After bouncing all over the place with several days where stock prices changed by 3% or more in November, Cleveland-Cliff's (CLF 0.29%) stock finished November with a 7.25% gain. While no specific story triggered a sizable gain, rising international iron ore prices had a lot to do with the improving stock price.
For years the consensus opinion was that the iron ore industry was in a deep downturn from which it had yet to recover. Traders were consistently scared to buy into iron ore or iron ore focused companies because they saw China scaling back steel production and the massive buildup of iron ore stockpiles at Chinese docks.
The bulk of Cleveland-Cliffs' business is selling iron ore to American steel mills, which garners a significant price premium to international iron ore thanks to lower transportation costs and higher grade iron ore. However, the company does have a large mine in Australia, and that mine has been struggling to make much of a profit because of the reasons mentioned above.
There has been an interesting wrinkle in those international iron ore prices recently, though. As a means of curbing pollution, China's steel mills are electing to use higher quality iron ore. Formerly, mills in the country would use low-grade material that was much less expensive, but refining the product is costly and extremely pollutive. With Chinese steel mills electing to use higher grade iron ore, many of those massive ore stockpiles at Chinese docks aren't getting used, and the price for higher grade ore is on the rise. If the price for higher grade iron ore -- something Cliff's Australia mine can provide -- continues to trade at a premium to lower grades, it could give the company's earnings a boost.
For a company that was left for dead a few years ago, Cleveland-Cliff's management has done a commendable job of getting the business to fighting weight by shedding less profitable, non-core assets and reducing the company's debt load to a much more manageable level.
Now, with a cash-generating business in place, management is targeting growth by moving up the iron ore value chain with its Hot Briquetted Iron (HBI) project in Toledo. The facility will upgrade the company's iron ore to a semi-refined product that suits electric arc steel furnaces.
The current changes in the international iron market will help the business, but it isn't much of a needle-mover. CEO Lourenco Goncalves has previously stated that there are no long-term plans for its Australia mine and it will only continue to run as long as it is a cash generating asset. The market may continue to send shares on a roller coaster ride based on iron ore prices, but long-term investors should be much more focused on the company's ability to build this new HBI facility without putting too much strain on the balance sheet to get it done.