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Investment Overview for Cliffs Natural Resources (NYSE:CLF)
WHAT HAS CHANGED?
Iron ore and metallurgical coal prices fell sharply over the course of 2015. This prompted Cliffs to review its business priorities. The company decided to focus on its profitable U.S. Iron Ore operations and has decided to sell off its higher cost assets, provided that it can find buyers for the same. Further, the imposition of antidumping duties on steel imports from a range of countries has helped boost the prospects of the domestic steel industry and, in turn, Cliffs operations.
- Exit from coal mining business
- With the downturn in coal prices over the past few years, Cliffs' North American Coal segment was consistently reporting losses. The company sold off its coal mines in a phased manner and with the sale of its last two coal mines in Alabama and West Virginia in December 2015, exited the coal business.
- Signing of long-term supply agreements with ArcelorMittal and U.S. Steel Canada
- Competition from low priced steel imports had been negatively impacting the prospects of domestic steelmakers over the past few years. Regulatory intervention in the form of the imposition of antidumping duties on steel imports from a number of countries exporting steel to the U.S. has diminished the adverse impact of competition from these imports. As a result, the business environment for both domestic steelmakers and iron ore miners has become more favorable.
- Cliffs signed two long-term supply agreements with ArcelorMittal and U.S. Steel in the first half of 2016. The new agreement with ArcelorMittal replaces an existing agreement which was set to expire at the end of 2016. Cliffs also revised upwards its 2016 shipment guidance for its U.S. Iron Ore operations, reflecting the improved demand conditions.
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: Iron ore prices have declined over the past few years due to a global oversupply situation. However, we expect prices to bottom out in the initial part of the forecast period and rise over the rest of it. This would lead to an increase in revenue per ton for Cliffs' North American Iron Ore division as well, which have price adjustments linked to global iron ore prices. However, if the recovery in iron ore prices is weaker than anticipated and revenue per ton for the North American Iron Ore division reaches $85 per ton instead of $ 91 per ton (as currently factored into our model), it would represent a downside of around 15% 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 onward, as a result of recovering iron ore prices and the company's cost reduction efforts. However, if the recovery in margins is stronger than expected and the division's EBITDA margin recovers to 36% by the end of the forecast period, instead of 34% (as currently factored into our model), it would represent an upside of 12% to our current 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 (Cliffs' share of production capacity) stood at 25.5 million tons of iron ore pellets per annum at the end of 2015, which represents 44% of U.S. iron ore pellet production capacity.
Long-term purchase contracts with some of the world’s biggest steel producers
Cliffs' major customers are ArcelorMittal and AK Steel which account 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 half of global steel consumption. 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 around two-thirds 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 declined for two consecutive years in 2014 and 2015 and is expected to decline in 2016 as well. Going forward, the demand for iron ore will be heavily contingent upon the demand for steel and the production of the commodity in China. If steel production does not pick up sufficiently, the growth in iron ore prices will remain subdued.
Oversupply of iron ore
Weakness in demand for iron ore and the ramp up of production by major iron ore mining companies has resulted in an oversupply situation. The worldwide surplus of seaborne iron ore supply is expected to widen from around 33 million tons in 2016 to around 100 million tons in 2018. The persistent oversupply situation will limit the upside for iron ore prices.
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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