Iron Prices Will Lead Cliffs Natural Resources Higher

| About: Cliffs Natural (CLF)

The mining industry(NYSEARCA:XME) has been in a freefall this year, lead by lower commodity prices and slowing demand for iron in China. For Cliffs Natural Resources (NYSE:CLF) though, we have reached oversold territory. Using industry average statistics, balance sheet improvements, and current iron prices; we can see that this North American mining leader is due for a trend reversal.

Financial Strength and Profitability

There are three prominent figures that indicate Cliffs Natural Resources is not in such a dire straight as the media portrays. The first being the current ratio. Cliffs has a current ratio of 1.66x. This is great news because it means it is able to service its short-term expenses like account payable and operations. This ratio actually puts Cliffs in the top 50% of mining companies when evaluating competitors. The second is gross margin. Cliffs currently has a gross margin of 19.28%. This is higher 61% than its competitors. This is significant because as the Iron market fluctuates, higher margin companies are going to be able to absorb this type of volatility, should prices head lower.

Balance Sheet Improvements

Improvements in the balance sheet are essential for any company that directly correlates with commodity prices. Controlling expenses and servicing debt has been a cornerstone for mining companies past and present. Although Cliffs has dug itself into a hole, recent improvements are encouraging.

Over the past four quarters, Cliff's has seen a -18.56% in long-term liabilities. Seen as one of the heavier burdens on the balance sheet, this is a great improvement. A -8.79% decrease in total liabilities is noteworthy as well. In contrast, I included Cliffs current ratio to show improvements the mining leader has made to ensure it can service its short-term debt and continue operations.

Iron Prices

The following chart shows the correlation between stock price and iron ore prices. Based on the past correlation, we can see that the two figures have diverged. Iron Ore spot prices have stayed above $130 for four straight months, and have climbed from $99.47 in September of 2012. This indicates a possible oversold valuation for Cliffs, especially in the near-term. $120/tonne has long been seen as the floor price for miners to stay profitable in the long term. Most recent iron spot prices of $116/tonne indicate short-term weakness in the metal, but a 4% rally of the metal from $111/tonne indicates this may be the bottom for now.

To further show this oversold indicator, I have added quarterly profit to this chart below.

The chart may be slightly misleading, so I have included the past four quarterly EPS below:

2nd 2012: $1.81

3rd 2012: $0.59

4th 2012: $-11.36

1st 2013: $0.66

The past trends show iron ore prices and Cliffs stock price moving together. Recently, this has not been the case, as iron ore prices moved higher since September, the stock has continued to struggle. A number of downgrades and negative press could have been the main culprit holding share price down. With the following improvements and iron prices off of 52-week lows, I expect the next couple quarters for Cliffs Natural Resources to be pleasantly surprising to investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.