The share price of Cliffs Natural Resources (CLF 4.40%) has maintained a downward trend over the last few years. This erosion of shareholder value can be blamed on a number of factors, including bad management, litigation, and the falling prices of met coal and iron ore.
The company is trying to get rid of major assets like the Bloom Lake mine and is reducing capital expenditure.
Bloom Lake debacle
The Bloom Lake mine has faced systematic problems due to falling production and increasing cash costs per ton, as shown in the figure below. This has forced the company to take a $1.2 billion impairment charge and slash its dividend by 75%.
Source: Cliffs Natural Resources Presentation
The adverse performance of Bloom Lake has embroiled the company in more legal troubles. The Shuman Law Firm has started its investigation into potential claims against the company's management. According to the plaintiff, the company violated the Securities Exchange Act of 1934 by not disclosing the failing condition of its Bloom Lake iron ore mine.
Falling prices
Source: Ycharts
Cliffs is also facing continual challenges from market factors such as the falling prices of iron ore and met coal. The prices have been declining constantly in 2014, primarily due to oversupply.
The price of iron ore delivered to China has fallen to $98.10 per dry ton, a 27% decline this year. A comparison of this price with Cliffs' production cost reveals that while the Asia-Pacific mines are still giving good margins of $33-$38 per ton, the U.S. and Canadian iron ore mines will provide margins of only $28-$33 and $8-$13 per ton respectively. These margins are based on the cash cost per ton provided in the company's future guidance, which doesn't include mine sustaining costs. The true cost will be higher and may even result in a loss per ton from the U.S. and Canadian mines, and minor profit from Asia Pacific mines, based on the current price.
Goldman Sachs predicts iron ore will fall to $80 per ton in the coming year due to further increases in supply. Giant miners such as Vale, BHP Billiton, and Rio Tinto are expanding their production capacity while India is also preparing to dump its production.
The Supreme Court of India has lifted its ban on the extraction of iron ore, but the state government of Goa and the Ministry of Environment and Forests still have to give the go ahead. According to the vice chairman of the Federation of Indian Mineral Industries, India will suppress iron ore prices with its contribution of 30 million to 35 million tons this year and around 50 million tons in 2015-16. This influx may force iron ore prices to fall even lower than Goldman Sachs' prediction, which will be bad news for Cliffs. From the table below, we can see that the company will hardly break even at a price lower than $80 per ton.
Source: Cliffs Natural Resources Presentation
In addition, the excess coking coal present in the market is forcing various companies to shut down their operations. Peabody (BTU +0.00%) and Walter Energy (WLT +0.00%) are already reducing capital expense and have closed down, or sold off, high cost/non-core. Last year BHP Billiton reported a production cost of $110 per ton whereas the current average production cost in the U.S. is around $135 per ton. The current price of coking coal at $120 per ton leaves coal producers with slim or even negative margins. As mentioned above, Cliffs' cost guidance does not include mine sustaining costs, therefore its true met coal cost per ton will be close to the U.S. average.
Bottom line
Cliffs Natural Resources is being affected by the high cost of holding the Bloom Lake mine. The company's CEO has announced that the mine could stay idle if iron ore prices keep falling and the management is considering strategic partnerships, or disposal of the mine, in order to ease the burden on the balance sheet.
Moreover, the company's $3.3 billion chromite project is still in the dark after being suspended last year due to development issues in Ontario, Canada. Cliffs is currently fighting two battles; one with falling prices and the other with its own mistrusting investors.
