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.
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.
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.