Must-know: What lies ahead for Cliffs Natural Resources? (Part 4 of 5)
What lies ahead for Cliffs?
Casablanca’s win implies a sale of the company’s international assets—Eastern Canada and Australia iron ore—as well as U.S. coal operations sooner or later. Although in the short-term, we don’t expect many changes at least at the operations level, since Cliffs’ management was already making good progress on reducing costs with capital expenditure cuts of 65% year-over-year (or YoY) and selling, general, and administrative expense (or SG&A) reduction of 13% YoY, apart from structural improvements. For example, redesigning of the pit and removing reserves associated with higher stripping—waste removed to ore mined—requirements led to a much reduced strip ratio of 0.86 from two at the start of the year. This will result in improved cost per ton profile for Bloom Lake in the longer term and could fetch a higher price for the asset when it’s sold.
Bloom Lake continuing for the time being
We believe Bloom Lake should continue with the current operating plan since idling it permanently at this stage might lower the final selling price it will fetch on sale. There are other issues that will have to be dealt with immediately with the sale of Bloom Lake. The company will have to take an impairment on Bloom Lake if it’s sold and the debt covenants will have to be renegotiated for debt or capitalization covenant.
Sale of other non-core assets
Other non-core assets like Australian assets, chromite project, and U.S. coal operations could be sold off by Casablanca because they have thought that Cliffs should focus on U.S. iron ore operations instead.
Credit rating reassessment
Moody’s had stated earlier this year that splitting up of the company could be credit negative. It could lead to an investment downgrade because it doesn’t believe any standalone company would be of investment grade.
Cliffs Natural Resources (CLF) is likely to remain entangled in these issues and risks an investment downgrade. However, major credit rating agencies have a stable outlook on Cliffs’ peers including Rio Tinto (RIO), BHP Billiton (BHP), and Vale SA (VALE). The SPDR S&P Metals & Mining ETF (XME) also gives broad based exposure to this sector.
Browse this series on Market Realist:
- Part 1 - Overview: Cliffs Natural Resources
- Part 2 - Why Cliffs’ share price rallied after Casablanca’s win
- Part 3 - Must-know: Casablanca’s vision for Cliffs Natural Resources
- Cliffs Natural Resources