Cliffs is working to reduce its debt


Nov. 19 2019, Updated 11:41 p.m. ET

Debt repurchase

Cliffs Natural Resources’ (CLF) net debt at the end of 4Q14 was $2.7 billion—compared to $3 billion at the end of 3Q14. This is because Cliffs repurchased more than $200 million in an aggregate principal amount of senior notes during 4Q14 and January 2015.

The notes were purchased in the open market at an average of a 34% discount to the par value. The total discount aggregates ~$70 million. Management stated that it will continue to repurchase debt opportunistically in the future as well. Any cash generated from the sale of coal assets will be applied to buy back the debt.

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During the call, management also mentioned that if bondholders offer bonds for sale at deep discounts to par, the company will use liquidity on hand to acquire the bonds. Separately, the company still has $200 million in share buyback options available. It can exercise the options until the end of 2015.

Cliffs is prioritizing its debt reduction to dividend distribution. That’s why it eliminated its quarterly dividend of $0.15 per share—effective 1Q15.

Reduction in credit facility

The size of the revolving credit facility, undrawn, was reduced to $900 million. There will be an additional reduction to $750 million by May 2015. The company stated that it hasn’t been forced upon by banks. It’s a reflection of a smaller global footprint and a changed mindset with respect to capital allocation. An era of heavy growth is behind them.

Management is taking steps in the right direction. It’s eliminating dividend and prioritizing debt reduction by opportunistically buying back debt. However, it still has a huge debt burden of $2.7 billion. In this weak commodity price environment, debt to that extent doesn’t bode well for a company. It isn’t good when the fundamentals of its highest revenue and earnings commodity, iron ore, aren’t too bright.

BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE) are also facing cash flow woes due to depressed iron ore prices. Cliffs forms 3.69% of the SPDR S&P Metals and Mining ETF (XME). XME provides diversified exposure to this sector.


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