A bad year is nearly in the rear-view mirror for Cliffs Natural Resources, but the view through the windshield doesn’t look great, either.
The Cleveland-based mining company with a huge presence on Minnesota’s Iron Range has seen its stock value evaporate in 2014, the price for its iron ore halved and Wall Street confidence in its ability to thrive reach rock bottom.
How bad was 2014?
In the past 12 months:
Cliffs’ stock has fallen from $27 per share to about $6, and some analysts say it may go lower. That’s for a stock that hit $100 per share in 2011 and $75 as recently as 2012.
Cliffs’ management team was ousted in late July when the company became the victim of a hostile takeover by the New York hedge fund Casablanca Capital. Casablanca, which called Cliffs’ old guard an “incompetent and entrenched” board that had “destroyed shareholder value” by expanding too fast and ringing up debt at the expense of profit, said it would downsize the company and sell off many or all of its foreign holdings.
Cliffs permanently shuttered its Wabush iron ore mine and shipping facilities in Newfoundland and Labrador early in the year. Then in November it announced it was seeking “exit options” to shut down its Bloom Lake operations in Quebec if a buyer didn’t come forward. So far, no buyer has emerged, and the operations appear doomed, at least in the short run. Ironically, closing the plant will cost Cliffs millions more.
Cliffs’ credit rating was dropped to junk status in October by Standard & Poor’s, and the company took a $5.7 billion write-down on its mining assets.
Cliffs announced earlier this month that it would sell its struggling Logan County coal operations in West Virginia to Coronado Coal LLC for $175 million and use the money to help pay off some debt. Cliffs said it expected to write off a $425 million fourth-quarter loss on the sale.
Iron ore price in a free fall
Perhaps most dire for Cliffs, and a host of other mining companies, is that the price for the iron ore they produce has dropped from nearly $200 per ton a few years ago to less than $70 per ton today. That’s below what it costs some companies to operate, industry analysts note, and some Australian mines already are closing.
Cliffs’ situation is so dire that Credit Suisse analyst Nathan Littlewood last week downgraded its stock price estimate from $10 to just $1. Cliffs’ debt is just too high to overcome even with the new management team’s best intentions to shed debt and production costs, Littlewood wrote. Furthermore, he blamed rapid expansion plans in recent years — what Credit Suisse calls “a failed empire-building attempt by prior management” — for a mountain of debt that even the company’s new management remains unable to solve.
While Credit Suisse said they were impressed with moves by Cliffs’ new managers to shed costs, including jettisoning the Canadian ore and U.S. coal operations, “the downward pressure on iron ore prices” may be too much to overcome, especially for a company with $2.8 billion in debt. (The same report also predicted bleak times ahead for both Essar Steel and Magnetation, both of which are spending big money on new Iron Range facilities written on business plans with iron ore prices of $80 per ton or higher.)
Cliffs officials declined to comment for this story. But what happens in coming months will be big news for the 1,851 Cliffs employees on the Iron Range and thousands of people who own stock in the company that’s had a presence on the Iron Range for a century and has a $251 million annual payroll here.
The company owns and operates Northshore Mining in Silver Bay and Babbitt and United Taconite in Eveleth and Forbes, as well as the Empire/Tilden operations in Michigan’s Upper Peninsula. It also is part owner and manager of Hibbing Taconite.
State Sen. Tom Bakk, DFL-Cook, the Senate majority leader and a member of the Iron Range Resources and Rehabilitation Board, said Cliffs’ Minnesota operations appear to be weathering the storm so far. Indeed, all three plants are at or near production capacity. Northshore continues to advance a new, added-value iron pellet. United is ready to expand its mine pit into the next 25-year supply of ore. And the new management team in Cleveland insists it’s focusing on its U.S. operations going forward.
“If Cliffs was just a U.S. company we wouldn’t be having this discussion. But the global situation with iron ore is such that Cliffs is just getting hammered in Canada and Australia,” Bakk said. He noted that there’s an estimated 300 million tons of excess iron ore capacity globally with the retail price of iron ore now below Cliffs’ (and other producers) cost to mine the ore in some locations, let alone ship it.
Global glut of iron ore
Optimists say Minnesota taconite iron ore should maintain its value as long as U.S. steelmakers continue rolling out products for an expanding economy — things such as automobiles, refrigerators and girders for new buildings.
“Globally, the iron ore industry built up to feed China and India over the past 20 years and now those steel mills aren’t making as much steel, and there’s just too much iron ore out there,” Bakk noted. “But we have a pretty good situation in the Great Lakes, for Minnesota taconite, because no one can get ore to Great Lakes steel mills as cheaply as we can. That’s why Cliffs is looking pretty good as a Minnesota producer. They have contracts for everything they’re producing here.”
Still, state Rep. Tom Anzelc, DFL-Balsam Township, also an IRRRB member, said the global glut of iron ore is bound to have reverberations in Minnesota.
“I think 2015 and 2016 are going to be very bad years for the iron ore business. There’s just too much supply and not enough demand and the falling price is going to kill some of the producers,” Anzelc said.
Cliffs has been especially hard-hit by the rapid free fall of iron ore prices because it has to sell everything it mines. Other Northland producers, such as U.S Steel’s Minntac and Keetac operations and ArcelorMittal’s Minorca mine, produce ore for the company’s own steel mills, so price fluctuations have little impact on the bottom line.
Even as the global market price drops, global mining giants Rio Tinto and BHP Billiton are increasing capacity in an effort to push higher-cost competitors in Australia, Canada and maybe the U.S. to quit the game. It’s the same strategy OPEC is using to drive high-cost oil producers out of the market.
Both companies are moving ahead with iron ore mine expansions, even as the price of ore drops. And Australia’s giant Roy Hill mine, with an output of 50 million tons per year — more than all Minnesota production combined — is expected to come online in 2015, leading to an even larger oversupply and even lower prices.
Even India is increasing production of iron ore, with a state-owned mining company announcing earlier this month they will produce 10 million metric tons per year by the end of the decade.
Last week Australian government officials cut their iron ore price estimate for next year by 33 percent. The government is predicting an average of $63 per ton for 2015, down from the $94 it forecast in September and down from an average of $88 this year.
Some analysts are skeptical that Cliffs can weather the storm. Analysts with TheStreet.com on Monday rated Cliffs a “sell.”
“The company’s weaknesses can be seen in multiple areas, such as its deteriorating net income, generally high debt management risk, disappointing return on equity, weak operating cash flow and generally disappointing historical performance,” the report noted.
Forbes predicted Cliffs’ problems earlier this year.
“In the context of the prevailing environment of low iron ore and coal prices, the company’s new management has an extremely tough job on its hands,” Forbes’ analysis noted on Sept. 30. Cliffs “will struggle to find buyers for its iron ore or coal assets, given oversupplied markets for both commodities and weak demand conditions. Further, the company may not realize the best value for its mining assets, even if some sales were to materialize.”
“With an oversupply situation and a low iron ore pricing environment expected to continue in 2015, the situation is looking grim at the moment for Cliffs,” the Forbes report concluded.
Source: duluthnewstribune.com