Cliffs Revises Outlook – Analyst Blog

Iron mining giant, Cliffs Natural Resources Inc. (CLF) updated its 2010 North American Coal outlook. The company’s revised full-year 2010 North American Coal sales volume is 3.9 million tons including about 3.4 million tons of metallurgical coal and 500,000 tons of thermal coal. The sales guidance also includes results from the recently acquired INR Energy, a privately held producer and exporter of high volatility metallurgical and thermal coal in West Virginia. Cliffs’ anticipate INR”s coal operations to add about 500,000 tons of metallurgical coal and 500,000 tons of thermal coal to its sales.

 

Cliffs also foresees sales volumes of 2.8 million tons from its legacy coal operations in West Virginia and Alabama, down 36% from its initial guidance of 3.4 million tons. The company attributed the decline to a sluggish production at its Pinnacle mine on the back of unfavorable environment conditions. Cliffs expects North American Coal revenues to dip 17% to 18% to $115-$120 per ton from the prior guidance of $140-$145 per ton. Lower revenues from the thermal coal revenues of INR due to lower average selling price as well as lower-than-anticipated spot sales of uncommitted met coal will trigger the decline.

 

Cliffs assumes the decline in production volumes at the legacy coal operations would escalate costs to $115 – $120 per ton, from the prior expectation of $110 – $115 per ton. Lower production would result in lesser fixed cost absorption, which would pull up costs. Additionally, acquisition related adjustments should also add about $16 per ton to non-cash expenses including depreciation, depletion and amortization and $2 per ton related to acquisition accounting adjustments for the INR Energy coal operations.

 

In response to slow production, Cliffs’ will be building a new automated longwall system at Pinnacle Mine in the fourth quarter 2010. Cliffs expects the new system coupled with other capital projects would improve production rates going forward. Cliffs currently anticipates North American Coal to record cash margin of over $60 million in 2010 and nearly breakeven in sales margin.

 

Cliffs Natural Resources Inc. is the largest producer of iron ore pellets in the U.S. Increasing international iron ore exposure, recovery in its coal business and longer-term diversification into the chromium business are huge positives for the stock. The company focuses on growing its international exposure in the face of a consistent decline in North American production. However, we are apprehensive that industry over capacity may pull down global iron ore and coal prices. We reiterate our Neutral recommendation on Cliffs.