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Cliffs Natural Resources Inc. (NYSE:CLF) is the largest producer of iron ore pellets for the steel industry in North America. Initially, Cliffs Natural Resources mostly managed iron mines for integrated steel companies; however, the company has turned its focus focused on acquiring direct ownership of iron mines, functioning more as a direct merchant of the resource. The company earned $2.3 billion in revenue and $204 million in net income in 2009.[1]

Of the eleven iron ore mines in operation across North America, Cliffs Natural Resources facilitates six, representing 46% of North American iron ore pellet production and allowing Cliffs Natural Resources to claim the number one market share position in North America. Two trends have depressed domestic demand for steel are declining new home construction due to the collapse of the U.S. Housing Market as well as troubles with American car makers. Both sectors drive a significant demand for steel.

Company Overview

Initially, Cliffs Natural Resources operations consisted mostly of managing iron mines for integrated steel companies; however, the company turned its focused on acquiring increasing ownership of iron mines, functioning more as a direct merchant of the resource.

Segments[2]

  • North American Iron Ore - the company the largest producer of iron ore pellets in North America and primarily sells its production to integrated steel companies in the United States and Canada. The company manages and operates six North American iron ore mines located in Michigan, Minnesota and Eastern Canada that currently have an annual rated capacity of 38.1 million tons of iron ore pellet production, representing 45.1 percent of total North American pellet production capacity.
  • North American Coal - operates two North American coking coal mining complexes located in West Virginia and Alabama that have a rated capacity of 5.5 million short tons of production annually. In 2009, the company sold a total of 1.9 million tons. Each of the company's North American coal mines are positioned near rail or barge lines providing access to international shipping ports, which allows for export of coal production.
  • Asia Pacific Iron Ore - Asia Pacific Iron Ore operations are located in Western Australia and include the company's 100 percent owned Koolyanobbing complex and its 50 percent equity interest in Cockatoo Island. The company serves the Asian iron ore markets with direct-shipping fines and lump ore.
  • Asia Pacific Coal
  • Latin America Iron Ore

Sales

Cliffs Natural Resources' sales of iron ore are to steel producers across the world: eight North American, one European, one Japanese and four Chinese. However, Cliffs Natural Resources' production is heavily directed towards and dependent on five customers in its North American market. The following presents the percentage of Cliffs Natural Resources yearly revenues generated by the three biggest customers.[3]

Business Growth

FY 2009 (ended December 31, 2009)[1]

  • Net revenue fell 35% to $2.3 billion. The company attributes the decline in revenue to lower sales volume related to its North American business operations as result of the sluggish global economy.
  • Net income fell 62% to $204 million.

Trends and Forces

Single End Market: Cliffs Natural Resources produces iron ore and metallurgical coal for the steel industry. Global demand for steel has been high in recent years, which leads to equally high demand for iron ore and metallurgical coal. However, if the global demand for steel were to decrease, this could negatively affect profits. Furthermore, the U.S. steel industry is extremely cyclical, and a decrease in steel production and profitability could lead to lower profits for the mining industry as well.

Energy Costs: The mining industry is extremely energy-intensive, demanding high amounts of diesel fuel, natural gas and electricity. These costs amount to about a quarter of Cliffs Natural Resources North American operating costs. Fuel prices have increased dramatically in recent years, due to a growing worldwide demand for energy.

Mini-mill vs. Integrated Steel Production: Iron ore is used only by integrated steel producers, whereas mini-mills use scrap steel. Steel production by mini-mills accounts for approximately 57% of finished steel products. If domestic steel makers increasingly use methods that do not use iron ore for production, whether it be for environmental concerns or regulations or for other reasons, demand will decrease likely leading to lower profitability.

January 12, 2011 acquires Consolidated Thompson Iron Mines

Consolidated Thompson Iron Mines agreed to a $4.9 billion takeover by Cliffs Natural Resources on January 12, 2011. For Cliffs Natural Resources the deal saves the companies upwards of US$75 million in pre tax operating expenses (many port and loading facilities are situated near Thompson's including the Wabush mine). Cliffs also owns 2 iron ore mining complexes in Australia, and 6 coal mines and six iron ore mines in North America.[4] Consolidated Thompson controls the Bloom Lake iron ore mine in Labrador (estimates production to double to 16 million tonnes by 2012). The takeover will bring the number of facilities operated by Cliffs Natural Resources to 10 for iron ore, 6 for coal mines with the potential to produce 30 million tonnes of iron ore pellets and 16 million tonnes of iron ore concentrate.[5]

Competition

Cliffs Natural Resources claims the number one market share position in North American iron ore production. Because Cliffs Natural Resources still manages mines for some steel companies, they control more iron ore than they own directly. However, even considering this point, Cliffs Natural Resources' complete ownership of more than a quarter of production is still the highest market share in the North American market. The company competes with:

US Steel (X)

ArcelorMittal (MT)

Iron Ore Company of Canada

Quebec Cartier Mining Co.

Trends & Forces

World coal reserves have a lifespan twice that of natural gas

Proven coal reserves total 897 billion tonnes (mostly in the USA, Russia, China and India, lead by North America), that's enough to support current production rates for over 119 years. Natural gas on the other hand (the second most important fuel for electricity generation) only has 46 to 63 years worth of proven reserves. That could make coal a better long term answer to high commodity prices and demand (the natural gas to coal price ratio has gone from over 3 to about 1 in just five years (2005-2010).[6][7][8]

References

  1. 1.0 1.1 CLF 2009 10-K "Selected Financial Data" pg. 44
  2. CLF 2009 10-K "Business Segments" pg. 6-9
  3. CLF 2009 10-K "Concentration of Customers" pg. 10-11
  4. Consolidated Thompson shares up sharply after Cliffs takeover dea (2011-01-12).
  5. Cliffs' Consolidated Thompson takeover would create N.A. iron ore giant (2011-01-12).
  6. World Coal Association. Retrieved on 2011-02-23.
  7. Southwest Virginia coal producer files for IPO (2011-02-21).
  8. Gas Rally Boosts Coal’s Allure for Power Plants: Energy Markets (2010-06-15).
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