Uncertainty Aversion: Why Cliffs Natural Resources Is A Good Buy

Iron ore prices have fallen more than 25% so far this year and seem bound to fall further according to major financial institutions. Larger mining conglomerates, which own more diverse portfolios of mineral resources as well as have better quality and more efficient iron mines, will be better able to weather the decline in iron prices than smaller producers, such as Cliffs Natural Resources that rely overwhelmingly on iron ore. Additionally, since most iron ore producers have stopped negotiating long-term contracts with their largest consumer, the steel industry, they are much more susceptible to iron ore price fluctuations.

Cliffs Natural Resources has the additional misfortune of being saddled with years of poor management, an inefficient coal division, increased costs of producing iron ore, increased operating expenses, mounting debt, activist investors, lawsuits, and a particularly harsh U.S. winter.




While the entire mining industry is suffering from lower iron ore prices, Cliffs Natural Resources, because of all its travails, has been underperforming its industry peers. Cliffs’ stock price has fallen far below its historical range relative to the global spot price of iron ore despite Cliffs’ meaningful steps to prepare for lower iron ore prices by signing long-term contracts and idling high cost Canadian mines. I Know First’s algorithm indicates that Cliffs has much room to rebound, and it ranks Cliffs as one of its top investments for both the medium and long-term time horizons.

Cliffs Natural Resources – Not as Bad as It Seems

Cliffs does face many real problems, but nearly all of these problems have already been factored into its stock price. In March, Citigroup’s analyst Clarke Wilkins said that “$US80 a tonne iron ore has already been priced in.” Additionally, while many analysts were initially concerned by Casablanca Capital’s activist role in the company, it now seems that Casablanca is proposing positive changes that will give shareholders more value for their equity.

There are also many factors that have put Cliffs in a good position for the upcoming years. Cliffs has established long-term contracts with large steelmakers such as ArcelorMittal to ensure a steady stream of income in the near future to hedge against the expected volatile iron prices on the spot market. The American economy is also expected to grow at a faster relative pace than the Chinese economy; thus American steel foundries are likely to have a greater relative demand for iron ore and Cliffs’ North American iron ore operations are perfectly situated to serve them. 


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