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Understanding Cliffs’ New Estimates: Why Are Iron Ore Analysts Second-Guessing?

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Nov. 20 2020, Updated 2:50 p.m. ET

CLF’s earnings drivers

Most of Cliffs Natural Resources’ (CLF) revenues and earnings are derived from its US (SPY) (SPX) steel division. This makes its drivers quite different from those of other seaborne iron ore players like Rio Tinto (RIO) and BHP Billiton (BHP).

Cliffs’ US division is impacted by the domestic steel market. US steel prices and order books for customers are the major revenue drivers for Cliffs Natural Resources’ US division.

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Analysts’ revenue projections for CLF

According to the consensus compiled by Thomson Reuters, Wall Street analysts covering Cliffs Natural Resources (CLF) project sales of $2.48 billion in 2017. This implies 17.6% YoY (year-over-year) growth. Similar to the downward revisions of revenues for other iron ore miners, analysts have also revised down CLF’s revenue estimates by 2.5% in the past month.

Due to the lack of future growth catalysts—and the fact that its Asia-Pacific iron ore mines are nearing the end of their lives—analysts are projecting a drop of 7.1% and 4.8% in revenues for 2018 and 2019, respectively.

EBITDA estimates

Cliffs’ EBITDA (earnings before interest, tax, depreciation and amortization) estimates for fiscal 2017 have been revised downward by 7.8% over the past two months alone. This is in line with the company’s reduction of its EBITDA guidance from $850 million to $700 million due to weaker seaborne iron ore prices and US steel prices.

According to analysts, 2017 will represent a peak in CLF’s EBITDA margins at 24.9%. The margins for 2018 and 2019 are expected to be lower at 21.1.% and 17.5%, respectively.

Since US steel prices are major earnings drivers for US steel companies, any weakness in prices could lead to a downward revision in earnings estimates for companies like Cliffs Natural Resources, U.S. Steel (X), AK Steel (AKS), and ArcelorMittal (MT).

Keep checking in with Market Realist’s Iron Ore page for the latest updates on iron ore prices and iron ore mining companies.

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