Is This Coal Giant Worth Buying?
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Based in Cleveland, Ohio, Cliff Natural Resources (NYSE: CLF) is an international mining and natural resources company, producing iron ore and metallurgical coal. The company has four key operating segments; U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal and Asia Pacific Iron Ore. Low coal prices were the main culprit behind company's weak performance in 2012. Now, the big question is how will the company perform in 2013?
Cliff Natural Resources’ earnings
In 4Q’12, Cliff Natural Resources reported a net loss of $1.62 billion or $11.36 per share versus a profit of $185.4 million or $1.30 a share in the same quarter last year. The core reasons behind this lackluster performance include a write-down in Canada, lower iron ore prices and higher costs. Plus, the coal industry got a major hit from a drop in iron ore prices that slipped from $180 per tonne (1 tonne=1000 kg) in September 2011 to $86.70 per tonne in September 2012.
Excluding the impairment charge and other items, profits were down to $89 million or 62 cents a share, in comparison with $213 million or $1.49 a share last year. Revenue was down $1.42 billion from $1.53 billion amid a 14% decline in seaborne iron ore prices. Costs of goods sold were up 15%.
As a result, Cliff Natural Resources announced that it would cut its dividend by 76% to a quarterly dividend of 15 cents a share.
What’s in store for 2013?
Recently, Cliff sold its interest in Australian Sonoma Coal; therefore, the company's chief production consists of met-coal. In order to repay its outstanding term loan facility, the company has announced its plans for a share offering. Due to further investments in the cards for Cliff’s Eastern Canadian iron ore business, the company is increasing its capital spending to $800 million - $850 million. A write-down of $1 billion in goodwill related to the takeover of Consolidated Thompson Iron Mines is also expected. As far as revenue for 2013 is concerned, the company expects it to remain in line with 2012.
Cliff Natural Resources is trading at a forward P/E (1yr) of 10.49 and is yielding 2.30%. A 76% cut in its dividend shows that it doesn’t have enough free cash flow. A negative levered free cash flow of $497 million is testimony to this. A negative profit margin of 15.32% and a ROE of -18.16% don’t help the cause either. Cliff has a mean recommendation of 3.0 on the sell side, suggesting that it isn’t an attractive buy at this stage.
The coal industry’s major players
The largest met coal producer in the U.S, Alpha Natural Resources (NYSE: ANR), beat analysts’ estimates in 4Q’12 by reporting a loss of $0.19 per share. Analysts were expecting the company to post a loss of $0.55 a share. One of the major reasons for this was the decrease in total costs on the Eastern side. The company expects its SG&A expenses to decrease to $140 million-$160 million this year compared to $210 million last year. In 1Q’13, analysts expect it to post a loss of $0.60 per share on sales of $1.33 billion. For the full year, it’s expected to report a loss of $2.11 a share. A mean recommendation of 2.5 on the sell side shows that it’s one of the better buys in the coal industry.
Peabody Energy Corporation (NYSE: BTU) appears to be one of the best stocks in the coal industry at the moment. One of the hallmarks of Peabody has been its Australian mines, where low production costs and high met-coal prices have given the company a big edge. The company has also been able to mint substantial profits by exporting coal from Australia to many Asian countries. With the Asian region comprising more than 67% of global coal consumption, the future looks bright for this energy giant. Peabody is trading at a forward P/E (1yr) of 11.19 and has a mean recommendation of 2.2 on the sell side, which makes it one of the top buys in the coal industry. You can have a further look at my detailed take on Peabody Energy here.
Cliff Natural Resources’ latest quarterly report clearly shows that the company hasn’t done that well lately. Having said this, the recent dividend cut reflects the company’s weak financial position. With steel prices improving at a snail's pace, iron ore prices need more time to recover. Almost all coal produced by Cliff is metallurgical coal, so an expected increase in demand for thermal coal for the purpose of power generation won’t have a significant effect on the company's revenues. However, the met-coal price will improve slightly this year, thanks to high demand in China. The bottom line is that the iron ore and coking coal industries still need more time to recuperate. So does Cliff. In short, I don’t recommend buying Cliff Natural Resources at this point.
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