Cliffs Natural Resources: Going Bankrupt?

Cliffs Natural Resources (CLF) announced fourth quarter ended December 31, 2015 total revenue of $476 million, down 54 percent year-over-year from $1.0 billion in fourth quarter of 2014.

Cliffs Natural Resources declared fourth quarter of 2015 adjusted EBITDA of $76 million or $0.29 of diluted loss per share, down 73.4 percent year-over-year from adjusted EBITDA of $286 million or $5.97 of diluted loss per share during the same period last year.

On the back foot

The natural resources exploration company reported continued decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment, negatively impacting the company’s key margins.

Cliffs Natural Resources uniquely realized notable year-over-year cost control with a significant 23 percent decline in U.S. iron ore cash production costs to approximately $45 per ton during the fourth quarter and about 40 percent fall in Asia Pacific Iron Ore cash production costs to nearly $26 per ton during the period.

The natural resources company reported 25 percent expansion in its fourth quarterly interest expense to $60 million as against $48 million during the same period last year and mainly due to the strategic issuance of key secured notes in the first quarter of 2015.
The interest expense for the quarter includes $51 million of cash spending and the rest $9 million of non-cash expenditure.

Cliffs Natural Resources is keen on optimizing its financial position by minimizing the non-core expenditures and overall production costs along with uniquely raising the much-needed cash through the issuance of secured notes to continue to operate profitably and return a majority of the invested capital to the key stakeholders.

The company’s Iron Ore pellet sales volume for the U.S. during the fourth quarter of 2015 was recorded at 4.5 million tons, approximately 42 percent decline as against 7.8 million tons sold reported during the same period last year. The volume decline was primarily attributable to the planned rejection of a non-strategic customer agreement, weaker demand from a majority of U.S. mills and improved sales volume during the similar quarter for the previous year from the late beginning of the shipping activities in 2014.

The cash production charge per ton for Iron Ore in the U.S. was $45.36, a decline of 23 percent over $58.96 during the fourth quarter of last year. The cost reduction was allowed by weaker employment costs, smaller repair and maintenance costs, and weaker energy rates over the years.

In a weak situation

The continued reduction in iron ore sales volume and weakening cash production costs per ton for the metal is driven by subdued global commodity demand and pricing environment, encouraging the key miners including, Cliffs to minimize iron ore mining and exploration while preserving the balance sheet’s health to successfully emerge from the ongoing weaker international commodity demand and pricing environment.

Going forward, the U.S. Iron Ore revenue realizations per ton for Cliffs Natural Resources is projected to vary by nearly $2.25 if key steel prices expand, and approximately $1.75 if steel costs decline.

Cliffs Natural Resources strategically announced an increase in key conversion rate of its preferred stock so that all the key stakeholders of the Series A preferred stock would receive extra company’s common shares instead of the accumulated dividend on February 1, 2016 which is in line with its continued commitment towards preserving cash amid tough global operating environment.

The ongoing cash preservation strategy of Cliffs by not paying dividends and instead offering extra stock to the key stakeholders is believed to preserve the shareholder’s confidence in the long-term growth prospects of the company and encouraging them to further invest into the currently low-cost stock.

Conclusion

The consensus estimate among 18 polled investment analysts evaluating Cliffs Natural Resources Inc. suggests that the company would underperform the market. This consensus estimate is maintained since the investment analyst’s sentiments declined on Jan 08, 2016. The earlier consensus estimate suggested investors to hold their position in the company.

A majority of the key investment analysts are extremely disappointed about the growth prospects of the company considering the continuing weaker global commodity demand and pricing environment coupled with disappointing company’s financial position which is expected not to contribute to the stock’s revival.

Overall, the investors are advised to “Sell” any equity held in Cliffs Natural Resources Inc. considering the company’s weaker financial position with significant total debt of $2.70 billion against weaker total cash position of $285.20 million only, restricting the company to continue with its daily operations profitably. The profit margin of -37.22% signifies no profit but loss. Further, the PEG ratio of 0.17 depicts only weak company growth.
Published on Mar 7, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

Posted in ...