Cliffs Natural Resources (CLF, Financial) significantly reduced its overall debt and focuses on further lowering the debt burden by eliminating the common share dividend to be paid to the shareholders.
A closer look at the business
For the complete fiscal year 2014, the iron ore production for Asia-Pacific was recorded at 11.4 million tons. Australia is identified as a country to continue the business for just the low cost producers. For instance, the operations at Koolyanobbing mine comes under such category.
Further, for boosting the company’s growth prospects, the fresh management team had focused on giving preference for implementing a business strategy keen on the key Iron Ore segment of the U.S. for the company and the expected sale of its other non-strategic mining operations including, North American Coal business, Asia Pacific Iron Ore and the Eastern Canadian Iron Ore segments.
The focused efforts of Cliffs Natural Resources to lower the costs and identify to operate the low cost mines in Australia is believed to not only significantly reduce the company’s excessive debt on the balance sheet but also hurt the shareholder returns.
Recently, Cliffs has primarily benefited from the strong decline of the Australian dollar against the U.S. dollar which has helped the company lower the production and operating costs coupled with the same benefit to other miners as well.
Cliffs is also witnessing a sharp fall in the production costs for North America with the management keen on further reducing the costs and display robust performance even after continued decline in the coal pricing.
The major reduction in the exchange rate for the Australian dollar against the U.S. dollar could be short-lived and fail to provide long-term respite in terms of production costs. However, the focused initiatives of Cliffs to lower the production costs and reduce the non-strategic expenditures are estimated to continually benefit the company and support it in coming out of this grave situation.
Restructuring in progress
Cliffs strategically sold Logan County Coal which delivered $174 million in cash and also provided the much-needed tax advantage to cash flows. For the rest of its two key coal mines, Oak Grove in Alabama and Pinnacle in West Virginia, Cliffs is looking for a right deal to sell these key assets at an appropriate price.
Cliffs is also performing a major restructuring operation at the Bloom Lake Group which is estimated to further lower the company costs and enable it to execute planned future investments.
The significant initiatives adopted by Cliffs to lower the costs, including selloff and restructuring, are expected to reduce the huge debt on the company and allow it to return to profitability with time.
Cliffs is believed to have survived the tough market competition by maintaining superior quality of production at reasonable costs mainly due to significant cost-cutting efforts taken by the company.
The fresh supply by the Cliffs in the Great Lakes is under sharp scrutiny for superior quality standards and is seen to be well ahead of the quality offered by its competitors regarding the superior production and reliable supply of iron ore pellets.
The higher quality production of Cliffs compared to its key competitors is estimated to drive significant customer traction for company products and enhance its visibility in an extremely crowded marketplace with lots of vendors.
There are mounting problems for Cliffs in its mines at Australia with iron ore pricing trend depicting a 42% decline in 2014 to a five-year low. However, Cliffs plans on countering the major decline through a significant buyback of its majority of shares and sale of key foreign assets. Still, the future growth prospects seem unstable with any major turnaround needing strategic accomplishment of counter techniques. Hence, the key analysts see Cliffs as an extremely risky investment with no significant shareholder returns expected soon.
Conclusion
Overall, the investors are advised to “Hold” their position in Cliffs Natural Resources Inc. looking at the poor company valuations and declining growth prospects with PEG ratio of -59.72, depicting no growth but decline compared to solid industry’s growth average of 0.24. The profit margin of -156.24% represent no profit but loss. Also, Cliffs has a poor record of earnings per share growth. In addition, Cliffs is hugely debt-laden with significant total debt of $3.15 billion against weaker total cash of just $290.90 million, restricting the natural resources major to plan for future strategic investments.
