There is a reason why in baseball three strikes are required for a strikeout. Three is a good number. One strike means nothing, two can be a mirage, but three represents a trend.
Cliffs Natural Resources' (NYSE:CLF) management team has made many mistakes, but the company has made three particularly big mistakes since 2010 that stand out the most.
The first big mistake that Cliffs' management team made was attempting to buy Alpha Natural Resources (ANR), a now-bankrupt metallurgical coal company. The management team bid nearly $120 for the now insolvent company, and it leveraged the balance sheet of the company to expand into the seaborne market levered to Asia at nearly the exact peak of the market. Even though the acquisition fell through, the fact that the management team had such horrendous foresight was telling.
The second big mistake Cliffs Natural Resources' management team made was the absurd dividend increase in early 2012, which the company had to eliminate just a year later. Cliffs significantly increased the dividend, when the company should have been raising capital and solidifying an already weak balance sheet. Instead, it focused on the short-term concerns of shareholders at the expense of bond holders and employees.
The third big mistake that the management team is now making is getting out of the very weak seaborne market. China laid more cement in the last five years than the U.S. has in the last century, and the Chinese real estate and infrastructure markets are expected to remain weak through next year. Iron ore production will also likely continue to rise, even as demand and demand growth remains weak for some time.
This is why Cliffs Natural Resources' recent decision to exit the seaborne market is so inexplicable. This company has made horrendous short-term and long-term decisions on a repeated basis over the last five years, and it is now exiting the very promising seaborne market at the exact wrong time, when the market is likely bottoming.
Iron Ore Price Graph
(Source: Financial Review Data)
China is still the future of the global economy, and even though the world's second-largest economy may remain weak for several years, the best years for China is likely in the future. Emerging market economies, such as India, are facing iron ore shortages as well. Half of China still lives on a dollar a day. The country's economy is still significantly smaller than the U.S. economy, and China has trillions in foreign reserves. India is also a major economy with a promising long-term future that will need to import iron ore in significant numbers as well.
Cliffs Natural Resources should have been paying dividends when the market was booming, solidifying the balance sheet as the market began to deteriorate, and rebuilding the company's assets in the current down market. Instead, Cliffs bond holders are paying the price for the company's' poor decision to leverage the balance sheet with an ill-fated dividend, and the company now exiting the most promising long-term market it currently operates in, when the market is likely bottoming. Cliffs Natural Resources management team is incompetent, and this stock cannot be owned unless significant management changes occur.
Disclosure: I/we 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.