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Must-know: Should Cliffs sell assets at this stage?

Anuradha Garg

Must-know: What lies ahead for Cliffs Natural Resources? (Part 5 of 5)

(Continued from Part 4)

Cliffs’ assets

We think it would be very difficult to find a right buyer for its assets in the current pricing environment. Let’s look at its major non-core assets and how they stack up on the divestment meter.

Bloom Lake

When Cliffs bought Bloom Lake back in 2011, the iron ore price was at $175 per ton levels compared to the $95 per ton levels right now. The take-or-pay contract associated with the asset to the tune of $64 million per year for Phase II—double the initial ramp up to 14 million tons—will make the hunt for a buyer even more difficult. To make economic sense out of the acquisition, the potential buyer would have to go ahead with the Phase II, so it could take full benefit of economies of scale. All these considerations will make the sale at a decent price quite difficult for Cliffs’ newly constituted board.

Australian assets

It would have been comparatively easier to find the buyer for its Australian operations given its proximity to China, which consumes about two-thirds of the seaborne iron ore traded. However, the mine life left at its Australian operations is about seven years. It wouldn’t be economically sensible for any buyer to go for this asset with such a low mine-life unless they’re able to increase the mine life which might lead to cost escalation.

Chromite assets

Cliffs’ chromite project, which is located in the Ring of Fire area of Northern Ontario, was idled by the management in 4Q13. Its main reason was ongoing delays like environmental assessment process, land rights, and negotiations with the province of Ontario. A junior miner, Noront Resources Ltd., might be interested in buying this asset because it is one of the key players in the region. Both Noront and Cliffs’ camps are located within a few hundred meters of each other. However, it has indicated that it won’t pay anything close to $500 million, which Cliffs has spent on the project.

We believe selling assets right now at the trough of the demand cycle or closer to it—many of the demand indicators have started turning around or have at least started posting lower year-over-year (or YoY) declines, as would be available on the Market Realist website soon—wouldn’t be good for the long-term value creation of the shareholders.

Investors might want to avoid Cliffs Natural Resources (CLF) for its stock specific issues in addition to decreasing international iron ore prices. On the other hand, low-cost producers like Rio Tinto (RIO), BHP Billiton (BHP), and Vale SA (VALE) could provide exposure to the iron ore sector with lesser issues. The SPDR S&P Metals & Mining ETF (XME) is also a good way of gaining exposure to this sector.


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