We have retained our Neutral recommendation on mining company Cliffs Natural Resources (CLF) following its mixed first-quarter 2013 results. While Cliffs should benefit from expanding mining capacity, it is exposed to a weak iron ore pricing environment.
Adjusted earnings for the first quarter, 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.
Cliffs, a Zacks Rank #3 (Hold) stock, is a leading producer of iron ore pellets in North America. The company remains optimistic regarding its financial flexibility including its 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 Asia Pacific.
Cliffs is switching its focus from acquisition-led growth to organic growth including developing assets within its existing project pipeline. It sees steady end-markets for its customers on the back of a recovery in the U.S. economy.
Cliffs is also investing in boosting its mining capacity globally. In Eastern Canada, the company is focused on the development of the Bloom Lake iron ore operation in an effort to boost the mine’s throughput. Cliffs has also made a significant progress in the internal evaluation of its chromite project in Ontario.
However, Cliffs remains hamstrung by weak iron ore pricing. Iron ore prices remain depressed, in part, due to oversupply in the market. The company is seeing lower pricing for sea borne iron ore which affected its results in the first quarter.
Excess capacity and weak Chinese demand has been a drag on iron ore prices. The uneven balance between demand and supply is weighing on pricing. The pricing environment is expected to remain volatile in 2013.
Other Stocks to Consider
Other companies in the mining industry having favorable Zacks Rank are Claude Resources, Inc. (CGR), Lake Shore Gold Corp. (LSG) and NovaGold Resources Inc. (NG). All of them hold a Zacks Rank #2 (Buy).
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