By Joshua Reider
Cliffs Natural Resources, Inc. (CLF) has fallen dramatically in the past year, but may finally be poised for a recovery. Cliffs is a smaller mining and natural resources company, with a market cap of around $2.99 billion that produces iron ore and metallurgical coal. Cliffs' stock has an extremely high short interest, and recently bounced off of 52-week lows. Iron ore prices have risen around 15% in the past two months, which should help Cliffs' revenue in the coming quarters. While Cliffs had been hit hard by the reduced demand for global steel production, there may be some positive signs on the horizon for the company.
Cliffs recently released its 2nd-quarter 2013 earnings. Consolidated revenues were $1.5 billion, down 6% from the prior-year quarter. Operating income dropped 28% to $262 million. The company reported a profit of $146 million, $0.82 EPS, down from $258 million, or $1.81 EPS for the prior-year quarter. The stock has a current dividend yield 3.04%. Cliffs had been paying a dividend as high as $0.625 per share per quarter, but reduced that dividend in order to preserve cash. Since 2009, the lowest quarterly dividend paid has been $0.04. The Board appears to adjust the quarterly dividend regularly based upon the health and cash flow of the company.
Cliffs' stock price has taken a massive dive over the past year, down over 50%. Revenues were hurt by drops in the prices of iron ore and coal. Shares hit a 52-week low of $15.41 on July 3, but have recovered nicely, up nearly 19% in the last month to around $20.58. The stock chart showed near-term resistance around $20, which the price recently broke through on moderate volume.
Cliffs trades more volatile than the overall market, with a beta of 2.51. As of July 15, there were 55.9 million shares being sold short, on a daily average volume of 7.2 million shares. This represents an extremely high short float of 36.72%, with a short ratio of 5.62. The number of shorted shares has been growing steadily on a monthly basis since August of 2012.
With such a high short interest, there is a real possibility of a short squeeze on positive news for Cliffs. The increased iron ore prices should boost earnings, as iron ore represented 72% of Cliffs' revenue in 2012. With such a high short interest, better revenue in the coming quarters could send the stock up quickly.
Notwithstanding the poor performance of the stock in the past year, some hedge funds are maintaining relatively large positions in Cliffs. We track quarterly 13F filings from hundreds of hedge funds and other notable investors. This information can be useful in developing investment strategies for individual investors. For example, we found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year.
One prominent hedge fund in the news recently, albeit under undesirable circumstances, holds a large stake in Cliffs. Steve Cohen and SAC Capital (see his favorite equity plays here) held over 3.5 million shares at the end of March, according to the fund's most recent 13F filing. As has been widely reported, SAC and Cohen have been under a cloud due to indictments from the SEC for insider trading. However, SAC is not alone in its position in Cliffs; Ken Griffin and Citadel Investments (see what stocks the billionaire is holding) also held over 950k shares at the end of March.
Cliffs has some larger companies as competition in the sector. The main competitor is Rio Tinto PLC, ADS (RIO), with a market cap of $63.28 billion, and a current dividend yield of 4%. Rio Tinto had net earnings of $9.3 billion in 2012, down from earnings of $15.54 billion in 2011. It was reported earlier in the year that the company was revisiting expansion plans for its iron ore operations as a result of lower prices for the commodity. Too much expansion of capacity for the export of iron ore could have a negative impact on profits for mining companies by driving down prices for the commodity.
Rio's share price is down 19.71% YTD, but up a solid 12.56% in the last month. The Company is trading at a forward P/E ratio of 8.32, versus a forward P/E ratio of 13.79 for Cliffs.
Vale S.A., ADS (VALE) is another larger competitor, with a market cap of $70.75 billion. Similar to Cliffs, Vale recently bounced off a 52-week low of $12.84. The stock hit a 52-week high of around $21.8 in January of this year, and is up 6.29% in the last month. However, Vale has a smaller dividend yield of only 1.11%. Vale had solid earnings of $3.2 billion for the Q1 of 2013, an increase of $1.2 billion from Q4 of 2012.
While Cliffs appears poised for a possible rise, there are some factors to consider. Unlike Vale and Rio Tinto, Cliffs is less diversified, and is therefore more impacted by fluctuations in the prices for coal and iron ore. Vale produces copper, while Rio Tinto produces aluminum, copper and diamonds, thereby providing alternative revenue streams for Cliffs' competitors.
Further, if Rio Tinto continues its production expansion for iron ore, this could directly impact Cliffs' revenues by hurting commodity prices. Still, the rise in iron ore prices, combined with the positive price performance in the past month could be a harbinger of things to come for Cliffs. If the shorts need to start covering their positions, the share price could head up in a hurry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article is written by Insider Monkey's writer, Joshua Reider, and edited by Jake Mann. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.