Can Cliffs’ North American Coal Operations Weather the Storm?

by Trefis Team
-6.88%
Downside
5.47
Market
5.09
Trefis
CLF
Cleveland-Cliffs Inc.
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Cliffs Natural Resources (NYSE:CLF) reported that its metallurgical coal mining operations at the Oak Grove mine in Alabama was hit by a storm. [1] The largest producer of iron ore pellets in North America said that its above-ground operations at the mine located 25 miles southwest of Birmingham, Alabama were affected by severe weather, including a tornado storm. The company’s employees are all reported to be safe and unharmed. Cliffs competes with other international mining and natural resources companies like Vale (NYSE:VALE), BHP Billiton (NYSE:BBL) and the Rio Tinto group.

We currently have a $102 price estimate for Cliffs Natural Resources stock, about 10-15% above market price.

Caught in the Eye of the Storm

The tornado that hit parts of Alabama on April 27th, and claimed dozens of lives around Tuscaloosa, left the mine in an inoperable condition. Cliffs reports that there has been significant damage to the mine’s preparation plant and overland conveyor system. Moreover, there has been an overall infrastructure damage in the region as a whole. While the exact impact of the damage is yet to be assessed by the company, it is clear that there will be delays in customer deliveries from the mine for some time going forward.

What this Means to Cliffs

The Oak Grove mine has produced between 0.9 million tons and 1.4 million tons of metallurgical coal over the last 5 years, and has a rated annual production capacity of 2.5 million tons. Cliffs was also keen on planning capital expenditures at this mine over the next few years to improve its capacity.

But while the capacity increase plans could be put on hold, the entire production capacity of the mine could be hit. Assuming the worst, if production from the mine stops completely, this would mean the coal sold by the company’s North American coal division would fall to 5 million tons in 2011, from our current estimate of 6.5 million tons.

This scenario implies a 3% drop in our $102 price estimate for Cliffs.

Things will, however, not be so grim. The more likely outcome being that Cliffs will be able to get operations at the mine ramped up and ready in a year. The impact would then primarily fall within the period until production is resumed, and the expenses incurred to get the mine up and running.

See our full analysis for Cliffs Natural Resources stock here

Notes:
  1. Cliffs Natural Resources Inc. Oak Grove Mine Impacted by Severe Weather in Alabama, Cliffs Press Releases, April 28 2011 []
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