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Cliffs Natural Cut to Underperform

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We are downgrading our rating on mining company Cliffs Natural Resources (CLF - Free Report) to Underperform following its lackluster third-quarter 2012 results. Earnings (from continuing operation) of 61 cents per share fell well short of the Zacks Consensus Estimate of $1.05. Profit slid roughly 86% year over year on account of lower iron ore pricing and higher costs.

Revenues tumbled 26% year over year to $1,544.9 million and missed the Zacks Consensus Estimate. The company cut its U.S. iron ore and North American coal sales volume forecasts for 2012 factoring in the volatile pricing environment.

Cliffs, which competes with CONSOL Energy Inc. (CNX - Free Report) and Alpha Natural Resources, Inc. , 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.

However, Cliffs' North American Coal segment is under pressure due to soft market pricing for coal products. Moreover, the company is witnessing lower pricing for sea borne iron ore across the U.S., Eastern Canada and Asia Pacific, which hurt its results in the third quarter.

According to Cliffs, iron ore prices were depressed in the last few months due to the lack of a strong recovery in steel demand in China, the world's largest producer and consumer of steel, and oversupply in the market. The company has trimmed its Chinese crude steel production and seaborne iron ore spot price forecasts for 2012.

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 is exposed to customer concentration risk. It also contends with higher labor and mining costs.

Our recommendation on Cliffs is in sync with a short-term Zacks #5 Rank (Strong Sell).

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