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Harsh Winter Contributes to Cliffs Natural Resources' Problems

Sometimes problems multiply at the most inappropriate times. This happened to Cliffs Natural Resources (NYSE: CLF  ) in the first quarter. The company, which suffers from low iron ore and met coal prices, took a hit from the harsh winter weather. As a result, Cliffs reported a first-quarter loss of $0.54 per share, widely missing analysts' estimates. Will Cliffs Natural Resources recover from this blow?

Weather hit was severe
Weather hurt the company's results in two ways. First, quarterly sales volume in the company's U.S. iron ore segment decreased by 8% due to difficult transportation conditions. Second, natural gas and electricity prices rose, lifting the costs of production. The cash cost of production in the U.S. iron ore segment was $65.42 per ton, up from $60.17 per ton in the first quarter of 2013. Lower sales and higher costs resulted in negative operational cash flow for the quarter. 

The big question is whether Cliffs Natural Resources will be able to catch up with sales in the coming months of this year. The company looked optimistic and maintained its U.S. iron ore sales volume expectations of 22 million tons to 23 million tons. The gap between production volume and sales volume was substantial in the first quarter. While Cliffs' U.S. iron ore segment produced 4.6 million tons of ore, it sold just 2.8 million tons. The remaining tons contributed to the rise in the company's inventory levels.

The sooner Cliffs could turn this inventory into cash, the better, as the company's debt covenants are back after creditors gave Cliffs more room to breathe. During the earnings call, Cliffs stated that it was sure it would be able to negotiate another period of relaxed covenants should the company break them. While it could be true, such negotiations will have a negative impact on Cliffs' shares.

Will Cliffs Natural Resources idle its met coal operations in the future?
The company's met coal operations represent another headache. The company estimates that the cash cost of producing met coal will be $85-$90 per ton in 2014. Meanwhile, Cliffs has committed and priced 60% of its sales volume at approximately $85 per ton. First-quarter cash costs were $86 per ton excluding inventory adjustments. Thus, Cliffs' met coal operations are more likely to be cash-negative this year.

Cliffs expressed enthusiasm over the recent cuts in North American met coal production, namely Walter Energy's  (NASDAQOTH: WLTGQ  ) move to idle its Canadian operations. The company stated that it would be following the market closely and will consider different options should the pricing stay where it is or decline even further. Just like many others, Cliffs is playing a waiting game on the met coal front. So far, this has not brought value to shareholders.

Bottom line
Cliffs Natural Resources continues to suffer from low pricing. The company's cost-control initiatives were unable to offset market conditions. This year, Cliffs' results will greatly depend on transportation. It is crucial for the company to catch up with the postponed shipments. Otherwise, Cliffs will find itself under increased pressure.

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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8/28/2015 4:02 PM
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