Cliffs Natural Struggles Amid Weak Iron Ore Prices

Cliffs Natural Resources (NYSE:CLF) announced its second quarter earnings for 2013 on July 25. It reported revenues of $1.5 billion, a decrease of 6% year-over-year. The lower revenues were driven by a 11% decrease in global seaborne iron ore pricing. Net income stood at $133 million compared to $258 million in Q2 2012.

The lower net income was primarily driven by lower consolidated sales margin, which was offset partially by a significant decrease in year-over-year SG&A and exploration expenses. Also, Cliffs recorded recorded a $68 million asset impairment charge in the second quarter due to the write-down of its Amapa investment. ^[1]

Cliffs maintained its sales and production outlook for the U.S. Iron Ore division and the Asia-Pacific Iron Ore division. However, for the Eastern Canadian Iron Ore division, it reduced its  full-year sales volume expectations. Revenue per tonne of iron ore sold decreased across all segments due to global weakness in iron ore prices. ^[2]

See Full Analysis for Cliffs Natural Resources Here

Lower Realized Iron Ore Prices

China is the world’s biggest consumer of iron ore and its sluggish economic growth rate has dampened prices of nearly all major commodities. The country is in the process of reorienting its economy away from investment in capital assets and towards greater domestic consumption. Also, exports have fallen. China reported a GDP growth rate of 7.5% in the second quarter this year, a far cry from its double-digit growth rate days. ^[3]

Although the majority of Cliffs’ revenues come from its North American iron ore business which sells primarily to U.S. customers, sales prices are nevertheless benchmarked to global prices which are influenced to a large extent by the Chinese demand. In accordance with these trends, Cliffs reported an iron ore price of $126/tonne for the quarter, down from $141/tonne in Q2 2012. ^[4]

Performance Of Various Business Segments

The U.S. Iron Ore business recorded sales volumes of 5.7 million tons, down from 5.4 million last year. The increase was primarily due to higher customer demand and increased export sales related to pellet contracts that were previously supplied by Cliffs’ Wabush Mine. Due to a 8% decrease in revenue per ton, total segment revenues decreased year-over-year from $705 million to $701.7 million despite the higher volumes.

The Eastern Canadian Iron Ore business sold 1.9 million tons, a decrease of 18% from the second quarter last year. The decrease was driven by lower iron ore pellet availability from the Wabush mine. Year-over-year revenues decreased from $303.9 million in Q2 2012 to $213.9 million, due to lower volumes as well as a 14% decrease in revenue per tonne.

The Asia Pacific Iron Ore division reported sales volumes of 3 million tons, down 3% from last year. Revenues fell from $361.1 million in Q2 2012 to $327 million due to a combination of lower sales and a price drop of more than $8 per ton.

The North American Coal business recorded revenue of $245.9 million, an increase from $209.2 million in Q2 2012. This was due to a sales volume increase by 36%, offset partially by 13% lower prices in line with prevailing market trends.

Other Business Developments

Cliffs has temporarily stopped the environmental assessment process for its $3.3 billion chromite project due to unresolved land rights and unfinished agreements with the provincial government. Without substantive progress on these fronts, it is reluctant to move forward with the project, especially at a time when its resources are strained due to a difficult business environment. ^[5]

The Ring of Fire region is thought to hold up to $50 billion worth of minerals and is going to be North America’s first major source of chromite. Black Thor alone is expected to produce 600,000 tonnes of ferrochrome once production begins. Cliffs has a capital expenditure budget of close to $3.3 billion for this project. Ferrochrome is used mostly in the production of stainless steel and there are very few mines in the world with large deposits of chromite from which it is made.

Cliffs also announced an increase to its 2013 capital expenditures budget to approximately $1 billion from its previous expectation of $800 – $850 million. The expenditure target has been revised upward due to additional spending required at the Bloom Lake Mine related to tailings and water management. Cliffs expects to fund the increase in its capital expenditure expectation from available liquidity and borrowing arrangements, including lease financing.

Outlook For 2013

Cliffs has maintained its sales and production outlook for the U.S. Iron Ore and Asia-Pacific Iron Ore business for the full year.

For the Eastern Canadian Iron Ore segment, the company decreased its production volumes expectation to 8-9 million tonnes from its previous estimate of 9-10 million tonnes. The decrease in expectations was primarily driven by lower volumes from the Bloom Lake Mine on account of lower than anticipated throughput and ore recovery rates.

In the Asia Pacific Iron Ore division, Cliffs maintained the sales and production volumes at 11 million tons.

Our price estimate for Cliffs Natural Resources is $30, which will be revised shortly in view of the first quarter earnings results.

Understand How a Company’s Products Impact its Stock at Trefis

1. Cliffs Natural Q2 2013 10-Q, SEC [↩]
2. Cliffs Natural Q2 2013 Earnings Conference Call, Seeking Alpha [↩]
3. China Q2 GDP growth Slows To 7.5%, China Daily [↩]
4. Cliffs Natural Q2 2013 Earnings Presentation, Cliffs Website [↩]
5. Cliffs Natural Resources Temporarily Suspends its Chromite Project Environmental Assessment Activities Pending Resolution of Various Issues, Cliffs News Release [↩]