Wells Fargo upgrades Cleveland-Cliffs to $14 on hidden 2027 upside

Investing.com -- Wells Fargo upgraded Cleveland-Cliffs (NYSE: CLF) to Overweight from Equal Weight on Tuesday, raising its price target to $14 from $12. The bank argued that Wall Street is systematically underestimating the steelmaker’s 2027 earnings potential.

Shares climbed 4.8% in pre-market trading, signaling significant upside toward the new target.

The bullish call centers on a projected $2.65 billion in 2027 EBITDA. According to Wells Fargo analyst Timna Tanners, this figure materially exceeds FactSet consensus, even factoring in a potential drop in benchmark U.S. hot-rolled coil (HRC) prices.

"We upgrade CLF... reflecting our view that H2E and 2027E EBITDA can materially exceed FactSet consensus, even assuming benchmark HRC prices normalize to ~$1,000/st from recent levels near $1,250/st," Tanners wrote in the upgrade note. The $14 target is based on an unchanged 6x 2027 EV/EBITDA multiple, which aligns with historical U.S. blast furnace peers.

Tanners’s bull case rests on three compounding EBITDA tailwinds that she believes consensus has failed to model:

• The Stelco Bridge: Canadian HRC prices at Cliffs’ Stelco operations have surged to roughly $1,100 per short ton (from under $700) since the company outlined its original $500+ million annualized Stelco EBITDA bridge. Wells Fargo estimates this price surge creates an incremental $800 million annualized benefit. By contrast, FactSet consensus models only a $700 million year-over-year increase for 2027, severely under-reflecting this advantage.

• Fixed-Price Contract Repricing: Tanners sees $500 million of additional opportunity in 2027 from repricing roughly 2 million tons per year of open fixed-price contracts. Supported by a tight market and the current 50% Section 232 tariff on steel imports, she estimates achievable premiums of $250 per ton on these volumes.

• CRU-Linked Contract Volumes: A third lever involves roughly 6 million tons per year of CRU-linked contracts. Wells Fargo models an additional $240 million EBITDA benefit if discounts settle approximately four percentage points below 2026 levels.

Together, these drivers underpin the $2.65 billion EBITDA estimate, which Wells Fargo projects would generate roughly $560 million in free cash flow. Crucially, this would drive Cliffs’ net leverage down to 2.6x—a massive improvement from the punishing 15.2x recorded in the second quarter.

Tanners categorized the upgrade as a "tactical call," noting that while the broader steel pricing cycle may be nearing a peak, the pricing benefits to Cliffs have lagged. She acknowledged that the stock’s historical discount to peers like Nucor (NYSE: NUE) and Steel Dynamics (NASDAQ: STLD) has been somewhat deserved due to Cliffs’ higher debt, lesser product diversification, and delayed pricing benefits. However, the upgrade thesis hinges on this lag finally unwinding as Canadian pricing gains and contract resets hit the 2027 income statement.

Risks remain front and center in the note. Tanners flagged that any rollback of the 50% Section 232 tariff on imports or a broader economic slowdown could disproportionately impact Cliffs due to its elevated fixed-cost base and leverage. Furthermore, Wells Fargo’s valuation incorporates a 10% probability-weighted discount for Cliffs’ pending lawsuit with Mesabi Metallics, which carries a potential $5.7 billion total liability.

However, Tanners dismissed longer-term structural supply concerns for the time being: "While significant new sheet capacity has been announced for the latter part of the decade, we believe those risks are still too far out to weigh on the stock today."

Original Article

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