Cliffs Natural Resources - Solid First Quarter Makes A Great Entry Point

| About: Cliffs Natural (CLF)

Shares of Cliffs Natural Resources (NYSE:CLF) traded with gains of nearly 15% in Thursday's trading session. The troubled mining and natural resources company reported its first quarter results on Wednesday, April 24th after the close.

First Quarter Results

Cliffs Natural Resources generated first quarter revenues of $1.14 billion, down 6% on the year before. Lower revenues were mostly to blame to a 10% decline in global iron ore sales volumes. Revenues fell short of consensus estimates of $1.19 billion.

Net income for the first quarter came in at $97 million, or $0.66 per share. This compares to last year's earnings of $2.63 per share. Adjusting for special items, the earnings decline is less worrisome. Adjusted earnings per share came in at $0.60 per share vs. last year's earnings of $0.85 per share. While revenues fell short of estimates, earnings comfortably beat consensus estimates of $0.45 per share.

CEO and Chairman Joseph Carrabba commented on the earnings:

"We are headed in the right direction in 2013. During the first quarter, we took deliverable measures to reduce our balance sheet leverage and improve our cash position. Also, our operating teams are taking a pragmatic approach to reduce operating costs across the board. We expect these initiatives will position the Company to successfully manage through volatile pricing environments."

Performance Of Iron Ore Activities

The U.S. Iron ore business reported sales volumes of 3.1 million tons, down from 3.4 million last year due to a customer bankruptcy. Revenues rose by 2% to $120 per ton, resulting in a $2 increase in sales margins to $51 per ton.

The Eastern Canadian activities sold 1.9 million tons, roughly unchanged from last year. Revenues increased by 13% to $132 per ton over the past quarter. As cash costs fell by 4% to just under $100 per ton, profitability of the unit increased a lot. Cash margins came in just above $10 per ton, which compares to a loss of $8 last year.

The Asian activities reported sale volumes of 2.3 million tons, down 17% on the year before. Revenues fell 9% to $117 per ton, while cash costs increased by a dollar to $75 per ton. All in all, cash margins fell sharply from $45 to $27 per ton.


Cliffs Natural Resources ended its first quarter with $287 million in cash and equivalents. The company operates with $3.4 billion in total debt, for a sizable net debt position of $3.1 billion. Yet Cliffs has another $1.25 billion of liquidity available under its revolving credit facility.

For the full-year 2012, Cliffs generated annual revenues of $5.9 billion. The company reported a $900 million loss after taking "one-time" charges of $1.05 billion.

Factoring in a 12% jump in Thursday's trading session, the market currently values the company around $3.0 billion. This values the company's equity at 0.5 times annual revenues and 20 times annual earnings, backing out the $1.05 billion special charge over the past year.

Cliffs has taken measures to repair the balance sheet. The company issued equity, thereby raising $1 billion during the first quarter, in order to pay down some of its debt. The company furthermore cut its quarterly dividend by 76% to $0.15 per share, for a current dividend yield of 2.8%.

Some Historical Perspective

Shareholders in Cliffs Natural have been on a roller coaster ride over the past decade. Shares were trading at merely $2 in 2003 and peaked around $100 in 2008 amidst a global commodity boom. Shares fell all the way to just $10 in 2009, to recover again towards $100 in 2011.

Shares kept sliding to lows of $17 earlier this month, and despite Thursday's gains, are still trading 80% below last year's highs.

Between 2009 and 2012, Cliffs has more than doubled its annual revenues from $2.3 billion towards $5.9 billion over the past year. The company reported large profits in 2010 and 2011, followed by a large loss last year.

Investment Thesis

Despite Thursday's correction, shareholders of Cliffs have seen their holdings fall in value by almost 70% over the past year. Falling iron ore prices have put pressure on the prospects for miners, while the general markets are hitting fresh all-time highs.

Doubts about a slower global economy, and that of China in particular, have put pressure on copper, iron ore and aluminum prices. The lower prices put pressure on Cliffs' prospects. The company has a range of disadvantages compared to some of its competitors, including a higher cash costs for production, lack of diversification across multiple commodities and a large debt position. At the moment, Cliffs pays some $200 million per annum in interest expenses, for an effective interest rate of almost 6%.

Yet Cliffs is taking actions to combat the commodity price declines. Last month, the company announced the closure of the Wabush pellet plant in Canada, thereby pushing cash costs for the unit down by $5 per ton. However, if prices fall further, Cliff's higher cost base and weaker balance sheet make it vulnerable and less able to compete against the likes of Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).

Shares trade at historically low values, and even far below book value. Investors are simply scared of further write-downs, falling commodity prices and the sizable leverage. Yet there are some positive signs. Cliffs has raised money and cut its dividend to reduce leverage, commodity prices remain relatively healthy and the firm is cutting its production costs.

With the first signs of improvements becoming obvious, now might be the time to pick up some shares.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CLF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.