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Jonathan Poland
Jonathan Poland
Articles (172)  | Author's Website |

There's Upside in Jim Simons' Cliffs Natural Resources

Renaissance owns over 6.8 million shares and keeps buying

February 25, 2016 | About:

Cliffs Natural Resources Inc. (NYSE:CLF) is a leading mining and natural resources company that has been crushed under the weight of debt and downturn in the iron ore market.

The once high flyer has seen its stock price obliterated from the $90 highs in 2011 down to under $2 a share. And, despite paying down over $1 billion in debt since then, the company is under intense pressure with the price of iron ore (per metric ton) dropping from $185 down to $41 in the last five years. The company took on too much debt thinking that the price would remain high and it could keep growing, but now that it’s 77% lower, Cliffs is battling for survival.

The guru position

Jim Simons (Trades, Portfolio)’ Renaissance Technologies owns over 6.8 million shares of Cliff’s Natural Resources at prices in the $4.50 range and has continued to buy and buy as the price decreased. The short-term payoff seems to hinge on whether the company can successfully execute an offering to exchange bonds to lower its debt obligation. The debt exchange offer provides an opportunity to exchange existing bonds for newly issued 8% 1.5 lien senior secured notes due 2020. The end date on the exchange is this Sunday and is expected to lower the company's debt by approximately $1 billion.

On Feb. 10, Lourenco Goncalves, Cliffs' chairman and CEO was "very pleased with the early results of the debt exchange which to date will generate annual interest expense savings of $13 million and debt reduction of $268 million."

Cliffsoperations

The company is a major supplier of iron ore pellets to the North American steel industry from its mines and pellet plants located in Michigan and Minnesota and has been hustling to focus on that side of the business, selling off other divisions to streamline efficiency and productivity. In December, the company completed the sale of its remaining North American coal business, an industry that could be dead in 20 years.

Lourenco Goncalves, Cliffs' CEO, had this to say: "The sale of Pinnacle and Oak Grove to Seneca Coal marks Cliffs' exit from the coal business, and represents another very important step in the implementation of our U.S. iron ore pellet-centric, environmentally compliant strategy.”

Valuation

Liquidity is a serious concern for Cliffs, but the first maturity is still two years out. That’s why management is trying to get ahead of it with the exchange since the real burden is found in its quarterly interest payments. The company has total debt of $2.7 billion and only $285 million in cash. This is huge considering that it has a market capitalization of $285 million. The company should have no problems operating in the current environment if the debt exchange offer is fulfilled. The company still generates over $2 billion a year in revenue and its core iron ore business is actually profitable.

While Cliffs' share price has been hit hard, the business has seemingly passed through the most dangerous time without completely killing shareholder value. Cliffs has even cut its exposure to China and is on track to build a capital structure which could be sustained during the low part of the current steel market cycle, which could last a while.

If you look at this stock from a purely fundamental standpoint, it may prevent the majority of investors from pulling the trigger on the trade. Turnarounds are not something that many investors have the patience for, and the risk of insolvency is higher for Cliffs than, say, BHP Billiton (NYSE:BHP). However, the risk reward payoff is much greater and following Simons' portfolio weighting is not a bad idea, either.

While Renaissance owns 6,826,800 shares, that is just 0.02% of Simons' total holdings. Again, unless you have a strong circle of competence in this particular industry, the stock is definitely just a flyer. The fundamentals are still very negative, and this remains a risky investment, but one that could product a nice return in a short amount of time.

About the author:

Jonathan Poland
I help people build assets. The best part of investing is that it doesn't matter who agrees with you, rather what your return versus the market is over the long-term.

Visit Jonathan Poland's Website


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Comments

Jonathan Poland
Jonathan Poland - 1 year ago    Report SPAM

Has been good for a short term pop of 62% in the last month.

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