Why Cliffs’ share price rallied on 3Q 2014 results

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Market responds to results

Cliffs Natural Resources Inc (CLF) saw its share price increase by ~25% after it released its third-quarter results for 2014. In this article, we’ll review the main reasons for the favorable market reaction.

Share price

U.S. iron ore and North American coal beat expectations

Cliffs Natural Resources, or Cliffs, beat market earnings expectations for the quarter ended September. Higher-than-expected revenues earned by the U.S. iron ore division and higher-than-anticipated cost reductions in North American coal operations drove the earnings.

Potential resolution of Eastern Canadian assets

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The market also reacted favorably to the possibility of an exit from the troubled Eastern Canadian assets, with less-than-anticipated losses. Later in this series, we’ll look at the various options management is considering to favorably resolve Bloom Lake, which has been a cash drain on Cliffs since it was acquired back in 2011.

Short covering

As highlighted in a previous report on Cliffs, the company has one of the highest short interests in the sector. Stronger-than-expected results, possible resolution of Bloom Lake by year end, and confident management led the shorts to cover their positions.

Short-sellers borrow and sell shares, and once the price falls, they buy and return them, taking the profit. If however, the prices rise, there’s a short squeeze, and borrowers buy shares to cut their losses. That leads to higher demand and pushes the price even higher.

The short interest led the share price rally of ~25% after the earnings call. In his opening statement, Cliffs’ newly appointed CEO, Lourenco Goncalves, said he was “here to reward the longs.” Management also indicated they’d like to maintain the dividend.

All of this helped the company’s share price in the short term. Longer term, however, investors want to see an end to the cash drain on non-core assets. Pricing is likely to be pressured given the new capacity announcements by major iron ore players in recent times, including BHP Billiton Limited (BHP), Rio Tinto (RIO) and Vale SA (VALE). These companies are part of the SPDR S&P Metals and Mining ETF (XME).

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