Lourenco Goncalves was leafing through the pages of the Wall Street Journal one morning in early 2014 when he read that activist hedge fund Casablanca Capital was agitating for management and board changes at Cliffs Natural Resources, one of the largest producers of iron ore pellets in North America.
Brazilian-born Goncalves had recently retired at age 55 after two successful runs as a CEO in the U.S. But after decades making a name for himself as an outspoken steel market wizard, Goncalves found it boring on the sidelines. Instead of mirthfully passing the time on the golf course, he still kept close watch on the global industry. Naturally, the stirring over at Cliffs gave him some ideas.
The Cleveland, Ohio-based company was an established player with a proud history stretching back to the 1800s. But it was pursuing what Goncalves believed was an errant strategy to diversify with Canadian operations and other minerals besides iron ore, an essential ingredient for steelmaking.
Goncalves got on the phone with his former banker, Mark Henkels, now a managing director at Moelis & Company. He asked his old colleague if a connection could be made regarding Cliffs. One week later, Henkels and the founders of Casablanca, Douglas Taylor and the late Don Drapkin, flew to see Goncalves at his home in Fort Lauderdale, Florida.
“They presented their plan, and I said ‘your plan sucks,’” Goncalves recounted in an interview with Debtwire in New York last week. The Rio de Janiero native is notoriously candid, and speaks in an undulating, Carioca-accented baritone.
Goncalves told Casablanca if they really wanted his involvement, they’d have to go with his vision, which was to pare down Cliffs into what it does best: producing and selling iron ore pellets in the United States. That meant reversing course from a track that had already led the company to accumulate a mountain of debt to fund the acquisition of marginal Canada-based assets. In the meantime, cheap steel imports from China were swamping American steelmakers -- Cliffs’ principal customers. And iron ore prices were drifting consistently lower as supply in the market mushroomed, setting up a perfect storm for Cliffs’ balance sheet.
In stepped Goncalves.
From teetering to turnaround
Following a proxy fight with opposing shareholders, Goncalves took over as Cliffs CEO in August, 2014, and set in motion a sweeping operational and balance sheet transformation. Less than three years later, Goncalves and his team were on Wall Street last week to ring the closing bell at the New York Stock Exchange in celebration of Cliffs’ 170-year anniversary – a stark contrast to the course that many had predicted.
“The biggest accomplishment was avoiding bankruptcy,” Goncalves said, a fate viewed as a foregone conclusion by many market participants, especially as iron ore prices dropped to multi-year lows in 2015 and early 2016.
Once at the helm, Goncalves quickly moved to make Cliffs more nimble and focused, selling off unprofitable assets.
“The Canadian assets, the coal assets, the chromite assets, the nickel assets – we stayed with what we do well.” Goncalves said. “My predecessors believed that what was going on between 2005 and 2012 was the rule. China going up, up, up, up, up – they thought it would continue to go up forever. Lourenco Goncalves did not.”
Still, even following the asset disposals, market fears of a Cliffs bankruptcy persisted. In late 2015, iron ore prices dipped to around USD 40 per ton for the first time in years – from averages above USD 100 per ton in 2014. And Cliffs’ bonds traded into deeply distressed territory, with an issue of senior unsecured bonds due in 2020 dipping to around 15 cents on the dollar in December, 2015 – near the market bottom for iron ore.
Goncalves responded with aggressive balance sheet maneuvers to take out chunks of Cliffs’ outstanding debt, including various rounds of bond buybacks at distressed prices, swaps of unsecured notes into secured bonds at a discount, a pair of equity raises, and a secured debt issuance to repay revolving loans and enhance liquidity.
He also renegotiated crucial, multi-year supply contracts with steelmakers ArcelorMittal and Essar Steel Algoma, locking up nearly the entirety of the U.S. market for iron ore. Taken together, the series of moves – along with a bounce in iron ore prices in 2016 – allowed Cliffs to skirt through the downturn, and set it up for one of its best cash flowing years in history in 2017, Goncalves said.
