How Low Can Cliffs Natural Resources Go?

Shares of Cliffs Natural Resources (NYSE: CLF) hit a 52-week low on Friday. Let's take a look at how it got there and see if cloudy skies are still in the forecast.

How it got here
Cliffs Natural, a miner of iron ore pellets and metallurgical coal, has suffered on many fronts.

The primary concern for Cliffs has been the rising costs of mining. Labor costs and fuel expenses related to transportation increased dramatically in its latest quarter, easily erasing any gains experienced by a higher volume of iron ore sales related to its acquisition of Consolidated Thompson in the United States.

Also, a slowdown in Chinese growth has caused concern throughout the entire metals sector that demand could wane. Cliffs' management confirmed these concerns with its cautious near-term outlook. In addition, Asia's largest copper provider, Freeport-McMoRan Copper & Gold (NYSE: FCX), has seen its stock hit as copper volumes sold fell by roughly 100 million pounds in its latest quarter. That's tangible evidence that has caused mining shareholders of all forms to be concerned about Asia's growth prospects.

Still, optimists remain. Cliffs' recent purchase of Consolidated Thompson gives the company further inroads into China as Wuhan Iron & Steel is one of its largest customers. In addition, Cliffs' focus on organic growth and shareholder equity is bound to make investors happy. In March, Cliffs' boosted its quarterly dividend payout by 123% and has raised its payout by 594% since February 2010!

How it stacks up
Let's see how Cliffs Natural Resources compares to its peers.

CLF data by YCharts.

Please note that Rio Tinto (NYSE: RIO) split four-for-one in 2010, and this chart seems to have improperly factored that in as a drop. As you can see (minus the chart glitch), these stocks tend to trade very much in line with one another despite their diverse operations. Now let's take a closer look at each one from a fundamental standpoint.

Sources: Morningstar and Yahoo! Finance. Yields are projected.

No, your eyes aren't deceiving you, and yes, these really are some exceptionally attractive valuations across the board. That's one reason that miners of all forms -- iron ore, coal, gold, silver, et al. -- remain very much on my buy radar. However, one thing to keep in mind is that these dividend payouts are subject to fluctuation based on underlying metal prices and cash flow. If metal prices were to dive considerably, these dividends could dip at the discretion of each individual management team.

Vale is a particularly intriguing buy at these levels considering that 51.2% of its revenue came from Asia in its latest quarter. With much of that region growing, Vale's management is confident that near-term weakness will be trumped by long-term international outperformance.

BHP Billiton has an incredibly diverse portfolio of operations, but nearly all are under pressure from a slowdown in China. Weak iron ore pricing, delays on orders from China, and weak natural gas prices hurting the company's thermal coal business are all concerns that have led to its microscopic forward P/E ratio.

Rio Tinto is considerably more levered to mineral resources and metals than any other company of this group. It has suffered from weaker aluminum and iron ore prices, as well as uncertainty in the gold and silver market.

Overall, though, every company here looks attractive on its own merits.

What's next
Now for the $64,000 question: What's next for Cliffs Natural Resources? The answer is going to depend on whether iron ore pricing stabilizes and whether demand in China and the U.S. picks up.

Our very own CAPS community gives the company a four-star rating (out of five), with a whopping 96.6% of members expecting it to outperform. I, too, have chosen to stand alongside 1,422 other members and make a CAPScall of outperform on Cliffs, although I find myself down 36 points at the moment. I don't, however, have any plans to close that pick.

Cliffs Natural has made the transition from growth stock into a value-oriented play that's focused on organic growth and increasing shareholder value. That means you can expect tight cost controls and solid dividends going forward. We also have to remember that while China is slowing, 7.5% GDP growth is still pretty darn good, everything considered. Just over three times cash flow is far too cheap for this powerhouse, and I remain quite optimistic on its outlook over the long run.

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