Neutral on Cliffs Natural - Analyst Blog
We are reaffirming our Neutral rating on mining company Cliffs Natural Resources (CLF). Second quarter earnings of $1.81 per share topped the Zacks Consensus Estimate of $1.75. However, profit slid 37% year over year on account of lower pricing and higher costs. Revenues slipped 10% year over year and missed the Zacks Consensus Estimate.
Cliffs is the largest producer of iron ore pellets in North America. It remains optimistic regarding the prospects for cash generation and the opportunities that will fund organic growth projects and return cash to shareholders. The company also has a significant presence in the Asia-Pacific region, where demand is still robust, lending support to shipments.
The company is switching its focus from acquisition-led growth to organic growth including developing assets within its existing project pipeline. It sees steady end-markets for its customers on the back of a recovering U.S. economy.
Cliffs is expected to spend roughly $1 billion in 2012 to boost its mining and transportation capacity globally. The projected spending includes $300 million of sustaining capital and $700 million of funds aimed at improving growth and productivity.
In Eastern Canada, the company has decided to commence the production of a lower silica, premium grade iron ore concentration product at its Bloom Lake iron ore operation, which is expected to lure new customers and boost the mine's profitability. In addition, a number of projects are currently underway at the Wabush mine. Cliffs has also advanced the chromite project in Ontario, Canada, from pre-feasibility to feasibility phase.
However, Cliffs' North American Coal segment is under pressure due to soft market pricing for coal products. Moreover, the company is witnessing lower pricing for sea borne iron ore across the U.S., Eastern Canada and Asia Pacific, which hurt its results in the second quarter.
The prices for commodities have been under pressure due to the uncertain economic environment. International demand and economic conditions strongly affect the prices of iron ore and coal. The current uncertain macroeconomic environment, including the European sovereign debt crisis, may impact the company's operations and its results.