Iron ore miners have struggled due to the fall in the prices of the metal and Cliffs Natural Resources (CLF, Financial) is no exception to it. The company has lost over 70% of its value over the last 12 months, and it may look like a cheap buy; however I think it is a value trap that investors should avoid. Let’s take a look at the reasons why I think Cliff Natural Resources will continue falling.
Cost-cutting moves
The company's cost-cutting steps have produced noteworthy results. In fact, as a result of these hard works, expenditure for the first quarter plunged to $16 million, which reflects an 85% decline as equated to last year. But these initiatives are not adequate and management is now compelling more aggressive initiatives in order to decrease costs.
Consequently, the company is further dropping its capital expenditure budget to $125 million, which a $25 million decrease from its previous supervision. Along with this, the miner has also reduced its headcount by 25% in the first quarter. These additional steps should improve its balance sheet going frontward.
However, regardless of the cost-cutting actions, it's unlikely for Cliffs Natural Resources to overcome the fall in iron ore prices. Iron ore prices are down near to 30% y-o-y and may plunge more as Goldman Sachs in recent times forecasted that iron ore prices will carry on to fall due to feeble demand and intensifying supplies. The firm noted:
"The structural drivers of the iron ore price trump cyclical drivers and they are unchanged since mid-2014: demand is lackluster, supply growth continues and prices must overshoot on the downside to force high-cost mines to close."
Another challenge
Furthermore, the steel market of China is already oversupplied; that is the reason why companies are being forced to export steel at truncated prices in order to move inventory. This has formed an oversupply condition in the U.S. steel market. At the moment, the oversupply has steered to a fall in steel utilization rates in the U.S., and steel companies are being forced to futile plants in order to decrease supply. For illustration, U.S. Steel (X, Financial) has lazed three blast furnaces of late, and strategies to lay off a vast number of workers. As such, it is not astounding to realize that utilization has plunged terrifically.
The U.S. market is a significant buyer of steel after China, so paleness in this sector will generate additional headwinds for iron ore pricing. As such, it is not unexpected to see that the likes of UBS are cutting their iron ore value estimates. Due to the rise of low cost iron ore supply, the latest rally in iron ore pricing will emanate to an end, and the mineral will drop back to $45 a ton from around $61 a ton at present.
Conclusion
All in all, Cliffs Natural Resources is in a terrible condition. The company will continue to struggle due to falling iron ore prices and increasing debt load. The company’s secured a loan at a very high rate of interest in the last quarter and this will further deteriorate the companies bottom-line. Hence, I think Cliffs Natural Resources is a value trap and should be avoided.
