Cliffs Scraps Michigan JV

Given its strategic priorities and intentions to focus primarily on its core business, Cliffs Natural Resources Inc. Co (CLF - Analyst Report) intends to scrap its Michigan Iron Nuggets joint venture with Kobe Steel.

Founded in 2007, this joint venture has conducted a number of feasibility studies on the possibility of pursuing a commercially viable process to produce a pig iron substitute using Kobe's ITmk3 technology and Cliffs' iron ore assets.

The plant employs less than 10 employees, who will be reassigned to other positions within the company after the termination of the joint venture. No anticipated material financial impacts will be incurred.

Recently, Cliffs also announced its spending plans for 2012. The company intends to increase its spending by 12% year over year to about $1 billion for 2012 in order to boost its mining and transportation capacity globally.

The forecasted spending includes $300 million of sustaining capital and $700 million of funds aimed at improving growth and productivity.

Cliffs plans to start production at a chromite deposit in northern Ontario in 2015. A recent study of the area led the company to expand its output estimate to 1 million tons of chromite ore on top of the 600,000 tons of ferrochrome expected from the site.

Cliffs has been reporting outstanding results in the last few quarters. In the third quarter of 2011, Cliffs posted net earnings of $590 million or $4.07 per share, up 100% from last year’s $297 million or $2.18 per share. Earnings surpassed the Zacks Consensus Estimate of $3.67 per share.

Quarterly revenues came in at a record $2.1 billion, up 59% year over year. The increase was driven by higher pricing and sales volumes in the company's iron ore segments, along with incremental sales from Cliffs' recently acquired Bloom Lake operations in Eastern Canada.

We believe Cliffs will report another outstanding quarter when it will announce its fourth quarter and fiscal 2011 results on February 13, 2012. The company’s new projects and developments will help to boost its quarterly revenue. The company also has a significant presence in the Asia-Pacific region, where the demand is still robust, lending support to the company’s shipments. The profitability of the company may become a cause of concern in the coming quarters as the prices for commodities have been under pressure due to the uncertain economic condition.

Cliffs faces stiff competition from CONSOL Energy Inc. (CNX - Analyst Report) and Peabody Energy Corp. (BTU - Analyst Report).

We maintain our Neutral recommendation on Cliff with a short-term Zacks #4 Rank (Sell) on the stock.

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