Earnings miss for Cliffs Natural Resources

A severe 36% year-on-year drop in prices for seaborne iron ore during the third quarter torpedoed earnings for Cliffs Natural Resources (CLF-N). The iron ore and metallurgical coal producer’s consolidated revenues fell 26% to US$1.5 billion during the quarter, down from US$2.1 billion in the same period last year, while net income attributable to shareholders was just US$85 million or US$0.59 per diluted share, down from US$601 million or US$4.15 per share in the third quarter of 2011.

As of Sept. 30 the company had US$36 millionof cash and cash equivalents and$3.9 billion in total debt, including $250 million drawn on its $1.75 billion revolving credit facility. Cliffs generated $308 million in cash from operations during the quarter versus $821 million in the same quarter in 2011.  

Looking ahead, Cliffs is cutting its full-year 2012 cash flow from operations expectation to about US$600 million from its previous estimate of US$1.3 billion, but plans to maintain its 2012 capital expenditures budget of about US$1 billion (US$300 million in sustaining capital and US$700 million in growth and productivity improvement capital).

Some analysts see the earnings miss as a chance to pick up more of the company’s battered stock, which ended the week in New York at US$36.49 per share within a 52-week range of US$32.25-US$78.85.

“Cliffs’ share price has fallen below US$40,” Tony Robson of BMO Capital Markets in London writes in a research note, arguing that the current metrics represent a buying opportunity for investors “given the recent recovery in iron ore prices to US$115 per tonne and strong Chinese import levels.” (Robson notes that Chinese imports in August reached 65 million tonnes.)  

The analyst concedes that the company’s financial results demonstrate just how vulnerable Cliffs is when “low commodity prices hit medium-to-high cost mines” and points out that the company’s “debt is too high and cash flow is weak” and that it could cut its dividend from the current US$0.625 per share per quarter to its previous US$0.28 per share “to neutralize this issue,” yet he still recommends buying on the current weakness.

“Reasonable free cash flow of US$400 million is expected by BMO Research in 2013, with some US$1.5 billion out of a US$1.75 billion revolver also available for drawdown to fund either capex at Bloom Lake or, if necessary, maintain the dividend,” Robson said. “There likely remains some investor concern on progress at the Eastern Canadian operations and Cliffs remains a higher risk iron ore play due to its higher position on the cost curve, but BMO Research expects some stability to emerge in early 2013.”

Anthony Rizzuto and Joseph Giordano of New York-based Dahlman Rose & Co. initiated coverage on the company on Oct. 26 with a hold rating on the stock because they believe “low iron ore prices and cash flow concerns will continue to pressure the shares” and note that they expect the company “will have difficult decisions to make over the next year concerning production and capital allocation.”