What Could 2Q16 Mean for Cliffs’ Asia Pacific Division?



Asia Pacific Iron Ore division

Cliffs Natural Resources (CLF) will operate its Asia Pacific Iron Ore (or APIO) segment until it’s sold out. 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).

Seaborne iron ore prices have been resilient since the start of 2016. Due to more stable seaborne iron ore prices, Cliffs’ realized prices for APIO stood their ground in 1Q16. Its realized revenue per ton was $41.20, which was 22% higher sequentially. Even year-over-year, the decline was just 4%. Strong imports from China (YINN) (FXI) amid higher steel prices is helping seaborne prices.

Average benchmark seaborne iron ore prices have risen 15% in 2Q16 sequentially. So realized prices for the APIO segment are expected to be higher than the 1Q16 price of $41.20 per ton.

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More reduction in costs

On the other hand, costs could benefit from the depreciating Australian dollar against the US dollar. While cash costs per ton for the APIO segment were $34.30 per ton in 2Q15, they were just $26.90 per ton in 1Q16. The reduction was mainly due to reduced mining and administrative costs.


Cliffs expects 2016 sales volumes for its APIO segment to be 11.5 million tons, which is flat year-over-year (or YoY). The product mix is expected to be 50% lump and 50% fines.

Management commented that of 11.5 million tons, 9 million tons will be mined, and the remainder will be sold from the company’s work-in-progress inventory. This should improve the company’s cash costs and lower its inventory levels.

However, investors should note that while there is a limited scope for cash improvement in this division apart from currency depreciation, the downside to seaborne prices could be substantial.

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). XME gives diversified exposure to the metals and mining space. CLF forms 3.6% of XME.


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