Avoid these Dangerous Cliffs, and Find Your Value Elsewhere – Cliffs Natural Resources Inc (CLF)

Amid the carnage of the 20% bloodbath to which shareholders of Cliffs Natural Resources Inc  (NYSE:CLF) were subjected on Wednesday, Fools may be mightily tempted to go Cliffs-diving for what they hope may prove a long-term bottom in what has become a most inglorious downward trajectory for the stock.

My colleague and Motley Fool Materials & Energy analyst Taylor Muckerman believes the resulting share price “could certainly be a buying opportunity” for long-term investors, and considers this a “perfect example” of the value investor’s opportunistic mantra of buying when others are fearful. As a value investor myself, I am typically prone to a similar thought process, but in the case of Cliffs, I simply don’t see a long-term bargain here.

My cautious approach to Cliffs served me well after the stock suffered an inglorious fall of 19% during another decidedly rough week last October. From that point, when I encouraged investors to “steer clear” of the stock, Thursday’s collapse appended a further 18% drubbing. My words of warning were directed equally at income investors as well, since the persistence of a distressed margin structure and a severely impaired balance sheet appeared to place the company’s unsustainable dividend “in serious jeopardy.” This week, Cliffs announced a 76% reduction of the quarterly dividend to $0.15 per share. Although some sort of relief rally can commonly follow a fall this profound, allow me to convey some of the factors that still have me keeping well clear of this stock.

For starters, the important Bloom Lake iron ore mine in Quebec — for which Cliffs has already recorded a $1 billion writedown relating to the 2011 acquisition of Consolidated Thompson — continues to present what I would characterize as insufficient clarity as to the exact nature and extent of what appears to be a declining set of expectations from the mine. While the optimistic investor may interpret the $75 million increase to 2013 capital expenditures announced this week as a bullish signal of thawing market concerns, I have learned the hard way to remain vigilant toward the risk of substantial cost overruns from major projects of the sort.

Cliffs’ coal unit has made impressive strides toward turning operations around from a cost structure that I flagged as “unacceptably high” back in 2010, but persistently weak pricing for metallurgical coal nonetheless had the unit joining Cliffs’ Eastern Canadian Iron Ore unit in negative sales-margin territory for the fourth quarter of 2012. Unless the Wabush mine can achieve wholesale and immediate cost declines beneath the $166-per-ton reported for the quarter, some risk of curtailed or discontinued production there remains on my Foolish radar. I do expect some further strengthening of iron ore and met coal prices, but I expect that strengthening to be only moderate and weighted toward the back half of 2013.