Coverage Launch: $81 Trefis Price Estimate for Cliffs Natural Resources

-12.05%
Downside
22.74
Market
20.00
Trefis
CLF: Cleveland-Cliffs logo
CLF
Cleveland-Cliffs

Cliffs Natural Resources (NYSE:CLF) is an international mining and natural resources company. It 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. Competitors include Vale (NYSE:VALE), BHP Billiton (NYSE:BBL) and the Rio Tinto group.

Launch of Coverage on Cliffs Natural Resources; $81.17 Price Estimate

We recently launched coverage on Cliffs Natural Resources with an $81.17 price estimate for the company’s stock.

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We have broken down our analysis of Cliffs Natural Resources into five main business segments:

  1. North American Iron Ore Division
  2. Asia Pacific Iron Ore Division
  3. North American Coal Division
  4. Asia Pacific Coal Division
  5. Other Investments

Global Iron Ore Industry

The iron ore industry is completely dependent on global crude steel production. Iron ore is the principal raw material in the steel-manufacturing process, with 98% of all iron ore mined used to make steel. As steel is used directly in the development of infrastructure, overall economic progress drives the global demand for steel which in-turn drives the demand for iron ore.

China contributes to almost half of the world’s total iron ore production, followed by Brazil, Australia and India. China is also the biggest importer of iron ore in the world, as its rapid economic development necessitates a substantial increase in its steel production. Because of this, China has been one of the biggest factors influencing global iron ore prices.

Cliffs Natural Resources’ Niche

Cliffs’ North American iron ore division is its most valuable division contributing more than 50% to our estimated stock value for the company. Cliffs’ competitive advantage lies in its position as the biggest iron ore pellets producer in North America. The total estimated production capacity of all mines in North America is 85 million tons, of which almost 27 million tons is contributed by Cliffs. This represents a 30% share of the North American iron ore industry. Cliffs has been able to leverage the strength of its position to enter into long-term supply contracts with some of the world’s largest steel producers including ArcelorMittal and Severstal.

The North American iron ore division produces thirteen different grades of iron ore pellets and delivers it to customers based on their preference, which essentially depends on the characteristics of the customer’s blast furnace operation. The price per ton at which the iron ore is sold is generally a formula that considers the quality of the pellets, the distance to be transported and most importantly the prevalent global iron ore prices.

Global iron ore prices have consistently risen in the last decade with global iron ore production not able to keep pace with the increasing demand for iron ore by developing countries like China and India. A fall in iron ore prices is likely in the future as leading iron ore producers increased production capacity to meet large demands in the booming global economy prior to 2008, and China has increased focus on iron-ore sufficiency in the recent past.

As the revenue generated per ton of iron ore pellets sold by the North American iron ore division is directly correlated with the global iron ore prices, we expect the division’s revenues to reduce over the years.

Drag the trend line in the modifiable chart above to see the impact of various North American iron ore revenue per ton forecasts on Cliffs Natural Resources’ stock value.

See our full analysis for Cliffs Natural Resources stock here.