenance in related areas of Cleveland Works, including the wastewater treatment plant and the onsite powerhouse. With the additional work being done, we now plan to have Cleveland Works back at full capacity in August, aligning with improved automotive steel demand. With the bulk of the work behind us, we expect our excess and idle costs to decline meaningfully in the third quarter. In terms of working capital, while our gross inventory values increased as a result of higher costs during Q2, our total steel inventory volumes were actually reduced by 230,000 tonnes in the second quarter and have declined about 400,000 tonnes so far this year. As costs for several of our primary inputs have declined recently since the end of Q2, and with Cleveland Works back in full operation in Q3, we expect working capital to be a meaningful source of cash in the second half of the year. Even with the current lower price of commodity grade steel in the market, we expect to continue generating strong free cash flow for the remainder of the year. There are several factors that will continue to support our cash generation going forward under the current environment. One, the fixed price nature of nearly half of our order book will keep our average selling price elevated despite lower spot prices. Two, fixed price contract resets occurring on October 1 are going up, not down. Three, lower operating repair and maintenance and idle costs going forward. Four, the expected release of working capital that we have built up over the past 18 months. And five, lower CapEx spending as we have no major capital projects on the horizon for the foreseeable future. This will all allow for continued robust free cash flow generation, opportunistic share buybacks, and aggressive debt reduction, with net debt well below one times our last 12 months adjusted EBITDA, we continue to be focused on maintaining conservative leverage levels going forward. With that, I'll now turn the call over to our CEO, Lourenco Goncalves.
Lourenco Goncalves, CEO
Thank you, Celso, and good morning, everyone. Cleveland-Cliffs became a steel company on March 13, 2020, when we completed our acquisition of AK Steel. We were particularly drawn to AK Steel because of its strong focus on the automotive market and its leading research and development capabilities. The automotive sector requires highly customized flat-rolled steel and adheres to strict specifications with a lengthy approval process. Commodity steel does not apply in the automotive field, which is true in Europe, Japan, South Korea, and the United States. The supplier base for steel in the automotive sector is limited to just a few companies capable of meeting the extensive needs of car manufacturers, often consisting of one major supplier per country or region. Shortly after acquiring AK Steel in March 2020, the entire automotive production ecosystem experienced an unprecedented shutdown that had never happened in over a century. After three months, production resumed, but the rates were far from the previous decade's levels, even with heightened demand influenced by COVID-19 restrictions. During the automotive sector's slow recovery, we acquired ArcelorMittal USA, making Cleveland-Cliffs the largest automotive steel supplier in North America by a significant margin. We then faced a wave of supply chain disruptions, primarily driven by widespread microchip shortages, which further stalled recovery and continues to impact production levels. Over the six years prior to 2020, North American light vehicle production averaged over 17 million units annually, but in the last two years, that number dropped to just 13 million units per year, a 24% decline during a time of increasing consumer demand. Meanwhile, other sectors that consume steel, notably construction, have expanded, benefiting us as shown in our record earnings in 2021. However, our mini-mill competitors are more tied to construction and have seen greater advantages in that market, especially in their downstream operations. This situation is about to change. Given the current economic landscape, characterized by 40-year high inflation and rising interest rates but consistent low unemployment, we have the potential for a shift in demand favoring us. While construction has outperformed automotive for over two years, this trend is reversing. The North American automotive sector could have produced an additional 8 to 10 million vehicles during the past two years. Consequently, there's a significant pent-up demand for cars, trucks, and SUVs, reflected in the soaring used car price index, which has nearly doubled and remains near record highs. Furthermore, the average age of vehicles on the road in the U.S. has reached 12.2 years, the highest ever. The unemployment rate stands low at 3.6%, the lowest in 53 years, meaning that people not only have the means to buy new cars but often require them for commuting. Compared to housing, car loans are less affected by interest rates, so if individuals have a steady income, they can manage car payments. Unless inflation control leads to a surge in unemployment, every car produced in the coming years will have a buyer; it's merely dependent on having the requisite