The recovery, however, is not complete. After Cliffs’ adjusted EBITDA collapsed to USD 293m in 2015 – from USD 1.05bn in 2014 – it ticked back up to USD 374m last year, and Goncalves now projects the figure for 2017 will come in at USD 700m, with USD 450m of cash flow.
What Goncalves has done at Cliffs is “somewhat unprecedented,” says Henkels, of Moelis, who worked with Cliffs on the disposal of its Canadian assets. “The gravity of the losses were monumental as compared to the relative size of the company.”
Keeping the company alive “was not an easy task,” especially given the highly negative environment for iron ore prices, said Michael Gambardella, senior metals, mining, and steel analyst at JPMorgan Chase. “He’s the only one that could have done what he did. He came in as an outsider, which in a lot of cases is good because you can take a fresh look at things and not be jaded by decisions made in the past.”
In a big, global industry with a lot of followers, Gambardella said, Goncalves was the only one he knew of that was talking about an iron ore turnaround in early 2016. “Out of a big negative consensus he was standing by himself -- he was shouting by himself,” Gambardella said.
Chief explaining officer
When speaking with Debtwire early on 1 May at the Hilton restaurant in Times Square, Goncalves was fresh off of a television interview in which a CNBC reporter asked him about Cliffs’ first quarter earnings miss.
“Can you believe it?” he said. Asking for a clean sheet of paper, the executive pulled a pen out of his suit coat, and proceeded to map out how, by paying down USD 600m of Cliffs’ outstanding debt, it brought the company’s quarterly earnings per share to 16 cents – roughly in line with Wall Street estimates. “Tell me how that’s a miss.”
On Cliffs’ earnings calls, Goncalves has developed a reputation for dressing down Wall Street analysts that have a negative view of iron ore prices or that put a low target price on Cliffs’ stock – which some say make him one of the most entertaining CEOs to observe.
“There’s no one out there like him,” said Gambardella, of JPMorgan, who’s been covering the steel industry for 34 years. “I think he’s a breath of fresh air, and I think he’s one of the smartest guys out there in terms of his knowledge of the iron ore and steel industry.”
On his first investor call as Cliffs’ CEO, in October, 2014, Goncalves cut off a Wells Fargo equity analyst before he could ask a question, telling the analyst that because he had put a USD 4 per share target price on Cliffs’ stock – it was trading around USD 17 per share – he must already know everything about the company, and therefore shouldn’t need to ask any questions. (Cliffs’ stock eventually traded below USD 4 per share with market capitalization dipping as low as USD 193m in January 2016 before recovering to USD 1.83bn today.)
On another call, he asked analyst after analyst for their firm’s view on iron ore prices. One analyst from Morgan Stanley mild-manneredly articulated his firm’s outlook, which was for a prolonged depression in iron ore prices. Goncalves thundered: “I can’t hear the conviction in your voice!”
Goncalves also seems to take particular pleasure in calling out the failures of the executives at the so-called “major” iron ore producers – Brazil-based Vale and Australia-focused BHP Billiton, Rio Tinto, and Fortescue. He has blamed them for foisting insanity on iron ore markets by overproducing in a race to the bottom. Early last year, he commended Rio Tinto when they removed their CEO, Sam Walsh, “the key architect of the disaster they inflicted upon themselves.”
And after all but one of the executives at the major producers were let go, he noted that the new management teams were generating better margins and returns for their shareholders.
“The Australian-Brazilian championship of stupidity is over,” he said on Cliffs’ 3Q16 investor call.
Still, most recently he blamed a 9 March speech by the current CFO of BHP, Peter Beaven, for the latest sharp drop in iron ore prices. In the speech, Beaven noted that market fundamentals pointed to a “softening” of iron ore prices, suggesting that BHP is ready for much lower prices.
