What Could Drive Free Cash Flow for Cliffs Natural Resources?


Jul. 11 2016, Updated 10:06 p.m. ET

Free cash flow

Cliffs Natural Resources’ (CLF) higher debt compared to its earnings ability has been one of the major factors weighing down its stock. Most of its non-core assets have been disposed of without any significant cash inflows. The only non-core asset left is the Australia iron ore division, which is less likely to get sold due to its short mine life of about three years and the weak seaborne price fundamentals.

In such a scenario, the company will most likely have to rely on internal cash flow generation to reduce its debt. It’s in this context that we’ll discuss Cliffs’s free cash flow (or FCF) generating ability.

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FCF generation is not enough

Cliffs’s consensus FCF estimate is $152 million for 2016 as compared to a -$43 million in 2015. Due to strong steel prices in the US, analysts have increased their FCF estimates. The estimates for 2017 are $157 million.

As we’ve noted previously in this series, the company’s earnings estimates might have more upside, which could also lead to an upside to its FCF estimates.

Investors should note that Cliffs’s debt maturities are still comfortable with major debt repayments beginning in 2018. However, the company needs to reduce its financial leverage, so the biggest investor concern is addressed in this depressed commodity price environment.

BHP Billiton (BHP) (BBL), Rio Tinto (RIO), and Vale (VALE) are also facing cash flow woes due to lower iron ore prices. Cliffs forms 3% of the SPDR S&P Metals and Mining ETF (XME). XME provides diversified exposure to this sector.


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