Analyst Sees Cliffs Natural Resources Redlining Debt Pacts

Cliffs Natural Resources Inc. CLF will violate its debt covenants in the third quarter and get forced into a restructuring, an analyst said Monday.

Shares of the Cleveland-based mining company changed hands recently down nearly 5 percent at $5.96.

Axiom's Gordon L. Johnson III downgraded Cliffs to Sell, from Hold citing risks to the company's liquidity in the face of what he called a pending collapse in iron ore prices.

Cliffs recently agreed to sell a raft of non-core assets including Bloom Lake iron ore mine near Labrador, and its Logan County coal operations in West Virginia, while its Chief Executive Lourenco Goncalves has acquired a sizable personal acquisitions in the company's shares.

But Johnson noted that the privately held Indian conglomerate Essar Group recently got financing to boost iron ore production even as demand sinks.

"Iron ore prices are bout to take the next big leg down," with demand from China slowing at record rates, Johnson said.

At the same time, significant devaluations of key foreign currencies puts Cliffs at a competitive disadvantage.

"As this dynamic becomes increasingly clear, we fear Cliff's shares could come under significant pressure," Johnson said.

Johnson expects the company will violate a key interest coverage ratio in its debt covenants by the third quarter of 2015.

"There's not much more they can do to raise capital other than eliminate the dividend," Johnson said.