Cliffs Natural Resources: Earnings Preview

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Trefis) -- Cliffs Natural Resources(CLF) is set to announce its fourth-quarter earnings on Wednesday.

We are expecting soft results relative for the first three quarters of 2011 as iron ore prices declined substantially in the fourth quarter. Mining stocks have been under some pressure following weak earnings from competitors such as Rio Tinto(RIO) and BHP Billiton(BHP). Cliffs' stock traded down 3.5% on Friday amid the mining sell-off.

Our price estimate for Cliffs stands at $89, implying a premium of more than 20% to the current market price. See our full analysis for Cliffs Natural Resources here.

Cliffs Natural Resources recorded robust revenue and earnings in the first three quarters of 2011, mainly due to higher iron ore prices and increased sales volumes. However we expect the fourth-quarter earnings to be comparatively weak as iron ore prices corrected by almost 30% in the quarter.

North America iron ore and Asia Pacific iron ore constitute 53% and 20%, respectively, of our price estimate for the company. Accordingly any prolonged weakness in iron ore prices could impact our estimate of the company's value.

The stagnant outlook for demand in North America has led the company to emphasize its position in the Asia Pacific region to tap the continued strong demand. Cliffs is expecting demand from emerging markets, primarily China, to be a major source for its growth. In 2012 the company expects to sell nearly half of its more than 45 million tons of expected global iron ore sales to seaborne customers in the Asia Pacific region, with the remainder being sold to North American customers.

However, the company expects it to be partially offset by lower pricing. The company also recently announced the dissolution of its Michigan iron nuggets joint venture with Kobe Steel to reiterate its focus on its core businesses.

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