Cliffs Completes Bond Buyback As Part Of Ongoing Measures To Tackle Challenging Business Conditions

Cliffs Natural Resources (NYSE:CLF) continues to make incremental improvements to its operating and financial situation, as it looks to boost flagging cash flows in the prevailing environment of weak iron ore prices. The company recently completed the buyback of $125 million worth of bonds due in 2018. ^[1] In addition to reducing the company’s outstanding debt, the move would help Cliffs save $18 million in interest payments until maturity. ^[1] The bond buyback is the latest in a series of moves undertaken by Cliffs’ management in response to the adverse iron ore pricing environment.

Weak Iron Ore Prices

Iron Ore Prices, Source: Y Charts

Iron ore is the main raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining prices of the commodity. Though a majority of Cliffs’ iron ore sales are to the North American steel industry, sales agreements are benchmarked to international iron ore prices. International iron ore prices are primarily determined by Chinese demand, since the Chinese steel industry purchases nearly two-thirds of the world’s seaborne iron ore supply. ^[2] Chinese steel demand growth is expected to decline by 0.5% in 2015, after a 3.3% decline in growth in 2014. ^[3] Weak demand for steel has translated into weak demand for iron ore.

On the supply side, rising iron ore production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. ^[4] The worldwide surplus of seaborne iron ore supply is expected to reach 437 million tons in 2018, from an anticipated surplus of 184 million tons in 2015. ^[5] The oversupply situation has resulted in a sharp decline in iron ore prices over the last twelve months, as illustrated by the chart shown above. Given the prevailing weakness in demand, the supply surplus is likely to keep iron ore prices subdued in the near term.

Cliffs’ Ongoing Response to Challenging Business Conditions

In addition to weak iron ore prices, Cliffs’ business has also been negatively impacted by the rising tide of cheap steel imports into the U.S. As a result of the competition from steel imports, the U.S. steel industry is operating at lower production levels and capacity utilization rates. In order to adapt to this situation, the company slashed its production guidance for its U.S. Iron Ore operations to 19 million tons for 2015, from its original guidance of 22 million tons for the year. ^[6]

See our shipment forecasts for Cliffs’ North American Iron Ore Division

In addition to lowering production levels, the company has sharply reduced capital spending, with capital expenditure for 2015 expected to range between $100 and 125 million, as compared to $284 million last year. ^[7] Cliffs reported negative operating cash flows in the first six months of the year. Reduced capital spending and lower interest payments will help offset some of the impact of negative operating cash flows in the near term. However, all these measures are only incremental in nature, and will help ensure that Cliffs is able to meet its near term debt obligations. Only a significant improvement in iron ore pricing would appreciably improve the company’s business prospects. However, given the prevailing iron ore oversupply situation, such an outcome is unlikely to occur any time soon.

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1. Cliffs Natural Resources Inc. Announces Successful Conclusion of Tender Offer, Cliffs Natural Resources [↩] [↩]
2. China Plans Iron Ore Subsidy for Miners Amid Rout, News Says, Bloomberg [↩]
3. Short Range Outlook 2015-2016, World Steel Association [↩]
4. BHP, Rio Gamble with Stacked Iron Ore Deck, Mineweb [↩]
5. Iron Ore Majors Boosting Supply as Glut, China Sink Prices, Bloomberg [↩]
6. Cliffs Natural Resources Q2 2015 Earnings Call Transcript, Seeking Alpha [↩]
7. Cliffs Natural Resources Q2 2015 10-Q, SEC [↩]