Is a Turnaround in the Cards for Cliffs Natural Resources?

I have been bearish on Cliffs Natural Resources (CLF) for over two years now. My short calls on the stock have yielded double-digit returns as the stock has plunged from over $22 to under $1.75 in the reference period. Although the stock has been beaten-down and appears cheap fundamentally, I think investors should continue avoiding it due to various reasons. Hence, I am reiterating my sell rating on Cliffs Natural Resources.

More pain ahead

Cliffs Natural Resources’ revenue has fallen off a cliff in the last few years, however I think there’s more pain ahead for the company.
The stock definitely hasn’t bottomed yet and investors should not make the mistake of betting on a turnaround right now.

The primary reason why I think Cliffs Natural Resources has more downside is because of the fact that it supplies iron pellets to steel manufactures that use blast furnace. Blast furnace is an outdated technology that is slowly losing out to electric arc furnace, or EAF. Despite the recent rise of EAF, there is still a lot of room for growth.

According to several forecasts, EAF are expected to steal market share from blast furnaces. Given that blast furnaces use iron ore pellets for manufacturing steel, Cliffs Natural Resources’ business may face more pressure due to this shift. As a result, I think investors should stay away from the stock as falling revenue and profits will have a negative impact on share price.

Oversupply still exists

Iron ore prices are near multi-year lows as the market has been plagued by oversupply. However, conditions aren’t expected to stabilize soon as many analysts expect iron ore demand to drop in the near future. With China’s demand for iron ore expected to reduce considerably in the near future, iron ore prices could stay depressed for a large portion of 2016.

In my opinion, Cliffs Natural Resources’ chances of a recovery entirely depend on iron ore prices, and as of now, the prospects don’t look good for the company. For these reasons, I think Cliffs Natural Resources is a sell.

Conclusion

Cliffs Natural Resources may appear cheap, but there are several reasons why the stock is trading at a beaten down valuation. With a recovery in iron ore prices not expected in the near future, I think investors should not bet on Cliffs Natural Resources’ turnaround. In addition, the company faces more headwinds in the long-term as the demand for iron ore pellets is also expected to decrease. All things considered, I think Cliffs Natural Resources is still a sell.
Published on Jan 5, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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