On Sep 24, we upgraded our recommendation on mining company Cliffs Natural Resources (CLF) to Neutral. While we account for the weak pricing environment, we are encouraged by the company’s cost management initiatives.
Why the Upgrade?
Both adjusted earnings and sales for second-quarter 2013, reported on Jul 25, topped Zacks Consensus Estimates. However, reported profit slid on hefty impairment charges and lower prices. A double-digit decline in global iron ore pricing led to a decline in the top line.
Cliffs remains optimistic regarding prospects for cash generation and the opportunities that will fund organic growth projects and return cash to shareholders. It also has a significant presence in the Asia-Pacific region, where demand is still robust, lending support to shipments.
Moreover, Cliffs has taken up initiatives to drive organic growth including developing assets within its existing project pipeline. The company is also boosting its mining and transportation capacity globally. It sees steady end-markets for its customers on the back of a mending U.S. economy.
Management is also focusing on improving the cost structure amid a weak pricing environment, reflected by reduction in the selling, general and administrative (SG&A) and exploration costs targets for 2013 and cost reductions in the North American Coal division.
However, Cliffs remains hamstrung by lower iron ore pricing, partly due to oversupply in the industry. Commodity prices are expected to remain under pressure due to the uncertain economic environment.
Cliffs' North American Coal segment is under pressure due to soft pricing for coal products. Moreover, it is witnessing lower pricing for sea borne iron ore which hurt its results in the second quarter.
Iron ore prices remain depressed due to the lack of a strong recovery in steel demand in China, the world's largest producer and consumer of steel, and a persistently oversupplied market. As such, the uneven balance between demand and supply is weighing on pricing.
Other Stocks to Consider
Other companies in the mining industry with favorable Zacks Rank are Gold Fields Ltd. (GFI), Lake Shore Gold Corp. (LSG) and Denison Mines Corp. (DNN). All of them carry a Zacks Rank #2 (Buy).
