Cliffs Feeling The Heat Of Dampened Iron Ore Prices

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

The outlook for iron ore and coal prices seems bearish as the low demand and oversupply situation is likely to continue into next year.

Cliffs has reached an agreement to sell off its Logan County Coal assets for $175 million. Pretax losses from the sale of assets could amount to $375-$425 million.

The company terminated its issuance of notes due to the prevailing market conditions. The tender offer was set for a sum of up to $600 million for debt refinancing.

Cliffs reported a net loss of $5.9 billion for Q3 relative to a $104 million profit the company posted a year ago in the corresponding quarter.

The outlook for shares seems bearish as any company positives could be offset by the volatility in iron ore and coal prices in the future.

Cliffs Natural Resources (NYSE:CLF), the Cleveland, Ohio-based mining company, is feeling the heat as iron ore and coal prices dampen in the international market. The slowdown in the Chinese steel industry, which happens to be the largest consumer of iron ore -- accounting for nearly 60% of seaborne consumption of the commodity -- is a sign of continuing volatility in the iron ore market. What added to the disappointment of many iron ore producers was Morgan Stanley lowering its forecast for iron ore prices, as it believes that the low demand and oversupply situation in the market is likely to continue next year as well. The coal industry seems to be looking even grimmer as thermal coal use has now come under scrutiny by Chinese authorities of the country, owing to pollution. As the company is trying to refocus its operations toward iron ore production by selling off high cost iron ore and coal mines, it continues to face some challenges down the road.

Cliffs Reaches Agreement on Logan County Coal Sell-Off

Cliffs recently announced that it has reached an agreement to sell off its Logan County Coal assets for a sum of $175 million. This sell-off is a part of the company's ongoing initiative to streamline its production activities in order to cope with the dimmed iron ore and coal price outlook. The sell-off comes with some bad news for the upcoming quarter, as the company is expecting to record pretax losses from the sale of assets that amount to approximatly $375-$425 million.

This move might be one that lowers the outlook for results expected from the current quarter, but it should be viewed by investors as a step that enhances the long-term growth prospects of Cliffs. It is also one that could allow the company to become more flexible in troubling times, especially as the proceeds from this sale could be used to pay off the company's existing debt.

Cliffs had also said that it is seeking options to exit its Bloom Lake iron ore mine located in Canada. Prior to this announcement, it was public news that Cliffs was in need of $1.2 billion to fund the ramp-up of production in this facility to enhance profitability. However, due to the volatility in the iron ore market, this option no longer seems viable for the company.

Termination of Notes Tender Offer

One of the latest developments that has taken place includes the company terminating its issuance of notes in the market due to the prevailing market conditions. The tender offer was set for a sum of up to $600 million for debt refinancing. These issuances have been postponed until further notice. Due to this postponement, none of the tendered securities will be accepted for purchase and no consideration is to be paid to the holders of the securities either. Following this announcement, President and CEO Lourenco Goncalves stated that the company has ample liquidity and financial flexibility at the moment.

Overview of Third-Quarter Results

Cliffs Natural Resources recently reported its third-quarter results. Revenues declined by 16% year on year as coal and iron ore prices were lower in the international market. Consolidated revenues amounted to $1.3 billion for the quarter. Although the company was able to lower costs by a marginal 2%, this decrease was not enough to prevent the company from reporting a net loss of $5.9 billion for the quarter. This is a major drop from the $104 million profit that the company posted a year ago in the corresponding quarter. Net loss per share translated into $38.49 for the quarter, which came as a hard blow to investors. Gross margin for the company was calculated at 21.56%, which is considered to be quite low. Furthermore, this margin has declined over the margin reported in the same quarter last year. Net margin for the company was calculated at approximately 1%.

Outlook

For now, the major downside that needs to be taken into consideration is the outlook for iron ore prices in the future. The lower prices of iron ore will continue to weigh on the company's top-line growth, subsequently leaving share prices depressed in the future. An analysis of share prices in the capital markets indicated that share value has declined by nearly 70% year to date. Share prices stood at $26.21 as of Dec. 31, 2013. Shares now trade near their 52-week low, as they hover around the $8 mark. Shares of SLB have seen a 52-week high of $27.13, whereas their 52-week low stands at $7. Analysts remain pessimistic in their outlook as they believe that shares could touch a level of $8.82 in the next year.

Giving credit where it is due, the latest sale of assets is a positive step taken by the company that has had a positive impact on investor confidence in SLB. Not only will this latest sale allow the company to manage its debt levels in a better manner, but is also a step in a direction that allows the company to execute its strategy of operational streamlining in a successful manner.

However, many investors question whether these moves will be enough to help the company recover from last quarter's result and post better performances in the future. The company has already hinted at a pretax loss from the sale of its latest assets, indicating that the next quarter's results do not look any better at this point in time. That said, now would not be the ideal time to purchase shares of this company as the share outlook seems bearish. There is a lot of uncertainty surrounding how the company will be able to cope with the changing market environment and how successful its strategy is by the end of its completion. Until then, shareholders will be able to find better stocks to put their money in.

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.