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What Could Cause an Upside to CLF’s Free Cash Flow Estimates in 2017?

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Free cash flow

Traditionally, Cliffs Natural Resources’ (CLF) debt has exceeded its earning ability, which was one of the major concerns for its investors. Most of its non-core assets were disposed of without any significant cash inflow.

As a result, it became essential for the company to generate internal cash flor to repay its debt. In this context, let’s discuss Cliffs Natural Resources’ ability to generate FCF (free cash flow).

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FCF generation accelerating

Cliffs Natural Resources noted during its 4Q16 earnings call that it is expecting to generate FCF of $550 million in 2017. Before the company released its 1Q17 results, analysts were expecting FCF of ~$500 million for 2017.

However, as Cliffs Natural Resources downgraded its EBITDA[1. earnings before interest, tax, depreciation, and amortization] guidance from $850 million to $700 million, analysts also downgraded their earnings estimates for the company.

These analysts currently expect the company to generate FCF of $390 million for 2017. Investors should note that this is still higher than the actual FCF of $234 million reported in 2016.

Is there more upside ahead?

As we’ve discussed previously in this series, one of the biggest catalysts for Cliffs Natural Resources (CLF) and its peers’ earnings lies in the import restriction into the US. A favorable outcome could encourage investors to increase their earnings estimates, leading to a potential upside to the company’s free cash flow.

In our view, Cliffs Natural Resources’ debt maturities are still comfortable, with major debt repayments now pushed to 2025. Among its peers, 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’s (XME) holdings.

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