Tags: Cliffs | Natural | Resources | CLF

Cliffs Natural Resources Dented by Slowdown Fear

Friday, 06 Apr 2012 11:39 AM

By Greg Brown

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Cliffs Natural Resources (CLF) has had the rug pulled out from under it, falling from a 52-week high of $102 to around $67.05, well below its 50-day and 200-day moving averages. Despite a reasonable dividend of 3.7 percent, investors seem to have abandoned it out of fear that a global slowdown will hurt the miner, whose major customer is China.

Cliffs Natural Resources is a global iron ore producer and a significant producer of high- and low-volatile metallurgical coal. Operations take place around the world, divided into major segments of U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Ferroalloys, and the Global Exploration Group.

Cliffs makes most of its money by mining iron ore, the raw material of steel production, and thus is heavily linked to global economic growth for its own success, and on continued demand from China.

“Steelmaking in Asia, led by China’s economy, reached historically high levels in 2011. Global crude steel production, the primary driver of our business, was up approximately 5 percent in 2011 as compared to 2010,” management recently told investors.

China must import ore to keep up with its internal demand, Cliffs points out. China’s own mining efforts are not enough, and its ore is of a lower grade than found outside the country.

“If the economic growth rate in China slows for an extended period of time, or if another global economic downturn were to occur, we would likely see decreased demand for our products and decreased prices, resulting in lower revenue levels and decreasing margins,” Cliffs management points out.

Consolidated revenues for 2011 increased to $6.8 billion, with net income from continuing operations per diluted share of $11.61. This compares with revenues of $4.7 billion and net income from continuing operations per diluted share of $7.51 in 2010, Cliffs reports.

Cliffs is a $9.55 billion market cap firm with a 12-month trailing P/E of of 5.77, compared to 10.51 for the metals and mining sector. It has a five-year price-to-earnings growth (PEG) ratio of 10.27.

Its projected earnings per share growth for the coming year is 21.96 percent, vs. an average of 40.5 percent for the sector.

Mostly buys


Analysts like Cliffs, giving it mostly buy or neutral ratings. Standard and Poor’s, Columbine Capital, RBC Capital Markets and JP Morgan all rate it outperform, although Thompson Reuters/Verus considers Cliffs a sell.

“Following a sales gain of 45 percent in 2011, we look for a 14 percent rise in 2012. In our view, the inclusion of Consolidated Thompson for a full year, along with higher sales of metallurgical coal and increased shipment volume in the Asia Pacific segment, will offset lower sales in the U.S. Iron Ore unit,” S&P analysts wrote in a report at the end of March.

S&P cautioned that its forecast assumes real U.S. GDP growth of 2 percent and global growth at 2.4 percent, as well as an increase in global steel production leading to increased demand for iron ore.

Cliffs Natural Resources next reports on April 26.

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