uploads///USIO_Price realization

Why Cliffs’ Downgraded Its Earnings Guidance Yet Again

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Jul. 31 2017, Updated 9:40 a.m. ET

US realized prices

As we discussed in the previous part of this series, realized prices along with volumes drive a company’s revenues.

The realized revenues for Cliffs Natural Resources’ (CLF) US Iron Ore (or USIO) unit are influenced by the demand for iron ore pellets from its customers. Industrial commodity (DBC) prices, customer mix, energy prices (USO), freight rates, production costs, and hot rolled band steel prices are among the factors influencing CLF’s realized revenues.

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Realized revenues climb

Cliffs Natural Resources’ (CLF) average realized prices during 2Q17 came in at $97 per ton, which reflects an impressive growth of 24% year-over-year and 22% quarter-over-quarter. Management had guided for substantially improved realized prices in 2Q17. Improved realizations are mainly due to the new 2017 formulas. Cliffs’s carryover tons from 2016 were also worked off during 1Q17, which led to a liftoff in realized prices in 2Q17. These improved realizations are expected to continue for the rest of the year as well.

EBITDA guidance downgraded again

Beginning in 2017, the company changed its assumptions to give its guidance based on its EBITDA.

While the company had downgraded its 2017 EBITDA from $850 million to $700 million in 1Q17, it further downgraded to $650 million in its 2Q17 results. The new guidance assumes year-to-date (or YTD) averages will continue for the rest of the year. This guidance also reflects Cliffs’ revised assumptions for pellet premiums, realization rates, and cash costs.

Management, however, made it abundantly clear during the conference call that this guidance might prove to be conservative as the YTD averages for US steel prices and iron ore prices should improve in the second half of the year. Earnings for US steelmakers such as AK Steel (AKS), Nucor (NUE), U.S. Steel (X), and ArcelorMittal (MT) are sensitive to US steel prices, which influence the contract prices for Cliffs Natural Resources.

In the next part of this series, we’ll discuss Cliffs Natural Resources’ Asia-Pacific division.

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