On Jul 15, we downgraded our recommendation on mining company Cliffs Natural Resources (CLF) to Underperform factoring in a weak pricing environment.
Why the Downgrade?
Cliffs' adjusted earnings for first-quarter 2013, reported on April 24, beat the Zacks Consensus Estimate while sales miss. Profit fell on a reported basis on weak iron ore pricing and lower volume.
Estimates for Cliffs are on the downswing. The Zacks Consensus Estimate for 2013 has gone down roughly 7% over a month to $2.47 per share. On a similar note, the Zacks Consensus Estimate for 2014 has also declined around 11% to $1.66. With Zacks Consensus Estimates for both 2013 and 2014 going down, Cliffs now has a Zacks Rank #4 (Sell).
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 first 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.
Moreover, Cliffs is exposed to customer concentration risk. It also contends with higher labor and mining costs.
Mining Stocks That Warrant a Look
While we prefer to avoid Cliffs, other companies in the mining industry with favorable Zacks Rank are Impala Platinum Holdings Ltd. (IMPUY), Stillwater Mining Co. (SWC) and Avalon Rare Metals Inc. (AVL). All of them hold a Zacks Rank #1 (Strong Buy).
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