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We have retained our Underperform rating on mining company Cliffs Natural Resources (CLF - Analyst Report) following its tepid fourth-quarter 2012 results. Our view reflects higher costs and a volatile pricing environment.

Why Maintained?

Cliffs’ fourth quarter adjusted earnings from continuing operations of 41 cents a share, reported on Feb 12, largely missed the Zacks Consensus Estimate of 55 cents. The company swung to a loss on a reported basis on sizable charges. Revenues declined 4% year over year to $1,535.9 million on lower pricing, but managed to beat the Zacks Consensus Estimate of $1,529 million.

Cliffs remains hamstrung by weak iron ore pricing. Iron ore prices remain depressed, in part, due to oversupply in the market. Cliffs' North American Coal segment is under pressure due to soft pricing for coal products. Moreover, it is witnessing lower pricing for sea borne iron ore across the U.S., Eastern Canada and Asia Pacific, which hurt its results in the fourth quarter. Cliffs expects the pricing environment to remain volatile in 2013.

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 Cliffs' operations and its results.

Cliffs is exposed to customer concentration risk. It also contends with higher labor and mining costs. Cash costs are expected to be higher in 2013 across Cliffs’ U.S. Iron Ore and Eastern Canadian Iron Ore segments, as reflected in its guidance. Costs are expected to rise in Eastern Canada given the planned maintenance work at the Bloom Lake iron ore operation.

Cliffs has also slashed its quarterly cash dividend by 76% to 15 cents per share from 62.5 cents considering the cash requirement for its Bloom Lake expansion project.

Other Stocks to Consider

While we prefer to stay away from Cliffs, other companies in the mining industry having favorable Zacks Rank are Uranerz Energy Corp. (URZ - Snapshot Report), UR-Energy Inc. (URG - Snapshot Report) and Paramount Gold and Silver Corp. (PZG - Snapshot Report). All of them hold a Zacks Rank #2 (Buy).

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