Why Cliffs’ operating performance has broadly deteriorated




Overall sales and profitability are down for iron ore players across the board. But Cliffs’ peers with fewer costs per ton, like Rio Tinto (RIO), BHP Billiton, (BHP), and Vale SA (VALE), are still profiting at current prices.

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. This makes Cliffs much more leveraged to iron ore prices. In 2013, sales revenue for Cliffs was down 3.1% from 2012. You can mainly attribute this fall to lower worldwide iron ore sales volume and lower realized revenue rates for coal products of 15.5% year-over-year.

Let’s take a look at performance by segment.

Revenue and mergin per ton

U.S. Iron Ore

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This segment’s sales margin declined 7.6% year-over-year for 2013. This fall was mainly driven by lower revenue of $55.4 million, increased costs of goods sold, and operating expenses of $18.9 million. Sales volume was lower by 334 thousand tons because of the expiration of a one-year contract with a customer and the bankruptcy of another customer. The average revenue rate also fell $1.21 per ton to $113.08 per ton in 2013 because of an unfavourable customer mix (a higher sales tonnage to overseas customers) and discounts.

Cliffs’ share of production in the U.S. segment also decreased by 7.8%. This fall was mainly because of idling at two of the four furnaces.

Financials CLF

Eastern Canadian Iron Ore

Revenue for this segment decreased 3% year-over-year because of a lower sales volume of 383 thousand tons due to idling of pellet production at Wabush mine. This was partially offset by higher average realizations that were driven by changes in spot market pricing. Due to high production costs and lower pricing, the Wabush mine was idled and the Bloom Lake mine’s Phase II was also put on hold indefinitely.

Asia-Pacific Iron Ore

Revenue for this segment declined 3% year-over-year. This fall was mainly because mining at Cuckatoo mine completed and, as a result, the company sold its interest in the mine. The sales margin, however, increased 18% year-over-year because realized the revenue rate increased 2.8% on per-ton basis year-over-year.

North American Coal

Revenues decreased by $44 million or 6.7% year-over-year for this segment. The sales margin per ton decreased to a loss of $1.99 in 2013 from a loss of $0.28 in 2012. This decrease was primarily driven by a downward trend in market pricing, including a 24% decrease in quarterly benchmark price.

A key ETF

The SPDR S&P Metals & Mining ETF (XME) is also a good way to gain exposure to metals and mining sector.


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