uploads///Net debt to EBITDA

Low Iron Ore Prices Challenge Cliffs’ Debt Profile

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Aug. 7 2015, Updated 10:07 p.m. ET

Liquidity

Cliffs Natural Resources (CLF) had liquidity in excess of $600 million at the end of 2Q15. This included cash and cash equivalents and available capacity on its asset-backed liability (or ABL) facility. At the end of the second quarter, no amount was drawn under the asset-backed liability facility of $532.7 million.

However, Cliffs used a high level of working capital, approximately $236 million year-to-date. The company attributed this high usage to the “usual seasonality” of the business. The management mentioned during the call that consistent with the seasonality of the business, the working capital should reverse in the second half of the year, more so in the fourth quarter. The velocity of receivables and the work-off of the inventory should contribute toward this decline.

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Debt profile worsening

Cliffs’ net debt as of June 30 was $2.6 billion, compared with $3.1 billion a year earlier. However, the net debt has increased by $86 million, compared with the end of the first quarter. Net debt to annualized EBITDA (earnings before interest, tax, depreciation and amortization) works out to be 10x at the end of 2Q15. This is higher when compared to the ratio of 6.7x at the end of 1Q15.

With debt remaining more or less constant and EBITDA declining due to lower realized prices, Cliffs’ debt coverage could become worse going forward. Although management is doing what is under its direct control, the biggest factor impacting Cliffs’ iron ore prices is not under its control. This could mean further pressure on the company’s cash flows.

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 3% of the SPDR S&P Metals and Mining ETF (XME). XME provides diversified exposure to this sector.

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