Cliffs Natural Resources Inc. (CLF, Financial) performed unexpectedly well in 2016 mainly due to the strong recovery in iron ore prices. The stock was up more than 400%, making it a top performer among the iron ore miners. Moreover, the stock was off to an amazing start heading into 2017 as well, but it is down nearly 20% year to date after reaching its 52-week high in February.
Cliffs recently reported its first-quarter results. In the first quarter, the iron ore producer detailed earnings per share (EPS) of 16 cents, missing the analysts’ estimate by 4 cents. The company’s revenue came in at $462 million, exceeding the analysts’ estimate by $49.29 million. Most importantly, that figure represents a surge of 51.2% year over year.
The company’s adjusted EBITDA was $92 million, a surge of 156% compared to the first quarter of the previous year. Moreover, the company reduced its total debt by $600 million. Furthermore, the iron ore producer’s SG&A expenses were down $10 million sequentially, and $2 million year over year, to $26 million.
As a matter of fact, the iron ore prices’ downturn started in early 2011 after reaching its all-time high level. Iron ore price, however, increased from $42 per dry metric ton in January 2016 to $80 per dry metric ton in December 2016, and this was the primary reason behind the company’s impressive performance in 2016.
Moving ahead, iron ore prices endure in an uptrend this year. According to the latest forecast report from tradingeconomics.com, iron ore prices are projected to remain strong for the rest of 2017 which is obviously good news for iron ore producers going forward.
In point of fact, iron ore is one of the most significant ingredients to produce steel. Therefore, iron ore prices are also directly proportional to the steel demand in China as it accounts for 45% of steel demand around the globe. Worldsteel anticipates demand for steel in China to be flat this year at around 681 million tons.
It is true that Chinese demand has been driving iron ore prices higher, but a slowing Chinese economy along with increasing production from major iron ore producers could spell troubles in the year ahead.
Apart from this, the demand for steel in the U.S. is also slowly inching upward mainly due to President Donald Trump’s infrastructure plan. If everything goes per plan, Cliffs could relish a solid revenue growth in the future.
Summing up
Cliffs Natural Resources rewarded shareholders with triple-digit returns in 2016, but it is not likely that the iron ore producer will display the same kind of performance this year as well. Even though iron ore prices are forecasted to remain strong this year, shareholders should not expect the stock price to continue growing at a strong rate.
However, Cliffs is making several right moves as it is focusing on strengthening its balance sheet. On the other hand, the iron ore producer also seems well poised to gain massive benefits from the growing steel demand.
Moreover, it also trades at a healthy price-earnings (P/E) ratio of 7.34, significantly less than the industry’s average. As a result, shareholders should continue their long-term journey with Cliffs as its long-term outlook is positive.
Disclosure: No position in the stocks mentioned in this article.
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