Cliffs Natural Resources (CLF, Financial) recently released mixed results for the first quarter of fiscal 2015. The revenue of the company declined due to a soft commodity market, but the net income rose impressively as a result of extinguishment of debt and other income tax valuation allowances. The management of the company is now looking for growth in its financial performance in the future. It is undertaking various cost-cutting initiatives to improve its operational, as well as its financial, performance. Cliffs is also bullish about its market share on the back of its performance in the recently reported quarter which will again help it to secure good margins in the challenging operating and commercial environment.
How Cliffs is trying to improve
The macroeconomic environment is tough, and Cliffs is putting in necessary efforts to still hold a profitable edge in the market. It is therefore responding aggressively by taking reduction initiatives, methodically allocating capital and aligning corporate overhead, bringing in change within its business. These steps will again push it to reduce expenses at most possible places.
Cost-cutting initiatives are Cliffs’ key strategies to maintain a profitable edge in the market. This will further help the company keep its asset cash flow well in the long term. However, it might face some crunches in the near term. The cost-cutting initiatives have contributed well to it as due to this, its North American coal business performed terrifically posting a $6 million adjusted EBITDA.
Besides achieving solid growth in the EBITDA, Cliffs looks well positioned for better growth due to many reasons. Its USIO business is growing at full pace, delivering reliable profitability despite low prices, which are imposed by two Australian major seaborne trade of iron ore. This is because Cliffs sells custom-made, blast furnace-ready pallets and not sinter feed lines, which help it in driving good profit margins. This is an added advantage to Cliffs because this will strengthen its position in the market, as there is shortage of sintering plants in the U.S. , and, due to other environment restrictions, sinter-fed lines cannot be sold in the U.S. market.
The way ahead
Moving ahead, Cliffs is having a full range of long-term contracts out of which none will expire for the next seven quarters. This is a good long-term opportunity for Cliffs, as this will build a hedge around it against the price volatility. Further, the company is optimizing its operations and maintenance practice by reducing manpower as well, which will further drive the costs lower and improve its margins.
Cliffs is seeing good growth opportunities in the electric arc furnace market and to see good profits in the near term, the company is laser focused on securing a trial order for DR pallets. These initiatives will open new opportunities for it to further diversify its business, which will also attract new customers to its USIO business.
Conclusion
Now looking at its fundamentals, the company is making losses hence it doesn’t have trailing and forward P/E. The commodity market looks soft in future as well, so the initiatives taken by Cliffs will take some time to be fruitful. The company is also disappointing with its profit margin of -156.24%. Considering all these points, I would urge investors to see investment in the Cliffs Natural Resources as of now.
