Will Cliffs Continue To Outperform Other Mining Stocks?

Chris Lau, Kapitall: Cliffs is cutting costs to keep up with falling ore prices, but is that enough to keep other mining stocks at bay?

Iron ore producer Cliffs Natural Resources (CLF) is up over $7 from the $20 lows seen in October. Cost cutting and better metal prices supported respectable quarterly results.

[Read more from Kapitall: Rebound for Raw Materials: 4 Commodities Stocks to Consider]

While a large debt load and China's economic slow down once prompted a bearish outlook for the raw materials provider, investors will want to pay attention as to whether Cliffs will continue to turn around its business, or whether its debt will make it easier for its major competitors to dig in to the company's market share.

As the chart below illustrates, Cliffs has had a noticeably robust month, even though raw materials have had a strong fall as a whole.

Click on the interactive chart to see data for these mining companies over time. 

Cost cutting

To adjust for weaker demand in iron ore, Cliffs is reducing its debt profile and reducing Selling, General & Administrative expenses. In its last quarter, iron ore sales dropped 4% to 6.3 million tons.

The decline was due to a force majeure from one customer and the end of a contract with another. Cliffs still expects revenue per ton will be $110 to $115. For 2013, the company believes it will sell between 20-21 million tons of iron ore.

Weaknesses

Uncertainty for the Wabush location will weigh on Cliffs. The company will not know until closer to the end of the year what sales volumes to expect. At Bloom Lake, the sales level was flat, at 1.4 million tons. Asia Pacific Iron Ore sales dropped 8% to 2.8 million tons. Despite the weak quarter for Asia Pacific Iron Ore, Cliffs expects to sell between 10-11 million in 2014.

Click on the interactive chart to see Cliffs price data over time. 

Earnings a bright spot

Cliffs tripled its operating income. In aggregate, the company earned $1.1 billion so far EBITDA. A 17% increase in seaborne iron ore helped contribute to higher revenue. In its third quarter, Cliffs earned $104 million, or $0.66 per diluted share. This is up from $0.59 per share last year.

Analysis

A disciplined cost control measure for Bloom Lake and its coal business helped Cliffs report a good third quarter. Now that the expense profile is lower, Cliffs is in a better position to benefit from better metal prices. On the downside, if prices drop, Cliffs will not be in as dire a situation as it was previously.

Cliffs looks to be in a healthier position financially and operationally, more so than the market realized. Though its debt is still high, Cliffs aims to reduce it to around $3 billion in the coming year.

This is achievable with capital expenditures dropping and earnings rising. The downside seems limited because costs are manageable. Cliffs may be in a strong position to benefit from improving coal and iron ore pricing. 

 

(Written by Chris Lau, a Kapitall Contributor. All data sourced from Zacks Investment Research.)

null

If you liked this article you might like

The President Must Show 'America First' Isn't 'America Alone': Market Recon

The President Must Show 'America First' Isn't 'America Alone': Market Recon

Masco, Diplomat Pharmacy, Vail Resorts: 'Mad Money' Lightning Round

Masco, Diplomat Pharmacy, Vail Resorts: 'Mad Money' Lightning Round

What it Takes to Power This Bull: Cramer's 'Mad Money' Recap (Thursday 11/30/17)

What it Takes to Power This Bull: Cramer's 'Mad Money' Recap (Thursday 11/30/17)

These Stocks Are Changing Course

These Stocks Are Changing Course

Insiders Are Loading Up on Kite Pharma, Cliffs Natural Resources and More

Insiders Are Loading Up on Kite Pharma, Cliffs Natural Resources and More