Asia-Pacific Iron Ore division
Cliffs Natural Resources’ (CLF) current direct exposure to the seaborne iron ore trade is in its APIO (Asia-Pacific Iron Ore) division. The remaining life for this operation is close to four 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 (EWZ).
Seaborne iron ore prices have held firm since the start of 2016 despite market participants calling for a downturn. During the company’s 2Q16 earnings call, Cliffs’s CFO (chief financial officer) P. Kelly Tompkins said that a seaborne price higher than $50 per ton allows APIO to be a “healthy cash flow generator” for the company.
The election of Donald Trump as the next US president and his infrastructure-friendly policies have boosted commodities, including iron ore. Seaborne iron ore prices reached a two-year high of $79 per ton in the aftermath of the election. This prompted speculators to dive in, which further spiked prices.
Almost all market participants, including BHP and RIO, agree that iron ore prices have a downside from here as fundamentals in the form of higher supply start kicking in for 2017. In the short-to-medium-term, however, higher prices provide a nice tailwind to Cliffs’s APIO division.
Cliffs Natural Resources has a 2016 sales volume guidance for APIO of 11.5 million tons, which is flat year-over-year. The product mix is expected to be 50.0% lump sum and 50.0% fines. During the 3Q16 earnings call, Cliffs Natural Resources’ CEO (chief executive officer) Lourenco Goncalves said the company will continue to operate APIO through the four years of its remaining mine life.
Goncalves said, “To the extent we locate more saleable or in pricing remains constructive, this could modestly increase.” If prices remain firm, Cliffs might extend the mine life at its APIO operations.