Must-know: Should you own Cliffs Natural Resources right now? (Part 9 of 10)
Iron ore prices
As we already outlined in our industry overview for iron ore, we don’t expect iron ore prices to move up much from their current values. In fact, they could fall a bit given weaker-than-expected demand and strong supply.
The majority of the supply additions are from low-cost producers with a cash cost of $40–$50 per ton. This will tend to displace the high-cost supply from the market that produce at cash costs of $90–$120 per ton. So Cliffs is a high-cost producer compared to its peers. You can see this difference in the chart above.
You can also see that Cliffs has fallen much more than Rio Tinto (RIO), BHP Billiton (BHP), and Vale SA (VALE). This is because Cliffs is more levered to iron ore prices than more diversified international peers. The majority of its revenues are from iron ore, and also its high financial leverage makes it doubly sensitive to the prices prevailing in the market.
The SPDR S&P Metals & Mining ETF (XME) also gives you exposure to the sector. Cliffs Natural Resources (CLF) forms 3.46% of the fund.
The Bloom Lake issue also makes Cliffs depend more on prices. Under a higher price scenario, the company could think of going ahead with the project. But in a sub-$100 price scenario, it would be ideal for the company to either abandon this plan completely or roll in a partner with financial strength to go ahead with this initiative.
All the indicators for steel demand—and thus iron ore demand—seem to be falling for the time being. But we believe we’re close to trough as far as indicators like the purchasing managers’ index (or PMI), construction starts, and gross domestic product (or GDP) year-over-year growth are concerned. Yet supply is a structural issue that we believe will keep prices lower for longer.
So no short-term relief is in sight for Cliffs for the time being.
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