Cliffs Natural Resources: Riding The China Steel Wave

Cliff's Natural Resources CLF
Price: $82.80
Forward P/E: 5.8
Earnings Growth: 94%
Projected Sales Growth: 52%
Market Cap: $11.32 billion

Why It's Featured:

Earnings will almost double this year; high operating and profit margins; notable Return on Equity and Assets.

Danger Zones:

Extreme price volatility; global economic recovery.

Cliffs Natural Resources CLF, a mining and natural resources company, produces iron ore pellets, lump and fines iron ore, and metallurgical coal products.  The company operates six iron ore mines in Michigan, Minnesota, and eastern Canada; two iron ore mining complexes in Western Australia; five metallurgical coal mines located in West Virginia and Alabama; and one thermal coal mine located in West Virginia.

It also owns a 45% economic interest in a coking and thermal coal mine located in Queensland, Australia; and a 30% interest in Amapa, a Brazilian iron ore project in Latin America, as well as chromite properties in Ontario, Canada.  The company, formerly known as Cleveland-Cliffs Inc, was founded in 1847 and is headquartered in Cleveland, Ohio.

In the last 6 years, CLF split 3 times, each 2 for 1.  That's the good news.  The bad news is that in one year, between May of 2008 and March of 2009, the stock went from $121.90 to $11.80.  An investor would have lost 90% of the value in 10 months.  So if you're interested in CLF, buckle up.  The ride can be rough at times.

Since March of 2009, CLF has gone almost straight up with only a small dip in early 2010.  Any investor who bought CLF at its low, saw a return of almost 600% at current prices.  It was higher earlier this year, hitting $102.50.  With that kind of recovery, is there room left for more?

If you look at earnings, there certainly should be.  Finishing 2010 with $7.49 a share, the company appears to be on track to deliver record earnings in 2011.  Ten analysts have a consensus estimate of $14.48, then see $14.60 next year.  The range of estimates for both years is wide, going from $12.90 to $15.90 in 2011, then $12.50 to $17.00 in 2012.  The spurt of earnings is evident in the estimate for the June quarter.  Analysts expect $3.67 compared to $1.92 last year in the second period.  For the third quarter, they see $4.09 vs $2.18 in 2010's third.

Reasons for the robust growth include China's need for steelmaking materials as well as long-term contracts that were renegotiated with higher prices.  Also helping is the fact that most mines are running at full capacity which makes for higher margins due to better efficiencies.

CLF recently bought a Canadian iron ore producer, Consolidated Thompson.  The company expects the new acqusition to shovel 8 million tons out of the ground each year.  Consolidated also has two developmental properties that will add to production when completed.

There was a relatively small disruption in one of the company's coal operations in April.  A tornado tore through the Oak Grove Mine, blowing out the conveyor system and the preparation plant.  Insurance will cover the necessary repairs.  In all, the North American Coal division represented 9% of the company's sales in 2010.  Management thinks the disruption will be short lived, affecting only the current quarter's production.  For the full year, it adjusted coal sales to 5.1 million, down from 6.5 million tons, to reflect the disaster's damage.

Essential numbers:

Market Cap is $11.49 billion. Trailing P/E is 8.45.  Price to sales ratio is 2.22.  Price to book is 2.67.  Book value is $31.50.  Operating margin for the last 12 months was 33.01% while Profit margin was 26.59%.  Return on equity was a notable 38.47%.  Return on assets was 14.64%.  Total revenues were $5.14 billion.  Total cash is $2.27 billion for $16.72 a share.  Total debt is $2.61 billion.  Debt to equity ratio is .61.  Current ratio is 3.35.  Beta is 2.35.  (Can you say volatile?)  In the last 52 weeks, the stock is up 50%.  There are 135.65 million shares Outstanding with a Float of 134.80 million.  Insiders own 1.3% of the stock.  Institutions have 87.20%.  The dividend is 56 cents a share.

This stock seems to be firing on all cylinders.  Everything's going very well with increased demand most likely for coal and iron ore as global economies build infrastructure and grow.  But keep in mind, it was only in 2001 when the company had three in a row years of losses: minus 40 cents followed by minus 82 cents, then minus 40 cents.  Investors looking for a way to benefit from a global economic recovery will find this stock of keen interest.  Just be sure to watch commodity prices and be ready to bail if earnings start to fall.

- Company Web site: www.cliffsnaturalresources.com

- Ted Allrich
June 23, 2011

Ted is the Chairman of the Board of B of I Holding and Bank of Internet USA. He is also the founder of The Online Investor (www.theonlineinvestor.com) which has a Free Newsletter for investors.