Cliffs puts the brakes on spending, swings to Q4 profit

On his second day on the job at Cliffs Natural Resources (NYSE: CLF) three months ago, newly appointed president and chief operating officer Gary Halverson shelved the company’s $3.3-billion plan to build a chromite mine in the Ring of Fire in northern Ontario and a ferrochrome facility in Sudbury.

Halverson made headlines again when he slashed Cliffs’ 2014 capital expenditure budget by more than half to US$375 million to US$425 million. Part of the cuts will come from suspending the phase-two expansion of the company’s Bloom Lake iron-ore mine in Quebec and the idling of the Wabush iron-ore mine in Labrador. 

The iron-ore and coal producer reported that it had swung to a profit in the fourth quarter of 2013 and that its board had further promoted Halverson — formerly the interim chief operating officer of Barrick Gold (TSX: ABX; NYSE: ABX) — as Cliffs’ new CEO.

On a Feb. 14 conference call, Halverson told analysts and investors that his priority for any cash generated over and above the company’s capital spending and dividend payments this year would be to lower Cliffs’ net debt position, and that “fiscal restraint with a focus on cash-flow generation and balance-sheet discipline must guide our decisions.”

Another priority, he said, was “just getting back to the basics” — improving productivity, lowering costs and right-sizing Cliffs’ organizations. “This begins with top management,” Halverson explained. “I have recently initiated a reorganization that will de-layer the senior executive team and provide a direct reporting line from the operations management to me.”

But whether Halverson can turn Cliffs’ fortunes around during a time of volatile commodity prices remains unknown. If fourth-quarter results are any guide, things may be looking up for the company. In the three months ended Dec. 31, 2013, Cliffs’ net income climbed to US$31 million, or US20¢ per share, compared with a US$1.6-billion loss, or US$11.36 per share in the fourth quarter of 2012. Excluding one-off items, earnings rang in at US$218 million, or US$1.22 per share, up from US$89 million, or US63¢ per share in the fourth quarter of 2012.

For the full year, cash flow from operations more than doubled to US$1.1 billion, net debt was trimmed to US$2.7 billion and year-on-year selling, general and administrative expenses (SG&A) and exploration expenses fell by 32% to US$135 million.

“I think it’s pretty important to point out that the vast majority of Cliffs’ operations are running quite well, the full-year costs in both Asia–Pacific iron ore and North American coal decreased significantly and our U.S. iron-ore costs remain relatively flat year-over-year,” Halverson said on the conference call, adding that another area of cost-cutting was lower SG&A and exploration expenses.

While it’s a good start, however, Halverson said “it’s not enough,” and that the company must be more aggressive in cutting costs.

Turning to Eastern Canada, Halverson said Cliffs will keep operating the first phase of Bloom Lake, but will not spend capital for the sake of boosting volume. “We will only spend the minimum required capital until we develop the path that extracts the highest value from Bloom Lake for our shareholders,” he said, adding that if iron ore pricing drops he “will not rule out idling this operation.”

The company expects to produce 5.5 million to 6.5 million tons from the first phase of Bloom Lake this year at a cash cost of US$85 to US$90 per ton, compared with US$89 per ton in the fourth quarter of 2013.

“We have cut the project’s 2014 capital budget to largely include what’s required from a sustaining and license-to-operate standpoint,” he elaborated. “By adjusting our tailings and water management strategy using different vendors and spreading the spending over many years, we have lowered the capital deployed for tailings and water management in 2014.”

As for the decision to idle the Wabush mine, Halverson said the company had undertaken initiatives over the past two years to cut costs, improve productivity and increase long-term profitability, but that they were not enough to impact the operation. Cliffs will incur US$100 million in costs from idling Wabush this year.

Cliffs’ efforts to reduce costs across the organization and its decision to cut 2014 capex by 50% failed to impress activist hedge fund Casablanca Capital, which owns 5.2% of the company. In a Feb. 12 statement, Casablanca called Cliffs’ measures “a knee-jerk response to our call for change,” and said they were “inadequate to address Cliffs’ issues, including the need for dramatic cost savings, and do not demonstrate the strong leadership needed to create substantial value for shareholders.” 

“The sad truth is that shares of Cliffs have lost more than 80% of their value since mid-2011,” said Donald Drapkin, Casablanca’s chairman. “The company’s actions to date have confirmed our lack of faith in the ability of the current board and management team to reverse the deterioration in Cliffs’ financial performance.”  

In late January, Casablanca urged Cliffs to spin off its Australian and Eastern Canadian iron-ore assets, including Bloom Lake, so that Cliffs could focus on its more profitable U.S. operations.