Is Cliffs Natural Resources About to Go Down?

Against all odds, shares of Cliffs Natural Resources (CLF) have staged an impressive rally over the last few months. The stock has jumped almost 150% since hitting year to date lows in early January. While the rally has been very impressive, investors shouldn’t get carried away and use it to sell the stock. Cliffs Natural Resources still faces many headwinds going forward, and I think it is best to sell the stock at current levels.

Dark clouds ahead of short-term rally

Cliffs Natural Resources moved upward rapidly mainly due to the recent surge in iron ore prices.
This recent surge in iron ore costs is being boosted by sentiments as it is presumed that financial support by the Chinese government will result in enhancement of the Chinese economy and levitate iron ore consumption, as China is the largest iron ore consumer around the globe.

However, it is worth noticing that the iron ore pricing is being driven by sentiments, not by fundamentals, so the company will probably have a tough time moving onward. Furthermore, Cliffs Natural Resources itself is not in a noble shape from a fundamental point of view, which is another reason to be cautious of the stock’s rally.

As a matter of fact, JP Morgan predicts that Cliffs Natural Resources’ free cash flow will reach $225 million in 2016 and $294 million in 2017, equated to previous predictions of negative free cash flow of $102 million this year and $32 million in 2017 for $40 and $42 per ton price situation in 2016 and 2017, respectively.

If the iron prices manage to stay constant, the company will witness an enhancement in its financial performance. However, this rush in iron prices will not last long as the industry’s fundamentals are not in support of such a rally, as Credit Suisse anticipates iron ore prices to move down to $35 per ton moving onward as the rally is an outcome of some short-covering in outlooks.

Apart from this, the Chinese policy makers publicized their aspiring tactics of supporting an escalated growth aim. They also planned to cut additional industrial capacity, comprising in steel production. This will put a lid on the need for iron ore in China as it accounts for 40 percent of world steel manufacture.

Also, China decides to decrease excess capacity in steel manufacture in the range of 100 million to 150 million in the approaching five years, although, at the same period, production will escalate. This will lead to unrelenting oversupply in the iron ore segment.


The iron ore market still looks troubled and the recent rally in Cliffs Natural Resources will likely prove to be unsustainable. I think it would be wise for investors to book profits here as fundamentals will soon catch up to reality.
Published on Apr 18, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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