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Analysts’ Views on Cliffs’s Net Debt in 2017

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Jan. 31 2017, Updated 6:55 p.m. ET

Financial leverage

Cliffs Natural Resources’ (CLF) rise in debt has put immense pressure on its stock price. The company’s management has been trying to reduce its debt since it took over in August 2014. It maintains that its top priority for the proceeds from any source is to retire its debt. As the higher financial leverage has been the major burden on its stock for the last few years, it’s important to know what analysts expect for the company’s debt.

Analysts estimate that Cliffs’s net debt fell 18% between 2015 and 2016. Analysts forecast a further reduction of 11% and 10% for 2017 and 2018, respectively.

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Net-debt-to-forward EBITDA ratio

The net-debt-to-forward EBITDA (earnings before interest, tax, depreciation, and amortization) ratio shows the number of years it would take a company to eliminate its net debt paid solely out of its EBITDA. At the end of 2015, Cliffs had a net-debt-to-forward EBITDA ratio of 9x, which is very high in a depressed commodity price environment. According to analyst estimates, this ratio is expected to improve significantly to 5.7x at the end of 2016 and 3.2x at the end of 2017, partly due to improving EBITDA estimates and falling debt. Other US (VTI) steel companies (SLX) with high financial leverage, such as ArcelorMittal (MT), AK Steel (AKS), and U.S. Steel Corporation (X), have also made successful efforts to reduce their debt levels.

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