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Cliffs to Gain from ArcelorMittal Deal, Debt & Cost Actions
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On June 7, we issued an updated research report on Cliffs Natural Resources Inc. (CLF - Free Report) .
The mining company swung to a profit on a reported basis in the first quarter of 2016. Adjusted loss was much lower than the Zacks Consensus Estimate. Revenues fell year over year, but surpassed expectations. The company reaffirmed its sales volume expectations for 2016.
Cliffs is among the world’s lowest-cost producers of iron ore. The company is boosting its mining and transportation capacity globally. The company will also benefit 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.
The company recently cut a major supply pact with ArcelorMittal (MT - Free Report) . Cliffs, last week, announced a 10-year iron ore pellet supply agreement with ArcelorMittal USA LLC, part of ArcelorMittal. 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.
Moreover, Cliffs remains focused on deleveraging its balance sheet. The company’s total debt reduced to $2.5 billion at the end of the first quarter from $2.7 billion at the end of 2015. Cliffs’ sustained commitment to reduced debt will further lower its interest expenses. The company now expects interest expense for 2016 to be roughly $220 million, lower than the earlier expectation of $240 million, as a result of debt management actions taken during the first quarter.
Cliffs is also focusing on cost management amid a weak pricing environment. The company lowered its cost of production per ton by around 26% in the first quarter. It also remains committed to reduce selling, general and administrative (SG&A) costs in 2016.
Cliffs recently entered into multiple contracts with Minnesota Power, a utility division of ALLETE Inc., 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 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 is a Zacks Rank #1 (Strong Buy).
Other Stocks to Consider
Other well-placed stocks in the mining space include Teck Resources Limited and BHP Billiton Limited (BHP - Free Report) . While Teck Resources holds a Zacks Rank #1 (Strong Buy), BHP Billiton sports a Zacks Rank #2 (Buy).
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 >>
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Cliffs to Gain from ArcelorMittal Deal, Debt & Cost Actions
On June 7, we issued an updated research report on Cliffs Natural Resources Inc. (CLF - Free Report) .
The mining company swung to a profit on a reported basis in the first quarter of 2016. Adjusted loss was much lower than the Zacks Consensus Estimate. Revenues fell year over year, but surpassed expectations. The company reaffirmed its sales volume expectations for 2016.
Cliffs is among the world’s lowest-cost producers of iron ore. The company is boosting its mining and transportation capacity globally. The company will also benefit 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.
The company recently cut a major supply pact with ArcelorMittal (MT - Free Report) . Cliffs, last week, announced a 10-year iron ore pellet supply agreement with ArcelorMittal USA LLC, part of ArcelorMittal. 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.
Moreover, Cliffs remains focused on deleveraging its balance sheet. The company’s total debt reduced to $2.5 billion at the end of the first quarter from $2.7 billion at the end of 2015. Cliffs’ sustained commitment to reduced debt will further lower its interest expenses. The company now expects interest expense for 2016 to be roughly $220 million, lower than the earlier expectation of $240 million, as a result of debt management actions taken during the first quarter.
Cliffs is also focusing on cost management amid a weak pricing environment. The company lowered its cost of production per ton by around 26% in the first quarter. It also remains committed to reduce selling, general and administrative (SG&A) costs in 2016.
Cliffs recently entered into multiple contracts with Minnesota Power, a utility division of ALLETE Inc., 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 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 is a Zacks Rank #1 (Strong Buy).
Other Stocks to Consider
Other well-placed stocks in the mining space include Teck Resources Limited and BHP Billiton Limited (BHP - Free Report) . While Teck Resources holds a Zacks Rank #1 (Strong Buy), BHP Billiton sports a Zacks Rank #2 (Buy).
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 >>