materials for production. Steel, which constitutes approximately half the weight of a vehicle, is the primary material needed. Over the past two years, Cleveland-Cliffs has invested to prepare for this increase in demand. We are now equipped with advanced technologies, including a new blast furnace at our Cleveland Works operation. Our automotive customers have reported improvements in their supply chains, and our observations support this positive trend. The production levels in the first half of this year have not come close to meeting their full potential, even in comparison to the preceding decade. From the latter half of 2022, we anticipate increased automotive production volume, which will enable improvements in our operating costs. This volume growth will arise from both internal combustion engine and electric vehicles. We are not only the largest provider of steel to the automotive industry but also to each individual car manufacturer that is transitioning to EVs. Rising fuel costs have heightened consumer interest in electric vehicles. If you, as an investor, are confident about the EV transition, Cleveland-Cliffs is the key partner you need, not just because of our historically high-quality products for ICE vehicles but also due to our comprehensive offerings of advanced high-strength steels suitable for battery-powered EVs. Moreover, we are the sole domestic producer of non-oriented electrical steel in the U.S., needed in vehicles for the motor, amounting to about 150 pounds per unit. Due to rising demand for these materials, we are investing $30 million in our Zanesville, Ohio facility to add 70,000 tons of production capacity for non-oriented electrical steels, effectively doubling our capability without hindering our industry-leading capacity for grain-oriented electrical steels. This expansion will create an additional 100 good-paying middle-class union jobs in Zanesville once it begins operations in 2023. Moving forward, we will focus on such low-cost, high-impact capital projects, which set us apart from competitors who have committed to substantial CapEx investments in new steel and aluminum mills. When we acquired ArcelorMittal USA, we anticipated needing to invest significantly to upgrade its assets to meet our higher standards, which has been accomplished. Currently, we have the necessary equipment and technology in place to fulfill the demands of our customers in automotive and other sectors. Notably, our capital expenditure in 2023 is expected to decrease compared to 2022. This comes after completing the major Cleveland Works revamp, with no comparable projects scheduled until at least 2025. Outside the automotive sphere, we see that destocking is occurring at service centers, resulting in lower inventory levels. While other steel-consuming sectors have peaked, automotive has not. A notable portion of our sales, 45%, is on fixed prices, which are not directly linked to current market prices. Our leading market share in automotive stems from our technical prowess and timely delivery rather than pricing. This positions us well for anticipated price increases in upcoming renewals, where we can realign our full-service offerings with proper value. These fixed prices will sustain our strong cash flow throughout the rest of the year, along with the expected release of part of the $2 billion in working capital accumulated over the past 18 months. We aim to achieve this working capital release through lower input costs and proactive management of raw materials. For instance, we are extending the idleness of our North Shore swing facility until at least next April, as the pellets from North Shore are not currently required due to increased scrap usage in our steelmaking operations since acquiring FPT last year. We aim to preserve this finite resource rather than allocating it for the benefit of the Mesabi Trust and its unit holders. Regarding labor relations, we have initiated negotiations with United workers to renew our labor agreement, which expires on September 1 and covers about half our workforce. We value our relationship with the unions and look forward to reaching a fair agreement for both sides. Cleveland-Cliffs represents more than just steel production; our mission is to revitalize American manufacturing while supporting a robust middle class. We are not merely a steel company from the past; we are the current and future leaders in our industry, equipped with the right personnel, technology, and capabilities to demonstrate our commitment moving forward. I'll now hand it back to the operator for questions.
Operator, Operator
Thank you. We'll now be conducting a question-and-answer session. Our first question is coming from Curt Woodworth from Credit Suisse. Your line is now live.
Curt Woodworth, Analyst
Yeah, thanks. Good morning, Lourenco and Celso. First question, just with respect to cost progression going forward. You outlined $200 million of costs for Cleveland this quarter, and it seems like the remaining $42 million was more on the energy side. So would you expect to get most of that $200 million back? And does $200 million also include the implied loss of volume as well from the facility in the third quarter?
