Cliffs Natural Ends Pellet Agreement with Essar Algoma
Cliffs Natural Resources Inc. CLF declared that it has ended its pellet sale and purchase agreement with Essar Algoma, effective Oct 5, 2015. According to Cliffs Natural, Essar Algoma violated multiple clauses under the agreement, thus leading the company to terminate the contract. However, the company may consider continuing the supply of pellets to Essar on terms in line with a just-in-time iron ore supply arrangement.
Cliffs Natural is the largest producer of iron ore pellets in North America. The company reported strong second-quarter 2015 results, with a net income of $60 million versus a net loss of $2 million in the year-ago quarter. The company has implemented a strategic capital allocation plan to ensure the optimum utilization of cash. Further, Cliffs Natural remains focused on deleveraging its balance sheet.
In August, the company successfully closed a previously announced tender offer which enabled it to reduce its debt by $125 million along with an $18 million reduction in interest expense until maturity. Further, it achieved a $56 million equity value creation through discount capture.
However, Cliffs Natural has been significantly challenged by declining iron ore pricing. Seaborne iron ore prices remain under pressure, thereby weighing on the company’s revenues. The current uncertain macroeconomic environment, including the slowdown in Europe, may impact the company’s operations and results.
Moreover, for 2015, Cliffs Natural reduced its full-year sales and production volume expectation by 1.5 million tons to 19 million tons of iron ore pellets. This reflects the current low capacity utilization rates among U.S. steel makers, mainly due to heavy imported steel penetration.
Zacks Rank
Cliffs Natural currently carries a Zacks Rank #3 (Hold).
Better-ranked companies in the mining space include Fortescue Metals Group Limited FSUGY, Vale S.A. VALE and Primero Mining Corp. PPP, all carrying a Zacks Rank #2 (Buy).
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