Cliffs’ Asia Pacific Iron Ore May Struggle to Remain Cash Neutral



Asia-Pacific iron ore

Cliffs Natural Resources’ (CLF) current direct exposure to the seaborne iron ore trade only remains in its APIO (Asia–Pacific iron ore) division. Management wants to exit this division and region as soon as possible. The remaining life left for this operation is less than three 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 (VALE), and Fortescue Metals Group (FSUGY). Vale forms 2.9% of the iShares MSCI Brazil Capped ETF (EWZ).

The seaborne iron ore trade has been hit hard by a supply glut from these players along with weak demand from China. The benchmark seaborne iron ore prices fell by 39% in 2015.

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  • The sales volumes for APIO in 4Q15 were 2.9 million tons, which is flat compared to 4Q14.
  • Cliffs expects the 2016 sales volume for APIO to be 11.5 million tons, which is also flat year-over-year (or YoY). The product mix is expected to be 50% lump and 50% fines.
  • The management commented that out of 11.5 million tons, 9 million tons will be mined while the remainder will be sold from company’s work-in-progress inventory. This should improve its cash costs and lower its inventory levels.

Realized revenues

As expected, the realized revenues for the APIO division fell by 39% YoY and 14% quarter-over-quarter (or QoQ) to $33.70 per ton. This is due to the general fall in the seaborne benchmark index.

Cliffs’ management mentioned during the call that they’ll continue to operate APIO with a view of cash optimization. While the pressure is expected to continue to remain on the prices, we’ll see how the company is doing on the cost front to offset the price decline to the greatest extent possible.


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