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Must-know: Will Cliffs survive the downturn?
Cliffs Natural Resources’ (CLF) coal and eastern Canada iron ore divisions are burning cash. This is a result of the depressed pricing environment for coal and iron ore.
Market analysts have started turning bearish on Cliffs Natural Resources (CLF). There are many downgrades. The target price has been revised down in recent weeks.
Iron ore’s demand dynamics are getting worse for China and Japan. This will put pressure on the realized prices for Asia Pacific’s iron ore shipments.
Iron ore operates two mines in eastern Canada—Wabush and Bloom Lake. The Wabush mine was idled in 1Q14 due to high costs. Bloom Lake became a drag on the already depressed earnings.
U.S. iron ore could navigate through a weaker pricing environment. However, reassessing prices in 2015 would put downward pressure on margins.
Selling assets at reasonable prices could provide Cliffs Natural Resources (CLF) with a cash buffer to reduce the net debt. However, the expectation of any sustained recovery remains bleak.
Cliffs Natural Resources (CLF) changed its management in July 2014. Management changed as a result of a proxy contest by Casablanca—an activist hedge fund.
Cliffs Natural Resources’ (CLF) new management changed the terms of its debt agreement to repurchase the company’s shares. The shares are worth up to $200 million.
On the debt maturity side, Cliffs Natural Resources (CLF) has $218.5 million in debt maturing in the next three years. This gives the company some relief.
Most of the metallurgical coal produced in the U.S. is exported. In fact, metallurgical coal dominates overall U.S. coal exports. In 1Q14, the U.S. exported 28 million short tons of coal.
The iron ore market is in a structural oversupply. Weak demand from China is pushing prices even lower. The situation isn’t balanced.
Iron ore accounts for most of Cliffs’ production and earnings. In 2Q14, iron ore contributed to 84% of the total sales’ value. The rest of the total sales were from coal.
Cliffs Natural Resources (CLF) is mainly an iron ore producer. A small percentage of its revenue comes from metallurgical coal sales.
Its high debt is the main culprit and is hindering Barrick’s ability to grow. So much so that the company had to divest and sell-off some of its mines to pay down some of its debt.
Both Barrick and Newmont have large, overlapping operations in Nevada. Combining operations would reduce costs and increase free cash flow, which both companies need to do.
Since 2012, Barrick has reduced the number of mines from 27 to 19 and divested non-core assets for proceeds in excess of $1.3 billion. Most of these proceeds were used to pay down debt.
Debt to equity measures a company’s financial leverage. A high debt to equity ratio generally means that a company has aggressively financed its growth using debt.
With Barrick’s new focus on quality over quantity, many of its mines were sold off in the last year and a half. The company sold off non-core mines, reducing the number of mines from 27 to 19.
This suspension is positive for Barrick. The capital that had been allocated for the development of this project will be used to pay down Barrick’s debt and improve its overall financial condition.
The Kabanga nickel project is an active mine exploration project in Ngara District, Tanzania. It is a 50-50 joint venture between Barrick and Glencore.