What Could Drive Cliffs’s Free Cash Flow in the Future?


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

Free cash flow

Cliffs Natural Resources (CLF) has higher debt than earning ability, and this has been one of the major factors weighing down its stock for the last few years. Most of its non-core assets have been disposed of without any significant cash inflow.

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

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FCF generation accelerating

Cliffs’s FCF estimate is $261 million for 2016, compared with the FCF of -$57 million reported in 2015. Due to strong steel prices in the United States, analysts have increased their FCF estimates. The estimate for 2017 is $188 million. As we’ve discussed previously in this series, the company’s earnings estimate might have more upside, which could also lead to an upside to its FCF estimate.

Investors should note that Cliffs’s debt maturities are still comfortable, with major debt repayments beginning in 2020. However, to address the biggest investor concern in this depressed commodity price environment. the company needs to reduce its financial leverage.

BHP Billiton (BHP) (BBL), Rio Tinto (RIO), and Vale (VALE) were also facing cash flow woes due to lower iron ore prices in 2015, which were somehow taken care of as commodity prices rallied in 2016. Cliffs forms 3% of the SPDR S&P Metals and Mining ETF (XME).


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