Early in the year, Cliffs Natural Resources Inc (NYSE:CLF) sold one of its coal mines. A few months later, when it reported first-quarter results, it announced that coal was being classified as a discontinued operation. In other words, it was getting out of coal completely. Management is hinting that it's found a buyer for the rest its coal assets, but don't get too excited, because that's not going to save the day.
Cliffs Natural Resources' main business is iron ore. Its main market is North America, where steel makers have been struggling to compete with cheap foreign imports. That's been a big problem. The miner lost money for five consecutive quarters heading into the profit it had in the second quarter. But there's a fly in that ointment -- earnings from continuing operations were still in the red.
And it's worth noting that continuing operations excludes the coal group. Metallurgical coal, which is the type of coal the company mines, has been hurt as bad, if not worse, than iron ore. Which is why the miner is looking to get out of what is a relatively small business for it compared to iron ore. But the second quarter shows that the precipitous drop in iron ore prices is still taking a big toll on Cliffs' business.
Cash is king
Cliffs is doing what it can to get its ship in order. The first coal sale brought in nearly $175 million in cash that it used to shore up its finances. There's no telling how much money Cliff's will get for the rest of its coal assets, but management appears pretty upbeat about getting a deal done. According to CEO Lourenço Gonçalves:
As for the remaining coal assets, Pinnacle and Oak Grove, we continue to work diligently with interested buyers toward a deal, which we expect to announce in the very near future.
This will help the company strengthen its balance sheet and prolong its life, with the hope of living to fight another day. That may sound dire, but consider this quote from the CEO when asked about how he plans to use cash from such things as asset sales:
So I'm going to use the cash for the thing that's better for Cliffs Natural Resources... and to hurt as much as I can the ones that are making my life miserable here because it's difficult enough to run this company going against all the bad perception of iron ore, all the bad perception of coal, and it is annoying to see how much a bunch of guys hiding behind the screens and doing what they are doing, trying to take down a great American company. That's not going to happen.
Those are fighting words that seem a bit heated for a quarterly conference call, but that gives you a sense of the severity of the issues Cliffs is facing. Which is why the miner is retrenching. Of course, you could argue that investors have a right to question Cliffs about how it intends to use cash, since some of its problems look like self inflicted wounds. The roughly $5 billion 2011 purchase of Consolidated Thompson to increase exposure to the Chinese market at what we now know was the top of the commodity cycle is a painful example--and one that helped put the company in its current weakened state.
Still, Cliffs appears to be doing the right things today even if it's made mistakes in the past. For example, in addition to refocusing around its core, Cliffs has been cutting back on spending -- which is what all miners have been doing. On this front, it's worth noting that despite the fact that coal is discontinued, it still costs the company money.
CFO Kelly Tompkins noted during the second-quarter conference call that the company's capital spending guidance of $100 million to $125 million includes around $25 million related to coal. Cut that out, and there's a big cost savings for the company as well as a cash infusion if the remaining coal mines get sold.
That dovetails with efforts to strengthen its financial position by reworking its debt. According to the CEO, "Another significant accomplishment of this past year was the successful replacement of the overly restrictive covenant-heavy revolver line of credit which, if maintained, would have precluded us from making several important moves." So, there's more flexibility now than there was before, as management has shifted into survival mode, and there might be even more flexibility to come if, or perhaps when, the final coal mines are jettisoned.
It's still about iron ore
This is all great news, but the story here is still about iron ore. There's no doubt that Cliffs is working hard to survive, but until its core market starts to turn higher, it's just battening down the hatches and trying to make it out of the hurricane in one piece. So, as an investor, a coal sale is a good thing, but it's just one small piece in a much bigger puzzle. In the end, there are still a lot of reasons to be concerned about Cliffs including a tough global iron ore market, continuing debt issues (even though there's notable improvement here), and the company's core U.S. steel customers which are still struggling to deal with low-priced imports.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Cliffs Natural Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.