Lourenco Goncalves, CEO
Look, I'll give you a generic idea on the answer and then I'll let Celso handle the specifics, Curt. We acquired assets, particularly the set of assets that came from ArcelorMittal, that were not in great shape. We knew that coming in. That's why we paid a price that was much lower than the actual value of the assets. So I'm sure you recognize that. So it's not like we did not know what was coming. So this being said, all these big costs are behind us. Cleveland was the last one. And when we shut down the blast plants, we saw the opportunity due to a market that was less than ideal, let's call it that, to do things that are overdue like the powerhouse and the water treatment we have at the Cuyahoga River and pretty close to Lake Erie. So we need to be very careful with these things, and we take our environmental commitment very seriously, as you know. But these are one-time things that don't happen often. Like I said, our next big deal might come in 2025, between now and then, we have nothing. Anyway, Celso, please go ahead and complement the point that Curt was asking.
Celso Goncalves, CFO
No, I think you covered it. When you shut down a facility like Cleveland, you have the opportunity to fix everything. We took advantage of that in Q2, and the slower start in automotive has given us time to catch up on maintenance. The facilities we acquired needed to be brought up to our standard. Additionally, we faced some inflationary pressures like natural gas, electricity, scrap, and alloys, which all spiked during the quarter but have since decreased. I would say that the biggest cost impacts are now behind us. You may see some flow-through in inventory in Q3, but we don't anticipate any major outages like Cleveland until 2025.
Curt Woodworth, Analyst
So would you expect to recoup most of the $200 million this quarter? I'm just trying to kind of get a little bit more color on unit cost progression into the quarter.
Lourenco Goncalves, CEO
Yeah. This cost will run through inventory in Q3, if that's your question.
Curt Woodworth, Analyst
Okay. I have a couple of questions about cash flow items. Assuming that fuel pricing remains around the current levels, despite the forward curve shifting back into contango, what do you anticipate for the working capital release in the second half of the year? Additionally, could you provide updates on your estimates for capital expenditures this year and next year, as well as cash taxes for this year?
Lourenco Goncalves, CEO
I'll handle the CapEx while Celso will address the working capital. The CapEx for next year will be capped at $800 million, which should serve as a reliable guideline moving forward. Unlike others, we will not initiate our mills for CapEx. Our approach is different as we focus on maintenance and taking care of our equipment rather than worrying about specific quarters. We fulfilled our requirements in Q2, and that's indicative of good management. Looking ahead, we won't engage in significant CapEx because we've already completed what we needed. If you require a figure for your model, I suggest using an estimate in the vicinity of $800 million, likely between $800 and $880 million, or around $850 million on a going forward basis. That's it for CapEx. Celso, please take it from here regarding working capital.
Celso Goncalves, CFO
Yeah. In terms of working capital, we've built a lot of working capital since we acquired AM USA and that's now starting to reverse. So working capital is going to provide a tailwind even as pricing falls. Receivables, for example, will accelerate. Q2 was probably the peak in terms of inventory cost. We're replacing higher-cost now with lower-cost inventory. So this is all going to support healthy free cash flow generation going forward from this release of working capital.
Curt Woodworth, Analyst
Okay. Thanks very much.
Lourenco Goncalves, CEO
Thank you, Curt.
Operator, Operator
Thank you. Our next question is coming from Lucas Pipes from B. Riley Securities. Your line is now live.
Lucas Pipes, Analyst
Thank you very much, and good morning, everyone.
Lourenco Goncalves, CEO
Hi, Lucas.
Lucas Pipes, Analyst
Lourenco, I believe in your prepared remarks, you commented on automotive volumes being up. And I wondered if you can maybe put some numbers around that for Q3 and Q4. And then also on total volumes, what you think might be a good ballpark for the remainder of the year. Thank you very much.
