Cliffs Natural Resources
Cliffs Natural Resources (CLF) is primarily an iron ore producer, with a small percentage derived from sales of metallurgical coal—both key raw materials for producing steel. It accounts for close to 46% of North America’s iron ore pellets. It’s important to note that pellets are produced by agglomeration and thermal treatment, with grades ranging from 67%–72% iron (or Fe) supply. It has operations in U.S., eastern Canada, and Australia. Iron ore accounts for bulk of the Cliffs’ production and earnings. In the 2Q14, iron ore contributed to 84% of total sales value, the rest being coal sales. Out of iron ore sub-divisions, U.S. iron ore production remains the key driver of the company’s earnings before interest, taxes, depreciation, and amortization (or EBITDA).
Cliffs’ key segments
Cliffs’ segments are organized by product and geography. They’re mainly classified into U.S. iron ore, eastern Canadian iron ore, Asia Pacific iron ore, and Northern American coal. We’ll discuss segment-wise performance in the next part of this series.
2Q14 earnings overview
Cliffs reported an underlying loss of $8 million, or $0.05 per share. These are adjusted for several one-off costs like inventory adjustments, severance expenses, proxy expenses, idling costs, and non-recurring income tax benefits. The company’s revenue was down 26% year-over-year (or YoY) due to lower shipments and lower prices. Its EBITDA margin was 16.4% which was 430 basis points lower than the 2Q13 margin.
Its net-debt came at $3 billion. Though the company’s debt covenants don’t seem to be a problem right now, if iron ore prices remain below $100 per ton, the interest coverage ratio—EBITDA to net interest—could become a concern.
The company was operating cash flow negative at $124 million, but it was free cash flow positive.
In iron ore and coal markets, Cliffs’ main competitors are Rio Tinto (RIO), BHP Billiton (BHP), and Vale SA (VALE). The SPDR S&P Metals & Mining ETF (XME) is also exposed to the iron ore industry and CLF forms 3.46% of it.