Why Were Revenue Estimates for Cliffs Revised Upwards?


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

Revenue estimates

Revenue estimates from analysts are a proxy for the volumes sold multiplied by the prices received for a mining company. Wall Street analysts covering Cliffs Natural Resources (CLF) are projecting sales of $2.0 billion for 2016 and $2.3 billion for 2017, which implies a revenue change of 1.1% year-over-year (or YoY) in 2016 and 11.0% in 2017. Cliffs’s actual revenue fell 41% YoY in 2015.

The projection for 4Q16 is $672 million, which implies a very impressive growth of 41% YoY. Most of this expected growth is due to an improvement in iron ore prices and volumes between 4Q15 and 4Q16.

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Revenue catalysts

As steel prices recovered in 2016 due to trade cases, analysts have become more optimistic about the US steel sector. Donald Trump’s win in November acted as another positive catalyst. His stance on protectionism and promises for infrastructure spending went a long way in boosting analyst sentiment towards the US steel sector.

In 2016, Cliffs announced that it was reopening its previously idled United Taconite plant two months early, in August. To reflect this, it also upgraded its sales and production guidance. Its sales guidance now stands at 18 million tons, 0.5 million tons higher than its previous guidance. The company also signed a new agreement with ArcelorMittal (MT) for ten years. Many analysts had anticipated the renewal of the ArcelorMittal (MT) contract by Cliffs, while some analysts had to revise their forecasts.

More upside?

Analysts have increased their one-year forward revenue projections by 9% in the last year. Investors should note that US steel imports could keep falling due to anti-dumping duties. This fall would lead to US (SPY) steelmakers such as U.S. Steel Corporation (X), AK Steel (AKS), and ArcelorMittal (MT) operating at higher capacity utilizations. In this scenario, Cliffs’s volumes and pricing could see further upside.


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