Lourenco Goncalves, CEO
I can't put out a number. Very bluntly, it's very difficult at this point to narrow down to a number. But I can see trends. The orders are starting to come in more consistently. The unexpected shutdowns are gone. The announcements of new EVs from the likes of our clients, each one of them. You pick one, and we are there. We are the biggest supplier of whichever one you pick, and the orders are consistent with what they are ordering in terms of steel. There's a lot of development in the background in our R&D department to advance the high-strength steels for enclosures of batteries for EVs as well as specifications of materials for the skins and the structure of these same EVs. So things are really moving back where they should move. One short-term indicator is also that there's a big trend right now of car manufacturers being kind of the reality sinking in, in Europe. It's clear that all this talk by the Europeans is just that, talk. They don't have natural gas even to heat their houses. So we are starting to see reallocation of microchips and other things from Europe to the United States. And we're also seeing the growth in orders as a consequence of that. So even though I'm not giving you a number, Lucas, I'm giving you a lot of good indications that things are starting to turn and we are ready for that.
Lucas Pipes, Analyst
That's very good to hear. Thank you for that color. Lourenco, it was great to hear that the October pricing is going to be up. And I'm sure there are a lot of different components to this negotiation and resetting these prices. But when I think back to late last summer, prices were at record highs. And so, you would think that led into the October pricing last year. So what's maybe the biggest factor this year for the higher pricing reset? And can this carry forward into the January and April negotiations as well?
Lourenco Goncalves, CEO
Basically, Lucas, what people see on the spot price doesn't really have a lot of contact points with what we deal with on a daily basis with our car manufacturers. And by the way, this applies to pretty much every automotive industry. When I say that Cleveland-Cliffs is the largest, let me put numbers on that. Last year, we supplied 6.8 million tons of steel to the automotive industry, and the automotive industry produced 13 million cars. So 6.8 million is bigger than 6.5 million; that will be half. So we supply more than half of the steel that the automotive industry acquired. So we are really affected by the automotive industry. The results we have brought to this company since we built this company a couple of years ago are nothing short of a miracle, particularly because we are going against the backdrop of our main markets that are not working properly. So that's about to change at this point. They know that. They can't just try to negotiate the last penny at a moment that they are fighting for their own survival. They have one big competitor that came brand new to the sector and took over the electric vehicles chunk of the market. Now they're playing catch-up. I'm telling you they're playing catch-up pretty fast, and we are helping them to play catch-up. And the price conversation exists, but it's not front and center when we are negotiating the bulk of their needs. Then they might buy hot-rolled stuff that has fewer restrictions and things that go into less critical parts of the car. They still have the ability to buy from others. But for the real deal, they buy from Cleveland-Cliffs. They know that. We know that. That's the negotiation that's going on.
Lucas Pipes, Analyst
Great. Lourenco, really appreciate the color. Thank you very much. I'll turn it over.
Lourenco Goncalves, CEO
Thanks, Lucas.
Operator, Operator
Thank you. Your next question today is coming from Michael Glick from JPMorgan. Your line is now live.
Michael Glick, Analyst
Hey, good morning. The market's obviously focused heavily on demand right now. I mean, I guess, beyond auto, could you just talk about how the order book has been shaping up in recent weeks? And have you seen any pockets of weakness in demand in any of your non-automotive end markets?