Goncalves took issue with these comments, and let everyone dialed into Cliffs 1Q17 call know about it. “Now tell me, in what other business is this speech okay from any CEO, and particularly from a CFO?” he said, before wondering aloud what the consequences would be if the CFO of a car manufacturer said something similar – something to the effect that, based on car inventory levels, car prices are likely to go down significantly.
He then paused for 10 seconds for his listeners to think about it.
Goncalves has saved some of his most cutting remarks for companies that would ostensibly compete with Cliffs’ competitive position in the U.S. In recent years, those companies have been Minnesota-based start-ups Magnetation and Essar Steel Minnesota – both of which suffered financial and operational difficulties and are just coming out of their respective bankruptcies.
Now, Chippewa Capital, led by Virginia environmentalist Thomas Clarke, has acquired both of the companies and is proposing to complete construction on Essar’s half-finished taconite plant, and also build a more advanced direct-reduced-iron (DRI) facility nearby. DRI plants produce higher quality pellets for steelmakers’ more modern electric arc furnaces.
Cliffs plans to build its own DRI facilities starting next year, Goncalves said, given no new blast furnaces have been built in the U.S. since the 1970s. But, he said, the 3m ton per year facility proposed by who he calls “Chewbacca Capital” doesn’t exist anywhere in the world.
“Look, if you combine a blind with a handicapped, you're not going to make for an MMA fighter, right? You are going to make a handicapped blind man,” he said on Cliffs’ 1Q17 investor call. He continued on, now with the sarcasm dripping: “So you're combining Magnetation with all their success in the past with Essar Minnesota that has also been extremely successful.”
Goncalves’ arrival and success was not an inevitability, even for someone as seemingly confident as he is.
“Look, when I was growing up in Rio, my goal was to have enough money to take my family out for lunch on Sundays. I never planned to come to the United States,” he said when asked if he ever imagined growing up that he would one day appear on Wall Street as the CEO of a large American company.
After college at the Military Institute of Engineering in Rio de Janeiro, he started work in 1981 at the basic oxygen furnace shop at the Companhia Siderurgica Nacional (CSN), the national steelmaker, while Brazil’s state enterprises were still under the auspices of military rule. He was based at the company’s headquarters in Volta Redonda – 100 miles from Rio.
Ten years later Goncalves became a general manager of hot rolling, then general manager of cold rolling and coated products, then plant superintendent, then, finally, managing director in charge of operations and sales. Along the way, he got his Master’s degree in Metallurgical Engineering from the Federal University of Minas Gerais in Belo Horizonte.
“I’m a steelmaker,” he now says proudly.
Brazil in the early 1990s, like many Latin American countries, was suffering through the tail-end of a debt crisis, including bouts of hyperinflation and the prospect of government insolvency. And in 1992 – 1993, when Brazil moved to privatize its industries under the administration of Itamar Franco – a move seen as a remedy for the debt-burdened government – Goncalves helped lead a group of CSN employees in a bid for the company.
“Being in Brazil, during that specific time, with Itamar, and privatization, change of currency, from inflation to no inflation, I had to go through a lot of things commercially that gave me a very big view of the world,” he said.
During his time at CSN Goncalves wanted to help Brazil become an industrial powerhouse, but Brazil’s economy was shrinking, and CSN had to seek new markets for its steel. During his tenure, “I went from selling to three countries outside of Brazil, to 65 – that was under my watch. Because we had no choice,” he said.
And in 1998 change brought opportunity when Benjamin Steinbruch, the interim CEO of Vale, which owned a 50% equity stake in U.S.-based California Steel Industries (CSI), asked Goncalves to take on the role of CEO at CSI in order to fix the company’s operations.
“They gave me two years, and I said I can fix that in one,” he says, after which time he would go back to Brazil.
He and his family arrived in California in January, 1998. In April, he called Steinbruch with good news and bad news. “The good one is that CSI is fixed. The bad one is that I’m not going back.”
In Brazil, Goncalves had been concerned about the security of his family, and he believed he was a kidnapping target. Because of his position at CSN, he says his drivers were both acting bodyguards, and could drive cars backwards at very high speeds.
