Cliffs Natural Resources (CLF +4.70%) found itself in the wrong place at the wrong time in 2013, with pressure on the steel industry hurting demand for its iron ore and metallurgical coal offerings. Yet even though the company took a much bigger hit early in the year than iron-ore rival Vale (VALE +3.52%) and met-coal competitors Alpha Natural Resources (NYSE: ANR) and Peabody Energy (BTU +0.00%), Cliffs has managed to claw back some of its share-price losses. Are investors rightfully optimistic about a potential rebound for iron ore and met-coal? Let's take a closer look at what happened with Cliffs Natural Resources this year and whether its stock could post gains in 2014.
Cliffs Michigan Operations. Copyright © 2011 Cliffs Natural Resources.
What happened to Cliffs Natural Resources in 2013?
Coming into 2013, many investors saw Cliffs Natural Resources as a smart dividend play, with the stock carrying a yield of more than 6% at the beginning of the year. But in its first quarterly report of the year, Cliffs put a quick end to dividend investors' hopes for the stock, announcing that it would slash its payout by more than 75% to just $0.15 per share. The stock predictably plunged, with even the company's extensive cost-cutting and productivity-gain initiatives proving insufficient to offset the impact of rock-bottom prices for iron ore and metallurgical coal.
To add insult to injury, Cliffs followed up the dividend cut by announcing secondary offerings of shares, diluting investors' stock after the steep share-price drop. Although the offerings helped the company's balance-sheet strength, the timing couldn't have been worse from a shareholder perspective.
Meanwhile, poor industry conditions dragged down competitors' returns as well. Vale has had to deal with sluggish demand from China for iron ore, and for U.S. investors, weakness in Brazil's currency has contributed to big share-price losses. Alpha Natural and Peabody Energy have faced their own struggles. Although Peabody's Australian reserves give it a competitive advantage in serving Asian markets, coal producers are all suffering from negative perceptions on coal as an energy source on the thermal side and a lack of construction and infrastructure-building activity on the metallurgical-coal side.
Cliffs Total Return Price data by YCharts.
Later in the year, though, Cliffs finally started seeing some signs of life. Iron-ore prices hit bottom at midyear and climbed somewhat during second half of 2013, helping Cliffs give investors some rare good news in its third-quarter report. Signs of greater demand for steel production in China helped bolster the iron-ore market, helping Cliffs and Vale recover. Moreover, Cliffs hasn't had to deal with the ongoing travails of the thermal-coal market, which continues to suffer from poor pricing and to weigh on Alpha Natural and Peabody.
Even so, Cliffs faces an ongoing challenge from its need to keep costs down and make best use of its available cash. In order to fund expansion at its Bloom Lake mine, the company mothballed its Ontario chromite project. Expansion could help Cliffs earn more from higher iron-ore prices, but taking away diversification opportunities makes it even more important for Cliffs to continue to see progress in worldwide steel production volume.
Stats on Cliffs Natural Resources
|
Revenue, Past 12 Months |
$5.71 billion |
|
1-Year Revenue Growth |
(3.9%) |
|
Net Loss, Past 12 Months |
($1.25 billion) |
|
Net Income, Previous Year |
$904.5 million |
Source: S&P Capital IQ.
What's next for Cliffs Natural Resources?
The biggest immediate problem that Cliffs could face is the $4.1 billion market cap that puts it near the bottom of the S&P 500. Getting evicted from the benchmark could result in another leg down due to index-related selling. Yet long-term investors can note that the performance of S&P stocks often improves after getting demoted.
Cliffs Natural Resources could bounce back in 2014 if iron-ore prices continue to rise and if the company's cost-cutting and balance-sheet-improving measures keep bearing fruit. That's a tall order, but the stock has a lot further to recover if the commodity cycle turns positive again.
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