Downgrading to Market Perform, Target Price Lowered
BMO Research is resuming coverage on CLF following a period of research restriction. Cliffs reported Q4/12 underlying earnings of US$89M, or US$0.62 per share versus BMO Research and consensus forecast of US$0.54 per share, plus an equity issue.
Negative. CLF has issued 9M ordinary shares and 27M depositary shares. Whilst strengthening the balance sheet, shareholders are effectively being asked to pay for the company’s poor performance. CLF sees no improvement to costs at Bloom Lake near term, forecasting cash costs of US$85–90/t in 2013. Capex for 2013 has increased to US$800–850M from US$700–800M previously. Prudently, CLF has significantly reduced the dividend to US$0.15 per quarter.
EPS has been reduced 46% to US$1.47 in 2013E and reduced 40% to US$2.70 for 2014E.
BMO Research’s estimate of Cliffs’ NPV of US$38.75 per share is down 26% on the prior US$52.43.
Even acknowledging the shares are at a 52-week low, BMO Research downgrades CLF to Market Perform and reduces its target price to US$27 from US$50, representing 0.7x NPV. This is on expectations of: 1) iron ore prices have peaked and are expected to decline; 2) per share dilution on the unexpected equity issue; 3) failed corporate strategy (coal, Amapa, Bloom Lake, chrome); 4) capex remaining too high; and 5) loss of U.S. iron ore sales contracts. Shareholders should switch to Rio Tinto (RIO-LSE; £33.28; Outperform).
boy did you switch horses in mid stream, I thought you said they were supposed to get bought out today at 56 for sure, gap up monday hammering shorts and now down another 15% on top of the 6% today, maybe I should buy some ah lol