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Why Cliffs wants to operate North American coal at zero EBITDA

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North American coal operations (or NAC)

This segment of Cliffs Natural Resources Inc (CLF) owns and operates six metallurgical coal mines across West Virginia and Alabama, and one thermal mine in West Virginia.

NAC

North American coal operating performance

Sales volume for 3Q 2014 was 1.9 million tons, which is 15% higher than the 1.6 million tons sold in the third quarter of 2013. The increase was primarily driven by increased low-volatile export sales and additional spot sales. Also contributing to the increase—higher thermal sales related to a new contract and increased high-volatile sales as a result of new export relationships.

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NAC reported $6 million in adjusted earnings before interest, taxes, depreciation, and amortization (or EBITDA) in 3Q 2014. At this level, the NAC segment breaks even. This is due to the cost cuts applied in the segment. Management wants to operate this segment as a zero EBITDA player until it finds a buyer for the business.

Metallurgical coal prices are down 17% for this quarter compared to the same quarter last year. This has also negatively impacted pricing for Cliffs’ peers (KOL) in this space, including Arch Coal Inc (ACI), Alpha Natural Resources, Inc. (ANR), and Cloud Peak Energy Inc. (CLD).

Outlook

Cliffs maintained its full-year 2014 North American coal expected sales and production volume of 7 million tons. Sales volume mix is anticipated to be ~70% low-volatile metallurgical coal, 20% high-volatile metallurgical coal, and 10% thermal coal.

The company also maintained its full-year 2014 revenue per ton outlook of between $75 and $80. Cliffs has ~90% of its expected 2014 sales volume committed and priced at $78 per short ton at the mine.

The company lowered its full-year cash cost expectation to between $80 and $85 per ton, from its previous expectation of $85 to $90 per ton.

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