How are Cliffs’s Cost-Cutting Initiatives Progressing?



Cliffs’s cost-cutting initiatives

In 1Q15, Cliffs Natural Resources (CLF) embarked on various cost-cutting initiatives in order to increase its cash flow so it could navigate through the tough iron ore market conditions.

Cliffs lowered its capital expenditure (or capex) guidance to $100–$125 million from $125–$150 million. It also lowered its SG&A (selling, general, and administrative) guidance for 2015 to $120 million from $140 million.

Management commented that sustainable long-term SG&A could be lower, since this includes some expenses to support the Asia Pacific iron ore and North American coal segments.

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Selling non-core assets

During the 1Q15 conference call, Cliffs management commented that it’s in talks with multiple buyers for the sale of coal assets. Until the time of sale, the company plans to operate two of its mines—Oak Grove and Pinnacle—at neutral EBITDA (earnings before interest, taxes, depreciation, and amortization) levels.

Any further progress toward the sale of these assets would be positive for the company, as metallurgical coal prices are under pressure. A sale would help reduce Cliffs’s debt and improve its liquidity profile.

Other companies, including BHP Billiton (BHP), Rio Tinto (RIO), and Vale S.A. (VALE), have also embarked on various measures to divest their non-core assets. BHP Billiton did it through a spin-off in the form of a new company called South32.

Rio Tinto and BHP Billiton form 10.7% and 17.8%, respectively, of the iShares MSCI Global Metals & Mining Producers ETF (PICK). Cliffs forms 2.8% of the SPDR S&P Metals and Mining ETF (XME).

Exploring new opportunities

During the 1Q15 conference call, Lourenco Goncalves, chief executive officer and president of Cliffs, mentioned that the company is looking at opportunities to start a DR (direct reduced) pellets plant in Minnesota or potentially a DRI (direct reduced iron) facility. The tentative volume could be 5 million tons with the potential to grow to 10 million tons of DRI in three years.

This opportunity isn’t in the company’s capex guidance yet. The facility would supply products to mini steel mills in the United States. Mini mills contribute about 60% of steel production in the United States. Such an opportunity could be significant for Cliffs in terms of market potential.

Investors will be watching Cliffs’s 2Q15 results and earnings closely for any update on the sale of coal assets and further updates on venturing into the direct reduced iron business.

For the latest updates, visit Market Realist’s Iron Ore page.


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