What Are the Earnings Drivers for Cliffs Natural Resources?



Revenue drivers

The factors that are impacting Cliffs Natural Resources (CLF) are quite different than those impacting global iron ore players Rio Tinto (RIO) and BHP Billiton (BHP). That’s because most of Cliffs’s revenues are tied to the domestic US (QQQ) steel market. US steel prices and orderbooks for customers are the major revenue drivers for Cliffs’s US division.

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Analyst projections

Revenue projections from analysts are a proxy for the volumes sold times the prices received for a mining company. Wall Street analysts covering Cliffs Natural Resources (CLF) are projecting sales of $593 million for 3Q16 and $2.0 billion for 2016.

Analysts have increased their revenue projections since the start of the year, from ~$1.8 billion to ~$2.0 billion for 2016. The revenue projection implies a change of 3.0% year-over-year. Cliffs’s actual revenues fell 41.0% year-over-year in 2015.

Cliffs has also upgraded its sales and production guidance. If steel prices remain lower for longer, the long-term analyst forecasts might have a downside.

Earnings estimates

Analysts have consistently revised their EBITDA (earnings before interest, tax, depreciation, and amortization) projections upward for Cliffs. Its EBITDA has been revised upward by an impressive 90.0% since the start of the year to $465 million for the next four quarters.

The upward revision is mostly due to higher steel prices and certainty regarding futures volumes after a new contract with ArcelorMittal (MT). Cliffs’s better-than-expected cost-cutting efforts might also have encouraged analysts to increase their EBITDA estimates. You should watch steel prices in the domestic US steel market to get a sense of Cliffs’s future earnings.

Any weakness in steel prices could lead to a downward revision of earnings estimates for US steel companies such as Cliffs, United States Steel (X), AK Steel (AKS), and ArcelorMittal (MT).


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