Cliffs' Management Is Running Out of Time

Another day, another development in the Cliffs Natural Resources saga. This time it's the release of Cliffs' second-quarter results, which show that the company continues to struggle in the weak iron ore pricing environment.

The company reported a net loss of $2 million, or $0.01 a share, for the second quarter, compared with a profit of $133 million, or $0.82 a share in the year-ago period. However, excluding one-off items, Cliffs' loss increased to $0.16 per share. Analysts had been expecting a loss of $0.08 a share for the period, so the company missed estimates.

What's more, the company reported a 26% year-over-year decline in revenue for the period to $1.1 billion. This decline was led by lower sales volumes from U.S. iron ore operations; output at these operations fell 24%. Net debt jumped 15% year over year.

Locking horns
Unfortunately, this poor set of results is bad news for Cliffs' management. As Cliffs is locked in a proxy battle with activist fund Casablanca Capital, management really needed to report a strong quarter ahead of a key vote next week.

Casablanca, which owns around 5% of Cliffs, has put up its own nominees for election at Cliffs' AGM next week. The activist hedge fund is pressing shareholders to vote for its nominees. This proxy battle has been raging for some time now, and it would appear as if Casablanca is winning over investors. These poor second-quarter results are only likely to increase support for the fund's nominees and activist intentions.

Some good news
Still, there was some good news contained within Cliffs' second-quarter report. Management revealed that cost cutting had reduced the company's full-year cash cost per ton outlook for the Bloom Lake Mine and Asia Pacific iron ore segment. Additionally, the Bloom Lake mine achieved a record quarterly sales volume of 2 million tons.

Year-over-year capital spending also fell by 77%, or $210 million, to $61 million. And lastly, cash cost per ton rates were lowered across all business segments.

Actually, this is where Cliffs has made some real improvements. During the first half of this year, the cash cost at the company's Asia Pacific iron ore mines fell around 17% compared to the year-ago period, and Canadian cash costs fell 11%. U.S. costs ticked slightly higher.

Outlook
Nevertheless, Cliffs' outlook figures did not make for good reading. The company expect U.S. iron ore output for the full year to be at the lower end of previous guidance of 22 to 23 million tons. The full-year outlook cost per ton of mining ore was reduced slightly because of lower depreciation costs. 

In Canada, Cliffs expects production to be at the higher end of expectations of 7 million tons. Moreover, The company is reducing its full-year 2014 cash cost per ton expectation for Eastern Canadian production down to $80 to $85 per ton, from its previous expectation of $85 to $90 per ton. Asia Pacific iron ore sales are also expected to come in at the higher end of expectations.

The bottom line
All in all, Cliffs' second-quarter results really failed to impress ahead of its key vote next week. The company continues to face pressures from a weak iron ore pricing environment, and while management has made progress cutting costs, a lot remains to be done. 

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