Would the CEO's Departure Help 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.
More often than not, the departure of a CEO is bad for the short-term prospects of a stock. The most recent example of this statement is Lululemon, when the departure of Christine Day sent the stock south despite a decent earnings report. Every rule has an exception, though. Cliffs Natural Resources (NYSE: CLF) spiked on the news that the company’s CEO Joseph Carraba is going to leave at the year’s end.
Such a reaction could be justified, as the stock has lost 57% this year. It’s quite natural to blame the CEO for such a poor performance. However, in Cliffs’ case, iron ore prices seem to be a better candidate to take the blame. The only thing that interests Cliffs’ investors is if the news is really positive for the beaten down stock.
While the CEO goes away, the problems stay
One thing is for sure. Investors who blame company’s management for the stock’s performance would have to wait half a year before leadership changes. Currently, there is no succession plan. The following CEO would have to deal with a relatively high debt level in the environment of low iron ore prices.
Iron ore prices are something that a company cannot voluntarily change. Iron ore has been in a downtrend since the beginning of the year. Prospects look bleak. Goldman is forecasting $155 a ton in 2014 and $80 a ton for 2015. Credit Suisse recently cut its price outlook for iron ore to $103 in 2013 and $95 in 2014.
Overproduction and weakness in China are the usual suspects. As for China, recent data on country’s exports did not add optimism for investors. Exports fell 3.1% from a year earlier while analysts estimated a 3.7% gain. This is another piece of data from the world’s most populated country that shows signs of a slowdown.
Iron ore miners like BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RIO) are a part of the problem, as they have been expanding on their projects. These miners are more diversified than Cliffs, and this helps their stocks. BHP Billiton is down 24% while Rio Tinto has lost 28% this year. The companies have started to understand that the situation is worse than expected.
BHP Billiton has stated that it would reduce its capital expenditure by 30% in the next two years. Rio Tinto has been in divestment mode. The company has been trying to sell its Australian thermal coal assets, as well as its coal unit in Mozambique. However, Rio Tinto was not able to sell its diamond business, and had even given up attempting to do so.
What can be done?
What could a new CEO do what the previous one hasn’t done? Cliffs has been expanding the coal part of its business. Coal is under the same pressure as iron ore, and coal miners are crushed as well. Having $3.4 billion in debt, the company could sell non-core assets to limit the debt load.
As prices go lower, more miners would be considering selling some of their assets. As you could see from Rio Tinto’s example, it’s not that easy to do so. Such decisions must be taken fast, as there would be no buyers or the prices would be extremely low if everyone decides to sell.
If you do not believe in the apocalyptic scenario, Cliffs has gotten cheap enough with a forward P/E of 9 and P/B of 0.5. The stock currently yields 3.66%. Analysts are optimistic about short-term prospects, giving the stock a $22.50 mean price target, a 35.5% upside.
BHP Billiton trades at a forward P/E of 18.2 and P/B of 2.33, while Rio Tinto trades at a forward P/E of 7 and P/B of 1.61. Both stocks are dividend plays. BHP Billiton yields 3.88%. Rio Tinto yields 4.49%. Analysts’ targets are favorable as well, giving BHP Billiton 32% upside and Rio Tinto 59% upside. To me, this looks overoptimistic.
I think that the departure of the CEO does not change the outlook for Cliffs. If you like risk and can afford it, this is a very interesting stock. If you are conservative, stay away from it as it will be volatile and can fall further if the worst-case scenario comes into play in the iron ore market. BHP Billiton and Rio Tinto are more diversified. Their dividend yields look attractive, however, they are not free from the downside risk either.
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Vladimir Zernov 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!