Here’s Why We’re Raising Our Price Estimate For Cliffs To $10

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Cliffs Natural Resources has benefited from an improvement in the iron ore pricing environment over the past few months. The following chart illustrates the extent of the recent recovery in iron ore prices.

Iron Ore Prices LTM Jan 2017

Iron Ore Spot Prices, Source: Y Charts

Iron ore prices have benefited from an improved demand outlook from the U.S. and China in recent months. President Trump’s plans for a $1 trillion revamp of U.S. domestic infrastructure has translated into the firming up of the U.S. demand outlook for steel and iron ore going forward. [1] In addition, prices of iron ore have also benefited from a fiscal stimulus in China, the world’s largest consumer of the commodity. [2] As a result of the firming demand conditions, iron ore prices are expected to average higher this year as compared to the year recently ended.

In addition to benefiting from a favorable pricing environment, the company’s operations were also positively impacted by its cost reduction initiatives. The company’s U.S. and Asia Pacific iron ore operations reported year-over-year declines of 7% and 8%, respectively, in their cash cost of goods sold and operating expense rates in 2016. [3] With an improved pricing environment, lower cost operations will facilitate margin expansion for the company going forward.

As a result of these aforementioned changes in Cliffs’ business and operating conditions, we have suitably modified our forecasts for various drivers in our model for the company’s stock price, including realized prices and margins.

This has translated into our new $10.47 price estimate for the company, which is a reflection of the uptick in the company’s fortunes.

Have more questions about Cliffs Natural Resources? See the links below.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Cliffs Natural Resources

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Notes:
  1. U.S. governors prepare wish lists for Trump infrastructure promise, Reuters []
  2. China’s stimulus-driven growth bolsters metal prices, Financial Times []
  3. Cliffs Natural Resources 2016 10-K, SEC []