Cliffs Natural Resources Will Reach New Highs After Q4 Report

| About: Cliffs Natural (CLF)

Summary

Cliffs reports its Q4 results, beating analysts' estimates on both earnings and revenue.

Domestic demand is strong but prices still don't share this strength.

I expect new highs in the coming weeks.

Cliffs Natural Resources (NYSE:CLF) has just reported its fourth-quarter results, significantly beating analysts' estimates on both earnings and revenue. I was positive on Cliffs before the report and the report confirmed my optimism.

Let's immediately turn to the most important things. Cliffs reported net income of $81 million and earnings of $0.42 per diluted share on a GAAP basis. The main driver behind earnings' strength were increased sales in the U.S. segment.

The company sold 6.9 million tons of pellets in the fourth quarter, highlighting increased demand. At the same time, the price was $73.86 per ton, up slightly from $73.50 per ton in the third quarter. Once again, prices do not show upside pressure yet.

Cliffs estimates that it will produce 19 million tons of pellets in 2017, running at full capacity. From now on, realized prices in the U.S. segment will be the biggest driver as the sales maximum will be reached.

The same is true for the Australian segment, which continues to be an important EBITDA contributor due to the rebound in the iron ore prices.

In 2017, Cliffs plans to report $510 million of net income and $850 million of adjusted EBITDA. Pick your favorite EBITDA multiple and you'll arrive to a target price for Cliffs that is higher than the current level.

With $323 million of cash and less than $2.2 billion of long-term debt, Cliffs is finally positioned to reap the benefits of focus on the domestic market without excessive worries over leverage. I expect that the debt level will be pushed below the $2 billion mark during this year.

As I stated in my pre-earnings article, the $8.30 level looks like important local bottom for Cliffs. A significant deterioration of the outlook for U.S. steel producers (Cliffs' clients) will be necessary to push Cliffs shares below this level.

I suspect that many investors are now orienting on this price level and will leave the ship if the stock price drops below, creating a tide of selling.

Safety first, but we should also not forget about the potential. In my view, Cliffs shares are poised to rally to new highs after this report.

Costs are kept at bay while production increases due to strong demand. The regulatory environment is favorable for at least the next four years.

Iron ore prices show inner strength and were able to withstand both the startup of Vale's (NYSE:VALE) S11D project and the recent attack on excessive leverage from Chinese authorities.

The only factor that lags behind is the U.S. realized price. I hope to hear more on this during the earnings call.

All in all, it was a very good report which should bring new buyers into Cliffs shares.

I remain bullish on Cliffs and expect that new highs will likely be reached in the coming weeks.

In case that the "steel strength" thesis does not play out well, the bailout price is below $8.30.

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.

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Tagged: , Industrial Metals & Minerals, Earnings
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