Cliffs Natural Resources (NYSE:CLF) is one of the world's largest producers of iron ore and coal. Before the financial crisis in 2008, the coal and iron ore business was great to be in. Back then, rising energy prices boosted demand for coal, and growth in China was also creating increased demand for iron ore, which is used to make steel. Things have certainly changed as growth in China has slowed and reduced demand for iron ore. Energy prices are also nowhere near the pre-crisis highs, and cheap natural gas has created an inventory glut for coal. However, history often repeats, and the major decline in this stock might be an ideal buying opportunity for investors with a longer-term time horizon.
While China is not growing as fast as before, many analysts still see growth of about 7% for this country. China could see growth accelerate as the U.S. economy continues to improve, but more importantly, when Europe rebounds, which might take a couple more years. If China sees a real estate bubble pop or if things get worse instead of better for Europe, this would create additional downside risks for this stock. However, investors who can see a time in the future when the global economy is more robust could be very well-rewarded for buying this stock at just around $20 now. Back when the global economy was experiencing growth, this stock traded for nearly $120.
This company is a low cost producer of these natural resources, and it appears to have the financial strength to ride out the challenges facing the coal and iron ore industry. Even as coal and iron ore prices are depressed, analysts still expect this company to generate earnings of $1.81 per share this year and even more next year. This company has shown it has significant earnings power when coal and iron ore prices are not at depressed levels. Back in 2011, it reported earnings of $11.48 per share, which is something long-term investors should consider, since it is possible that industry conditions will one day improve.
The company recently reported solid financial results for the first quarter of 2013. Revenues came in at $1.1 billion, and net income was $97 million, or 66 cents per share. The company also said it expected full-year iron ore sales to increase to 21 million tons and that it continues to seek expense reductions "across the board." This is a real positive for investors, and the company appears well-positioned to remain profitable during these more challenging times, as well as for the more prosperous future that could lay ahead.
Just a few days ago, analysts at FBR Capital reiterated a "outperform" rating and set a $28 price target. With the shares now trading near $20, this could offer investors upside of roughly 40%. Analysts at JPMorgan (NYSE:JPM) recently turned even more bullish on Cliffs and set a $40 price target. That would give investors a potential gain of 100%, from current levels.
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
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.