Is it Safe to Buy Cliffs Natural Resources?

After losing more than 75% of its value in 2015, Cliffs Natural Resources ( CLF ) delivered stockholders with huge returns in 2016, as the stock surged over 450%. The main reason behind the company's awful performance in 2015 was the poor iron ore price that decelerated to $39.60 per dry metric ton in December 2015 from $136 per ton in January 2014.

However, iron ore was one of the astonishing and optimistic performers in the previous year. Initially, when heading into 2016, the forecasts for iron ore price were quite disappointing mainly due to China's slowing economy.

As China is iron ore's top consumer, the slowdown could have plunged the iron ore price further even after it declined for three successive years. However, things were totally different in 2016, as iron ore price showed massive recovery.

In 2016, the iron ore price almost doubled from $39.6 per ton to $79.75 per metric ton, and currently trades at $86.60 which represents a two-year high. The main reason behind the turnaround is the surge in China's import that displayed a 12% jump year over year.

To improve the economy, the Chinese government implemented enormous stimulus programs, which, in turn, surged the country's desire for iron ore. Despite the increasing price for iron ore and Cliffs being relatively robust recently, the company continued to aggressively focus on reducing its expenses.

In the fourth quarter, the company reported EPS of 34 cents, exceeding the estimates by 11 cents. The company's revenue came in at $754 million, beating the consensus by $78.76 million. Most significantly, that figure shows a surge of 58.4% year over year.

Throughout the past 10 quarters, the company's revenue has been declining at an average of 22.4%. However, the company finally managed to report positive revenue growth in the fourth quarter on the back of strong iron price.

Summing up

In 2016, improving iron ore prices together with the company's enhancing fundamentals helped Cliffs to report robust growth, but the stock might not be able to display the same kind of growth this year. It is true that strong Chinese demand has been improving iron prices, but a slackening Chinese economy still remains a severe problem.

Cliffs' performance is purely dependent on iron ore prices. Currently, iron ore trades at two-year highs and it is not likely that iron ore prices will double again this year as well. As an outcome, stockholders should book the profit by selling the recent rally.

Disclosure: No position in the stocks mentioned in this article.

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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