Concerns still remain
The U.S. iron ore division should return to normalcy in the second half after harsh winters impacted volumes in the first half of 2014.
Continued improvements in the labor market, construction activity, and motor vehicle production is expected to support the North American steelmaking market. Since Cliffs Natural Resources makes the bulk of its revenues from this market, it would lead to more stable revenues for the company.
China is another important market for the company. However, it remains a little tricky. Weaker-than-expected demand coupled with oversupply of iron ore should lead to depressed iron ore prices. Investors interested in investing can track indicators like real estate sales, iron ore port inventory, steel production, and China’s Purchasing Managers Index (or PMI) to see how they’re tracking, which will give a direction for iron ore demand situation there. It’s important to note that these will soon be available on the Market Realist website. However, management seems to be quite upbeat about the China’s demand situation. They cited China’s commitment to achieve targeted real gross domestic product (or GDP) growth of ~7.5%.
The liquidity position for the company remains comfortable for now, with the renegotiation of the credit line. The company should be able to honor the renegotiated debt covenants.
Operational improvement, but concerns remain
The cost cutting efforts of the management are praiseworthy, especially the structural changes in mine plan, logistics, and reduction in contractor hours for Bloom Lake and Asia Pacific iron ore. The cash cost guidance per ton has been reduced by $5 for these two divisions. These measures would also help improve the cost profile for the mines for the long term.
Some issues of concern still remain that could have a long-term impact on the company’s performance:
Iron ore pricing is a concern for all Cliffs Natural Resources’ (CLF) peers like Rio Tinto (RIO), BHP Billiton (BHP) and Vale SA (VALE). However, a lower cost profile should support players like RIO and BHP in the current pricing environment. The SPDR S&P Metals & Mining ETF (XME) is also exposed to the iron ore industry.