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Cliffs Natural (CLF) Upgraded to Strong Buy: Here's Why

Zacks Equity Research

On May 25, 2016, Zacks Investment Research upgraded Cliffs Natural Resources CLF to a Zacks Rank #1 (Strong Buy).

Factors to Consider

Cliffs swung to a profit on a reported basis in the first quarter of 2016. Adjusted loss was much lower than the Zacks Consensus Estimate. Revenues fell year over year, but beat expectations. The company backed its sales volume expectations for 2016.

Cliffs expects continued economic growth in the U.S. to support domestic steel production and demand for steelmaking raw materials. Steel demand in the U.S. is expected to be backed by strength in the automotive sector and a recovering housing market.

Cliffs is boosting its mining and transportation capacity globally. The company will also benefit from its pellet supply contracts with its U.S. iron ore customers, which will help it to mitigate the impact of fluctuation in seaborne iron ore pricing.

Cliffs has also implemented a strategic capital allocation plan to ensure optimum utilization of cash. Its focus remains on providing maximum return to the shareholders by way of dividend distribution and share buybacks while maintaining its organic growth pipeline.

Cliffs is also focusing on cost management amid a weak pricing environment, reflected in a reduction in its selling, general and administrative (SG&A) expenses in 2015. The company targets further reduction in SG&A costs in 2016.

Moreover, Cliffs remains focused on deleveraging its balance sheet. The company’s total debt fell around 4% year over year to $2.7 billion at the end of 2015 and further reduced to $2.5 billion at the end of the first quarter. Cliffs’ sustained commitment to reduced debt will further lower its interest expenses.

The company now expects full-year 2016 interest expense to be roughly $220 million, lower than the earlier expectation of $240 million, as a result of debt management actions taken during the first quarter.

Other Stocks to Consider

Other well-placed stocks in the mining space include BHP Billiton Limited BHP, Turquoise Hill Resources Ltd. TRQ and Ciner Resources LP CINR, all holding a Zacks Rank #2 (Buy).

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