- Cliffs Natural Resources is focusing on cost reductions and is also suspending operations as it tries to stay afloat in a weak iron ore pricing environment.
- Iron ore prices are expected to decline further this year, while credit tightening measures in China will further hurt Cliffs.
- The weakness in coal pricing and an unattractive valuation make an investment in Cliffs even more risky.
Mining and natural resources company Cliffs Natural Resources (NYSE:CLF) is enduring tough times in 2014 as weak iron-ore prices have crippled the company. Cliffs has been in a tough spot for a pretty long time now, and it had to cut its dividend by a massive 76% last year. In addition, Cliffs started selling shares to repay its debt. Since then, Cliffs has focused on cutting costs in order to set its house in order.
Focus on cost cutting
The company is on a cost cutting spree and has indefinitely suspended its Chromite project. This would reduce its 2014 Chromite spending by $45 million. Apart from this, there are plans of cutting 2014 capital spending by over 50%. Moreover, Cliffs has idled its underperforming assets, paid down debts, increased liquidity, and has set further cost reduction targets for this year. It has managed to decrease costs in both Asia-Pacific iron ore and North American coal so far as a result of its initiatives.
Looking ahead, Cliffs believes that growth will come after the successful demonstration of improved performance with its currently-owned assets. Cliffs is evaluating a range of options to best use its capital to generate attractive return rates and drive long-term shareholder value.
In addition, an improvement in overall economic conditions in the U.S. in 2014, supported by higher auto production, a rise in building construction, and other fundamentals are expected to support domestic steel production, and increase related demand for steel making raw materials. As such, demand for iron ore could increase this year.
On the other hand, China, which is the world's second-largest economy, is expected to see strong commodity demand this year, including iron ore. However, recent credit tightening measures in China have constrained growth in the near-term. But, Cliffs believes that these reforms would support a stable economy and steady demand for steel making raw materials in the long run.
However, the overall outlook for iron ore in 2014 is not promising. As reported by Bloomberg, Australia, the largest exporter of iron ore, has cut its price estimate for this year and predicted a further drop in 2015. According to Bloomberg -
"Iron ore fell into a bear market this month on speculation that slowing economic growth and credit concerns in China, the biggest buyer, may curb the expansion in demand just as global supply increases. BHP and Rio Tinto (NYSE:RIO) predict lower prices this year after miners spent billions of dollars to boost output. Banks from Citigroup Inc. to Standard Chartered Plc predict a surplus, and Goldman Sachs Group Inc. listed iron ore among its least-preferred commodities for 2014."
Hence, Cliffs might not find much solace in the near future as the iron ore market remains depressed.
Focus on efficiency
But, Cliffs is focusing on maximizing its free cash flow and reduce net debt. Accordingly, it will engage in minimal capital spending at projects such as Bloom Lake until it finds the option that would extract the highest value for shareholders. The company is examining different alternatives for the asset, including a range of outcomes from strategic partnerships to a sale.
Cliffs aims at reducing Bloom Lake's capital and operating cost as much as possible. Bloom Lake's production volume has averaged over 500,000 tons of concentrate per month. These volumes are still below expectations and cash cost is unacceptably high, so maintaining production is a critical step.
Cliffs has also announced the idling of its Wabush Scully Mine, owing to several unsuccessful attempts to lower cost, improve productivity, and increase long-term profitability. This would lead to approximately $100 million in cash costs in 2014. Also, ECIO sales volumes are dropping. They decreased 6% to 2.2 million tons in Q4 from 2.3 million tons in the prior year period, primarily driven by December's extremely cold weather.
Over the past year, Cliffs has conducted a significant amount of work to identify cost improvement efficiencies in various systems, processes, and activities. Now, in 2014, it expects the implementation of these efficiencies to materialize into results. These efficiency improvements have helped it offset inflation in a number of its inputs from labor to transportation rate. And, the weaker Australian dollar is also favorably impacting its cost.
Negatives to note
In 2014, Cliffs will continue to evaluate the economic implications that lower coal pricing could have on this business. But there aren't many positives on this front either. As reported by Reuters -
"Top global miner BHP Billiton sees little improvement in coal prices in the near term as the market is likely to remain oversupplied for some time, its coal chief said on Wednesday.
Prices for metallurgical coal have slumped to around $105 a tonne from more than $300 in 2009, while thermal coal prices have dropped to $75 from highs around $130 in 2011, which has led producers to shut some mines, axe jobs and shelve projects.
At the same time, miners have boosted output at some mines, looking to lower production costs per tonne, while BHP itself opened a new mine a year ago and has another due to start producing this year, exacerbating the glut.
"It's tough out there. It's hard to see any relief in the short-term, certainly when you've got such strong supply," BHP Billiton coal president Dean Dalla Valle told reporters after a business lunch."
Stay away from Cliffs
So, the outlook for Cliffs doesn't look bright at all right now, especially considering that the company has a massive debt burden of $3.26 billion while its cash position is quite weak at just $335 million. Also, a look at the P/E ratios indicates that Cliffs' earnings are expected to decline. While its trailing P/E ratio is 8.80, the forward P/E ratio is quite high at 18.63. Hence, considering all these factors, I think it is best to stay away from Cliffs.