An Update On Cliffs Natural Resources' Restructuring

| About: Cleveland-Cliffs, Inc. (CLF)
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Summary

Cliffs restructuring is slowly taking place.

The company is selling off loss making assets.

The next few quarters will be key.

Cliffs Natural's (NYSE:CLF) turnaround is slowing taking place and while the company is still struggling. Things are becoming less complex for the company. Assets are being closed, liabilities wound up and cash burn should be falling.

The most recent asset sale is the company's Logan County Coal assets in Southern West Virginia. The assets are being sold to Coronado Coal II LLC for US$175 million in cash and the assumption of certain liabilities. Cliffs expects to record a loss on the sale of assets in the range of approximately $375 million to $425 million on a pre-tax basis in the fourth quarter of 2014.

Cash received from this deal will be used to pay down debt but more importantly it will reduce cash burn for the group. Cliffs doesn't break down results mine by mine but based on third quarter results the group reported a loss per ton of $23 per ton of coal mined at its North American operations during the first nine months of this year. If management has any sense this deal will reduce cash burn from Cliffs' loss making coal operations.

Citigroup's view on the asset sale:

"We view it as a positive that Cliffs Natural Resources was able to sell coal assets in the current environment although we believe a significant portion of the sale price represents replacement costs for the surface infrastructure…"

However,

"...While a positive step, the $175 mln sale itself does not materially move the needle on their $3.2 bln in debt, and the major issues remains the low iron ore price and their high-cost Canadian assets (preliminary closure cost estimate of $650-$700 mln)..."

Of course, the Canadian assets is a reference to Cliffs' Bloom Lake mine. Cliffs has failed to find partners for Bloom and is now pursuing exit options that could cost as much as $700 million over five years. This removes much certainty surround the outlook for the asset, but it's yet another cost the company will have to grapple with.

Still, on the whole it is a positive development for the company. Bloom Lake has been a black hole for investment ever since Cliffs' acquired it. $700 million in shut down costs is minimal compared to the billions Cliffs has spent over the years to acquire the mine and bring it into production.

Bad news

The decision to shut Bloom along with the sale of the North American coal assets are positive developments for Cliffs. However, the company's recent decision to pull a previously announced tender offer to purchase outstanding notes totaling up to $600 million has not been received well by the market.

An unfavorable move in market rates was the reason given for this decision to pull the tender, which is understandable. The high yield market has been volatile recently and Cliffs can afford to wait around for a better deal. Cliffs intends to keep its $1.125Bn credit agreement in place and the existing notes come with interest rates of between 3.9% and 6.3% so it's not as if Cliffs is paying a high rate of interest for this debt.

Cliffs' Chairman, President and CEO, Lourenco Goncalves: "Cliffs has ample liquidity and strong financial flexibility. Accordingly, we will be patient and disciplined in assessing the capital markets. We appreciate the positive response received in our tender offers."

Management support

On a side note, one thing that should be noted with regards to Cliffs is recent management stock buying. One of Casablanca's criticism of the previous management was the fact that none of the executive management team had bought stock in Cliffs, they had no skin in the game in other words. All stock held by management was handed to them as rewards, stock options.

According to Finviz.com, since the end of August, Cliffs' new management team has spent $250,000 buying Cliffs stock. $250,000 is not a lot in the grand scheme of things but it's 100% more than the previous management team spent on stock. So, the company's new set of directors actually have some of their wealth tied to Cliffs' performance.

The bottom line

All in all, the past few months have shown that Cliffs is changing. The company is making progress and management seem to be focused on the company's turnaround. With skin in the game, they stand to lose out if things go wrong.

Progress is being made but Cliffs' recovery is far from complete. Management is only just getting started.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.