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Is Cliffs Natural Resources’ Net Debt Still a Problem?

Cliffs Natural Resources Rallies: Why Are Analysts Still Bearish?

(Continued from Prior Part)

Debt reduction

Cliffs Natural Resources (CLF) ended 4Q15 with a net debt of $2.4 billion compared to $2.5 billion at the end of 3Q15. On January 27, 2016, the company announced its debt exchange offer. It offered bondholders new secured notes in exchange for their current holdings. On February 29, 2016, Cliffs announced the tender results. The exchange resulted in a debt reduction of $293 million and interest expense reduction of $14 million annually. While this is lower than what was possible, it’s still a positive development. Further exchanges could help reduce debt even further.

High debt has been the main factor weighing down Cliffs stock in the face of waning iron ore prices. It’s important to know what analysts are expecting in terms of Cliffs’s debt. Going by analysts’ estimates, they don’t expect Cliffs to make any significant progress on debt reduction going forward. The net debt forecast at the end of 2016 is $2.4 billion compared to $2.5 billion at the end of 2014.

Net debt to forward EBITDA

Net debt-to-forward EBITDA (earnings before interest, tax, depreciation, and amortization) shows the number of years it would take a company to eliminate its net debt paid solely out of its EBITDA. At the end of 2015, Cliffs had a net debt-to-forward EBITDA ratio of 9x, which is very high in a depressed commodity price environment. According to analyst estimates, this ratio going forward is expected to be 11.3x in both 2016 and 2017. This implies that the company’s EBITDA is expected to deteriorate at a faster rate as price declines outpace cost reductions and debt remains more or less constant.

Cliffs is continually making efforts to reduce debt, but if commodity prices remain depressed for longer, it might not be enough to affect debt.

Other companies with high financial leverage, including ArcelorMittal (MT), AK Steel (AKS), and United States Steel (X) could be under pressure in 2016. Investors looking to diversify the risk of investing in a single security can consider the SPDR S&P Global Natural Resources ETF (GNR). Almost 25% of GNR’s holdings is invested in steel and other metals companies. Nucor (NUE) forms 1.7% of GNR’s portfolio.

In the final part of our series, we’ll look at Cliffs’s free cash flow and whether it can make a dent in the company’s debt.

Continue to Next Part

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