Cliffs’ Coal Sales in North American to More than Double

Cliffs Natural Resources (NYSE:CLF) has been reinforcing its position as the largest producer of iron ore pellets in North America. It is also a major supplier of direct-shipping lump and fines iron ore out of Australia. Moreover, in recent years it has forayed into the coal business and is today a significant producer of metallurgical coal. It competes with other international mining and natural resources companies like Vale (NYSE:VALE), BHP Billiton (NYSE:BBL) and the Rio Tinto group.

We maintain a $103 price estimate for Cliffs Natural Resources stock, a roughly 15% premium to the market price.

Cliffs has been following a strategy of geographical diversification while also diversifying its mineral portfolio. The company solely focused on iron ore from its inception in the 19th century until 2007 when it entered the coal industry. The company also made a significant investment in ferrochromes in 2010 – in a bid to become a one-stop-shop for steel manufacturers, as iron ore, coal and ferrochromes serve as the primary input materials in the production of steel.

Cliffs’ Coal Operations at a Glance

Cliffs primary coal operations are in North America, comprising of five metallurgical coalmines and one thermal coal mine. The North American coal division produced only metallurgical coal until the company’s acquisition of CLCC in July 2010, which allowed it to diversify into thermal coal production. The division has a rated annual production capacity of 9 million tons of coal, with 7 million tons of metallurgical coal and 2 million tons of thermal coal.

Besides this, Cliffs owns a 45% economic interest in the Sonoma coal project in Queensland, Australia, which accounts for all of Cliffs coal operations in the Asia-Pacific region. With these operations expected to produce around 3 million metric tonnes of coal in total, this represents less than 1.4 metric tonnes as Cliffs’ share.

Substantial Value Added by North American Coal Operations

Cliffs enjoys a unique advantage in the highly fragmented coal industry in North America as its long-term relations with some of the world’s largest steel manufactures owing to their iron ore supply contracts has allowed it to create coal supply contracts with them very easily. This is evident from the fact that the division’s 5 biggest customers accounted for more than 75% of the total revenues for this division. Customers include ArcelorMittal (NYSE:MT), Severstal and other global steel giants which look for long-term contracts for the stable supply of their coal needs.

This leads us to believe that from its sales figure of less than 3.3 million tons of coal in 2010, Cliffs will manage to sell almost 9 million tons of coal by the end of the forecast period. That combined with a predicted increase in the price of coal in the years to come is what leads us to believe that this division is responsible for more than 16% of the value of Cliffs’ share.

See our full analysis for Cliffs.