Investors Should Be Cautious While Investing in Cliffs Natural Resources

The shares of Cliffs Natural Resources (CLF, Financial) are constantly moving toward all time lows amidst a number of challenges reeling around the company. In the past year, its stock has declined more than four times and even now it does not seem to have hit the bottom as it continues its downward momentum. The company recently reported its fourth quarter results that topped the street expectations. In spite of this, Cliffs failed to cheer the investors.

Moving in the wrong direction

During the quarter, its sales declined 15.2% from a year ago period to $1.28 billion, while earnings adjusted for onetime costs came in at 1 cent per share compared to 1.64 cents last year. The falling commodity prices continued to weigh on its financials, which was further backed by weak iron ore demand. Led by these headwinds, Cliffs has suspended its dividends that will reduce its expenditure while saving significant amount of capital.

Strategic decisions such as these enabled the company to reduce its debt by a substantial amount and also lowered its costs, which exceeded its own expectations. Cutting off the quarterly dividends may be painful in the near term but it is a significant step in reducing its debt that would yield good return in the long run.

Positives to note

On the positive side, Cliffs made significant progress in its cost reduction efforts in the Asia Pacific iron ore segment (APIO). During the quarter, cash production cost in the region was down 25% year over year, which was mainly driven by increased iron ore production. The management is taking various initiatives that will further cut down its cost by almost $20 per ton compared to last year. Going forward, the company is planning to exit Australia after the five year life of mine and until then, these efforts will strengthen its business.

Although the company is working hard to bring its business back on track, all its efforts are more than offset by the near term headwinds it is facing. And to top that, many of the analysts have downgraded the stock reducing their price targets. For example, Nomura has reduced its rating with a $5 price target citing that the business will remain under pressure because of continued weakness in iron ore prices.

These factors will continue to weigh on its stock, and until and unless there is a turnaround in the iron ore prices its shares will continue to underperform. Interestingly, some positive cues are coming in from the market regarding iron ore gaining back its strength. According to Brian Yu of Citigroup, iron prices are expected to hit bottom in the third quarter of the current fiscal.

Conclusion

It will be a matter of time to see how things work out with Cliffs in the days ahead. Currently it does not have any trailing P/E, but its forward P/E looks impressive at 11.06, reflecting that its earnings will improve. However, considering the headwinds discussed above, it seems prudent for investors to avoid this stock for the moment and wait on the sidelines checking for any reversal in iron ore pricing trends, as it will be the main factor driving Cliffs Natural Resources back to its former glory.