How Cliffs' Has Succeeded In A Bear Metals Market

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There's a dire shortage of good news in many spots across the globe: California's drought, Syria's tussle against ISIS, and the global mining market, which has seen the price of everything from iron to gold take a massive nosedive since the commodity peak of 2011.  Look at the largest composite metal ETFs: the DB Base Metal Fund has dropped almost twenty percent year-to-date; the Dow Jones-UBS Industrial Metals sub-index has plummeted almost 25%.  The drop in metal prices has done a number on many mining companies, most notably South Africa's century-old Blyvooruitzicht (an Afrikaans surname) Gold Mining Co, which went belly-up as the price of gold dropped below $1500 per ounce.  With a shortage of good news, some companies are creating their own positivity, as evidenced by Cliffs Natural Resources rising by double-digit figures in August thanks to their shrewd business strategies.  Why is Cliffs succeeding in one of the worst metals markets in history?

Bigger, Better, Barium

Crack open an economics textbook and take a look at the Hubbert Curve, the relationship between a resource and its exploitation by a business.  In future classrooms, the stock price of Cliffs (CLF on the NYSE, trading for $3.11 a share) may be included as an example diagram or as an asterisk to a Hubbert Curve.  Their trading price during the Great Recession and the commodities boom of 2011 followed the trajectory to a T, rising with the valuation of the goods and then collapsing once oversupply cut into profitability.  Unlike some mining and energy companies which simply continue to overproduce once they have reached market saturation, most notably Chevron, Cliffs has aggressively cut back on their expenditures in order to keep their supply low and their prices as high as possible.  They mothballed the Bloom Lake Mine and Wabush mines in Canada as well as the Tia Maria mine in Peru on the belief that they should shelve projects rather than commit to long term investments, moves that gave their stock a brief bounce in late 2013 before the 2014 metal bust dropped the floor out from beneath the mining community.  Cliffs entered into the 2015 fiscal year without many options for improvement, meaning the company has had to aggressively manage their own debt in order to remain viable.

Rebounds and Retreads

In the first week of August, Cliffs announced they would buy back $100 million of their debt in senior notes due in 2018.  In the second week of August, the company's board of directors went even further to buy back nearly $125 million.  The announcement gave their stock a much-needed boost, rising by about eleven percent in the first day of trading and holding steady above the $3 figure after spending almost all of July trading below it.  The Cliffs debt buyback represents good news for investors on several different fronts.  First and foremost, the company snatched up their own debt for pennies on the dollar, commiting just $550 per each $1000 note of debt, and effectively wiping out over fifty million dollars worth of debt.  Their overall debt to EBITDA financial performance stands at seven to one, high for most companies but relatively low for many mining interests.  The Australian Rio Tinto empire, for instance, has a debt to EBITDA that's hovering well above ten to one.  The relatively low debt ratio can help to reverse the stock tumble experienced by Cliffs, who has seen their trading price fall from $16 per share one year ago to just above $3 today.  Given that their overall debt sits at two and a half billion dollars, the sum of $125 million may seem like a drop in the bucket, especially with half a billion dollars of debt outstanding to mature in 2018 and $1.5 billion due to mature in 2020.  The move nevertheless eases the pressure on a company that is enjoying less of a decline in revenue than their decline in costs, allowing them to squeeze profitability out of each operation by minimizing their financial risk at every turn. 

Iron Clad

The risk that now faces Cliffs, and their investors, is the domestic iron market.  The price of iron has fallen steadily from 2011 to 2014 but has largely remained steady through 2015.  Given that Cliffs relies on their US iron mines for the largest cut of profitability, they are in a unique position to profit if the metal can rebound.  Should they choose the route of lower costs, however, they may put several iron mines on ice and sacrifice revenue to keep costs low.  With the moves to snap up their own debt, however, it's clear the company isn't waiting for a rebound in the iron price and will act aggressively in order to keep their debt to financial performance stable.  That provides a glimmer of opportunity for investors who need to shore up mining stocks in their portfolio.

  • The Takeaway: Cliffs is in the midst of a short-term bounce that could carry them through the 2015 year with positive results.  Invest directly in their stock at the earliest possible opportunity to get in on the growth.  Since the company is trading at fantastic lows, it's a great value buy, but only in the short term.  The harsh metals market will prevent Cliffs from long-term growth, so buy in and sell as soon as two to three months out.  Indeed, investors with a penchant for pump-and-dump investing can buy Cliffs and then sell it in a matter of weeks, since the growth looks short and sweet.  Their last bump in 2013 lasted only four months but saw growth of over 75%.
  • Don't look to mutual funds that are heavy in base or precious metals for opportunities.  These are unlikely to grow without a fresh commodity boom, which most economists believe will be not happen until 2018 at the earliest.  Invest directly and individually to eliminate the greatest risk in a portfolio.

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