Evaluating Cliffs Natural Resources’ product and customer mix

Market Realist

Must-know: Should you own Cliffs Natural Resources right now? (Part 3 of 10)

(Continued from Part 2)

Cliffs’ products and customers

The products Cliffs sells and the customers Cliffs serves vary by segment. So let’s take a closer look at each segment.

U.S. iron ore

This segment produces standard and fluxed pellets. Standard pellets require less processing, so they’re less costly to produce. For fluxed pellets, fluxstone is added to the concentrate before pelletizing. Concentrate ore is ore processed to separate deleterious elements and produce higher-quality product of 63%–69% content. Fluxed pellets perform at higher productivity levels.

U.S. operations sell primarily to North American steel producers. The company has multi-year supply agreements with customers with clauses for price readjustments based on international iron ore prices, general industrial inflation, and steel prices.

Eastern Canada Iron Ore

This segment produces concentrate product at Bloom Lake and Wabush. Production from this segment mainly sells through the seaborne market to Asian steel producers that have sintering capabilities. This segment’s pricing is primarily through short-term pricing arrangements that are linked to the spot market.

Asia Pacific Iron Ore

The Koolyanobbing operations serve the Asian iron ore markets with direct-shipped fines and lump ore. Lump iron is between millimetres and 30 millimetres in size, while anything below 6 millimetres is considered fines. Fines have iron content ranging from 56% to 66%.

This segments sells primarily under three-year supply agreements to Chinese steel producers and two-year term supply agreements to Japanese customers. The existing contracts are due to expire at various dates until March 2015 for Cliffs’ Chinese and Japanese customers. Pricing for other customers consists of shorter-term pricing mechanisms for various durations up to one month, based on average of daily spot prices.

North American Coal

The company sells its metallurgical coal to global integrated steel and coke producers in Europe, North America, China, India, and South America. Cliffs sells its thermal coal to energy companies and distributors in North America and Europe. Generally, 60%–70% of its production is committed under contracts for at least one year. Of Cliffs’ 2014 projected production, 50% has been committed and priced. The remaining tonnage is primarily pending price negotiations with its international customers. This generally depends on settlements of Australian pricing for metallurgical coal.

Cliffs Natural Resources (CLF) is not wholly exposed to volatile seaborne market prices, as you saw above. But its peers Rio Tinto (RIO), BHP Billiton (BHP), and Vale SA (VALE) mainly ship their production oversees, generally priced on short-term or spot bases.

The SPDR S&P Metals & Mining ETF (XME) is also a good way to gain exposure to this sector.

Continue to Part 4

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