Cliffs Natural Resources (NYSE:CLF) is set to announce its first quarter earnings on Wednesday. We are expecting the company to follow Q4 earnings and post a decline in net income on a year-over-year basis. Iron ore prices have not recovered to prices seen a year ago even as shipments could increase for the company. Also, the slump in U.S. coal demand will likely hit the company’s revenues. Cliffs 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 and competes with other international mining and natural resources companies including Vale (NYSE:VALE), BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO).
We are in process of revisiting our price estimate for the company’s stock.
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Iron Ore Prices Yet to Recover, Coal Demand Slumps
As a result of economic conditions in the Eurozone and a slowdown in demand from China, iron ore prices crashed to about $120 in the fourth quarter. While prices have recovered to reach $145, the mineral is still significantly down from the $180 levels seen last year. We will be closely watching North American iron ore shipments as the stronger pulse shown by the U.S. economy could lead to surprises.
As evidenced by the railroad companies’ Q1 results, U.S. coal demand has suffered a severe blow related to all-time low natural gas prices. Further, the EPA’s recent regulations effectively barring new coal-fired power plants has also played a major role in the demand slump.
The company had seen double digit year-over-year revenue growth for four consecutive quarters; however Q4 earnings were down by about 50% as iron ore prices corrected by almost 30% in the period.
Long Term Outlook Solid, Asia Pacific to Drive Growth
On a long term basis we remain optimistic about the company’s prospects. The company is eying the Asia-Pacific region to tap into the continued strong demand compared with the stagnant outlook in North America. Cliffs is expecting demand from emerging markets, primarily China, to be a major source for its growth.
In 2012 the company expects to sell nearly half of its 45+ million tons of expected global iron ore sales to seaborne customers in the Asia Pacific region, with the remainder being sold to North American customers. However, sustained weak iron ore prices could dampen the mood. In a recent announcement, the company more than doubled its quarterly dividend.