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 ABL facility of $532.7 million.
Working capital release?
Cliffs used a high level of working capital, approximately $236 million, in the first half of 2015. The company attributed this high usage to the “usual seasonality” of the business. Management mentioned during its 2Q15 results call that consistent with the seasonality of the business, working capital should reverse in the second half of the year, more so in the fourth quarter.
Steps in the right direction
During 3Q15, Cliffs reduced the 2018 debt maturity by $125 million through cash tender. In the process, it captured a discount of $56 million and a reduction of $18 million in interest expenses until maturity. However, the absolute amount of debt is still quite high at $2.5 billion.
Cash flows under pressure
Cliffs’s US iron ore (or USIO) division is the company’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-forward EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 9.0x at the end of 2Q15 compared to 6.7x at the end of 1Q15.
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. Investors will watch closely for any announcement on asset sales in Cliffs’s 3Q15 results.
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 3.4% of the SPDR S&P Metals and Mining ETF (XME). XME provides diversified exposure to this sector.