Commodities & Metals

Is Cliffs Natural Resources Getting Close to Falling off the Cliff?

Cliffs Natural Resources Inc. (NYSE: CLF) announced that it will pursue exit options for Bloom Lake going forward. This is just another obstacle in the road that the company will have to hurdle, but that seems to be the story of this company over the past year.

The 52-week high for Cliffs was posted on November 20, 2013, at $28.12, and the long and short of the matter is that the chart is all downhill from there. Even looking at it technically, the 50-day and 200-day moving averages have acted as strong resistance at nearly every inflection for the past year.

Cliffs previously announced that, in order to make Bloom Lake viable, it must develop the mine’s Phase 2. The total investment is estimated at $1.2 billion, and should there be a closure, the estimated closure costs should fall within the range of $650 million to $700 million in the next five years.

Cliffs also mentioned in its press release that its subsidiary, Cliffs Quebec Iron Mining, along with Bloom Lake General Partner and Bloom Lake Iron Ore Mine, lost an arbitration claim that they filed against a previous Bloom Lake customer. The arbitration pertained to the August 2011 termination of an iron ore sales agreement.

The press release stated the damage as:

In November 2014, the arbitrators decided in favor of the former customer and awarded it damages in an amount of approximately $71 million as well as attorneys’ fees and accrued interest from the date of termination of the offtake agreement in August 2011. Cliffs Quebec Iron Mining Limited is currently reviewing the award to determine appropriate next steps.

This compounds the already rough time that Cliffs has had in the past quarter, much less the year.

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24/7 Wall St has previously covered the struggle that the company has been going through, and from what we’ve seen it seems like an “I told you so” moment from analysts:

  • Citigroup downgraded Cliffs to a Sell rating from Neutral and lowered the price target to $5 from $16 on October 20.
  • Nomura downgraded Cliffs to Reduce from Neutral with a price target of $5, down from $18, on October 3.
  • Wells Fargo has an Underperform rating for Cliffs and cut its valuation range to $4 to $7 on October 1

Short sellers seem to have gotten a piece of the action too. Short interest in the company was 62.7 million shares in the late October settlement date, the second highest reading on the year after 68.5 million in mid-October.

Lourenco Goncalves, chairman, president and CEO of Cliffs, commented on the Bloom Lake situation:

Despite the continued interest of the prospective equity partners in Bloom Lake and in its high quality ore, the potential investment is not achievable within a time frame acceptable to Cliffs. With expansion no longer viable, we have shifted our focus to executing an exit option for Eastern Canadian operations that minimizes the cash outflows and associated liabilities.

Shares of Cliffs were down over 14% to $8.74 Wednesday in the noon hour. The stock has a consensus analyst price target of $9.90 and a 52-week trading range of $7.00 to $28.12.

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