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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.



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Cliffs Natural Resources

(CLF) - Get Cleveland-Cliffs Inc Report

, an international mining and natural resources company, is the largest producer of iron ore pellets in North America and a major supplier of direct-shipping lump and fines iron ore out of Australia.

It is also a significant producer of metallurgical coal. It competes against


(VALE) - Get Vale SA Report


BHP Billiton

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and the Rio Tinto group.

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Cliffs recently released earnings for the last quarter of 2010 that marked an extremely profitable and eventful year. Cliffs reported $4.7 billion in revenues in 2010, more than double its $2.3 billion in 2009. Net income jumped five-fold from $205 million in 2009 to more than $1 billion in 2010.

We have updated our price estimate for Cliffs to $103 following the earnings release. This represents a premium of roughly 5% to market price. We primarily attribute this premium to our estimated impact of the recently acquired Consolidated Thompson Iron Mines on Cliffs' North American iron ore division.

In a

recent article

, we had enumerated the advantages to Cliffs once the integration of Consolidated Thompson is completed. As we had mentioned then, the most significant advantage to Cliffs from the acquisition is the increase in its North American iron ore production capacity.

The newly acquired mines are ramping up to their full production capacity of 8 million tons of iron ore. An increase in capacity to 16 million tons is expected towards the end of 2012. This would raise Cliffs' iron ore production capacity in North America from around 25.6 million tons to more than 40 million tons in a few years.

This would likely translate to a corresponding increase in iron ore pellets sales for the division. With the amount of iron ore pellets sold to the 3 biggest customers (


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, Algoma and Severstal) expected to remain more or less constant, this increase in sales would be captured in our forecast for sales to other smaller Cliffs' customers.

With gross margins for the North American iron ore division expected to stabilize around 36%, and with an expected revenue of more than $100 per ton of iron ore, this increase in sales would lift the value of this division, and hence, the value of the company.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.