Lourenco Goncalves, CEO
Yeah. Look, automotive is different. And I think I've spoken enough about automotive at this time. So let's move to the other sectors. Service centers, like holes, they are still in the destocking mode. So it's not really bad, but it's opportunistic. It's just what they need. Nobody builds inventories, and destocking has an end game. You end up with low stock. So it's coming soon. And when the stock is really low, what do they do next? They buy. So my optimism for the latter part of Q3 is big; like the other companies that pre-announced, said the same thing. So that's service centers. As far as manufacturing, that is a big broad sector when we say manufacturing. There are parts of the manufacturer that have run hot and buy a lot, and we will supply some of them. And there are other parts of the manufacturing spectrum that are much lower, particularly things that are related to construction. So we are not a major player, by any stretch, but we are starting to see things slowing down in construction. So it's a mixed bag. The good thing for us, Michael, is that automotive has less to do with recession and a lot more to do with employment. Assuming that we don't go into a deep recession and we still keep employment at decent levels, even if unemployment increased a little bit, we still have enough middle-class type of buyers and above to continue to buy the cars they want. You continue to see people that are really upset with higher fuel prices to try to move and buy their first electric vehicle. And these are all things that will benefit Cliffs going forward. So I really encourage you to look forward instead of just looking right now at what you see in the results or the press or the negativity or the political football. The fact of the matter is that we are at this point in the United States in a moment of people really considering buying cars. If the cars are made available, you're going to see a wave of acquisitions of cars that is unprecedented. But the cars need to be available. It looks like they are becoming available.
Michael Glick, Analyst
Understood. And maybe as we think about the balance sheet, how should we think about your net or maybe even absolute debt target in this environment?
Lourenco Goncalves, CEO
Look, I think we got to what we have to get. We are consistently below one-time EBITDA. And we will continue to manage down this debt with cash flow. It's clearly our main priority to continue to knock down debt. I don't know if you lost about $6.3 billion in revenues is all record quarter. And our conversion to free cash flow was also outstanding. And we put the vast majority of the cash generated to pay down debt. We started to buy stock until the silly season started, and then we stopped buying stock, and then we focused only on that. We will continue to focus on that, like Celso said, we're going to be very focused on paying down debt as always. And we buy stock if the opportunities arise. But I really believe that at this point, my opportunities to buy stock, we will start to be rationalized. We want to be really focused on that.
Michael Glick, Analyst
Understood. Thank you very much.
Lourenco Goncalves, CEO
Thank you.
Operator, Operator
Thank you. The next question is coming from Emily Chieng from Goldman Sachs. Your line is now live.
Emily Chieng, Analyst
Good morning, Lourenco and Celso, thanks for the update this morning. My first question is just around the asset portfolio and following the closure of Indiana Harbor. And I know you did mention this in your prepared remarks, ongoing commitment to each of your assets just to reconfirm, do you feel that the size of your portfolio is rightsized at this point with your assets now running more efficiently than they were before?
Lourenco Goncalves, CEO
Good morning, Emily. The shutdown of Indiana Harbor 4 was primarily driven by our goal to lower our carbon emissions. We can achieve this because Indiana Harbor 7 uses a significant amount of HBI at a lower cost, which results in much less CO2 emissions per ton of steel produced. This allows us to serve the entire Indiana Harbor complex as well as Riverdale by operating just the Indiana Harbor furnace. Additionally, we have developed substantial scrap capacity at Anaha and Riverdale. Essentially, we are aligning the production capacity with market demand in a sustainable manner. I believe we are currently optimized and do not plan to reduce or expand our footprint; we are maintaining our current size. Future gains will be largely from margin improvements, like the recent $30 million investment in Zanesville to restart a sensing mill for producing non-oriented electrical steel, which is essential for electric vehicle engines. We are also ensuring that our operations in Butler remain viable, as the demand for transformer-related products is very strong right now. We are the exclusive provider of these types of electrical steels, so our position is solid.
Emily Chieng, Analyst
Great. That's very clear. And a follow up is just around gas and energy and electricity cost there. But there's clearly been elevated in the second quarter. How do you see that trending in the third quarter? And maybe if you could share how you think about sort of the hedging program in place and what sort of spot exposures you might have there?
Lourenco Goncalves, CEO
Yeah, I'll let Celso take that.
