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What Could Cliffs Do Going Forward to Reduce Financial Leverage?

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Financial leverage

Cliffs Natural Resources’ (CLF) rising debt has put immense pressure on its stock. 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.

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Liquidity situation

Cliffs ended 3Q16 with $132.0 million in cash and $247.0 million in asset-backed lending facilities. These figures amount to $379.0 million in total liquidity. The company outlined the receipts of proceeds from equity issuance and the corresponding repayment of 2018 notes as the two major liquidity events in the quarter.

Reduction in debt

During a recent interview, Cliffs Natural Resources’ CEO (chief executive officer) Lourenco Goncalves maintained that the company’s priority will be to use cash to pay down debt. He also said the company isn’t planning to issue any more equity at this point, as it would lead to a dilution of equity. Since seaborne and US domestic iron ore prices remain buoyant, the company could be planning to accumulate sufficient cash organically to reduce its debt.

It’s worth noting that the company raised $300.0 million in equity in 3Q16. It used the proceeds for general corporate purposes such as repaying debt, particularly its notes due in 2018. With the help of this equity, the company reduced its net debt to $2.0 billion at the end of 3Q16 compared to $2.5 billion at the end of 2Q16. That also reduced its net expenses $17.0 million annually.

Cliffs Natural Resources’ next major repayment comes due after 2020, giving it ample time to accumulate cash to reduce its financial leverage.

Other US (VTI) steel companies with high financial leverages, including ArcelorMittal (MT), AK Steel (AKS), and United States Steel (X), have also made successful efforts to reduce their debt levels.

The recent reduction of debt in a difficult market environment seems to have acted as a major tailwind for Cliffs Natural Resources stock.

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