It looks like traders are trying to sell leading North American iron producer Cleveland-Cliffs
For the quarter, earnings per diluted share came in at $2.36, far below analyst estimates of $2.75. But gross margins, though perhaps not meeting analyst projections, still improved more than a percentage point from last year. On a brighter note, operating income was about 61% higher, and revenue rose by about 43%, with the company experiencing much better sales-price realizations (average sales prices were up about 30%) on top of flat U.S. sales volume and the inclusion of sales from its newly acquired Australian subsidiary.
The big news for Cleveland-Cliffs in the coming weeks or months is the same as that for other iron producers, including Brazil's CVRD
Those price negotiations will certainly be important, since Cleveland-Cliffs' contracts all reprice based on changes in international iron pellet prices and in the producer price index. With the company estimating that production costs per ton will rise about 15% this year, it's easy to see how profit growth for 2006 is still somewhat up in the air.
To Cliffs' credit, it has transformed itself over the years into a leading pellet producer; it now controls about 28% of North America's capacity. What's more, there's no debt on the balance sheet. But clean balance sheets aren't quite enough in this business.
High scrap prices are making the traditional steelmakers more competitive, and international growth in steel output is making for attractive pricing on inputs such as coking coal and iron ore. The good times won't go on forever, though, so anyone considering these shares today shouldn't expect a repeat of the stock performance we've seen from mid-2003 up through recent highs.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).