Cliffs Natural Resources Inc (NYSE:CLF) — This small-cap company is one of the largest suppliers of iron ore pellets to the North American steel industry. Following the divestiture of its coal assets in 2015, it is now a pure-play iron-ore producer.
Zacks reports that its analysts have noted higher earnings estimate revisions, and Standard & Poor’s says that the U.S. steel mill industry’s capacity utilization has improved following several successful trade cases and new punitive tariffs on imports.
New agreements with its largest customer establish a minimum delivery of pellets, which is higher than double its current contract. Zacks reports that annual earnings estimates have risen from 92 cents to $1.07 per share by Street analysts.
S&P has raised its 12-month target price from $4.50 to $9 and increased the 2016 EPS estimate from a loss of 5 cents to a gain of 26 cents. It estimates earnings of 30 cents in 2017.
Second-quarter EPS of 5 cents was reported vs. an estimated loss of 21 cents, along with a 16% better-than-expected increase in sales.
CLF topped at $8.45 in late July, then consolidated for several weeks. But it fell sharply on August 10 following management’s announcement that the company would price a share offering at a sharp discount to its current price. It said that it would sell “about 44.4 million shares at $6.75 to raise $300 million, and the stock fell 8.2%, opening a gap from $7.66 to $7.54.
However, the good news for stockholders is management’s decision to use the proceeds to pay off $301 million in notes, and that will save $17 million annually on interest payments.
The stock has fallen to long-term support at its May and June high at $5.45 to $5.50. It is, I believe, due to a bounce to the middle of the gap that opened on the announcement of the new stock offering.
Thus buy CLF at under $6 for a trading target of $7.50-plus, and an objective of over 22%.
As of this writing, Sam Collins owned shares of CLF.