Celso Goncalves, CFO
Gas prices reached a 14-year high and remained at those levels throughout the quarter. The average market price for gas in Q2 was around $7.50 per MMBTU, compared to less than $5 in Q1. We have seen those prices decrease in Q3, which benefits us. We consume 200 million MMBTU across our footprint annually and maintain a philosophy of being 50% hedged at all times. Looking forward to the second half of this year, we are already 50% hedged at much lower levels than the current market price. Our goal is not to speculate on prices or profit from hedging but to soften the impact of price volatility. While we are exposed on the remaining half, being hedged helps mitigate the effects on our costs.
Emily Chieng, Analyst
Hey, thanks, Celso.
Lourenco Goncalves, CEO
Thanks, Emily.
Operator, Operator
Thank you. Our next question is coming from Timna Tanners from Wolfe Research. Your line is now live.
Timna Tanners, Analyst
Hey, good morning. I wanted to dial down a little bit more, if I could, on your utilization and your volume outlook for the second half. I know in the past, you had said that to get above 4 million tonne shipments per quarter, you need auto. So with the restart of Cleveland, could we be at that run rate by the end of the year and into next year? And with Cleveland, do you also see a bit of continued outage costs until those roll off into the fourth quarter?
Lourenco Goncalves, CEO
Yes, the answer to your first question is yes. One of the reasons we revamped Cleveland Number 5 is due to automotive demand, which we are seeing shape up. Cleveland Works is not only a key facility in the country for producing high-strength steels for vehicle structures but is also involved in some exposed parts. Additionally, we have other locations that focus on specific parts. So yes, we are targeting 4 million tons in automotive volume. Regarding utilization, we don't directly handle those statistics as they pertain to operational metrics. But you're correct, we are indeed aiming for that 4 million tons target. However, I may have missed part of your question.
Timna Tanners, Analyst
Yes, just the lingering outage cost, given you're talking about an August restart, so assumably perhaps some lingering inefficiencies into July, I guess?
Lourenco Goncalves, CEO
Yes, we will have some information. Celso might be able to provide more details, but most of it has already been processed. I'm not sure if you...
Celso Goncalves, CFO
Yeah, it will be back up and running in August.
Timna Tanners, Analyst
Okay. Helpful. And if I could follow up. I know last quarter, you talked a lot about the benefit of having your own raw materials. And I just love to get your perspective on kind of how quickly that prime scrap price seemed to have faded. I mean, do you expect that that's temporary and that it will still be tough to get prime-grade material and alternative iron units going forward? And that, that can be an advantage as some of this excess buildup in material than the panic time has rolled off?
Lourenco Goncalves, CEO
Yeah. Look, we are seeing a lot less competition for prime scrap. Our ability to do closed-loop with automotive continues to increase. At the beginning, we had to really fight to get the deals done. But now apparently, the competition is not really looking for prime scrap. They should have their reasons. To be honest with you, I don't care. For us, prime scrap is important. We prefer to use prime scrap. Prime scrap allows me to use less coke and using less coke generates less CO2, and that's a good thing. And the prime scrap that I use coming from automotive to go back to automotive in the steel that I produce is great to create a closed-loop solution with our clients, and there's value in that. And this value is being translated in our ability to renegotiate higher prices, and the price that we are currently in negotiations or already negotiated with our automotive clients. So that's all positive. That's good.
Timna Tanners, Analyst
Okay, great. Thanks.
Lourenco Goncalves, CEO
Thanks, Timna.
Operator, Operator
Thank you. Our next question is coming from Seth Rosenfeld from BNP Paribas. Your line is now live.
Seth Rosenfeld, Analyst
Good morning. Thanks for taking our questions. Just one final one, please, with the outlook for electrical steel, please. I'd love to hear a bit more about investment in Baynesville. Going to be very low CapEx for meaningful expansion of your non-oriented capacity. Can you give a bit more color with regard to the expected EBITDA contribution and ramp-up timeline of that? Also thinking about that facility, is there an opportunity for additional kind of debottlenecking or low-cost expansion looking forward?
Lourenco Goncalves, CEO
Good morning, Seth. Zaynesville, Ohio is currently where we finish some types of electrical steels that we produce. The production is concentrated in Butler, Butte, and Zaynesville. With this investment, we are bringing Zaynesville back into operation to produce steel and adding some auxiliary equipment to finish the steel from the mill, allowing us to be independent for this type of specs. Zaynesville will become a producing facility again as we are reviving a unit that has been idle for several years. When we acquired K2, this unit was already out of use, so we are essentially bringing it back to life. This is why the investment is modest; we are not building a new facility but revitalizing an existing one. The investment is $30 million for 70,000 tons, which is a good ratio. As the demand for electrical steels grows, we plan to do something similar in Mansfield to enhance our stainless steel production facility. We believe there is increasing demand for electrical steels and we can alleviate bottlenecks by adding electrical steel capabilities in Mansfield. This will also require a small investment with a significant return, but we are not finished with that yet. Zaynesville is already in progress, and Mansfield is planned.
Seth Rosenfeld, Analyst
Thank you. Just one follow-up on that front for Mansfield. If you were to expand more into electrical steel, would that come at the expense of lower stainless volumes?
Lourenco Goncalves, CEO
No, that's the key because doing that would be easy. We are, like we did in Janesville, creating capacity without giving away anything. That's where the science is.
Seth Rosenfeld, Analyst
Great. Thank you very much.
Lourenco Goncalves, CEO
Thank you.
Operator, Operator
Thank you. Our next question is coming from Carlos De Alba from Morgan Stanley. Your line is now live.
Carlos De Alba, Analyst
Yeah. Good morning, gentlemen. So we discussed the fact that your CapEx is going to remain around $800 million. And cash flow generation should be quite robust even if prices continue to go lower. You will buy back maybe shares. Your net debt is already quite low. What about dividends? Is that anywhere in your plans for the foreseeable future?
Lourenco Goncalves, CEO
Good morning, Carlos. Yes, it's on our radar, but it's not our priority. If investors are really looking for dividends, there are other companies in our sector that offer a reliable dividend and have stable businesses. I suggest that dividend-seeking investors consider those companies since they are reputable and will likely perform well. On the flip side, if you’re looking for growth and believe in the upcoming electric revolution, companies like General Motors, Ford, Toyota, Nissan, and Honda are making strides toward electric vehicles, and I am a major supplier to all of these companies. They are indeed moving towards electric vehicles, and we are collaborating with them in this transition. That represents growth for us, and we will keep growing, generating cash, and perhaps making minor adjustments to our stock buyback strategy. While I don't expect all investors to suddenly become enthusiastic about Cleveland-Cliffs and fully understand our operations, I believe our stock price will continue to be undervalued by the market, presenting opportunities. I've built this company into a strong position over the last two years, so reflect on our progress and where we might be in two years. A dividend didn’t bring us here; our success is due to our daily execution in business operations and finance. We're excelling in all those areas. What else, Carlos?
Carlos De Alba, Analyst
Yeah. The other question is regarding your end markets, given that this is something that is going to become increasingly important. In the second quarter, around 26% of your sales went into infrastructure and manufacturing. Could you break this down? How much was infrastructure, and how much was on manufacturing, given the comment that you made earlier on infrastructure is trying to maybe slow down a little bit?
Lourenco Goncalves, CEO
Yeah. Look, primarily manufacturing, because infrastructure, particularly infrastructure related to the infrastructure bill, this thing is not really sticky yet. Plate is infrastructure, and we are doing well with plate. And that's a part of the business that we really appreciate. But it's pretty much what we had before and things that we are conquering in our dealings with our clients. It's not the infrastructure deal we get. We believe that this will come but hasn't hit yet. So it's basically manufacturing.
Carlos De Alba, Analyst
All right. And then finally, if I can, and listen, just maybe to address a little bit of the elephants in the room on the story. So when you said that you are not going to make a major investment until at least 2025, so that potential electrical furnace that you were discussing in the last quarter is not going to come before that?
