Is It Time to Start Buying Cliffs?

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Cliffs Natural Resources Inc. (NYSE: CLF) always has offered a high leverage to U.S. steel prices, and over the past seven years this hasn’t been a positive for investors. However, one analyst seems to think that there’s an inflection point ahead and Cliffs might be a screaming buy going forward.

Jefferies initiated a Buy rating with a $9 price target, which compares with a $6.64 closing price and implies upside of 35%. The firm goes on to say that Cliffs is an under-recognized beneficiary of U.S. steel market strength, and pending trade protections may help ensure both higher average selling prices (ASPs) and demand for its high grade pellets into 2018.

While ongoing supply growth will weigh on seaborne iron ore, the Cliffs focus on premium pellets is a defensive positive. Further, current iron ore strength is a reminder Chinese steel restructuring could continue to support iron ore prices in months ahead.

The brokerage firm further detailed in its report:

While Cliffs is a pureplay iron ore miner, the company offers high leverage to US steel prices and production. US contracts are linked to a mix of seaborne iron ore and domestic steel prices, and we expect steel leverage to creep higher in coming years. 2017 contracts ensure near full utilisation but the medium-term outlook remains unknown, and Cliffs’ core blast furnace (BF) customers are far from bullet-proof. As such, trade policy supportive of rising steel production/prices should boost ASPs and drive critical demand for Cliff’s pellets.

Current iron ore strength is driven by demand pull in China as steelmakers’ robust margins drag iron ore up in tandem. This may persist near term as capacity closures drive BF utilization to its highest in a decade.

However, with supply growth continuing, Jefferies expects iron ore to end the year at $50 a ton, down from $63 spot. This will be a thematic headwind for Cliffs but is already baked into the brokerage firm’s cautious estimates.

Shares of Cliffs were last seen down 1.5% at $6.54 on Friday, with a consensus analyst price target of $6.79 and a 52-week range of $4.91 to $12.37.