Commodities & Metals

Reality Sets in at Cliffs as the Dividend Is Eliminated

Cliffs Natural Resources Inc. (NYSE: CLF) announced that during the last quarter of 2014 and the first part of January 2015, the company reduced its net debt balance by over $400 million. Cliffs orchestrated this reduction through the repayment of its short-term debt and the repurchase of aggregate principal of senior notes. However, this comes with a big price for investors — Cliffs’ board of directors decided to eliminate the quarterly dividend.

Originally Cliffs had a quarterly dividend of $0.15 per share on the common shares, which had an annual yield of 8%. This dividend is no more as the board decided to eliminate it for the first quarter of 2015 and all subsequent quarters.

The company says that it is eliminating the dividend to repay the debt. The reality is that the company has lost money for the past three reported quarters. Eliminating the dividend might help Cliffs save a little money in the short term, but you can imagine that shareholders would have even less of a reason to hold on to the stock without getting their 8% dividend.

In the period, over $200 million aggregate principal amount of senior notes were repurchased in the open market at an average discount of 34% to par. Ultimately this captured a total discount of roughly $70 million.

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At the end of the fourth quarter, Credit Suisse lowered its price target to $1 from $10, which is a huge shift in confidence as Cliffs has been at the mercy of analysts for a while. Also in the fourth quarter, Deutsche Bank downgraded Cliffs to Hold from Buy and Citigroup downgraded Cliffs to Sell from Neutral with a price target of $5.

Lourenco Goncalves, chairman of the board, president and CEO, said:

Our strong performance in the fourth quarter of 2014 and the sale of Cliffs Logan County Coal which closed on December 31st allowed us to take advantage of the discounts offered in the debt markets and significantly reduce our debt. We see accelerated debt reduction as a more effective means of protecting our shareholders than continuing to pay a common share dividend. The elimination of this dividend provides us with additional free cash of $92 million annually, which we intend to use for further debt reduction.

And for a reality check, it should probably not be a shock that Cliffs had to jettison its dividend. The company is challenged, and some analysts have started to worry about the company being a viable entity. Shares of Cliffs were up 1% at $7.57 in Monday’s premarket trading on the heels of the dividend-cut news. The stock has a consensus analyst price target of $6.75 and a 52-week trading range of $5.63 to $23.53.

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