Cliffs Natural Resources: Has the Turnaround Started?

After disappointing for years, Cliffs Natural Resources (CLF) has finally started to show signs of recovery. The stock is up 36.7% year to date and has staged a great turnaround in the last few weeks. Despite the stunning rally, I don’t think investors should start betting on Cliffs Natural Resources’ turnaround. I expect the rally to be short lived and will not be surprised to see the stock back under $2 in the coming weeks.

Debt Burden

Although the company has made a striking recovery this year on the basis of debt-exchange offer and improved iron ore pricing, stockholders should not get carried away.

Cliffs Natural Resources has faced many severe problems in 2015 from which liquidity is still a major problem.
According to the recent reported quarter, bearing in mind the Cliffs Natural Resources' market capitalization of around $300 million, it had a net debt of $2.4 billion which is huge compared to the market cap. Although Cliffs has enhanced its debt situation at the end of previous quarter, the left over debt will have a massive influence on the company’s cash flow profile and will not be able to improve its financial conditions.

In last quarter, Cliffs Natural Resources produced only $60.5 million of free cash flow and paid out $60 million in interest expenses. On the other hand, the company’s interest expense surged around 25 percent year over year as it dispensed new secured notes.

For the full year, Cliffs Natural Resources’ interest expense was $231.5 million, a surge of $46.3 million compared to preceding-year period. But that’s not the end because situations are about to get worse in 2016 as the interest expense is likely to reach $240 million regardless of the debt exchange.

Previous month, Cliffs Natural Resources declared a bond exchange which will exploit its new 8 percent 1.5 lien senior secured notes that value around $710 million and due in 2020. As per the Deutsche Bank, the company might save $40 million in yearly interest expense on the basis of successful bond exchange, but it is not enough to overcome the problem and would not do much to settle down the debt profile and liquidity concerns will still exist.

Final Words

I believe investors may have overestimated Cliffs Natural Resources’ ability to reduce its debt. Moreover, the recent debt reduction move doesn’t justify the rally in the stock, which is why I think investors should still be cautious about the company’s future. For these reasons, I think investors should sell Cliffs Natural Resources.
Published on Mar 2, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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