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How Is Cliffs Asia Pacific Doing in a Seaborne Supply Glut?

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Apr. 7 2015, Updated 5:07 p.m. ET

Asia Pacific iron ore operations

Cliffs Asia Pacific iron ore (or APIO) operations are located in Western Australia at the wholly owned Koolyanobbing mining complex. The Koolyanobbing operation serves the Asian iron ore markets with direct-shipped fines and lump ore. The lump products are fed directly to blast furnaces. The fines products are used as sinter feed.

The remaining mine life for Cliffs’ assets in its Asia Pacific division is only five years. The company is operating the division until it is sold or the mine life ends.

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Cliffs has guided for a cash cost per ton of $40–$45 for 2015 using the Australian dollar–US dollar exchange rate assumption of 0.81. APIO’s cash costs have come down substantially from previous periods, but it operates in the global volatile seaborne market and directly competes with major iron ore producers such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale S.A. (VALE), which have even lower costs.

Outlook still weak

The iron ore market has been going through a very rough patch since 2014. Iron ore prices were down ~47% in 2014. BHP, RIO, and VALE form 17.8%, 11.1%, and 2.7%, respectively, of the iShares MSCI Global Metals & Mining Producers ETF (PICK). Cliffs makes up 2.9% of the SPDR S&P Metals and Mining ETF (XME).

The outlook for seaborne iron ore prices is also weak given supply surplus coupled with weak demand growth from China. This weakness should set off to some extent against the depreciation of exchange rate, lower oil prices, and lower freight rates. However, that is most likely not enough to make this division profitable.

The best outcome for Cliffs Natural Resources (CLF) is probably to find a suitable buyer for these assets. But even that seems a little hard given the relatively short mine life remaining with no potential to increase it.

The iron ore outlook is weak, so let’s look next at the coal outlook for Cliffs Natural Resources (CLF).

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