Cliffs Natural Resources: 4 Things To Watch In The Q2 Report

| About: Cleveland-Cliffs, Inc. (CLF)
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Cliffs Natural Resources will report its Q2 results on July 28.

I outline key things I'll be watching in the report and the subsequent earnings call.

The report might power another short squeeze as well as trigger a correction, so watch out!

Cliffs Natural Resources (NYSE: CLF) is set to report its quarterly results on July 28 before the market open. Cliffs' stock was a high-flyer this year, bottoming at $1.20 and rising as high as $7.58. The stock still trades near highs, so the earnings report will be a major event which can push Cliffs' shares higher or start a significant correction.

Analysts estimates are changing in Cliffs' favor, but they are not changing fast enough:

Source: Yahoo Finance

These estimates have little common with reality and I expect that Cliffs will easily beat them when the company reports its second-quarter results. Instead of focusing on the headline number, I'll be watching for other developments and comments from Cliffs' management. Here's my list.

1. Realized prices in the U.S. segment. Those who follow Cliffs know that every $50 increase in the customers' realized hot-rolled steel prices leads to a $2 increase in Cliffs' realized prices per ton of pellets.

Many people were quick to guesstimate their numbers based on spot prices. However, Cliffs specifically stated that its guidance is based on customers' realized prices, not spot prices. In the report, we will see whether Cliffs' customers were able to rise prices with required speed.

I don't expect a major negative surprise on this front, but this factor is surely worth watching.

2. Equity offering plans. Back in June, Cliffs filed an S-1 form with plans to offer $300 million worth of shares. The situation has changed dramatically since that time. If Cliffs were to offer its shares now at current prices, the resulting dilution would be 23.4% compared to my initial estimates of 30% - 37%.

The key question is whether the demand for the shares exists at current prices. There's also another factor to think about. Despite the rapid increase in price, Cliffs' stock remains heavily shorted.

Share offerings typically put a break on the upside momentum, and this is not in the best interest of the company, whose CEO has multiple times spoken against those betting on the failure of Cliffs.

In my opinion, Cliffs should do the offering when the stock is rising to capture the best price possible. We'll know the position of the company on July 28. Equity offering is a crucial factor that will surely impact Cliffs' share price, and, frankly, a source of worry for those long the stock.

3. Essar Minnesota Future. As widely expected, Essar Steel Minnesota filed for bankruptcy as it was unable to develop the project. Essar Steel Minnesota was supposed to be Cliffs' competitor. Now Cliffs has the chance to buy the project on cheap, but how much will the development cost?

With all the fuss about the share price increase and the turnaround story, one should not forget that the company still has a lot of debt and should think twice before spending each dollar.

4. Australian costs. Just like the price of iron ore, the exchange rate of the Australian dollar has been volatile in the second quarter.

Cliffs managed to push the costs in the Australian segment to solid levels and keeping them at bay is crucial for the segment performance.

All in all, I expect that Cliffs' second-quarter report and the subsequent earnings call will give great food for thought. The company's shares are definitely overbought momentum-wise, but the significant short float leads to the possibility of an additional short-squeeze. Besides the company's actual performance, the key factor is the upcoming share offering, its sizing and pricing. Meanwhile, I maintain my positive view on Cliffs.

Disclosure: I am/we are long CLF.

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.