Dividend cut and losses hurt Cliffs

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

At a time when shareholders are hungry for yield, the dividend cut was the most damaging to the company’s equity value, as Cliffs will now pay a dividend of US15¢ per quarter. That’s down from the previous dividend of US62.5¢ per share, or 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 Cliffs shareholders — they also have to endure a bit of dilution. The company announced plans to issue 9 million shares to raise funds to repay outstanding debt. Cliffs has 142.5 million shares outstanding.

Recent price volatility in the iron ore market spurred the move towards cost savings and capital raising. When prices fell below US$100 per tonne late last year, Cliffs CEO Joe Carrabba said that Cliffs, along with all other iron ore producers, took time out to consider 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, regarding the quarterly earnings report.

For Cliffs that also meant finding savings by slowing down phase-two development at its Bloom Lake mine in Quebec on the southwestern end of the iron-rich Labrador Trough.

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

“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 importing 50 million more tonnes of iron ore last year than it did in 2011, and to the forecasted modest growth in U.S. iron ore demand for 2013.

But on the company front, the quarter saw an operational turnaround of its North American coal assets and record sales volumes in Australia. Overall coal sales were up 57% for the quarter.

But those benefits couldn’t mitigate the downside from the slowed ramp-up at the Bloom Lake mine, which has decreased volumes and increased costs. Overall revenues were down to US$1.4 billion from US$1.5 billion. Carrabba says that despite the mine’s somewhat dismal numbers, Bloom Lake still represents a good portion of the company’s future, and would become the company’s flagship mine.

The lower revenues filtered through to the bottom line, and Cliffs reported net loss for the quarter of US$1.6 billion, or US$11.4 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, Cliffs’ shares have fallen 21%, and were trading for US$28.25 in New York on Feb. 15.