Cliffs North American Coal – Outlook in a Very Weak Market



North American coal operations

Cliffs Natural Resources’ (CLF) North American coal (or NAC) segment owns and operates two metallurgical coal operations in Alabama and West Virginia. The annual rated capacity is 6.5 million tons. This product is sold to global integrated steel and coke producers in Europe, North America, China, India, and South America.

In the fourth quarter of 2014, the company sold its CLCC (Cliffs Logan County Coal) assets, which included two high-volatile metallurgical coal mines and a thermal coal mine.

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Cliffs has divested CLCC, which was sold for $174 million in 2014. Management is looking for buyers for the rest of the company’s coal assets, namely Pinnacle and Oak Grove mines. Management’s plan is to maintain this operation at EBITDA (earnings before interest, taxes, depreciation, and amortization) neutral level until the company find buyers. Cliffs expects to find buyers for these mines by the end of 2015.

The Pinnacle mine’s annual capacity is 4.0 million tons. Oak Grove’s is 2.5 million tons. The two mines have proven and probable resources for a 10–15 year mine life. Both these mines produce low volatile metallurgical coal. Divestments of these mines would help reduce the capital expenditure and other expenses related to these mines. That would be slightly positive for Cliffs Natural Resources’ (CLF) earnings. The proceeds from the sale could be used to pay down some of the company’s debt.

Coal outlook weak

The outlook for the metallurgical coal market remains very weak. The global market is going through oversupply and slowing global growth. There have been many supply curtailments across coal producers, including Arch Coal (ACI) and Alpha Natural Resources (ANR).

Coal stocks have been dropping. Peabody Energy (BTU), the largest American coal producer, dropped 14.4% year-to-date. The better managed Cloud Peak Energy (CLD) dropped 19% year-to-date.

Alpha Natural Resources (ANR) and Arch Coal (ACI) together form 4.4% of the SPDR S&P Metals and Mining ETF (XME).


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