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Is The “Clock Ticking” for Cliffs’ Potential Coal Asset Buyers?

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Coal assets sale

Cliffs Natural Resources (CLF) has classified its coal assets as “held for sale” as of March 31, 2015. While Cliffs was hopeful of striking a deal on the sale of its coal assets in the near term in 2Q15, that view has changed now. Since 2Q15, several coal companies have filed for bankruptcy and some deals were offered at rock-bottom prices. Cliffs’ potential buyers were distracted by these sales. Two major US (DIA) metallurgical coal producers, Alpha Natural Resources and Walter Energy, filed for bankruptcy during 3Q15, while other producers, including Peabody Energy (BTU), Cloud Peak Energy (CLD), and Consol Energy (CNX), are reeling under low commodity prices. All major coal companies are part of the iShares Russell 3000 ETF (IWV).

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New operating mine plan

Cliffs’ management has also come up with a new mine plan for operating the longwall coal mine. Management stated that as close to half of the costs associated with operating this mine are related to future development, it will be eliminating the labor and operating costs associated with future mine development. They’ll focus on mining and selling the coal from the longwall panels already developed. This should drive a significant reduction in cash costs, with expected costs to halve over the next six months. Cliffs’ management also expects the EBITDA (earnings before interest, tax, depreciation, and amortization) and free cash flow to turn positive through 2016 as they continue pursuing the sales of these non-core assets.

What does this mean for potential buyers?

While these changes will reduce the operating costs for Cliffs’ North American coal operations, if the mines are shut down at the end of currently developed panels, it could potentially mean significant restart costs for the buyers of these assets. As stated by Cliffs’ management, “the clock is ticking for the buyers.”

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