We are downgrading our rating on mining company
Cliffs Natural Resources
) to Underperform following its lackluster third-quarter 2012
results. Earnings (from continuing operation) of 61 cents per
share fell well short of the Zacks Consensus Estimate of $1.05.
Profit slid roughly 86% year over year on account of lower iron
ore pricing and higher costs.
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Revenues tumbled 26% year over year to $1,544.9 million and
missed the Zacks Consensus Estimate. The company cut its U.S.
iron ore and North American coal sales volume forecasts for 2012
factoring in the volatile pricing environment.
Cliffs, which competes with
CONSOL Energy Inc.
Alpha Natural Resources, Inc.
), is the largest producer of iron ore pellets in North America.
It remains optimistic regarding the prospects for cash generation
and the opportunities that will fund organic growth projects and
return cash to shareholders. The company also has a significant
presence in the Asia-Pacific region, where demand is still
robust, lending support to shipments.
However, Cliffs' North American Coal segment is under pressure
due to soft market pricing for coal products. Moreover, the
company is witnessing lower pricing for sea borne iron ore across
the U.S., Eastern Canada and Asia Pacific, which hurt its results
in the third quarter.
According to Cliffs, iron ore prices were depressed in the last
few months due to the lack of a strong recovery in steel demand
in China, the world's largest producer and consumer of steel, and
oversupply in the market. The company has trimmed its Chinese
crude steel production and seaborne iron ore spot price forecasts
The prices for commodities have been under pressure due to the
uncertain economic environment. International demand and economic
conditions strongly affect the prices of iron ore and coal. The
current uncertain macroeconomic environment, including the
European sovereign debt crisis, may impact the company's
operations and its results.
Moreover, Cliffs is exposed to customer concentration risk. It
also contends with higher labor and mining costs.
Our recommendation on Cliffs is in sync with a short-term Zacks
#5 Rank (Strong Sell).