Cliffs Natural Resources (NYSE:CLF) has revised its 2012 thermal coal sales and production volume outlook down from 1.1 million tons to about 800,000 tons.  The abundant supply and low prices of natural gas are largely to blame. Natural gas costs roughly the same as coal in terms of energy produced, and is cleaner to burn and easier to transport than coal. Furthermore, environmental standards are becoming increasingly strict, thus forcing companies to search for cleaner energy sources to meet these standards.
We, however, maintain our price estimate for Cliffs Natural Resources at $71, which is about 45% ahead of the current price of the company’s stock.
Coal will Continue to Add Value….
Even if thermal coal demand doesn’t pick up going forward, it will not have a significant impact on the company’s value, as the contribution of thermal coal is much lower than metallurgical coal. While overall metallurgical coal demand may also take a hit as steel demand slumps, we believe Cliffs enjoys a unique advantage in the highly fragmented coal industry as a result of its long-term relationships with some of the world’s largest steel manufacturers, owing to its iron ore supply contracts.
These existing relationships make it easier to win coal supply contracts. We expect the company’s coal shipments to reach nearly 9 million tons by the end of the Trefis forecast period as a result of these relationships and an expected increase in production.
Cliffs’ primary coal operations are in North America, consisting of five metallurgical coal mines and one thermal coal mine.
…..but Customer Concentration a Concern
Our primary concern stems from the fact that the North American iron ore and coal divisions’ revenues are highly dependent on a few customers – ArcelorMittal, Algoma and Severstal together make up about 35% of Cliffs’ total revenues. A loss of sales to any of these existing customers could have a substantial adverse impact on the company’s revenues and profitability.Notes: