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Cliffs Well Placed on Debt & Cost Actions, Supply Deals

Zacks Equity Research
Updated

On Jan 17, we issued an updated research report on mining company, Cliffs Natural Resources Inc. CLF.

Cliffs has outperformed the Zacks categorized Mining-Iron industry over the past year. The company’s shares have gained around 563.7% over this period, compared with roughly 315.3% gain recorded by the industry.


Cliffs is among the world’s lowest-cost producers of iron ore. The company is boosting its mining and transportation capacity globally. Cliffs will also gain from its pellet supply contracts with its U.S. iron ore customers, which will help it to mitigate the impact of fluctuation in seaborne iron ore pricing.

Cliffs is focusing on cost management, reflected by a decline in overall cash costs for the first nine months of 2016. The company’s cash costs for the U.S. operation fell roughly 6% year over year to $57.89 per long ton. Moreover, a roughly 13% year over year decline in cash cost was witnessed in its Asia Pacific operation for the period.

Moreover, Cliffs entered into multiple contracts with Minnesota Power, a utility division of ALLETE Inc., in May 2016 to purchase power in the long term. The agreement will enable Cliffs to enhance its future competitiveness and also improve its cash production costs over the long term.

Cliffs also remains focused on deleveraging its balance sheet. The company’s long-term debt reduced roughly 19% year over year to $2.2 billion at the end of third-quarter 2016. The company redeemed all of its outstanding senior notes due in Jan 2018 in the third quarter, reducing its interest expense by $17 million a year. Cliffs’ sustained commitment to reduced debt will further lower its interest expenses.

Cliffs has also implemented a strategic capital allocation plan to ensure optimum utilization of cash. Its focus remains on providing maximum return to the shareholders by way of dividend distribution and share buybacks while maintaining its organic growth pipeline.

Cliffs should also gain from its supply deals with other companies. The company, last year, cut a 10-year iron ore pellet supply agreement with ArcelorMittal USA LLC, part of ArcelorMittal MT. The contract ensures that Cliffs will remain ArcelorMittal USA’s sole outside iron ore pellet supplier until 2026.

The new contract allows Cliffs to supply up to 10 million long tons of pellets to ArcelorMittal USA. The supplied iron ore will meet the entire requirement at ArcelorMittal’s Indiana Harbor West and Cleveland Works steelmaking facilities, while continuing the current level of pellet supply to ArcelorMittal's Indiana Harbor East facility. The mutually beneficial agreement reinforces a strong business relation between the two companies.

The company also entered into a contract with U.S. Steel Canada to supply iron ore pellets. Based on this contract, Cliffs raised its U.S. sales volume guidance for full-year 2016 to 18 million long tons from the earlier forecast of 17.5 million long tons.

Cliffs currently carries a Zacks Rank #2 (Buy).

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Cliffs Natural Resources Inc. Price

 

Cliffs Natural Resources Inc. Price | Cliffs Natural Resources Inc. Quote

Other Stocks to Consider

Other well-placed companies in the mining space include The BHP Billiton Limited BHP and Teck Resources Limited TECK, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BHP Billiton has an expected long-term growth of around 5.6%.

Teck Resources has an expected long-term growth of around 10.7%.

Zacks' Top 10 Stocks for 2017

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?

Who wouldn't? As of early December, the 2016 Top 10 produced 5 double-digit winners including oil and natural gas giant Pioneer Natural Resources which racked up a stellar +50% gain. The new list is painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. Be among the very first to see it>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Cliffs Natural Resources Inc. (CLF): Free Stock Analysis Report
 
BHP Billiton Ltd. (BHP): Free Stock Analysis Report
 
ArcelorMittal SA (MT): Free Stock Analysis Report
 
Teck Resources Ltd. (TECK): Free Stock Analysis Report
 
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Zacks Investment Research