Cleveland-Cliffs' 21% Rally: Sustainable Recovery or Fleeting Optimism?

Cleveland-Cliffs (NYSE: CLF) has surged 21% in July 2025, fueled by a combination of earnings surprises, aggressive cost cuts, and a tailwind from U.S. steel tariffs. But is this rally a sign of a durable turnaround, or is the market overbidding on a fragile recovery? Let's dissect the catalysts and risks to determine whether this stock is a buy, hold, or sell.

The Catalysts: Earnings, Cost Cuts, and Tariff Tailwinds

Cleveland-Cliffs' Q2 2025 results were a mixed bag with a silver lining. While the company reported a GAAP net loss of $470 million, its adjusted EBITDA improved to $97 million—a $271 million turnaround from the previous quarter. This was driven by record steel shipments of 4.3 million net tons and a $15/ton reduction in steel unit costs. Management has reiterated its target of cutting costs by $50/ton by year-end, a goal that, if achieved, could significantly boost margins.

Historically, CLF's shares have shown a positive reaction following earnings beats, with a 50% win rate over three days and a 50% win rate over 30 days, according to backtests from 2022 to 2025. The maximum observed return after a beat was 1.52% on day three, suggesting a pattern of short-term optimism. However, the 25% win rate over 10 days indicates that initial gains may not always hold, underscoring the need for caution.

The bigger story, however, is the 50% U.S. steel tariffs imposed in June 2025. These tariffs have shielded domestic producers from cheaper foreign imports, allowing Cliffs to command higher prices. The company's CEO, Lourenco Goncalves, has even called for similar tariffs in Canada, signaling a strategic pivot to protect domestic steel demand. With $2.7 billion in liquidity as of June 30, Cliffs is well-positioned to weather near-term volatility while executing its cost-reduction plan.

The Risks: Cyclical Vulnerability and Overbought Sentiment

Steel is a cyclical industry, and Cliffs' recent rally may reflect optimism about a sector rebound rather than a fundamental shift. While the company's $4.9 billion in Q2 revenue exceeded expectations, it's important to note that this was partially driven by one-time factors, such as the expiration of a low-margin slab-supply contract. Once that tailwind fades, the company's EBITDA may face renewed pressure.

Moreover, the stock's 21% surge in July has pushed it to a 12-month high of $11.54, raising concerns about overvaluation. The price-to-EBITDA ratio now stands at 4.5x, a sharp discount to its 5-year average of 6.2x but still elevated given the company's debt load. If economic growth slows or tariffs are rolled back, the market could reassess Cliffs' risk profile, triggering a pullback.

Strategic Moves: Footprint Optimization and Free Cash Flow

Cliffs' aggressive footprint optimization—including idling underperforming facilities—has already begun to pay off. The $323 million in non-recurring charges for Q2 2025 were a necessary short-term pain point, but they are expected to unlock $50/ton in cost savings by year-end. This, combined with a $600 million reduction in capital expenditures, suggests a disciplined approach to profitability.

The company's focus on free cash flow recovery is another positive. With steel pricing bolstered by tariffs and a healthy order book, Cliffs could generate meaningful cash in H2 2025. However, its net debt-to-EBITDA ratio of 3.8x remains a drag, and debt reduction will be critical to restoring investor confidence.

Investment Implications: Buy, Hold, or Sell?

For long-term investors, Cliffs presents a high-conviction opportunity if the tariff environment remains stable and the company executes its cost-cutting roadmap. The $14 price target from KeyBanc implies a 23% upside from current levels, assuming the stock can sustain its momentum. However, the sector's cyclical nature and geopolitical risks (e.g., a potential tariff rollback) make this a high-risk, high-reward trade.

A more cautious approach would be to hold the stock, using dips to accumulate shares if key metrics improve. Short-term traders, meanwhile, should monitor steel prices, tariff policy developments, and Cliffs' Q3 earnings in October 2025. A breakdown below $9.50 would signal renewed bearish sentiment, while a sustained close above $12 could validate the rally.

Conclusion: A Rally Built on Real Progress, but Not Without Risks

Cleveland-Cliffs' 21% surge is justified by tangible improvements in cost efficiency, EBITDA, and liquidity, as well as favorable policy tailwinds. However, the steel industry's exposure to macroeconomic cycles and the company's elevated debt levels mean this rally could be overbought in the short term. Investors should balance optimism about Cliffs' turnaround with caution about the sector's volatility. For those willing to stomach the risks, this could be the start of a meaningful recovery—but patience and discipline will be key.
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