Cliffs Natural Retains Neutral Rec

We are maintaining our Neutral rating on mining company Cliffs Natural Resources (CLF - Analyst Report). The company witnessed lower profit in first-quarter 2012 on account of higher costs. However, sales improved 7% year over year driven by higher volume across the board.

Moving ahead, the company is switching its focus from acquisition-led growth to organic growth including developing assets within its existing project pipeline. The company sees steady end-markets for its customers on the back of a recovering U.S. economy.

Cliffs is the largest producer of iron ore pellets in North America. It remains optimistic regarding the prospects for cash generation and the opportunities that will fund organic growth projects and return cash to shareholders. The company also has a significant presence in the Asia-Pacific region, where demand is still robust, lending support to shipments.

Cliffs intends to increase its spending in 2012 (to roughly $1 billion) to boost its mining and transportation capacity globally. The projected spending includes $300 million of sustaining capital and $700 million of funds aimed at improving growth and productivity.

Moreover, Cliffs recently announced the advancement of the chromite project in Ontario, Canada, from pre-feasibility to feasibility phase. The company plans to spend $75 million on the project in 2012.

The company also remains focused on providing maximum return to the shareholders by way of dividend distribution while maintaining its organic growth pipeline. The company, in March 2012, boosted its quarterly dividend by 123% to 62.5 cents a share.

However, the prices for commodities have been under pressure due to the uncertain economic environment. International demand and economic conditions strongly affect the prices of iron ore and coal. The current uncertain macroeconomic environment, including the European sovereign debt crisis, may impact the company’s operations and its results.

Moreover, Cliffs' North American Coal segment is under pressure due to soft market pricing for coal products. The company saw flat revenues per ton in this business in the first quarter. Consequently, it has reduced its North American coal revenues per ton forecast for 2012 to $130 from $135 factoring in the weak market conditions.

Cliffs, which competes with CONSOL Energy Inc. (CNX - Analyst Report) and Alpha Natural Resources, Inc. (ANR - Snapshot Report), currently retains a short-term Zacks #3 Rank (Hold).