Cliffs Natural Resources: The Rally Is Still Alive

Company's prospects look bright due to increasing steel demand

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Oct 07, 2016
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If you look at the long-term perspective, Cliff Natural Resources (CLF, Financial) has been trading sideways for years. Throughout the past few years, Cliffs Natural Resources’ stock price had been continuously declining, but the company has performed extremely well this year as a surprise earnings beat and improving iron ore outlook led to the stock rallying over 400% from its 52-week lows.

In the most recent quarter, the company reported earnings per share of seven cents, five cents better than the estimates. On the other hand, the company’s revenue came in at $496.20 million, a drop of just 0.4%.

In the past six out of seven quarters, the company has shared a massive revenue decline, but in the most recent quarter, it successfully managed to decrease its revenue loss. Not only this, the company’s gross margin has also started moving upward. The primary reasons behind this improvement are Cliff’s belligerent cost reduction efforts as well as the upsurge in iron ore prices.

However, the company’s future is still dependent on the iron ore prices. Cliffs is a significant player in North America and the imports from Brazil and several other sources are damaging the North American market. China is the world’s largest steel consumer, followed by Japan and the United States.

As a matter of fact, North American markets have chiefly been governed by the native players. However, the drop in Chinese consumption along with steadily escalating supplies from Brazil and Australia has formed a supply surfeit in the worldwide market. As an outcome, iron ore prices have been reduced and striking for some of the North America steel mills.

However, the Chinese steel industry has been fortified to maintain its output in 2016. Moving onward, the demand for steel in China is likely to escalate as the government is investing in infrastructure projects at an exciting pace.

Most importantly, China has delineated an investment of $61 billion and $720 billion for developing infrastructure on a local scale and transport segment, respectively.

Considering all this, it can be certainly said that these development projects will surge demand for steel, which will ultimately boost iron ore demand. At last, it is great news for the company as it will witness a growth in its addressable market.

Summary

Cliffs Natural Resources has many positives going forward. The company has performed really well this year and the outlook for iron ore prices is looking favorable as well. As a result, I won’t be surprised if Cliffs continues moving higher.

Disclosure: No position in any of the stocks.

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