How Analysts View CLF’s Financial Leverage Trends in 2017 and Beyond



Financial leverage

Cliffs Natural Resources’s (CLF) new management has been trying to reduce its debt in earnest since it took over in August 2014. Its management maintains that its top priority for proceeds from any source is to retire its debt.

Cliffs Natural Resources announced several measures such as offering shares and an offering of senior notes on February 10, 2017. These measures are intended to reduce the company’s debt and to push its debt maturities farther out.

Cliffs Natural Resources’s (CLF) net debt fell 23% in 2016 to ~$1.9 billion at the end of 2016. Analysts estimate that CLF’s net debt should fall by another 39% between 2016–2017.

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Net debt-to-forward EBITDA ratio

The net debt-to-forward EBITDA[1. 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 Natural Resources had a net debt-to-forward EBITDA ratio of 9x, which is very high in a depressed commodity price environment. The ratio improved significantly to 5.2x at the end of 2016. According to analyst estimates, this is expected to improve further to 1.7x by the end of 2017.

This improvement is partly due to improving EBITDA estimates and falling debt. Other US (VTI) steel companies (SLX) with high financial leverage—including 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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