In California, he was driving his own car; his wife was taking the kids to school. “One day I got the quarterly newspaper, and there was a big headline: Crime is picking up. Two bicycles and one dog stolen last week.”
“I said, ‘This is paradise. I will never leave this place.’”
(Goncalves as CEO of California Steel Industries. Gina Ferrazi/Los Angeles Times/Getty Images.)
After four years at CSI, he received an invitation to help lead an operational turnaround as the CEO of Metals USA, a steel servicing company. The invitation came via his banker, Henkels, who was at CIBC at the time, and responsible for coordinating Metals USA’s emergence from bankruptcy.
“What I saw in Lourenco was a combination of operational excellence and commercial knowledge,” Henkels says. “That’s a very unique combination.”
He says Goncalves’ confidence should not be confused with bluster. “There’s no false bravado – that is a hands-on, from-the-factory-floor-on-up kind of learning curve that comes from battle-tested experience.”
At Metals USA, Goncalves brought the company public and grew its share price from USD 3 per share to USD 14 per share. At that point, he wanted to lock in the shares’ gains by taking the company private. (He once referred to public equity market capitalizations as “absurd fluctuations.”) He held a beauty contest, choosing Apollo Global Management in May 2015 to become the company’s new majority owner in a deal worth USD 450m, or USD 22 per share.
Under Apollo, Metals USA paid its equity owners 5.5x their initial investment, according to Goncalves. Still, during a few rough quarters, Metals USA bonds traded into distressed territory, and Goncalves took advantage by repurchasing them in the open market. He credits this time with arming him with capital markets savvy to manage a complex balance sheet.
“Everything I learned about how to work with the debt markets, I learned in the United States, some with California Steel, but a lot with my Apollo friends,” he said.
In 2012, Metals USA stock again went public through an IPO; the company then sold itself to Reliance Steel in 2013, at which point Goncalves slinked quietly into retirement.
Amid his flurry of reorganizational initiatives at Cliffs, Goncalves also became a unique advocate for the U.S. steel industry, and, by extension, the U.S. economy – a role he cites as one of his proudest achievements.
In late 2015, as steel was flooding into the U.S. from China, Goncalves and representatives from Minnesota – including Senators Amy Klobuchar and Al Franken, Representative Rick Nolan, along with Governor Mark Dayton – held a meeting on the Iron Range, in Northern Minnesota, where Cliffs has operations. They invited Denis McDonough, former Chief of Staff to President Obama and a native Minnesotan.
In the meeting, Goncalves and the elected officials impressed upon McDonough the importance of the steel industry for the U.S. economy and national security, and came away from the meeting feeling that McDonough would convey the message to President Obama.
In 2016, the Obama administration targeted illegally dumped steel to the U.S. with complaints before the World Trade Organization and the U.S. Commerce Department, leading to tariffs as high as 250% on certain imports from seven countries, including China.
“That was the turning point – when the Obama White House supported us. And the rest is history,” Goncalves recalled.
“Lourenco is not afraid to voice his opinion,” Senator Al Franken, who was at the meeting, said in a statement, calling Goncalves a “key resource” for him and other congresspeople on how to stand up for the U.S. steel industry.
“I’m convinced that this meeting—and the direct and forceful arguments from Lourenco—were instrumental in spurring U.S. action to stop illegal foreign steel dumping,” Franken said.
Fast-forward to the current administration and Goncalves has cheered President Trump’s plans to further investigate illegally dumped steel, and has also supported infrastructure spending proposals. Currently, Goncalves believes the steel industry lobby is as powerful as it’s been since he came to the U.S., especially with Wilbur Ross – an investor who cobbled together steel companies out of bankruptcy in the early 2000s – as Trump’s commerce secretary.
He says lower wages, subsidies for production, and currency manipulation give countries like China a huge advantage on the pricing of their steel.
“It’s absolutely unfair,” he says. “It’s not like they’re more competent than we are. Give me the same thing. I will crush them.”
by Kyle Younker