Cliffs Exits Coal Mining Business As Part Of Larger U.S. Iron Ore Focused Strategy

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The holiday season has brought some cheer for Cliffs Natural Resources (NYSE:CLF), with the company completing the sale of its remaining North American coal business. [1] Cliffs has sold off the Pinnacle Mine in West Virginia and the Oak Grove Mine in Alabama to Seneca Coal Resources for $268 million. In addition, Seneca Coal could pay Cliffs an earn out of up to $50 million, which is contingent upon the terms of a revenue sharing plan that extends through the year 2020. ((Cliffs Natural Resources Inc. Completes the Sale of its Remaining North American Coal Business, Cliffs Natural Resources News Release)) Cliffs’ management had been looking to sell off its North American coal business over the course of 2015. The sale fits in well with the company’s stated strategy of focusing on its U.S. Iron Ore operations, which is its most profitable business segment.

Plummeting Coal Prices

Metallurgical Coal Prices, Source: Bloomberg

The chart shown above illustrates the main reason for Cliffs selling off its remaining coal business. Both the Pinnacle and Oak Grove mines produce metallurgical coal, which is used as a raw material in steelmaking. Met coal prices have fallen sharply from the levels of $330 per ton seen in 2011. Coal miners globally had invested in boosting production capacity to take advantage of soaring prices in 2011, betting on sustained Chinese demand for the commodity. However, with the ongoing economic slowdown in China, the demand for steel from the country has declined, which has, in turn, negatively impacted the demand for met coal. Though coal miners globally have cut back on capital spending and have also idled significant chunks of high-cost production capacity, with demand for the commodity flagging, it could be some time before coal prices recover significantly. The decline in pricing has adversely impacted the profitability of coal miners globally, including Cliffs, prompting the company to exit the coal business.

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Focus on U.S. Iron Ore

In addition to the sharp decline in coal prices, Cliffs has also had to contend with plummeting prices of iron ore, the commodity which is the mainstay of its business. Much like met coal, the markets for iron ore, which is used as a raw material in steelmaking, are currently characterized by an oversupply situation. Rising iron ore production from iron ore majors such as Vale, Rio Tinto, and BHP Billiton, in the face of faltering Chinese demand for steel and iron ore, has negatively impacted benchmark iron ore prices as illustrated by the chart shown below.

Iron Ore Prices, Source: Y Charts

With falling iron ore prices adversely affecting the profitability of its business, Cliffs’ management has focused on cost reduction and the rationalization of capital spending across all of its business segments. More importantly, post the change in management last year with activist hedge fund Casablanca Capital taking control of Cliffs’ board, the company has made its U.S. Iron ore operations, its most profitable segment, the focal point of its business. [2] Cliffs’ management has previously indicated that all of its other mining assets are potential candidates for asset sales, provided that the company can find buyers for them. The company’s high-cost Canadian iron ore mining operations filed for bankruptcy towards the end of last year. With the sale of its coal mining assets, only the company’s Asia-Pacific iron ore mining assets remain operational from among its non-core assets. Cliffs’ Asia-Pacific operations have a remaining life of around five years and the management does not have any plans of developing more of its iron ore reserves in the region. Thus, Cliffs intends to exit its Asia-Pacific operations once its Koolyanobbing mine in Australia ceases production, unless it can find a buyer for the same.

With the completion of the sale of all of its coal mining assets, Cliffs is a step closer to becoming a pure play U.S.-centric iron ore miner. In a period of weak iron ore and coal pricing, focusing on its most profitable mining asset certainly makes sense from Cliffs’ perspective. Given that the subdued commodity pricing environment is likely to prevail for some time to come, the sale of its coal mining assets should stand the company in good stead in the near term.

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Notes:
  1. Cliffs Natural Resources Inc. Completes the Sale of its Remaining North American Coal Business, Cliffs Natural Resources News Release []
  2. Cliffs Natural Resources Q3 2014 Earnings Call Transcript, Seeking Alpha []