Cliffs Natural Resources: Looking at Possible Downsides for 2016
(Continued from Prior Part)
More downside?
Cliffs Natural Resources’ (CLF) share price has fallen by 71% year-to-date and 42% in the last month alone. This might have led investors to wonder whether this is the bottom.
The seaborne iron ore prices remain near multiyear lows, and there is no expectation of a turnaround anytime soon due to the structural nature of the supply-demand mismatch. Although Cliffs Natural Resources is relatively immune to the seaborne iron ore prices due to its legacy US iron ore contracts, they impact the company indirectly.
Burgeoning steel imports into the US (DIA) is one of the ways that excess capacity in the seaborne market has been channeled to the US. This has pressurized Cliffs’ customer base, which includes US Steel (X), AK Steel (AKS), and ArcelorMittal (MT), and has led Cliffs to scale back its volumes.
Concerns still linger
The shift from using a blast furnace to an electric arc furnace for steel producers remains real and Cliffs does not has any significant presence there, nor is it expected to have in the near future due to capital constraints.
The biggest investor concern regarding Cliffs still remains its debt level. Although Cliffs has purchased debt at a discount, that’s not enough to reduce it to any significant level. Due to the current weak demand price scenario, it is not expected to generate free cash flows to a level so as to cover its debt repayments with it.
According to company’s 10-Q, “Based on current mine plans and subject to future iron ore and coal prices and supply and demand, we expect our budgeted capital expenditures, preferred dividends and other cash requirements during the next 12 months to exceed our estimated operating cash flows.”
Catalysts going forward
The market is keenly waiting for the decision regarding Cliffs Natural Resources’ upcoming contract renewals in late 2016 and early 2017. The Essar Minnesota Steel plant is one of the important variables that could impact the outcome. Even if the contracts are renewed, the prices negotiated could be lower due to the bleak outlook. Essar’s steel plant could still take away its market share going forward.
Cliffs has come a long way since its new management took over in terms of cost control and domestic US focus. However, in the face of weaker iron ore demand scenario and a highly leveraged balance sheet, investors might want to wait for positive catalysts. These catalysts include an increase in the capacity utilization among US Steel producers, contract renegotiation at favorable terms, or significant debt reduction due to asset sales.
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