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Cleveland Cliffs Bonds Maturing In 2040 Offer 7.7% Yield To Maturity

Jeremy LaKosh profile picture
Jeremy LaKosh


  • Cliffs saw a notable decline in revenue and gross profit in Q1.
  • Cliffs did not need additional financing in Q1 as it had a large cash balance.
  • While operating cash flow was negative, a deeper dive shows a rational explanation.

Cliffs Natural Resources (NYSE:CLF) reported first quarter earnings that missed expectations a couple of weeks ago. Despite what appeared to be disappointing numbers, management made upward revisions to full year guidance. Earlier in April, I wrote about the fixed income opportunity related to investing in Cliff's 2025 maturing bonds. With the possibility of the company raising the cash necessary to reduce debt, fixed income investors may want to look long term at the company's 2040 maturing bonds. Priced at 85 cents on the dollar, and a 6.25% coupon rate, the 2040 bonds are yielding 7.7% to maturity.

Source: FINRA

Cliff's disappointing first quarter numbers were centered around lower revenues. The company posted revenue of almost half of what was reported in the same quarter a year ago. Along with the lower revenues, the company's gross profit sank to slightly negative, roughly $100 million less than a year ago. Operating income differences were even lower by $120 million.

Source: SEC 10-Q

While an examination of the profit and loss statement may cause investors to turn away, a look at the balance sheet can provide some explanation. Cliff's burned cash in the first quarter and nearly doubled its inventory. Since the company had a large cash balance entering the quarter, they did not need to borrow additional funds and debt remained unchanged.

Source: SEC 10-Q

Cliff's cash flow statement can provide better insight into the company's first quarter activities. The $193 million build in inventories negatively impacted operating cash flow. These inventories can be sold later in the year, thus boosting earnings and cash flow. The $220 million cash draw in the first quarter was two thirds operations and one third capital expenditures. As demonstrated by reviewing the balance sheet, financing activities were virtually nothing in the quarter.

Source: SEC 10-Q


This article was written by

Jeremy LaKosh profile picture
About My Writing: I am currently focused on income investing through either common shares, preferred shares, or bonds.  I will occasionally break away and write about the economy at large or a special situation involving a company I've been researching in. I target two articles per week for publication on Monday and Tuesday.About My Background: Bachelors in history/political science, Masters in Business Administration with a specialization in Finance and Economics. I enjoy numbers. I have been investing since 2000. Professionally, I am the CEO of an independent living retirement community in Illinois.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

I am long CLF 2020 maturing bonds.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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