CLF – Will Earnings Turn Cliffs Stock Around?

by Aaron Levitt | October 21, 2013 11:34 am

cliffs natural resources CLF[1]Cliffs Natural Resources (CLF[2]), which operates in two commodities with currently awful pricing environments, has been forced to deal with lower iron ore and metallurgical coal prices for the last year or so. That has led to dour Cliffs earnings reports and stagnant cash flows.

That fact hasn’t been lost on Cliffs stock holders, who have exited CLF to the tune of roughly 40% this year.

In fact, this decline has caused Cliffs stock to become something of a battleground between analysts and investors, who are betting on whether CLF has any sort of real value. The result? A slew of analyst upgrades … and downgrades.

With Cliffs earnings coming up after the bell Oct. 24, Wall Street will finally get a chance to see whether CLF has the goods.

What’s Expected

Like many commodity stocks, Cliffs Natural Resources has had a tough going. With iron ore and coal prices plunging because of slack global growth and demand, CLF first-quarter earnings plunged about 73% year-over-year. That sent the company into a tizzy, and Cliffs closed mines, cut production and ultimately reduced its dividend by about three-quarters. That came on the back of a nearly $900 million annual loss for 2012.

However, some analysts think further downside is limited.

That’s because prices for Cliffs’ two main products — iron ore and coking coal — have finally begun to move upward from their depths. Strengthening demand in key emerging markets like China and India has finally taken some slack out of supply gluts. Once again, the Asian Dragon has begun to beef up its infrastructure spending through stimulus measures — China’s latest higher PMI and GDP growth numbers underscore that the nation is once again in the driving seat. All in all, that should result in a continuing stabilization of iron ore prices.

That helped Cliffs earnings surprise to the upside when the company reported back in July, though the number still was far less than the year-ago period’s. CLF squeezed out 82 cents per share in profits, which beat estimates by 9 cents. More importantly, CLF managed to reduce its high debt load by about $110 million[3].

Building on that strength of higher commodity demand and pricing, analysts have once again turned favorable toward Cliffs stock. Citigroup estimates that CLF will report earnings of 78 cents per share — 22 cents better than its previous estimates, and an echo of similar projections from analysts at Zacks and Wells Fargo. Meanwhile, iron ore targets have been raised upward to $121 per ton[4].

CLF Getting Better Longer-Term

Given that the bar is so low for CLF, any good news could send Cliffs stock skyward. The obvious catalyst is both iron ore and metallurgical coal demand in China, though Cliffs also is moving to capitalize on some trends here in the U.S.

Cliffs is actively pursuing potential opportunities to supply direct-reduced iron (DRI) pellets for steelmakers such as Nucor (NUE[5]) and AK Steel (AKS[6]). As I’ve discussed before, DRI is a steel-making procedure[7] that uses natural gas instead of coal, and could be a huge growth industry for the firm as more steel companies take advantage of lower natural gas prices. Recent deals with the two firms — which extend out to 2023[8] — should help stabilize and boost cash flows at the struggling firm.

Add in recent management changes courtesy of shareholder activism, and you have a recipe for Cliffs to surprise big in 2014.

The Cliffs earnings report might just give us an early hint.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. [Image]:
  2. CLF:
  3. $110 million:
  4. $121 per ton:
  5. NUE:
  6. AKS:
  7. steel-making procedure:
  8. which extend out to 2023:

Source URL:
Short URL: