Mining company Cliffs Natural Resources Inc. (CLF) yesterday announced that it has priced its public offering of $400 million worth of 5.9% senior notes due March 2020. The company plans to use the net proceeds for general corporate purposes, which could include funding capital expenditures, paying down debt or repaying a portion of the company’s term loan under its credit facility, raised for the Amapa Project in Brazil. The offering is expected to close on March 17, 2010.

Cliffs’ total debt amounted to $525 million as of December 31, 2009. The company has maintained its debt-equity ratio at around 20% in the last three quarters. Standard & Poor’s Ratings Services has assigned its ‘BBB-‘ corporate credit rating to Cliffs while Moody’s Investor Services has a “Baa3″ rating on the senior notes.

Standard and Poor judges companies with BBB- rating on its debt as medium class borrowers, which are satisfactory at the moment. Moody’s judges obligations rated Baa3 to be under moderate credit risk. The outlook on the company is “Stable,” getting driven by increasing demand for iron ore, the steel making raw material and the full acquisition of the Wabush mine.

Wabush Acquisition

Cliffs recently fully acquired the Wabush Mines, which owns and operates iron ore mining and pellet facilities in Newfoundland, Labrador and Quebec in Canada. Wabush’s total rated annual production capacity is 6.4 million tons of iron ore pellets. Cliffs’ partners in the joint venture were U.S. Steel of Canada, which holds a 44.6% interest in the operation, and ArcelorMittal Dofasco holding 28.6% of the mine. The deal was worth $88 million.

Cliffs has focused on growing its international exposure having been experiencing consistent decline in North American production. The Wabush mine acquisition is consistent with this approach, as production will be directed primarily towards Europe. The transaction carries no integration risk since Cliffs has been the managing partner for Wabush since 1965. We expect Cliffs to continue to grow through acquisitions, both domestically and internationally.

Our Recommendation

We reiterate our Neutral recommendation on Cliffs Natural Resources Inc., the largest producer of iron ore pellets in the U.S. Weak iron ore and coal demand and pricing drove Cliffs losses in the first half of 2009. However, with demand picking up, Cliffs reported moderate profit for the full year 2009. Net income was $205.1 million or $1.63 per share in 2009, compared with $515.8 million, or $4.76 per share, in 2008.

Nonetheless, we are optimistic about Cliffs’ focus on growing its international exposure, facing a consistent decline in North American production. Post the Wabush mine acquisition, the company has recently raised its iron ore and coal sales and production volumes with steel demand recovering in the last few months.

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