Roller Coaster Ahead for This Mining Stock

Vladimir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mining companies have been under pressure this year. Whatever you dig, be it gold, silver, iron ore or coal – your stock would fall. Iron ore and metallurgical coal have been the softest spots so far. Cliffs Natural Resources (NYSE: CLF) has had the luck to mine both iron ore and metallurgical coal, which is why it's no surprise that the stock is down 50% year-to-date. Does it have a chance of rising?

One single thing that would boost the stock 

Cliffs Natural Resources gets its revenue from selling iron ore and met coal. If the prices for iron ore and met coal remain depressed, there is no chance that the revenue would improve. The company can battle its costs to a certain extent, but for a real change in fortune it needs improvement on the price side.

Why are the prices down? Iron ore and met coal are used for the production of steel. They are dependent on the state of the steel industry. The steel industry is not in the best shape because the demand is timid given the weak economy. The main driver for steel industry is China. The region is severely under urbanized. Many parts of the country are still mostly rural. A lot of people come to cities for a search of better life. They need houses to live, and this fact is driving construction. However, as China’s economy shows signs of slowing, businesses are more cautious about new projects. Currently, more steel is produced than is needed.

Would other companies curb production?

Steel producers like United States Steel (NYSE: X) or Nucor (NYSE: NUE) are not likely to curb production. United States Steel is struggling its way to profitability. Just two months ago, the company was expected to become profitable and report earnings of $0.34 per share in the next earnings season. The situation in the steel market did not improve, so the estimates were cut and now the company is expected to report a loss of $0.74 per share.

Nucor is expected to remain profitable, but its earnings estimates for the next quarter were slashed by 30% in just two months. In addition to its problems, United States Steel has quite a lot of debt, with a 1.1 debt-to-equity ratio.

Other iron-ore producers have not had a bright year either. BHP Billiton (ADR) (NYSE: BHP) is down 14% year-to-date, while Rio Tinto (ADR) (NYSE: RIO) has lost 23% year-to-date. The advantage of these companies over Cliffs Natural Resources is that they are more diversified.

BHP Billiton is engaged in the exploration and production of oil and gas; it mines copper, lead, zinc, molybdenum, gold, uranium, iron ore and met coal. Rio Tinto is as diversified as BHP Billiton. Prices for various resources have dropped this year, but they stay on various levels, which give these companies more flexibility.

As everyone is fighting their own battle, no one wants to curb its output. The market remains flooded. This means we need to see improvement on the demand side, which would enable the prices to rise. The European economy does not show signs of improvement. Almost every company from nearly each industry which has to deal with Europe indicates that it is a problematic region right now. Data from China is not encouraging either.

Bottom line

The bright spot is that Cliffs Natural Resources trades at 0.5 P/B. The dark spot is that the company needs prices to rise before the stock could follow. At current levels, the stock could attract risky bargain hunters. You can expect a lot of volatility to come. The company is dependent on the price environment, and this environment does not seem to get better. My take – it’s a risky bet, so if you are risk averse, this one is not for you. 

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Nucor. 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!

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