Beleaguered mining company Cliffs Natural Resources (CLF) reported a surprisingly strong profit late Thursday, sending CLF stock up sharply to end the week. That should help Cliffs fend off an activist investor for the time being, even as the outlook for mining stocks remains bleak.
Mining stocks and other industries that depend on high commodity prices have been struggling for a couple of years now, and CLF stock has been no exception. Even with the current rally, at $23 and change, CLF stock is still well below the $100 per share it hit in 2011.
As we noted recently with Caterpillar (CAT), declining metals prices have been weighing on sector shares for years. A wide range of hard commodities are near or below prices that were last seen at the end of 2010.
Part of that is due to China, where the economy is slowing down dramatically. China isn’t constructing things like highways and bridges and skyscrapers at the same feverish pace. That’s one thing that has been weighing on metals prices.
At the same time, the global economy has been sluggish, with giant areas of demand like the U.K. and eurozone struggling to stay out of recession. Additionally, metals prices are under pressure in some cases by too much production, as mining companies raced to produce more hard commodities when prices were rising years ago.
CLF Stock Rallies on Quarterly Results
Investors in CLF stock received a reprieve from the misery of mining stocks — at least for one quarter. Cliffs swung to an adjusted profit of $1.22 per share in the most recent quarter, beating analysts’s estimates by a wide margin.
Cliffs, which mines iron ore and metallurgical coal, was helped by rising prices for iron ore in the latest quarter — but most of the earnings beat came from cost cuts. That has been the playbook for mining stocks like CLF stock. Revenue actually slipped to $1.52 billion from $1.54 billion, so Cliffs had to make up the difference by slashing expenses.
Although prices for seaborne iron ore were up 10% in the last quarter, the global macroeconomic forces weighing on commodity prices are still in place. CLF stock is still in a deep hole, having lost 80% since 2011, and calls to break up the company aren’t going away.
New York hedge fund Casablanca — with a 5.2% stake in CLF stock — wants Cliffs to spin off its international businesses and double its dividend. (Cliffs stock has a current dividend yield of 2.8%.) But Cliffs is balking at the proposals even as it takes some drastic steps to shut up Casablanca.
Indeed, earlier this week, Cliffs said it would slash capital expenditures this year by more than half. It will also idle production at its Wabush mine in the first quarter. In addition to those cost cuts, Cliffs shook up its board of directors last summer and on Friday named Gary Halverson as CEO. Casablanca pushed its own candidate for the CEO job earlier in the week.
Given the action in CLF stock after earnings, the company looks to have bought itself some time in its fight with Casablanca. If Cliffs can continue in this vein until metals prices turn up decisively, it might even fend off the hedge fund for good.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.