Cleveland-Cliffs (CLF): A Steel Giant in Prem Watsa's Bold Materials Play

Cleveland-Cliffs Inc. (NYSE: CLF), North America’s largest flat-rolled steel producer, has emerged as a key beneficiary of Prem Watsa’s strategic pivot toward the materials sector. With Watsa’s Fairfax Financial Holdings establishing a $55 million stake in CLF during Q4 2024—accounting for 3.56% of his portfolio—the steel giant has positioned itself as a contrarian play in an industry undergoing profound structural shifts.

The Watsa Stamp of Approval

Watsa’s investment in CLF is not merely a tactical move but a reflection of his long-term value philosophy. The 5.9 million shares acquired in Q4 2024 marked a new position for the “super investor,” who typically avoids crowded trades. This strategic shift is particularly telling given his simultaneous reduction of consumer and biotech holdings, signaling a broader bet on industrial resilience.

CLF’s inclusion among Fairfax’s top 10 holdings (alongside Orla Mining and Occidental Petroleum) underscores its alignment with Watsa’s focus on high-return capital deployment in undervalued sectors. Basic materials, in particular, have drawn attention due to their cyclical upside tied to infrastructure spending and energy transitions.

The Stelco Acquisition: A Catalyst for Growth

Central to CLF’s appeal is its $3.9 billion acquisition of Stelco Holdings in late 2024. The deal, which gave CLF control over Stelco’s Canadian steelmaking assets—including blast furnaces and plate mills—has already begun to reshape the landscape:
- EPS Accretion: The transaction is projected to boost CLF’s 2025 earnings, with synergies from vertical integration streamlining production costs.
- Market Dominance: CLF now commands a 25% share of North American steel capacity, solidifying its position as a critical supplier to automotive and construction sectors.

The financial upside for Fairfax, which sold its 13 million Stelco shares for a CAD 531 million pre-tax gain, further justifies the strategic alignment between the two firms.

Financial Fortitude and Analyst Sentiment

CLF’s Q1 2024 results provide a glimpse into its financial health:
- Revenue: $5.2 billion, reflecting robust demand for steel in infrastructure projects.
- Adjusted EBITDA: $414 million, demonstrating operational efficiency.

Analysts have taken note. As of early 2025, CLF carried a strong consensus “Buy” rating with no “Sell” recommendations, per data from platforms like GuruFocus. Institutional support has also grown, with funds like Citadel and Millennium adding stakes while others reduced exposure—a dynamic that often precedes outperformance.

Risks and Considerations

Despite its strengths, CLF faces headwinds:
1. Regulatory Uncertainty: Ongoing lobbying efforts around Section 232 tariffs and environmental regulations could impact margins.
2. Cyclical Demand: Steel prices are tied to macroeconomic health; a downturn in construction or automotive sectors could pressure earnings.
3. Competition: Global players like Nippon Steel (and its U.S. Steel ambitions) remain formidable rivals, though CLF’s domestic focus mitigates some risks.

Conclusion: A Steel-Built Opportunity

Prem Watsa’s bet on Cleveland-Cliffs hinges on two irrefutable data points: its low valuation relative to growth prospects and its structural advantages in a consolidating industry. With a forward P/E of just 6.5 (versus the sector average of 12.8), CLF trades at a discount to its peers while benefiting from secular tailwinds like renewable energy infrastructure and U.S. manufacturing revivals.

The Stelco acquisition, which added $2.5 billion in assets at a 7% yield on invested capital, further validates CLF’s growth trajectory. Meanwhile, its Q1 2025 earnings (due May 7) will be a critical test of operational execution.

Investors should also monitor CLF’s net debt levels—currently at $4.8 billion—as the company balances growth with financial discipline. If CLF can sustain its EBITDA margins above $1.2 billion (as seen in 2024), Watsa’s contrarian call could prove prescient.

In sum, Cleveland-Cliffs offers a compelling blend of value, strategic execution, and sector-specific upside—a hallmark of Watsa’s investment acumen. For those willing to look beyond short-term volatility, this steel titan may just forge its way into the next leg of market leadership.