What: Shares of miner Cliffs Natural Resources Inc (NYSE:CLF) popped as much as 41% in early trading on Tuesday, after the company announced a new supply agreement. By noon EDT on Wall Street, shares had settled in at a 35% gain on the day.
So what: Cliffs Natural announced that it signed a long-term commercial agreement with ArcelorMittal USA LLC, part of ArcelorMittal SA (NYSE:MT), to supply all of the company's iron-ore pellet needs. The deal could be for up to 10 million long tons and comes with a minimum purchase requirement of 7 million long tons. This is a higher minimum purchase than two previous contracts that are being replaced in this deal.
Now what: While this is an incremental positive for Cliffs Natural Resources, it isn't an entirely new supply deal and won't likely lead to a big increase in profits. And the company is barely breaking even over the past year with the current deal in place.
What really needs to happen is this increase in volume combining with higher prices for iron ore to increase profits. Management thinks that iron ore prices will climb later in the year, but markets have been volatile and Cliffs Natural has a history of losses lately, so I would be cautious getting too bullish today.
Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of Cliffs Natural Resources. 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.