Dividend cut and losses hurt Cliffs

Investors were beating up Cliffs Natural Resources (CLF-N) after it cut its dividend and reported a quarterly loss.

At a time when investors are hungry for yield, the dividend cut was the most damaging to the company’s equity, as Cliffs will now only pay a dividend of 15¢ per quarter. That is down from the previous dividend of 62.5¢ per share representing a massive 76% cut and it comes less than a year after management doubled its payout.

But getting less yield on their shares isn’t the end of the pain for Cliff shareholders as they will also have to endure a bit of dilution. The company announced plans to issuing nine million shares to raise funds to repay outstanding debt.

Currently Cliff’s has 142.5 million shares outstanding.

Spurring on the move towards cost saving and capital raising was the recent price volatility in the iron ore market. When prices fell to below US$100 per tonne last fall, Cliffs CEO Joe Carrabba says Cliffs, along with all other iron ore producers, took pause and considered ways to improve the balance sheet.

“We want to have the financial flexibility and the liquidity to get through these cycles,” Carrabba said on a conference call connected to the quarterly earnings report.

For Cliffs that also meant finding savings by slowing down the phase two development of its Bloom Lake mine on the south western corner of the Labrador Iron Trough in Quebec.

Still Carrabba says the recent moves don’t mean the company has gone bearish on the price of iron ore going forward.

“You have got to think about the balance sheet work we are doing as risk mitigation, not future forecasting of iron ore pricing,” he said. “We are still bullish on iron ore, we just want to make sure our balance sheet is in shape to handle one of these jolts if it should happen again.”

In support of the bullish case for iron ore Carrabba pointed to China’s importing 50 million more tonnes of iron ore last year than it did in 2011 and the forecasted modest growth in US iron ore demand for 2013.

As for the brighter side of the picture on the company specific front, the quarter did see the operational turnaround of its North American coal assets and record sales volumes in Australia. Overall coal sales were up 57% for the quarter.

Those benefits couldn’t fully mitigate the down side from the slowed down ramp up at Bloom Lake Mine, however. That slowdown has meant decreased volumes and increased costs. Over all revenues were down to US$1.42 billion from US$1.53 billion. Carrabba says that despite the somewhat dismal numbers from the mine, Bloom Lake still represents a good portion of the company’s future and will become the flagship mine for the company.

The lower revenues filtered through to the bottom line and Cliffs reported net loss for the quarter of US$1.62 billion, or US$11.36 a share, compared with a profit of $185.4 million, or US$1.30 per share a year earlier.

Since releasing its quarterly results on Feb. 12 Cliff’s shares have fallen 21% and were trading for US$28.25 in New York on Feb. 15.