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TABLE OF CONTENTS May 19 - 25, 2014 Volume 100 Number 14 - 0 comments

Cliffs hit by falling prices, cold weather

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A harsh winter and low iron-ore and coal prices ensured that Cliffs Natural Resources (NYSE: CLF) would disappoint on its first-quarter earnings.

The company suffered a US$83-million first-quarter loss — which was far worse than what the Street was expecting. On a per-share basis the loss works out to US54¢ per share, which missed the consensus forecast of a US15¢ loss per share by a wide margin.

The miss came on the back of revenues from its coal and iron-ore divisions falling, as iron-ore revenues fell 9% year-over-year in the U.S., 25% in Canada and 19% in the Asia–Pacific region. Revenues were down 20% for its coal division again due to falling prices, while the cost per tonne was up 10%.

Beyond those poor fundamental factors, an unusually cold weather across the northern U.S. and eastern Canada hurt operations when much of the Great Lakes froze over for the first time in years.

While it can’t do much about bad weather, Cliffs has been reducing capital expenditure over the last few quarters. It has so far brought its capex down by over 50%.

And despite concerns on the pricing side, Cliffs kept its previously stated production and sales guidance across all of its business segments, although it did say those numbers would depend on iron-ore prices.

Investors can also look to the company’s infrastructure programs in China and Canada and a supply deal with ArcelorMittal (NYSE: MT) as drivers of growth.

The company’s results missed forecasts by BMO Capital Markets analyst Tony Robson by an even wider margin, as Robson had expected a loss of just US8¢ per share.

He attributed the earnings miss to lower revenues and sales, as well as inventory writedowns.

Robson noted that Cliffs’ first-quarter earnings are traditionally weaker due to seasonality, but conceded that the extreme cold made for an especially poor quarter. He also pointed to net debt increasing to US$2.9 billion from US$2.7 billion as something investors should note.

“The company continues to lose money at its Canadian iron-ore operations and U.S. coal,” Robson wrote in his research note. “The relatively poor quarter for its U.S. pellets operations highlighted the company’s reliance on that division to offset poor earnings performance elsewhere.”

Despite improvements on cost and maintaining its guidance, BMO lowered its 2014 earnings estimates to US90¢ per share from US$1.70 per share.

Robson has the stock rated “market perform” with a US$22 price target.

He noted, however, that his rating is contingent on improving earnings for the rest of the year.

“Cliffs remains a highly indebted, leveraged company with limited growth opportunities. Therefore, BMO Research prefers Rio Tinto [rated as ‘outperform’] for iron-ore exposure,” Robson wrote.

On April 29 — the day after the results were released — company’s stock was trading for US$17.56 on 3.98 million shares traded.

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