Cliffs Natural Resources (CLF, Financial) released not-so-impressive results in the fourth quarter. It fell shy of analysts' estimates. However, Cliffs’ management believes that its solid liquidity position might help it get better. Management is undertaking several strategies to uplift its performance in key markets, but the recent analysis about the future iron ore industry is disappointing and can impact Cliffs negatively. Let us have a look at some of these key aspects.
Can it improve?
Cliffs is sailing through troubled waters. The company is struggling with many aspects and paying debts is one of them. However, the sale of Logan County coal has given some relief in the past, but now Cliffs is aggressive in undertaking further debt reduction initiatives. The company might lose its market share further as it is mainly focusing on the debt reduction programs rather than focusing on creating value to shareholders’ wealth.
This might scare customers away from the stock making it bad to worse for Cliffs. The board has in fact decided to keep the dividend as usual; instead Cliffs will be applying the cash to its accelerated debt reduction programs.
Cliff is now focusing on various aspects to improve its cash position. It is pleased to settle down the Bloom Lake issue. The company had lost much capital in funding Bloom Lake mine in the past, but it is now pleased to get rid of Bloom Lake mine which has generated $150 million in CapEx which it is planning to use effectively in some growth initiative throughout 2015.
Out of its most promising segments, Asia-Pacific and Australia are showing positive signs. It is pleased to see record production in Asia-Pacific region. Moving to Australia, the company’s efforts of cutting costs to the lowest possible levels helped it to survive and Koolyanobbing is one such profitable mine in Australia. This is generating good EBITDA for Cliffs.
If we talk about Australia in particular, Cliffs is on track to back off from the Australian iron trade. Its Koolyanobbing has been operating for the last five years. The company is confident that the mine is in good shape and has capital to support its growth. But the depreciation in the Aussie dollar might be a headwind to Cliffs which can hurt it badly in the last days of mine operation in Australia.
Conclusion
The sale of Logan County and Bloom Lake CCAA are some of the wise steps that Cliffs has taken to improve its performance. This is expected to help Cliffs in executing its strategy of transforming it into a stronger iron ore supplier in U.S. This seems good, but the prospects of the iron-ore industry don’t look promising in the long run. The commodity has been on a consistent downward trend this year, and it is at the lowest level to which it has fallen in the past two years. Last month iron ore prices fell approximately to $70 per ton.
Analysts are expecting further downfall in the prices in future. Hence I recommend that investors observe Cliffs Natural Resources from the sidelines until it shows concrete signs of gaining market share in the future.
