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What Could Drive Cliffs to Stay Longer in the Asia-Pacific Division?

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Aug. 4 2016, Updated 8:04 a.m. ET

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. The remaining life for this operation is less than three years.

The APIO segment directly competes in the seaborne iron ore market with iron ore giants like 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).

Seaborne iron ore prices have held firm since the start of 2016 despite market participants calling for a downturn.

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APIO Volumes

  • The sales volumes for APIO in 2Q16 were 2.8 million tons, an improvement of 13% year-over-year.
  • The year-over-year improvement was mainly due to shipment timings as a result of port maintenance activities.
  • Cliffs maintained the 2016 sales volume for APIO at 11.5 million tons, which is also flat year-over-year. The product mix is expected to be 50% lump sum and 50% fines.

Staying for longer

Due to more stable seaborne iron ore prices, Cliffs’ realized prices for APIO also stood their ground from 2Q16. Its realized revenue per ton was $42, which is 2% higher sequentially. Even year-over-year, the decline was just 5%.

The management mentioned that a seaborne price higher than $50 per ton allows APIO to be a “healthy cash flow generator” for the company. On replying to a question, the management mentioned that if the seaborne prices remain in the $50–$60 per ton range, they could continue in the region for another four to five years. If the prices were to remain still higher, the company could also think of staying longer by spending some capital. That would, however, depend on how much higher prices are and management’s confidence.

In the next part of this series, we’ll look at Cliffs’s cost-cutting efforts.

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