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Why concerns still remain for the company
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.
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.
Conditions were difficult for the shipments segment due to the freezing of the Great Lakes, which resulted in a 24% decline in shipments year-over-year (or YoY)—this also lowered the volumes for the full year to the lower end of the previously announced range of 22–23 million tons.
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.
There are many problems Cliffs (CLF) will have to address in the short-to-medium term, like its Bloom Lake resolution and Casablanca resolution.
As we already outlined in our industry overview for iron ore, we don’t expect iron ore prices to move up much from their current values.
Cliffs Natural Resources (CLF) followed a growth path, with inorganic opportunities and expansion into commodities other than iron ore, over the last ten years.
New management plans to change its strategic course and improve operating and financial discipline following the company’s $9 billion acquisition spree over the last decade.
Casablanca Capital is an activist hedge fund that owns a 5.2% stake in Cliffs Natural Resources (CLF). The fund wants to take over board control and install its own CEO.
Cliffs (CLF) acquired Consolidated Thompson in 2011 for $4.9 billion. The main asset from this deal was the Bloom Lake Mine in Eastern Canada.
Cliffs Natural Resources (CLF) has a high cost per ton compared to these players. It also has a greater percentage of earnings from iron ore.
The products Cliffs sells and the customers Cliffs serves vary by segment. So let’s take a closer look at each segment.
While Cliffs Natural Resources (CLF) has most of its operating mines in the U.S., its peers Rio Tinto (RIO) and BHP Billiton (BHP) have their major assets in hematite-rich area of Western Australia.
Cliffs Natural Resources (CLF) is primarily an iron ore producer. A small percentage of its revenue comes from metallurgical coal sales.
However, along with valuation metrics, investors should look at the factors affecting each company.
Prices for iron ore have already decreased.
Since steel is a cyclical industry, iron ore mining is as well.
The iron ore industry is a high volume industry.
With the emergence of China’s demand, prices moved to quarterly contracts from annual private negotiations in 2010.
The cost curve also sets the floor for the price because if price falls below the cost of production of some players, those players will be out of the market.