Over the last few weeks, Cliffs Natural Resources (CLF, Financial) has been a pretty volatile stock to hold. The stock has been a delight for traders as it has moved back and forth recently. However, when it comes to a long-term perspective, Cliffs’ outlook is very weak.Â
Debt ridden
Cliffs Natural Resources’ debt has been increasing consistently for the last 12 months. Although the company has managed to cut back on various costs, the debt burden has increased. The company ended the last quarter with $2.80 billion in debt compared to only $270 million in cash.
What makes the matter worse for Cliffs is the fact that the rate of interest on a considerable portion of that debt is very high. The high interest expenses have offset the company’s cost-cutting efforts and as a result, the stock has massively underperformed this year.
Weak iron ore market
A high debt isn’t a bad thing in itself, as many companies are often highly leveraged. However, in Cliffs’ case, the high debt is a big burden as the iron ore market is expected to stay weak. Iron ore prices have fallen significantly over the last two years, and this has taken a toll on all iron ore suppliers.
Cliffs has lost roughly 90% of its market cap over the last two years and the future doesn’t look much better for the company. Citibank expects iron ore prices to remain low in 2016, and with Cliffs’ debt increasing gradually, I can see the stock price moving further down in the coming months. Citibank analyst Brian Yu recently said:
“CLF is making good progress lowering cost where they have control, including SG&A and capex, but market conditions remain challenging and Citi is forecasting a further decline in [iron ore] pricing to $41/ton in 2016."
Cliffs is already in troubled waters and a further decline in iron ore prices could be disastrous. With demand expected to stay low, the chances of iron ore prices to fall further are really high, which is why Cliffs is not a stock worth owning.
Conclusion
Cliffs Natural Resources is far from a bottom. The stock may be trading near 52-week lows, but I think it has more downside to offer. Investors shouldn’t expect Cliffs to turnaround any time soon. Falling iron ore prices and the increasing debt burden are massive headwinds for Cliffs going forward. Moreover, the miner’s high interest rate will also make survival in the weak commodity market difficult. Despite the company trading near 52-week lows, the stock is a value trap and should be avoided.
