Cliffs Natural Resources Inc (NYSE:CLF) recently closed around its 52-week low of about $18, its 12-month high is $71. So what’s the deal, why has Cliffs … fallen off the cliff?
The company, formerly known as Cleveland-Cliffs, was founded in 1847 and is headquartered in Cleveland, Ohio. Cliffs Natural Resources Inc (NYSE:CLF) is a mining and natural resources company engaged in the production of iron ore pellets, and metallurgical coal. Their business is geographically well diversified. It operates iron ore and coal mines domestically in Michigan, Minnesota, West Virginia and Alabama. The company also operates two iron ore mines in eastern Canada that primarily provide iron ore to steel producers in Asia; and two iron ore mining complexes in Western Australia.
In addition, it holds a 45% economic interest in a coking and thermal coal mine located in Queensland, Australia; 30% interest in an iron ore project in Brazil; and interest in a chromite project in Ontario, Canada.
Off the cliff?
Two major reasons for Cliffs Natural Resources Inc (NYSE:CLF) decline are; the steep pullback in the iron ore market, and its recent $5 billion acquisition of a Bloom Lake Canadian iron ore miner, which so far has not reached desired capacity in seaborne iron ore production. This mine is critical for Cliffs to supply future growth in Asia. Cliffs’ CEO, Joseph Carrabba, has called Bloom Lake “the future of the company.” Getting the mine’s production up has been costlier, and taken longer than anticipated. Management is targeting late 2014 to 2015 for key production capacity levels to be optimized. The acquisition is still preferable to starting from scratch. On average it takes between 5 to 10 years for new iron ore mine capacity to be planned, built and production begun.
Cliffs Natural Resources Inc (NYSE:CLF) was highlighted positively in a recent Barron’s article. That publication was also previously prematurely bullish on the stock back on January 30 (when the stock was trading around $36, now 50% lower). Barron’s now cites a bullish JPMorgan analyst who concludes, “The latest sell-off which has left the shares trading at 60% of tangible book value, appears overdone. The analyst thinks the stock is already discounting a significant drop in the price of iron ore, and says the oversupply fears are overblown. As Cliffs’ management shows improved execution, he sees the shares more than doubling.”
Other Players and the Iron Ore Market
BHP Billiton Limited (ADR) (NYSE:BHP) based in Australia, has total revenue over $67 billion and a forward-looking PE ratio of 14. Currently trading around $67, the stock is 16% off its 52-week high. Last month BHP announced profits down 25% from $10.04 billion a year ago to $4.24 billion, due largely to weak commodity prices requiring large write downs from their Australian nickel and aluminum assets. BHP’s new CEO Andrew Mackenzie has said the company will most likely deploy a strategy of divesting poorly performing assets. Some analysts estimate these assets, such as diamond mines in Canada, and oil fields in Pakistan, could fetch nearly $25 billion. These non-performing asset sales could take up to 3 years to consummate, but could end up reducing debt levels by 15-20%. Such debt reduction could potentially pave the way for an increase in the company’s dividend payout ratio of possibly 10% or more, according to one Deutsche Bank analyst. BHP Billiton Limited (ADR) (NYSE:BHP) currently yields 3.3%.
The Brazilian based Vale SA (ADR) (NYSE:VALE) is the world’s top producer of iron ore and the second largest nickel miner. At a recent price of $17 it is trading at 29% off its 12 month high, and 7 times forward looking earnings estimates. Last month Vale SA (ADR) (NYSE:VALE) announced a larger than expected net loss of $2.65 billion for their 4th quarter, compared to a 4th quarter profit of $4.67 billion, a year earlier. The company’s first net loss since 2002 was a result of massive write downs of $4.2 billion in nickel and aluminum assets.