Cliffs Natural Resources, Inc. Earnings: Is the Bottom Finally In?

On Thursday, Cliffs Natural Resources (CLF -0.10%) will release its quarterly report, and long-struggling shareholders aren't expecting any relief from the woes that have depressed earnings and revenue. Yet even as weakness in iron ore prices has held back Vale (VALE 2.87%) and other competitors in the industry, Cliffs hopes that a supply deal with ArcelorMittal (MT 0.95%) might finally mark the beginning of the end in the huge downturn that has brought Cliffs stock under so much pressure in recent years.

Cliffs Natural Resources relies on a healthy steel industry for demand for its raw materials, which include both iron ore and metallurgical coal. Yet around the world, activity levels in the construction and infrastructure arenas haven't been as strong as they were in the past, as formerly red-hot emerging market economies find a new, slower-growth equilibrium while developed nations embrace austerity measures that have led to reduced spending on public projects. With expectations so low, though, Cliffs might well be poised for a rebound if anything other than a worst-case scenario pans out. Let's take an early look at what's been happening with Cliffs Natural Resources over the past quarter and what we're likely to see in its report.

Source: Cliffs Natural Resources.

Stats on Cliffs Natural Resources

Source: Yahoo! Finance.

Can Cliffs earnings recover at last in the near future?
Unfortunately, analysts have gotten a lot less comfortable with Cliffs earnings prospects in recent months, reversing initial calls for a substantial first-quarter profit and slashing full-year 2014 projections by 60%. The stock has reflected those increased concerns, falling 19% since mid-January.

Even before Cliffs could report fourth-quarter earnings, Wall Street's experts believed that iron ore market conditions spelled trouble for the company as well as Vale and its other peers in the industry. Negative calls from several analysts pushed Cliffs stock price down, but when the company finally issued its report in February, shares rallied as the news wasn't as bad as many had feared. Cliffs has worked hard to try to follow a realistic turnaround strategy, and signs of a possible bottoming in iron ore prices could finally put an end to the pain that Cliffs shareholders have endured during the long downward trend in its stock.

Cliffs' struggles have led activist investors to call for dramatic action. In January, hedge fund Casablanca Capital took a 5% stake in Cliffs and called for the company to break itself in two parts, spinning off its international assets and freeing Cliffs' U.S. operations to take full advantage of the relative strength of the U.S. economic recovery. Reorganizing the U.S. business as a master limited partnership would create potential tax benefits and lead to higher distributions to shareholders, enhancing value and making Cliffs look more attractive to many investors. Yet opponents point out that other, more focused U.S. plays on coal and other resources have had to go the opposite direction, diversifying to escape pressures in the domestic market. Moreover, higher costs for its Canadian operations would make an international entity hard to manage separately.

Ring of Fire. Source: Cliffs Natural Resources.

Still, Cliffs has moved forward by finding demand wherever it can. In February, Cliffs announced a deal to extend its supply contract with ArcelorMittal for an additional two years, giving its Empire mine a customer to continue producing iron ore pellets. That won't necessarily solve Cliffs' long-term problems, but it could provide a bridge to help Cliffs get through the tough times while it waits for weaker players in the industry to halt production and allow prices to reach a higher equilibrium. In the long run, other endeavors like northern Canada's Ring of Fire chromite project could spur growth, but for now, Cliffs has suspended work there indefinitely in waiting for better conditions in commodity markets.

In the Cliffs Natural Resources earnings report, watch to see whether the company's efforts at cost-cutting are helping to preserve capital and extend its ability to survive the weak pricing environment. If conditions start to reverse, then Cliffs shares could rise in a hurry from their current depressed levels.

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