Although the company has taken welcome actions to improve its balance sheet with this week’s announcement of two separate share offerings (expected to raise roughly $800 million ) and the massive dividend cut, this will remain a heavily impaired balance sheet with — in my view — a risk of further impairment as the company struggles to return to profitability in a timely manner. Total debt at the end of 2012 stood at $4.1 billion, which is roughly equivalent to the company’s current market capitalization.
Finally, these distressed Cliffs shares face stiff competition for investment capital among the slew of deeply impaired mining stocks, most of which I would characterize as possessing far greater long-term upside potential — with substantially lower operational risks and far healthier balance sheets. Investors dying to dig for a bottom in met coal prices, for example, might do better to have a gander at Teck Resources Ltd (USA) (NYSE:TCK) or Peabody Energy Corporation (NYSE:BTU). A more attractive entry point could soon arise for Teck Resources if the company follows through on its stated interest in securing a copper acquisition, since the industry’s recent spate of horrendous asset impairments has investors reacting nervously to major acquisitions. Peabody recently took a writedown of its own, and as with Teck, I’m looking for strong contributions from seaborne met coal sales to render Peabody an exceptional long-term investment vehicle.
For the greatest bargains in mining, meanwhile, I urge value investors to take a long and careful look through the miners of gold and silver. A prolonged but moderate consolidation in gold and silver prices has accompanied an overdone thrashing of equity valuations among even the highest-quality operators in those industries. I couldn’t possibly condone an investment in Cliffs Natural Resources, for example, while shares of Endeavour Silver Corp. (CAN) (NYSE:EXK) offer multi-bagger potential with a far lower risk profile. Goldcorp Inc. (USA) (NYSE:GG) offers a comparable dividend yield to Cliffs’ adjusted payout, but it boasts an incomparably healthy balance sheet and far superior upside potential in the price of its principle product.
The article Avoid these Dangerous Cliffs, and Find Your Value Elsewhere originally appeared on Fool.com and is written by Christopher Barker.
Fool contributor Christopher Barker owns shares of Goldcorp, Peabody Energy, Endeavour Silver, and Teck Resources Limited. The Motley Fool has no position in any of the stocks mentioned.
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