What Factors Could Drive CLF’s Free Cash Flow Going Forward?


Apr. 24 2017, Updated 10:36 a.m. ET

Free cash flow

Cliffs Natural Resources (CLF) has higher debt than earning ability, which 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 typically relies on internal cash flow generation to reduce its debt. It’s in this context that we’ll discuss Cliffs Natural Resources’s ability to generate FCF (free cash flow).

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FCF generation accelerating

Cliffs Natural Resources’s (CLF) CEO, Lourenco Goncalves, mentioned during the 4Q16 earnings call that the company expects to generate $550 million of free cash flow in 2017. This would also help the company handle its debt more smoothly.

Analysts are expecting FCF of $508 million for 2017, compared with FCF of $234 million reported in 2016. Due to strong steel prices in the United States, analysts have increased their FCF estimates. The estimate for 2018 is $382 million.

Downside ahead?

As we’ve discussed previously in this series, Cliffs Natural Resources’s (CLF) earnings estimate might see more upside due to a weaker iron ore price outlook, which could also lead to a downside to its FCF estimate. The company’s management had guided for FCF and earnings for 2017 on the basis of average prices of iron ore and steel in January 2017.

Although iron ore prices are clearly below that level with a potential downside, steel prices might also not present much upside if President Donald Trump is not able to push through his agenda.

Investors should note that Cliffs Natural Resources’s debt maturities are still comfortable, with major debt repayments now pushed to 2025. BHP Billiton (BHP) (BBL), Rio Tinto (RIO), and Vale (VALE) could also start facing cash flow woes due to lower iron ore prices in 2017 and beyond. Cliffs Natural Resources forms 3% of the SPDR S&P Metals and Mining ETF (XME).


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