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Cliffs’s Asia Pacific Iron Ore Division: More Cost Cuts?

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Asia Pacific iron ore

Cliffs Natural Resources (CLF) is operating its Asia Pacific iron ore (or APIO) segment until it’s sold out. The remaining life left for this operation is 3.5 years.

The APIO segment directly competes in the seaborne iron ore market with iron ore giants such as BHP Billiton (BHP), Rio Tinto (RIO), Vale S.A. (VALE), and Fortescue Metals Group (FSUGY).

Seaborne iron ore trade is the hardest hit due to a supply glut from these players along with weak demand from China. So realized prices for APIO are not expected to be higher than 2Q15 when they came in at $44.30 per ton.

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More reduction in costs

On the other hand, the costs could benefit from the depreciating Australian dollar against the US dollar as well as lower freight costs. While cash costs per ton for APIO were $34.30 per ton in 2Q15, they were just $28 per ton in June 2015.

Reduced mining and administrative costs along with a favorable exchange rate led to this decline. Favorable exchange rates helped costs to the extent of $7 per ton in 2Q15. Since the Australian dollar has remained weak compared to the US dollar (UUP) in 3Q15, there’s a potential for APIO cash costs to fall even further.

Guidance

The volume guidance for Cliffs’s Australian business is 11 million tons for 2015. The cash cost guidance is $35–$40 per ton. This is mainly due to the favorable Australian dollar to the US dollar exchange rate.

It’s also important to note that investors who don’t want to invest in individual companies can invest in ETFs such as the SPDR S&P Metals and Mining ETF (XME), which gives diversified exposure to the metals and mining space. CLF forms 3.4% of XME.

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