Why investors should know Cliffs’ outlook



Cliffs Natural Resources

Cliffs Natural Resources (CLF) is mainly an iron ore producer. A small percentage of its revenue comes from metallurgical coal sales. Iron ore and metallurgical coal are key raw materials for producing steel.

Cliffs accounts for close to 46% of North America’s iron ore pellet supply. Pellets are produced through agglomeration and thermal treatment. The iron ore grades range from 67% to 72%. Cliffs has operations in the U.S., eastern Canada, and Australia.

Cliffs impacted

Commodity price weakness

Cliffs is down 65% year-to-date (or YTD) because of decreasing iron ore prices. The prices are down ~40% YTD. Metallurgical coal prices are down ~25% YTD. In this series, we’ll discuss how the decreasing commodity prices are impacting Cliffs.

Why Cliffs is impacted the most

Cliffs’ international peers (XME)—including Rio Tinto (RIO), BHP Billiton (BHP), and Vale SA (VALE)—are also impacted by the iron ore price decline. However, Cliffs is impacted the most.

In the above chart, it’s clear that Cliffs fell the most among its peers. Cliffs’ heavy debt load and high cost are the main reasons it fell the most.

Why is its outlook bleak?

Right now, Cliffs’ outlook doesn’t seem very good. Iron ore and metallurgical coal prices are declining. This is impacting Cliffs’ profitability. The declining prices are also hurting the likelihood that Cliffs will get reasonable prices for its non-core assets. The non-core assets are up for sale.

Before we discuss the reasons for Cliffs’ share price weakness and its outlook in the current commodity price scenario, we’ll briefly analyze a breakdown of Cliffs’ divisions, revenue, and earnings before interest, tax, depreciation, and amortization (or EBITDA).

Visit the Market Realist Iron Ore page to learn more about the industry.

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