Cliffs Makes $1.4 Billion Disappear

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I've eaten enough humble pie to serve an army lately, and I'm feeling rather stuffed. But Cliffs Natural Resources (NYSE: CLF  ) seems to think there's room in my Foolish belly for one more unsavory slice.

A looming $1 billion goodwill impairment charge -- relating to the miner's $5 billion acquisition of Canadian iron ore miner Consolidated Thompson in 2011 -- will leave a nasty stain on Cliffs' balance sheet when the company reports fourth-quarter earnings on Feb. 13. Two years ago, I wrongly praised the acquisition as "the stuff that strategic dreams are made of." I even went so far as to reference the mining industry's poor track record of injuring shareholders with overly aggressive acquisitions timed near the height of volatile commodity price cycles, and predicted that this particular deal would enjoy a "soft landing."

But, here in the aftermath of Cliffs' inglorious fall last October, and the company's "significant adjustments" to its 2013 operating plan announced in November, it became abruptly clear how wrong I had been. Faced with relentless cost pressures plaguing the entire industry, weakened iron ore market conditions, and also some material reassessment of long-term operating expectations for the project, Cliffs decided to delay completion of the phase two expansion at the Bloom Lake mine until at least early 2014.

The impaired valuation of Cliffs' 2011 acquisition now joins a most inglorious continuation of major miners' appalling track record of shareholder value destruction through aggressive acquisitions. Metallurgical coal competitor Walter Energy (NASDAQOTH: WLTGQ  ) unleashed a $1.1 billion writedown in November, and global giant Rio Tinto (NYSE: RIO  ) sent its CEO packing just last week after revealing shameful impairments totaling $14 billion! The bulk of those charges stems from Rio Tinto's ill-timed and ill-fated acquisition of aluminum maker Alcan, reflecting persistent and severe weakness in that segment of the commodity complex as well. Iron ore major Vale (NYSE: VALE  ) itself will book a $1.3 billion impairment on its minority stake in Norwegian aluminum group Norsk Hydro, and analysts expect BHP Billiton (NYSE: BHP  ) to soon suffer multibillion-dollar impairments of its own relating to underperforming aluminum and nickel assets.

In total, Cliffs will book $1.4 billion in non-cash charges, including a $365 million hit relating to the pending sale of its stake in the Amapa iron ore project in Brazil. Unfortunately, I don't suspect this will mark an end to Cliffs' troubles, with the company's medium-term earnings outlook looking rather grim. I continue to view Cliffs Natural Resources as an unsuitable investment vehicle at this time, perceiving risk of further downside to the shares.

Materials industries are traditionally known for their high barriers to entry, and the aluminum industry is no exception. Representing 14.7% of 2011 global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospective and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant simply click here to get started.

Read/Post Comments (3) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 27, 2013, at 8:10 AM, skypilot2005 wrote:

    i own a few shares of AZK. Alamos, not to be confused with Alamo. Ha. FYI:


    "Alamos is an established Canadian-based gold producer that owns and operates the Mulatos

    Mine in Mexico, and has exploration and development activities in Mexico and Turkey. The

    Company employs over 600 people in Mexico and Turkey and is committed to the highest

    standards of environmental management, social responsibility, and health and safety for its

    employees and neighbouring communities.

    Alamos has approximately $350 million cash on

    hand, is debt-free, and unhedged to the price of gold. As of December 31, 2012 Alamos had

    120,871,408 common shares outstanding (125,531,708 shares fully diluted), which are traded on the Toronto Stock Exchange under the symbol “AGI”.

    On January 8, 2013, Alamos Gold reported record fourth-quarter and annual gold production, achieving its production guidance for the year of 200,000 ounces of gold.

    Alamos sold 62,516 ounces of gold in the fourth-quarter of 2012 for record quarterly revenue of $106.9 million, a 50% increase from revenue of $71.1 million in the same period of 2011. For 2012, the company sold 197,516 ounces of gold for record annual revenue of $329.4 million, 45% higher than revenue of $227.4 million in 2011.

    On January 21, 2013, Alamos Gold announced that it has mailed its formal offer and take-over bid circular and related documents with respect to Alamos' offer to acquire all of the outstanding common shares of Aurizon Mines (AZK) to Aurizon shareholders.


  • Report this Comment On January 27, 2013, at 8:15 AM, skypilot2005 wrote:

    Aurizon Board of Directors Unanimously Recommends Shareholders Reject the Alamos Hostile Take-Over Bid January 23, 2013


  • Report this Comment On January 27, 2013, at 9:15 PM, skypilot2005 wrote:

    Everything an investor needs to know about investing in Silver:

    Corporate Presentation

    Jan. 2013


    Official Web Link Assistant to Sinchi


    Thanks, for covering this company starting many years ago.

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