Cliffs Natural Resources (NYSE:CLF) is expected to announce its first quarter earnings sometime next week. Lower prevailing iron ore and metallurgical coal prices in the first quarter of the year as compared to the corresponding period last year are likely to impact its quarterly revenue year-over-year. 
In February, the company announced its intention to shut down its Wabush iron ore mine by the end of Q1 2014. The winding down of operations at Wabush will impact production volumes in the first quarter at the Eastern Canadian iron ore operations. In addition, the ongoing negotiations between the company management and Casablanca Capital, a hedge fund that owns a 5.2% stake in Cliffs, seem to have no end in sight. The outcome of these negotiations is important from the point of view of the company’s strategic direction going forward.
You can check out our full analysis for Cliffs Natural Resources here:
- Cliffs Natural Resources’ Q3 2016 Earnings Preview: Cost Reduction Initiatives To Drive Improvement In Earnings
- How Sensitive Are Cliffs’ Revenues To Benchmark Iron Ore Prices?
- When Will Cliffs Become A Pure Play U.S. Iron Ore Mining Company?
- How Does Cliffs’ Recent Equity Offering Impact Its Indebtedness?
- Why We’re Raising Our Price Estimate For Cliffs To $8
- Cliffs Natural Resources’ Q2 2016 Earnings Review: Success Of Cost Reduction Initiatives And Recovery In Iron Ore Demand Bode Well For The Rest Of The Year
Iron ore and Coal Prices
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 largely determined by Chinese demand as China is the largest consumer of iron ore in the world. But flagging demand for iron ore from China has put downward pressure on iron ore prices. A Chinese government crackdown on polluting steel plants has forced many of them to shut down. In addition, tightening of credit by Chinese banks to steel plants, many of which are not in sound financial condition, will affect the demand for iron ore. This has resulted in an inventory build-up at Chinese ports which will further curtail imports. 
On the supply side, expansion in production by majors such as Rio Tinto and BHP Billiton has created an oversupply situation. A combination of these factors is likely to result in lower iron ore prices in the near term. Lower iron ore prices will impact Cliffs much more than the major mining companies due to the company’s higher cash costs per tonne of around $65-70, as compared to less than $50 for Rio Tinto and BHP. 
China is also the largest consumer of metallurgical coal in the world. There has been falling demand for the commodity by the Chinese steelmaking industry along with lower demand from other major consumers such as Japan and the EU. Falling demand coupled with an oversupply situation due to expansion in production by major mining companies has resulted in plummeting coal prices. This will have a negative impact on Cliffs’ North American coal business which primarily sells metallurgical coal, prices for which are linked to prices of Australian metallurgical coal. 
Unsustainably high costs per tonne coupled with low iron ore prices have forced Cliffs to announce the idling of its Wabush iron ore mine by the end of Q1 2014. Winding down of operations at Wabush will impact production volumes in the first quarter and for the rest of 2014 for Cliffs’ Eastern Canadian iron ore operations.
In addition to the troubles caused by falling commodity prices and mine closures, Cliffs’ negotiations with Casablanca Capital have resulted in a stalemate. Casablanca Capital is a hedge fund that has a 5.2% shareholding in Cliffs. Casablanca favors separating Cliffs’ U.S. and international operations, by bundling its Canadian and Asia Pacific businesses into a separate entity. Also, negotiations between Cliffs and Casablanca over the number of Casablanca’s nominees on Cliffs’ board of directors have not resulted in an agreement. The outcome of this tussle between Cliffs’ management and Casablanca may impact company strategy going forward. 
What to Look Out For
It will be interesting to note whether Cliffs’ management maintains its production and sales forecast for 2014 in the backdrop of an adverse price environment. Further, the subsequent conference call may shed more light on the current status of its deadlock with Casablanca Capital. These developments will give more clarity about the road ahead for Cliffs.
The current Trefis price estimate for Cliffs is $24.67, which represents a 30% upside to the current market price. This will be revised after the earnings announcement.Notes:
- Iron ore spot price chart, Y Charts [↩]
- The Latest Iron Ore Price Slump: Causes and Effects, Forbes [↩]
- BHP, Rio Gamble with Stacked Iron ore Deck, Mineweb [↩]
- Coking coal price crashes through $100, Mining.com [↩]
- Cliffs Natural Resources Inc. Proposed Settlement with Casablanca Capital, Cliffs News Release [↩]