Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: After being up in early trading, share of iron ore producer Cliffs Natural Resources Inc (CLF +3.80%) were hammered down the rest of the day and more than 9% at one point, before closing at about an 8% drubbing. That puts the stock down about 12% this week alone. This isn't anything unfamiliar for Cliffs investors over the past few years, as the company's shares have fallen from the $100 level in 2011, to today's $5 and change.
So what: Cliffs reported earnings after the market close yesterday, and hosted its earnings conference call this morning. Frankly, the company is plagued by the same oversupply that's been killing coal and iron ore prices for several years now. Revenue fell 28% from last year, but its costs only fell 14%, which is one of the problems with being in a business like Cliffs' with very high fixed costs and limited ability to reduce those costs while still producing a product to generate revenue.
Now what: Frankly, Cliffs is in a precarious position right now. It really needs iron ore prices to rise, or it could face dire straits ahead, as its cash position gets severely squeezed. This past quarter the company would have run out of cash had it not completed a secured debt offering of $540 million, with an interest rate of 8.25%. Even after the cash raise, the company ended the quarter with $355 million.
Management did say that it was "usual seasonality" in the quarter that led to a very high level of cash burn, and the company does still have access to its asset-backed lending facility, but that doesn't address the real problem: Iron ore prices have absolutely plummeted since 2013, and until they begin to rebound, Cliffs will continue to struggle.
The company could become a turnaround cyclical play on iron prices, but I'd wait until there was some sign of a sustained recovery in iron prices before I touched Cliffs Natural Resources.
