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Overview: Cliffs Natural Resources' 2Q14 earnings

Part 3
Overview: Cliffs Natural Resources' 2Q14 earnings (Part 3 of 4)

Why did the Cliff’s share price rally?

Share price rallies

As discussed in the previous part of this series, the realized revenue per ton was lower for all the segments compared to the 2Q13 and 1Q14. The decrease was driven by lower commodity prices. Iron ore prices are down 19% year-over-year (or YoY) and coal prices are down 30% YoY. Volumes were also down YoY, but the stock rallied 7% in a single trading session the next day of the earnings call and up 3% the subsequent trading day. This was because stock isn’t driven by the earnings per say, but by the market expectations about them. Analysts had factored in much more negative earnings and cost outlook than it actually came out with. Also, no one was expecting the structural improvements in cost, which the company was able to deliver. This has improved the cost profile of Bloom Lake and Asia Pacific iron ore long term.

Rev pt &amp; Strip ratioEnlarge Graph

Structural improvements

There are structural improvements in the Bloom Lake mine plan like redesigning the pit and the removal of reserves associated with higher stripping requirements. This will have a favorable impact on the strip ratios and consequently prices. The strip ratio will come down to 0.86 from two at the start of the year. For the Asia Pacific iron ore segment as well, structural improvements like pit redesign, overhaul of mobile maintenance strategy, mining efficiencies, and logistics costs led to lower cash costs. The cash cost guidance per ton has been reduced by $5 for these two divisions. These changes would have favorable long-term impact on cash costs per ton.

Capital expenditure (Capex) and SG&A cuts continue

Capital expenditure, or Capex, and selling, general, and administrative expense (or SG&A) cost cuts continue. Management reiterated the capex cut of 65% YoY and SG&A reduction of 13% YoY. The company also lowered the depreciation expense. It will be non-cash, but it will be earnings accretive.

Cliffs Natural Resources’ (CLF) peers like Rio Tinto (RIO), BHP Billiton (BHP) and Vale SA (VALE) will be releasing results in a few weeks. It’s clear from their preliminary commentary that their profitability will also be down due to decreasing international iron ore benchmark prices. However, company specific cost and productivity improvements would be the things to look for in their results. The SPDR S&P Metals & Mining ETF (XME) is also exposed to the iron ore industry and the previously mentioned companies.

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