Cliffs Natural Resources: Should You Invest?
Shares of Cliffs Natural Resources (CLF) have picked up nearly 30% from its all time low of $1.26 a share on January 11, 2016 to the current level of $1.64 a share. This uptick in its share price performance in my opinion will continue due to the fact that the company has seen the worst and made significant changes to its operations that now best fit the low commodity price environment. In fact, the company has started benefiting from these positive changes as seen in the third-quarterly report. Let us have a look.
Improving top and bottom line performance
Cliffs Natural Resources has consistently improved its top and bottom line performance, despite the fact that steel market remained pretty weak this year.
Moreover, the company has improved its earnings performance significantly. For instance, its loss for the quarter came in at $0.10 per share. This compares to loss of $0.21 per share in the second-quarter of 2015. In fact, its bottom line performance topped the consensus estimate of $0.25 loss per share by a big margin for the quarter.
This strong performance in its bottom lines can be attributed to the fact that the company has made some positive changes in its operation. For instance, the company during the quarter removed approximately $33 million of costs related to the idle of Empire and its United Taconite mines. This had positive impact on its EBITDA for the quarter. In fact, the company during the fourth-quarter sold the remaining shares of its coal business like Pinnacle Mine in West Virginia and Oak Grove Mine in Alabama to Seneca Coal Resources. Cliffs Natural Resources has received a total of $50 million from these divestments that should have positive impact on its EBITDA in the fourth-quarter of the year.
More upside to consider
Cliffs Natural Resources continues to work on its fundamentals such as cash production costs per ton and SG&A costs. Cliffs Natural Resources’ cash production costs for U.S operation came in at $48.99 per ton, down 16% as compared to $58.38 per ton in the same quarter last year. Also, its Asia Pacific iron ore cash production cost per ton has been reduced to nearly 49% year-on-year basis. This drop in its cash production costs is due to a variety of initiatives the company took this year. This includes, reduction of workforce, lowering employment costs, reducing and maintenance and repair costs.
Cliffs Natural Resources Natural Resources meanwhile reduced its selling, general and administrative costs by more than 55% to $22 million as compared to SG&A expenses of $50 million in the same quarter last year. Looking ahead, the company has lowered its full year SG&A expenses guidance. It now expects its SG&A expenses for the year to come at $110 million as against $120 million stated at the start of the year.
Apart from these reductions in cost, the company reduced its capital expenditure drastically during the quarter. Its capital expenditure for the quarter came in at $24 million, down approximately 66% from the second-quarter of 2015. As a result, Cliffs Natural Resources expects its capital expenditure for the year to come in the range of $85 to $95 million, from its previously stated guidance of $100 to $125. These reductions in costs should have positive impact on its earnings on the fourth-quarter results and help the company to offset the decline in the iron ore prices.
Improved steel demand in developed country to drive its growth in 2016
Cliffs Natural Resources Natural resources will benefit from the recovery in the steel demand in the developed country. As per a report by World Steel Association, the steel demand in the developed country will grow 1.8% in 2016, after a negative 2.1% demand in 2015. In fact, the report expects the steel demand excluding China to grow approximately 2.9% in 2016. The chart below shows growth in steel demand across the world.
More importantly, despite this reduction in the net debt the company has improved its liquidity position. For instance, its cash and cash equivalents at the end of the third-quarter were $270 million as compared to $244 million at the end of the prior-year quarter.
Cliffs Natural Resources Natural Resources is making significant progress on the operational side. It has divested its shares of holding coal businesses and reduced its operating as well as SG&A costs remarkably. This should help the company to improve its bottom line performance, considering the improvement in demand for steel in the developed countries. The stock has dipped nearly 78% in the past twelve months that creates an opportunity for investors to buy more of the shares, given the fact that the steel demand will improve in the developed nations.