Is Now the Time to Buy This Iron Ore Miner That’s 75% Off Its High?
Ray is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cliffs Natural Resources (NYSE: CLF) recently closed around its 52-week low of about $18, its 12-month high is $71. So what’s the deal, why has Cliffs … fallen off the cliff?
The company, formerly known as Cleveland-Cliffs, was founded in 1847 and is headquartered in Cleveland, Ohio. Cliffs is a mining and natural resources company engaged in the production of iron ore pellets, and metallurgical coal. Their business is geographically well diversified. It operates iron ore and coal mines domestically in Michigan, Minnesota, West Virginia and Alabama. The company also operates two iron ore mines in eastern Canada that primarily provide iron ore to steel producers in Asia; and two iron ore mining complexes in Western Australia.
In addition, it holds a 45% economic interest in a coking and thermal coal mine located in Queensland, Australia; 30% interest in an iron ore project in Brazil; and interest in a chromite project in Ontario, Canada.
Off the cliff?
Two major reasons for Cliffs decline are; the steep pullback in the iron ore market, and its recent $5 billion acquisition of a Bloom Lake Canadian iron ore miner, which so far has not reached desired capacity in seaborne iron ore production. This mine is critical for Cliffs to supply future growth in Asia. Cliffs' CEO, Joseph Carrabba, has called Bloom Lake “the future of the company.” Getting the mine’s production up has been costlier, and taken longer than anticipated. Management is targeting late 2014 to 2015 for key production capacity levels to be optimized. The acquisition is still preferable to starting from scratch. On average it takes between 5 to 10 years for new iron ore mine capacity to be planned, built and production begun.
Cliffs was highlighted positively in a recent Barron’s article. That publication was also previously prematurely bullish on the stock back on January 30 (when the stock was trading around $36, now 50% lower). Barron’s now cites a bullish JPMorgan analyst who concludes, “The latest sell-off which has left the shares trading at 60% of tangible book value, appears overdone. The analyst thinks the stock is already discounting a significant drop in the price of iron ore, and says the oversupply fears are overblown. As Cliffs’ management shows improved execution, he sees the shares more than doubling.”
Other Players and the Iron Ore Market
BHP Billiton (NYSE: BHP) based in Australia, has total revenue over $67 billion and a forward-looking PE ratio of 14. Currently trading around $67, the stock is 16% off its 52-week high. Last month BHP announced profits down 25% from $10.04 billion a year ago to $4.24 billion, due largely to weak commodity prices requiring large write downs from their Australian nickel and aluminum assets. BHP’s new CEO Andrew Mackenzie has said the company will most likely deploy a strategy of divesting poorly performing assets. Some analysts estimate these assets, such as diamond mines in Canada, and oil fields in Pakistan, could fetch nearly $25 billion. These non-performing asset sales could take up to 3 years to consummate, but could end up reducing debt levels by 15-20%. Such debt reduction could potentially pave the way for an increase in the company’s dividend payout ratio of possibly 10% or more, according to one Deutsche Bank analyst. BHP currently yields 3.3%.
The Brazilian based Vale S. A. (NYSE: VALE) is the world’s top producer of iron ore and the second largest nickel miner. At a recent price of $17 it is trading at 29% off its 12 month high, and 7 times forward looking earnings estimates. Last month Vale announced a larger than expected net loss of $2.65 billion for their 4th quarter, compared to a 4th quarter profit of $4.67 billion, a year earlier. The company’s first net loss since 2002 was a result of massive write downs of $4.2 billion in nickel and aluminum assets.
Clearly the iron ore market has been volatile over the past year, as reflected in the stock prices of these 3 companies, and the 2012 slide in Chinese demand for iron. Iron ore prices fell from a high of $187 per metric ton in 2011, to a low of $99 in September 2012. However, so far in 2013, the commodity has seen a sharp rebound to the $154 level in February, and most recently traded around $139. On Mar. 18, 2013 Vale chief executive Murilo Ferreira said China’s demand for iron ore is improving and he expects prices to be between $110 and $145 per dry metric ton this year.
What to do now?
Cliffs Natural Resources' stock price is down over 75% from where it traded just 2 years ago in 2011. The stock has approximately 20% of its shares sold short, and management believes their Bloom Lake Mine in Ontario, Canada will provide the needed capacity for future growth when the iron ore market rebounds. These facts seem to suggest the stock price may have limited downside from here, and much of the market’s concern regarding iron ore oversupply has already been discounted in Cliff’s current price.
When a turnaround in Asian iron ore demand actually materializes, earnings momentum returns to this stock, and the shorts run for cover, Cliffs’ stock price can appreciate significantly. Additionally, at present levels the stock has a dividend yield of 3.3% to compensate for awaiting a demand side rebound.
Now may be the time to take the plunge on Cliffs, with an initial position, when the market is providing this opportunity.
Ray Urci has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!