Cliffs’s Cash Flows Feel Pressure of Low Iron Ore Prices



Cliffs’s net debt

Cliffs Natural Resources (CLF) was able to reduce its net debt by $130 million in 1Q15 through exchange offers and open-market bond repurchases. The company also managed to get rid of its financial covenants in its revolving credit facility by using a smaller asset-based lending facility.

The company’s liquidity profile is comfortable with cash and cash equivalents of $355.7 million at the end of 1Q15. Cliffs didn’t draw anything on its new asset-based lending facility.

Cliffs also has $200 million in share buyback options available. It can exercise the options until the end of 2015.

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

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Steps in the right direction

Cliffs 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 $2.5 billion. Management is doing what’s under its control. But the biggest factor impacting Cliffs’s iron ore prices is not under its control, which could mean further pressure on cash flows.

Cash flows under pressure

USIO is Cliffs’s only positive cash flow earner segment, and it’s getting more and more linked to seaborne iron ore prices that remain structurally depressed. The company had a net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 6.7x at the end of 1Q15 compared to 3.5x at the end of 1Q14.

With this ratio, the company’s fortunes remain highly dependent on the future of iron ore prices. Any reduction in iron ore prices could mean further pressure on EBITDA and a condition of financial stress. Meanwhile, non-core asset sales at attractive prices could increase liquidity in the short-to-medium term.

BHP Billiton (BHP), Rio Tinto (RIO), and Vale S.A. (VALE) are also facing cash flow woes due to depressed iron ore prices. Cliffs forms 2.8% of the SPDR S&P Metals and Mining ETF (XME). XME provides diversified exposure to this sector.


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