Cliffs Natural Resources: a Good Investment?

Cliffs Natural Resources (CLF) earnings for the recent quarter increased to $0.62 per share from negative $0.24 per share in the fourth quarter of last year. In fact, its earnings were significantly above as compared to earnings of $0.02 per share in the same quarter last year.

Improved end-market and lower costs are tailwinds

The more important thing is that this improvement in the iron ore prices was across the world. As per a report by Bloomberg, the iron ore futures in China rose 5.6% to 367 Yuan, the highest since the trading started in 2013 due to the decline in the rebar stockpiles.

Also, the SGX AsiaClear contract in Singapore appreciated 5.3% to $44.70 a ton on June 6th, 2016. Thus, this improved market conditions for iron ore as well as steel should improve Cliffs’s operational and financial performance as demonstrated in the first quarterly results.

This improved earnings performance was due to its disciplined cost control measures coupled with the uptick in the iron ore and steel prices as discussed above.
Cliffs Natural Resources: a Good Investment?
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On the costs note, Cliffs Natural Resources lowered its cash production costs by a 26% to $48 per long ton for the recent quarter of 2016 as compared to $65 per long ton in the year-ago quarter of 2015. In fact, its cash production costs for the quarter declined 27% per metric tons on a year-over-year basis. Such reductions in the cash production costs can be attributed to its effort of minimizing repair costs, lower diesel fuel and natural gas rates and a significant drop in the labor expenses.

At the same time, Cliffs Natural Resources managed to reduce its SG&A expenses by 3% to $28 million for the recent quarter of 2016 from $29 million in the first quarter of 2015. This decrease in the SG&A expenses was driven mainly by a reduction in headcounts.

As a result of this improved cost performance, Cliffs Natural Resources sales margin in the Asia Pacific for the quarter improved significantly to $6.31 per ton as compared to $0.26 per ton in the same quarter a year earlier. The important thing is that this increase in the sales margin was despite its sales tones for the quarter declining by 8% to 2804 thousand tones as against 3034 thousand tons in the first quarter of 2015.

Looking ahead, Cliffs Natural Resources expects its cash production costs to be in the range of $50 to $55 per long ton, which is significantly down from its earlier announced cash production guidance of $55 to $60 per long ton for 2016. Thus, such costs reduction measures should allow the company to improve its earnings performance this year.

Lowering net debt

Cliffs Natural Resources continues to reduce its debt. For instance, the company managed to lower its net debt by $100 million to $2.4 billion from $2.5 billion in the first quarter of last year. This reduction in the net debt was driven by the decrease of $304 million in the principal amount of senior notes during the first quarter of 2016. Its total debt stood at $2.5 billion at the end of first quarter of 2016 versus $2.9 billion in the same quarter last year.


Thus, Cliffs Natural Resources remains a safe bet with the improvement in the iron ore and steel prices that are expected to remain strong this year. Also, the company is making significant progress driving down its costs structure that should lead to a better financial performance going forward.

Published on Sep 13, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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