Cleveland Cliffs: A Man Among Boys

Let me be the first to say I lightened up on this stock far too early - and we never had enough exposure (at most 1.5% of the fund). We have nearly a double in this position since adding it in the hectic March sell off. What a performance; and a little known fact is they have serious metallurgical coal exposure on TOP of their iron ore exposure [Chinese Warned of Record Rise in Ore Price - 85-95%!] [Apr 7: Posco Agrees to 200% Coal Price Increase]

It is funny to read through this article because I was in this name back in the days when they bought Portman and I remember the very negative reaction by very short-sighted investors - who many times much prefer companies do not spend on R&D or don't spend on smart acquisitions - since all they care about are moves to boost EPS one quarter out. But never in my imagination back then did I foresee this type of move. The move into met coal? Prescient. Personally I've been blown away that one of the mining world's "Big 3" have not taken Cleveland Cliffs (CLF) out a long time ago.

• Cleveland-Cliffs Inc. has seen its stock price rise more than 300 percent since the beginning of 2007. But that's nothing.
• If you go back to January 2001 -- the height of the steel crisis -- Cliffs' stock price has gone up some 5,000 percent, from about $2 a share to more than $100 today.
• That means a $20,000 investment then is worth $1 million now. (@&*(@!&*!)
• Global growth, especially in China, and a weak U.S. dollar have been the drivers, pushing up demand for steel made here and abroad. Cliffs mines in Michigan, Minnesota and Canada supply blast furnaces across North America with iron ore, the main ingredient in making steel, while their mines in Australia ship to China and Japan.
• Cliffs recent foray into metallurgical coal is expected to pay off in a big way, too.
• It has made all the right moves, beginning with a decision to expand its iron ore reserves in North America at a time when bankrupt steel companies were looking to unload them. Adding reserves at bargain prices proved brilliant, as Cleveland-Cliffs had more iron ore to sell once the steel industry consolidated and surged back to life.
• The company's then chief executive John Brinzo didn't stop there. In early 2005, flush with cash, the company bought into an Australian iron ore company called Portman Ltd. The move didn't sit well at the time with Cliffs investors who chastized Brinzo. They thought a better use of Cliffs' new-found wealth was to buy back shares, thereby rewarding current shareholders with instant gains.
• Last year, Cleveland-Cliffs expanded again under Brinzo's successor Joe Carrabba, this time into metallurgical coal. Cliffs' paid $450 million and absorbed $150 million in debt for PinnOak Resources LLC, which included coal mines in West Virginia and Alabama.
• Metallurgical coal, as opposed to the thermal variety burned to make electricity, is converted into coke. It's then mixed with iron ore in a blast furnace to produce molten iron, the first step in the steel making process.
• Carrabba said he expects coal contracts that now pay an average of $94 per ton to renew for at least $250 per ton when they start to expire at the end of this year in the United States and next April for European customers. About 60 percent of Cliffs' coal is exported, with much of it going to ArcelorMittal plants in Europe.
• "I would say over the last four or five years there really isn't anything they've done wrong," said David MacGregor, analyst with Longbow Research in Independence.
• While Harbinger likes Cliffs' business fundamentals, it's also thinking the company could be a takeover target at a premium price. Among those speculated to be interested in Cliffs is steel giant ArcelorMittal. It's already Cliffs' largest customer, commanding 44 percent of its North American iron ore sales.
• Unlike oil, iron ore is not traded on a commodities exchange and elicits little speculation from investors, he said. (this is also why I like iron as opposed to some other commodities - along with longer term contracts)

[Mar 7: Starting 2 Mining Positions Emphasizing Iron Ore]
[Feb 22: Didn't Realize Cleveland Cliffs had Coal Exposure]

Disclosure: Long (not enough) Cleveland Cliffs in fund; no personal position

Comments

[pachanguero]

nice call