Cliffs Natural Resources Could Disappear

Bloom Lake and the falling price of iron ore are pushing Cliffs towards the edge.

Jun 18, 2014 at 8:23AM

The price of iron ore is collapsing. Unless it rapidly reverses its course, Cliffs Natural (NYSE:CLF) is not going to be around for long.

Iron ore troubles
Goldman Sachs believes that the price of iron ore could fall to a low of $80 per ton by the end of this year. This would be a near 40% drop from the high of approximately $140 per ton reported last year .

If the price of ore were to reach this level, it would be a disaster for Cliffs. Cliffs is a relatively high-cost iron ore producer.

For example, the company reported that during the fiscal first quarter, its cost of production per ton of ore at its Canadian operations was $129.4, including depletion and amortization. This gives a sales margin of just under -$31 per ton.

Additionally, the total cost of ore produced within the Asia Pacific region was $71 per ton, giving a sales margin of $25 per ton. Within the U.S., the total cost of production per ton was just under $76, giving a sales margin of $34 per ton.

It doesn't take much work to figure out that Cliffs, in its present state, is highly sensitive to a falling iron ore price.

Drowning in Bloom Lake
But a falling price of iron ore is not Cliffs' only problem. The company is facing multiple other headwinds, the most persistent of which is Bloom Lake. There are also plenty of new competitors starting up within the Great Lakes region (which is depressing prices), and the company's Australian assets are rapidly depleting.

Wall Street sees the issue of Bloom Lake overhanging Cliffs' shares until a resolution is found. Casablanca Capital, the activist investment fund trying to instigate change at Cliffs, sums up the Bloom Lake debacle:

In 2011, Cliffs paid $4.9 billion to acquire the largely undeveloped Bloom Lake project in Eastern Canada. It has since spent approximately $1.5 billion on development and sustaining capex ... if Cliffs moves forward with the project, it estimates another $1.25 billion will be needed to complete the critical Phase II, while take-or-pay and production penalties ($60 – $80 million per year) will persist if the project is halted ... our analysis indicates Cliffs currently trades with a negative $2 billion value drag from Bloom Lake.

Smaller peers could disappear 
Iron ore industry giant Rio Tinto (NYSE:RIO) has weighed in on the state of the iron ore industry. The company's management has stated that if the price of iron ore does fall to the $80 per ton level, many smaller peers will disappear. I don't want to speculate too much, but I would be willing to say that Cliffs could also disappear if the price of ore fell below that level. 

However, Rio is not worried. You see, although $9 out of every $10 in profit Rio Tinto generates is from the production and sale of iron ore, the company is an extremely low-cost producer. At present, Rio's cost per ton is around $20, as compared to the current price of $90 per ton.

Nevertheless, it is possible that Rio is planning to drive smaller peers out of the market. Despite the fact that the iron ore market is oversupplied and prices are falling, Rio is still planning to up output to 290 million tons per annum this year, followed by 360 million tons in the near future. 

Foolish summary
Cliffs has many problems on its hands. However, the most important appears to be the price of iron ore. Cliffs is a high-cost iron ore producer, and a further decline in the price of the commodity is likely to hit Cliffs hard. The company's other problem is Bloom Lake, which it needs to find a solution to soon. 

Rio Tinto, on the other hand, is not worried about a falling iron ore prices. Rio is a low-cost producer and is planning to ramp up output over the next few years, which should depress costs even further. 

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

 

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers