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Investment Overview for Cliffs Natural Resources (NYSE:CLF)
WHAT HAS CHANGED
Iron ore and metallurgical coal prices have fallen sharply over the course of the last year. This has prompted Cliffs to review its business priorities. The company has decided to focus on its profitable U.S. Iron Ore operations and has decided to sell off its higher cost assets, provided it can find buyers for the same. The company's operations have also been negatively impacted by an adverse business environment facing the steel industry in the U.S., prompting the company to idle some of its mines.
- Idling of mines and divestments
- The company idled its Bloom Lake iron ore mine in January in response to a fall in prices. Bloom Lake was Cliffs' only functioning mine in Canada up until January. The company's Canadian unit later filed for bankruptcy protection.
- Earlier on in the year, Cliffs sold off Logan County Coal, a Cliffs subsidiary which represented the company's coal mining operations in Southern West Virginia.
- Earlier on in the year, Cliffs also sold off its suspended Chromite project, located in Northern Ontario, as it looked to focus on its U.S. Iron Ore operations.
- Cliffs idled its United Taconite mining operations during the course of 2015 and also announced plans to idle its Northshore mine, in response to weak demand for steel and iron ore in the U.S. Both these mines are located in Minnesota.
- Sharp increase in steel imports into the U.S.
- Steel imports into the U.S. have risen sharply over the course of the last year. The market share of steel sheet imports to the U.S. accounted for an estimated 22% of the steel sheet market in the U.S. in 2014, up sharply from 15% in 2013, and is expected to rise further in 2015. A significant proportion of steel imports are from developing countries which have low labor costs and low overall costs of production. Competition from these low-priced imports has negatively impacted shipments and realized prices for the domestic steel industry. This adverse business environment has also impacted the fortunes of iron ore producers such as Cliffs, since iron ore is the primary raw material for steelmaking. As a result of the adverse business conditions impacting the U.S. steel industry, Cliffs has scaled back production plans for the year.
Below are key drivers of Cliffs' value that present opportunities for upside or downside to the current Trefis price estimate for Cliffs Natural Resources:
North American Iron Ore Division
- North American Iron Ore Revenue Per Ton: The revenue per ton generated by Cliffs' North American Iron Ore division is expected to decline due to a fall in iron ore prices. Iron ore prices are declining primarily due to the weakness in global demand for steel and an oversupply of iron ore. We expect the oversupply of iron ore to decrease and prices to rise, starting in 2017. We expect the division's revenue per ton to start growing at 2% from 2017. However, if the rise in revenue per ton from 2017 onwards is lower than expected, at say 1%, this would represent a downside of nearly 10% to the Trefis price estimate.
- North American Iron Ore EBITDA Margin: We expect the North American Iron Ore division's EBITDA margins to increase marginally and stabilize from 2017 onwards, as a result of recovering iron ore prices and the company's cost reduction efforts. However, iron ore prices may take longer than expected to recover. If margins start recovering later than expected, in say 2019, instead of 2017, this would represent a downside of 5% to the Trefis price estimate
For additional details, select a driver above or select a division from the interactive Trefis split for Cliffs Natural Resources at the top of the page.
Cliffs Natural Resources is an international mining and natural resources company. The company is the largest producer of iron ore pellets in North America and a major supplier of iron ore out of Australia. Cliffs was also a significant producer of coal in North America, but has been scaling back its operations in response to weak market conditions.
The company's operations are mostly located in North America, with six iron ore mines and two coal mining complexes spread across the US and Canada. The company also has a substantial presence in Australia through two iron-ore mining complexes in Western Australia.
We believe that the North American Iron Ore division is the company’s most valuable segment for the following two reasons:
Majority of Cliffs' revenue generation
The North American Iron Ore division has been in existence since the establishment of the company, and even today accounts for nearly three-fourths of the company’s total revenue. The production capacity of Cliffs' U.S. iron ore operations stood at 25.5 million tons per annum at the end of 2014.
Long-term purchase contracts with some of the world’s biggest steel producers
Cliffs' major customers are ArcelorMittal and Severstal which provide for a significant chunk of the company’s revenue from the sale of iron ore pellets. Long-term contracts with these customers ensure the sale of a substantial portion of the firm's mineral production.
Weakness in global demand for iron ore
China is the largest consumer of steel in the world, accounting for around 50% of global steel consumption in 2014. Iron ore is one of the chief raw materials in the production of steel. Thus, China is also the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. International iron ore prices are largely determined by Chinese demand, since China is also the largest consumer of iron ore in the world. Chinese steel demand growth is expected to decline by 0.5% in 2015, following on from a 3.3% decline in demand in 2014. This is concurrent with weakening economic growth in China, which has tempered the demand for steel. China's GDP growth is expected to slow to 6.8% and 6.3% in 2015 and 2016 respectively, down from 7.4% in 2014. Weakness in Chinese demand for iron ore has resulted in falling international iron ore prices. Though the bulk of Cliffs' iron ore shipments are sold to the North American integrated steel industry, contracts are benchmarked to international iron ore prices. Thus the weakness in international iron ore prices impacts realized prices for the company's iron ore shipments.
Oversupply of iron ore
On the supply side, expansion in production by majors such as Rio Tinto and BHP Billiton has created an oversupply situation. A combination of weak demand and oversupply is likely to result in lower iron ore prices over the next few years. As per Goldman Sachs, the worldwide surplus of seaborne iron ore supply will rise to 437 million tons in 2018, from an expected surplus of 184 million tons for 2015. In view of the persisting oversupply situation, iron ore prices will remain subdued in the near term.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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