Lourenco Goncalves, CEO
No, no. We are done. We already revamped since I acquired AK Steel, we already revamped 1-2-3-4 blast furnaces. Four blast furnaces in two years, we are done through at least 2025. So we are in great shape as far as big investments. And just because you mentioned big investments, I want to make abundantly clear, we have no intention to build a new electric arc furnace in Middletown. But you are working together with permits? Yes, I have permits to mine stock in Minnesota going through 2050. So that's our long-term mindset. That's how I manage stuff. I've been doing it that way my entire life. But there's no EAF coming at Middleton. We are good with the footprint that we have. We are probably the most environmentally friendly blast furnace operator in the entire world. And when I say blast furnace operators, I'm saying a major supplier of automotive. Major supplier of automotive equals blast furnace operators. Keep this in mind. Think about Japan, think about Europe, think about South Korea, think about the United States. When you get to the United States, you get to Cleveland-Cliffs.
Carlos De Alba, Analyst
All right. Thank you very much. Good luck, gentlemen.
Lourenco Goncalves, CEO
Thanks, Carlos.
Celso Goncalves, CFO
Thank you.
Operator, Operator
Thank you. Next question is coming from Karl Blunden from Goldman Sachs. Your line is now live.
Karl Blunden, Analyst
Hi, good morning. Good to see the progress on debt reduction and the limited CapEx needs going forward. Just to be a bit more granular on the debt reduction front. Should we continue to expect full redemption of the 26 secured this year? Just going back to your comments from the 4Q call. Or when you look at the lower dollar price bonds like the unsecured, could that be a better use of cash for you? And I guess, finally, maybe you don't have to choose; you have enough cash flow based on what you've outlined to do both.
Celso Goncalves, CFO
Yeah. Karl, good question. So my goal is to take out those 6.75% secured notes due 2026 at the earliest. But when we saw that our 29s and 31s, which are our largest and most liquid unsecured bonds, were trading at such a discount, we sort of redirected dollars towards that in the open market. And we were really successful at picking those off in aggregate $300 million plus of those at a pretty good discount. So if we continue to see things like that, the strategy can shift because we get more bang for our buck targeting those. But absent those opportunities, our 2026 secured notes remain our main priority for full redemption.
Karl Blunden, Analyst
Got you. That makes sense. And then just with regard to the other senior debt in the structure or secured debt in the structure at least, when you think about the ABL and reducing that balance there, where does that come into the list of priorities? Do you anticipate over time getting that to be largely undrawn? Any comments there would be helpful.
Celso Goncalves, CFO
Yeah. So the ABL is still pretty cheap. So we use that as liquidity. And we have other bonds that are more expensive and that are already callable. So to the extent that those are available to be picked off, we'll continue to do that, especially if it's at a discount. And then we also manage our liquidity to keep our liquidity at least at $2 billion. So those are sort of all the levers that we play with. But absent other opportunities to pick off bonds in the open market, we'll just use cash to lower the ABL amount.
Karl Blunden, Analyst
Thanks for clarifying. Appreciate the time.
Celso Goncalves, CFO
Thank you.
Lourenco Goncalves, CEO
Thank you, Karl. Appreciate it.
Operator, Operator
Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
Lourenco Goncalves, CEO
Just appreciate the continued interest in our company and business. Please remember that I don't manage this company to get to the quarter results and the only good news sometimes when I have to report maintenance, we're going to have to report the expenses. Thank God, I haven't had to report any accidents because we take care of our equipment. So we don't have that. So that's a very predictable and boring company, but it's a very predictable and boring company that continues to be seen ahead of the curve and around the corner. So right now, it's not even that difficult to see around the corner. The future is in automotive, and automotive is electric vehicles, and we are working on that. It's pretty much the entire industry going toward that, and they're all buying from us. So things are getting exciting here at Cleveland-Cliffs. We'll talk again in three months. Thanks a lot. Bye now.
Operator, Operator
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.