Cliffs Natural Worth $75 A Share Even With Production Cuts

| About: Cliffs Natural (CLF)

Cliff Natural Resources (NYSE:CLF) recently announced that it will be cutting back production at its West Virginia mine. The company plans to lower production by 300,000 tons, which would put the mine's output at 800,000 tons.

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This move comes as coal prices have fallen dramatically due to a strong weakness in demand. Demand has fallen as winter was much warmer than expected.

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As prices continue to fall, coal producers are taking a hit on their bottom lines. Patriot Coal (PCX) and Alpha Natural Resources (ANR) have been under pressure as losses begin to mount. Patriot Coal lost $139 million last year. The company is losing more than its current market cap of $114 million. ANR lost $677 million last year. Both are expected to see losses going forward. There is even the possibility that Patriot Coal could file for bankruptcy soon.

So even with all of these problems coal companies are experiencing, Cliffs is still generating a decent profit. Analysts are expecting Cliffs to make $10.43 per share in 2013, but I do see the company's earnings being revised downwards as coal prices fall.

Whenever I try to estimate earnings, I always like to be conservative so I can better gauge the true value of a company. The lowest revenue estimate given by an analyst is $7.07 billion. So lets say the company will do $6.5 billion in sales. Currently, the company has an operating margin of 30.7%. I expect margins to decrease as selling prices for coal to fall. So let's put operating margin going forward at 25%. That puts the company's operating income at $1.625 billion. We then subtract $216 million in interest expense and account for a tax rate of 23%. The tax rate is what the company expects and the information can be found here. With these conservative estimates, I expect the company to generate around $1.08 billion in net income for 2013.

The company currently has a market cap of around $7 billion and is considered cheap if the company makes more than a $1 billion in profit. At $75 per share, the company's market cap would be around $10.5 billion. This puts the valuation for the stock at a P/E of 10.5, which is very appropriate.

The other point I liked in the recent press release is that the company will be selling 6 million tons of coal, while producing only 5.5 million in North America. The company's management is not just scaling back production because of prices, but this move would help them eliminate excess inventory.

Cliffs Natural's recent news shows the company is on the right path and the stock is a fantastic buy at this point even more than other profit coal producers such as Peabody (BTU). Peabody's future earnings estimates will fall as well, which means the company could be fairly valued at this point. Cliffs also has a solid dividend yield of more than 5%, which is much nicer than BTU's yield of 1.5%. Cliffs should easily climb towards $75 per share over the next year, which implies a 50% return from today's prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.