How Cliffs Is Navigating the Current Tough Iron Ore Market



Coal asset sales

Cliffs Natural Resources’ (CLF) management mentioned during its conference call that it continues to work with Pinnacle and Oak Grove, the interested parties for the sale of the remaining coal assets. The company’s management also mentioned that it expects to announce a deal regarding this in the “very near future.”

Other companies such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE) 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—South32 (SOUHY).

Rio Tinto and BHP Billiton form 10.7% and 17.8%, respectively, of the iShares MSCI Global Metals & Mining Producers ETF (PICK). The SPDR S&P Metals and Mining ETF (XME) also invests in the diversified metals and mining space.

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DRI facility

Cliffs’ management reiterated during the call that supplying to electric arc furnaces (or EAF) is an important part of the company’s future. The company is taking steps along with Nucor, a major mini-mill, in this direction. The management also mentioned that the company does not have the capital to invest in such a facility right now, but it is looking for potential partners.

Lowering costs and expenses

Cliffs Natural Resources (CLF) has maintained its capital expenditure guidance at $100 million–$125 million. This includes $25 million for the coal assets, which are up for sale. SG&A (selling, general, and administrative) guidance is $120 million for 2015. The sustainable long-term SG&A could be lower than this number, as this includes some expenses to support the Asia–Pacific iron ore and North American coal segments.

As we’ve discussed previously, Cliffs has reduced the unit costs substantially for its US iron ore (or USIO) and Asia–Pacific iron ore (or APIO) divisions. APIO’s unit cash cost reduction to $28 per ton in June is quite impressive. Any more favorable movement in the exchange rate could lead to further cost reduction.

Cliffs is also expecting to receive a federal tax refund of $160 million in 3Q15, which should help with the company’s short-term liquidity needs.


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