What Can Cliffs Do to Weather the Industry Downturn?



Lowering costs and expenses

In 1H15, 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.

Capital spending went down 79% year-over-year (or YoY) to $34 million in 1H15. Cliffs maintained its capital expenditure guidance at $100 million to $125 million for 2015. This included $25 million for coal assets, which are up for sale.

SG&A (selling, general, and administrative) expenses were down 27% YoY in 1H15. The guidance is $120 million for 2015. 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.

Cliffs has reduced 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 2015 was quite impressive. Any more favorable movement in the exchange rate could lead to further cost reduction.

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Selling non-core assets

During the 2Q15 conference call, Cliffs’s management commented that it continues to work with interested parties—Pinnacle and Oak Grove—for the sale of its remaining coal assets. Management also mentioned that it expects to announce a deal regarding this in the “very near future.”

Any further progress toward the sale of these assets would be positive for Clilffs, 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 (SOUHY).

Rio Tinto and BHP Billiton form 10.7% and 17.8%, respectively, of the iShares MSCI Global Metals & Mining Producers ETF (PICK). Cliffs forms 3.4% of the SPDR S&P Metals and Mining ETF (XME).

EAF opportunity

During the 2Q15 conference call, Cliffs’s management reiterated 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.

Investors will be watching Cliffs’s 3Q15 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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