There is nothing CLF can do about the iron ore price;
DOWNGRADING to UNDERPERFORM (from Neutral); Lowering Ests & TP
to $30 (from $50).
CLF is up 1.5% at around $34.20 now, having earlier hit a year
Most iron ore watchers have been shocked to see the spot
commodity price fall by 35% in the past 2 months. Like others, we
are watching inventory data and a spot commodity price in free
fall. Although we feel as though we have a reasonable grasp of what
has happened over the past few weeks in the iron ore market, we
will not pretend that we know exactly what is going to happen next.
We have no new operational insights into CLF's business since the
Strategy Day a month ago, so the focus of this report is CLF's
unavoidable exposure to the commodity price.
This report includes 1) an update on the physical market, 2) a
'mark to market' on SepQ12 iron ore prices as we highlight
potential $500mn full year consensus earnings risk, 3) a review of
what is now CLF's most important asset; US Iron Ore, 4) a
discussion regarding asset impairment risk on Eastern Canada, and
5) earnings sensitivities on US$80-140/t iron ore.
Upcoming data releases we will be watching for include 7 Sept -
MySteel mills survey, 9 Sept - Chinese IP, Chinese FAI, including
NBS steel production data and domestic iron ore production for
August and 10 Sept - Chinese iron ore imports.
We are cutting our target price to US$30/share (from
US$50/share) and rating to UNDERPERFORM (from Neutral) based on a)
near term mark to market on iron ore and 4.5x 12m EV/EBITDA. We
derive a 'scorched earth' valuation of US$20/sh at the back of this
report, which we consider a valuation floor for the company. We are
lowering our 2012/2013/2014 EPS estimates to $6.10/$7.02/$5.56
(from $6.90/$7.15/$6.87) respectively.