Cliffs Natural Resources Inc. (CLF) reported 4th quarter and fiscal year 2012 earnings on February 12th and the announcement included $2 billion in impairment charges taking in the 4th quarter lending to a loss of $11.36 per share. However excluding one time charges, the company earned 62 cents per share, ahead of analyst estimates for 51 cents per share in the quarter. Revenue for the year was $5.9 billion, down 11% year-over-year driven by a 23% decrease in seaborne iron ore pricing in 2012 over 2011. The board also approved a 76% reduction in the dividend to $0.15 per quarter. This move was aimed at preserving capital as cash from operations fell to $239 million in the quarter compared with $743 million a year ago. Cliffs Natural Resources also announced a public offering of 9 million shares of common stock and 20 million depository shares each representing a 1/40th interest in new mandatory convertible preferred stock. Proceeds of this offering will be used to repay the term loan facility.
Going forward, I believe the company is committed to controlling costs and that the demand picture for iron ore remains strong. Deleveraging the company is the right move at this time as volatility in pricing of iron ore and coal is only being amplified by the company's high degree of leverage. The company's future growth is in developing the Bloom Lake mine in Canada and it raised capex guidance from 2013 from $700 to $800 million, to $800 to $850 million on the back of future development of that mine. One important goal will be to reduce costs at that mine, when Cliff's acquired that mine in 2011 it had forecasted cash costs getting under $50 per ton, and currently the company is expecting cash costs of $85 to $90 per ton in 2013.
When you look at the valuation of Cliffs Natural Resources, there is not a whole lot to be excited about. The forward P/E of 11.62 is higher than Vale S.A. (VALE) and Rio Tinto plc. (RIO) at 8.61 and 9.05 respectively. Looking at the EV/EBITDA ratio, Cliffs has the highest in the group and its dividend yield now stands at only 1.8%. The biggest questions facing Cliffs Natural Resources are the strength of the global economy, specifically iron ore prices, and its management doing enough to turn the company around.
At this point the company is taking big steps to improve its capital structure and is increasing its capex spending, hoping to turn the corner and put this company's on the road to recovery but it might still be too early to buy in. The only place on the chart that could be interesting to start a position would be if the stock holds at around $28 per share. At that point the new dividend yield would be back up over 2% and the stock could form a bottom there. Otherwise there is no reason not to look at larger iron ore miners such as Vale instead of Cliffs Natural Resources. Not only is Vale more diversified it is also trading a discount to Cliffs and has a better yield.
Vale is the world's largest producer of iron ore, furthermore it also has a substantial manganese, nickel and potash business. With strengthening demand for iron ore and improving prices, now could be a good time to look at investing in this space. After bottoming this fall, prices of iron ore have been on the rise and investing in this trend though the more stable Vale makes sense now. I believe Vale has reduced risk, a beta of 1.63 compared to 2.28, and it is also comparatively cheaper. Additionally, Vale also appears to have found a bottom in the $16 to $17 range that is much more substantial then the bottom in Cliffs Natural Resources.
Data sourced from: Company filings, and Yahoo!Finance. Chart from: Freestockcharts.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.