Operating in two commodities with currently the worst pricing environments, Cliffs Natural Resources (NYSE:CLF) has been forced to deal with lower iron ore ad metallurgical coal prices for the last year or so. That fact hasn’t been lost on investors as the firm has reported dour earnings and stagnant cash flows. Over the past 12 months, the stock has lost roughly 73% compared with gains of around 10% for the broad S&P 500.

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This performance coupled with the lower pricing circumstances for its main products has prompted a series of downgrades for the beleaguered firm. The latest of which, came from investment bank Morgan Stanley (NYSE:MS).
However, it may not be all doom and gloom for the firm.
After its own downgrade back in November, Goldman Sachs (NYSE:GS) seems to have come to Cliff’s rescue and boosted its rating on the firm.
Given the conflicted views on the iron ore and coal miner, it begs the question- Is there really any value left at Cliffs?
Buy or Sell?
So far, Cliffs Natural Resources is down a staggering 51% since January.  Morgan Stanley downgraded the firm to "Underweight" from "Equal-Weight" and slashed its price target by 61% to $14 a share. That’s about four dollars lower than it is currently trading for.
The basis of the downgrade and lower price target was that iron-ore prices are falling after showing seasonal strength in the first two months of the year. Those lower prices will continue to hurt Cliffs. The firm already posted a loss of $899 million for its last fiscal year.

More importantly, looking forward the investment sees issues with growing iron ore supplies. Projects from rivals like BHP Billiton (NYSE:BHP), Vale (NYSE:VALE) and Rio Tinto (NYSE:RIO) coming online in the next few years will hurt Cliffs' sales volumes and prices. Cliffs' Asia business remains one of its weakest and features dwindling reserves and ore grades. Meanwhile, Cliffs' Canadian business is still saddled with high costs of production.

The company’s balance sheet also remains an issue. Cliffs’ $3.96 billion in long-term debt and recently cut its dividend by 76%. Overall, Morgan Stanley cited the firm’s "deteriorating operational outlook" as the reason behind the cut.
Yet, Goldman still sees some value left in shares. The bank raised its grading of the iron ore miner to “neutral” from “sell.” Goldman based its upgrade on the various positive steps Cliffs has taken to shore –up its balance sheet. This included issuing new equity and idling a high-cost iron ore pellet plant as well as cutting the firm’s high dividend.
According to Goldman, Cliff’s issues “are well known” and “after recent underperformance, near-term risk-reward appears more balanced.” 

SEE: Understanding Leveraged Buyouts
So Who’s Right?
There’s a lot to be said about both the upgrade and downgrade, however I’m inclined to believe that Goldman may have the edge in this fight. There are a lot of problems at Cliffs, yet there is plenty of value there as well- especially as a buyout target.  
First the outlook for both iron ore and metallurgical coal demand in China- the commodities key user- is improving. Once again, the Asian Dragon has begun to beef up its infrastructure spending through stimulus measures. All in all, that should result in a stabilization of iron ore prices.
Here in the U.S., Cliffs is actively pursuing potential opportunities to supply direct reduced iron (DRI) pellets for steelmakers such as Nucor (NYSE:NUE). DRI is a steel making procedure that uses natural gas instead of coal. That could be a huge growth industry for the firm as more steel companies take advantage of lower natural gas prices.
Then there is the buyout angle to consider. Already, Cliffs has been cited by analysts as a potential candidate for M&A, the company’s recent fall could provide the impetus to get that deal done. That buy-out could come in the $20 to $25 range.

SEE: Analyzing An Acquisition Announcement
The Bottom Line
Already, with expectations set so low, Cliffs could be setting up investors for a big surprise comeback in 2014. For value seekers shares are quite a buy yet as they still have some room to fall. However, there are some positives to like about Cliffs Natural Resources.

At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.

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