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What to Expect from Cliffs Natural Resources’ 2Q17 Earnings

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Part 8
What to Expect from Cliffs Natural Resources’ 2Q17 Earnings PART 8 OF 11

Analysts Expect CLF’s Net Debt to Fall 39% in 2017

Financial leverage

Although debt is still a concern for investors in Cliffs Natural Resources (CLF), the intensity has diminished greatly due to its new management’s focus and consequent reduction in financial leverage. CLF’s management’s top priority is to retire its debt with proceeds from any source.

During its 1Q17 earnings call, CLF’s chief financial officer, Timothy Flanagan, noted that the company would reduce its overall leverage. The company’s focus would also include extending its maturities, lowering its interest expenses, and simplifying its capital structure.

Analysts Expect CLF&#8217;s Net Debt to Fall 39% in 2017

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Cliffs Natural Resources (CLF) reduced its total debt by $600 million in 1Q17. Its net debt was $1.3 billion at the end of 1Q17, a reduction of 54% YoY (year-over-year) and 32% quarter-over-quarter. The consensus estimates noted that CLF’s net debt should fall 39% by the end of 2017 compared to 2016.

Net debt-to-forward-EBITDA ratio

A company’s net debt-to-forward-EBITDA1 ratio reflects the number of years it would take to eliminate its net debt paid solely out of its EBITDA.

With the repayment of debt and improvement in EBITDA, this ratio for Cliffs Natural Resources has improved significantly. At the end of 2016, CLF had a net debt-to-forward-EBITDA ratio of 5.2x, a significant improvement compared to its net debt-to-forward-EBITDA ratio of 9.0x at the end of 2015.

Analysts estimate that this ratio is expected to improve to 2.0x by the end of 2017.

Other US (VTI) (DOW) steel companies (SLX) with high financial leverage—including ArcelorMittal (MT), AK Steel (AKS), and U.S. Steel Corporation (X)—have also made successful efforts to reduce their debt levels.

  1. earnings before interest, tax, depreciation, and amortization
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