Image: Cliffs Natural Resources.
The iron ore market has been tough lately, and producer Cliffs Natural Resources (CLF 4.58%) has fought to survive in an extremely competitive environment. Even as overseas producers like BHP Billiton (BHP 3.24%) bring new supply on line, other competitors in China are flooding the market in a way that hurts the entire industry. Still, CEO Lourenco Goncalves has high hopes for Cliffs Natural, and he explained some of his vision of the iron-ore producer's future in the company's conference call following its latest earnings announcement. Let's take a closer look at Cliffs Natural Resources and what its leader thinks about its prospects for the future.
"Our management team and our operators have been able to consistently reduce costs across the board and improve our execution during one of the most challenging times in the history of the business."
With iron-ore prices so low, it has been essential for Cliffs Natural to focus on cutting costs wherever possible. The company's efforts haven't been perfect, as margins have nevertheless fallen sharply from the levels Cliffs enjoyed when iron-ore prices in the open market were much higher. Yet they have succeeded in keeping income from continuing operations positive, and that in itself is a major accomplishment in an environment in which many iron-ore producers have had difficulty doing even that much.
"We must do more to shore up profitability as we operate [our coal] mines during the sale process. As a consequence, we are adjusting our operating plans to ensure we extract as much value from the coal mines in the near term."
Cliffs Natural identified its North American coal business as being a candidate for sale, and it had expected to sell off its Pinnacle and Oak Grove mines fairly quickly. Yet bankruptcies in the coal industry forced potential buyers to put off deals, putting Cliffs in the awkward position of choosing whether to wait or move forward. Goncalves has tried to find a balance between the two paths, still seeking to sell the mines while doing whatever Cliffs can to squeeze more profit from them. Cliffs won't need to pay the costs for future mine development, but until it can sell the mines, it will remain exposed to conditions in the coal industry.
"The big Australian iron ore miners' misguided focus on market share at the expense of price continues to give the Chinese mills a cheap avenue to overproduce steel."
Cliffs has been critical of Chinese producers, accusing them of making economically irrational decisions given the current price environment in order to sustain production levels. Yet Australian producers like BHP Billiton haven't followed an ideal strategy either in Cliffs' eyes, choosing to fight back rather than curtailing supply and letting prices rise back to more normal levels. The mistakes that BHP Billiton and others have made is a big part of why Cliffs has focused on its U.S. operations, with the geographical advantage it has there wiping out much of the negativity on the world market.
"We're willing to sell [Essar Steel Algoma] iron ore pellets under a more commercially appropriate arrangement. We know the quality of Cliffs' products as well as the advantageous geographical position of our mines."
A big concern among investors has been the fallout from the termination of Cliffs' contract to supply iron ore to Essar Steel Algoma. Goncalves wasn't able to discuss the matter fully because of ongoing legal disputes, but he did reveal that Cliffs protected itself from any credit risk related to the dispute. Nevertheless, the dispute was part of the reason why Cliffs cut its sales forecast to 17.5 million tons for the year.
"We are starting to get out of the bottom. We are not at a top here, but we will get there."
Goncalves ended the call with a long monologue about the state of the global industry, finishing by noting that Cliffs Natural's decision to focus on the U.S. market reflects his belief that the domestic market is the best place in the world to be. In particular, with expectations that major steel producers will start to ramp up production and find ways to overcome competitive pressures of their own, Cliffs will be better positioned than ever to meet steelmakers' needs. If that proves to be the case, then Cliffs could use it to move beyond its challenges and start growing again.
Cliffs Natural has a long way to go, but it has also made plenty of progress lately. If commodities markets rebound soon, then Cliffs has given itself as good a chance as possible to use that rebound to its advantage.
