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Cliffs’ Asia-Pacific: Will Strong Seaborne Iron Ore Prices Lead to Mine-Extension?

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Asia-Pacific Iron Ore division

Cliffs Natural Resources’ (CLF) current direct exposure to the seaborne iron ore trade takes place in its APIO (Asia-Pacific Iron Ore) division. But the remaining life for this operation is only three and a half years.

The APIO segment directly competes in the seaborne iron ore market with iron ore giants like BHP Billiton (BHP), Rio Tinto (RIO), Vale (VALE), and Fortescue Metals Group (FSUGY). Vale makes up 2.9% of the iShares MSCI Brazil Capped ETF (EWZ).

Notably, seaborne iron ore prices have held firm since the start of 2016 and in 2017 year-to-date, despite market participants calling for a downturn.

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APIO volumes

The sales volumes for APIO in 4Q16 totaled 2.9 million tons, which represents a 1% rise YoY (year-over-year), mainly due to the size of vessel shipments. Cliffs (CLF) expects its 2017 sales volume for APIO to be 11.5 million tons, which would be flat YoY. The product mix is expected to be a 50% lump sum and 50% fines.

Realized prices

Due to more stable seaborne iron ore prices in 4Q16, Cliffs Natural Resources’ realized prices for APIO showed marked improvement. At $57.3 per ton, prices were 34% higher sequentially and 70% higher YoY. Higher iron ore prices drove $60 million in adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) for 4Q16. This is the strongest performance from this segment in the past ten quarters.

During the 4Q16 earnings call, while addressing a question about the remaining mine life of the operation, Cliffs Natural Resources CEO Lourenco Goncalves stated: “We continue to develop tracts of land, continue to mine in adjacent areas that we can get material and process material and bring the material to the port of Esperance and sell to good clients. So, as long as there is [an] economic reward to mine, as long as the price level is sane and it’s justifiable to continue to drill and explore in Australia, we will do it.”

In the next part, we’ll look at Cliffs Natural Resources’s cost-cutting efforts.

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