Cliffs Natural Plunges on Results, Dividend Cut, Share Offering
There was very little good news for Cliffs Natural (NYSE: CLF) when it released its fourth-quarter results after the closing bell on Tuesday.
The stock is down more than 19 percent in late trade on Wednesday and shares are now in play. Cliffs attracted big volume on the session as fund managers and other traders are looking to profit from the volatility while others are puking the stock up after a long decline punctuated by Wednesday's plunge.
Some players may be finding value in the name, which is now down 59 percent over the last 52-weeks and well off the $100 highs registered in July 2011. The catalyst for the next leg lower in the stock was a disappointing Q4 earnings report, a 76 percent dividend cut, and a share offering.
It was a triple whammy of a quarter for Cliffs, which produces iron ore and coal. Wall Street has been bearish on the name and almost 18 percent of the stock's float had been held short in recent days.
Joseph Carrabba, Cliffs' chairman, president and chief executive officer, said, "While 2012 had some noteworthy highlights, including the operational turnaround of North American Coal and record sales volumes in Australia, the year proved to be challenging both from a market perspective and operationally."
Iron ore prices fell from April 2012 through September 2012 before rebounding sharply in recent months. Overall, iron ore prices remain well off of highs seen in 2011 on weaker Chinese demand. Cliffs has also been hurt by its exposure to the domestic coal business which has been devastated by shifts in energy trends amid the shale natural gas boom in the United States.
For the fourth-quarter, the company reported a net loss of $1.6 billion or $11.36 per share, versus net income of $185 million or $1.30 per share, in the year ago period. The company's loss was primarily attributable to a non-cash impairment charge of $1 billion in goodwill related to the company's acquisition of Consolidated Thompson Iron Mines Limited.
On a non-GAAP basis, net income was $89 million or $0.62 per share, versus $213 million or $1.49 per share, in the fourth-quarter of 2011. This compared to analysts' consensus estimates of $0.58 per share.
Revenue in the quarter was $1.5 billion versus $1.66 billion last year. This missed Wall Street consensus revenue estimates of $1.53 billion.
For the full-year, the company reported a net loss of $899 million or $6.32 per share, versus net income of $1.6 billion or $11.48 per share, in fiscal 2011. On a non-GAAP basis, CLF reported net income attributable to Cliffs' shareholders was $493 million or $3.45 per share, versus $1.6 billion or $11.68 per share, last year.
The company also announced a sharp dividend cut on top of the less than stellar Q4 and fiscal year. The board of directors approved a 76 percent cut in its quarterly payout to $0.15 from $0.625.
The final nail in the stock's coffin was the announcement of a share offering whereby Cliffs is offering to sell 9,000,000 common shares and 20,000,000 depositary shares which entitle holders to a 1/40th proportional fractional interest in the rights and preferences of its new mandatory convertible preferred stock.
Cliffs said that it will use the funds from the share offering to "repay borrowings repay borrowings outstanding under its term loan facility." Any additional proceeds will be used for general corporate purposes.
In the aftermath of the corporate announcements, Deutsche Bank (NYSE: DB) analysts cut their rating and price target on the stock. The analysts downgraded CLF from Buy to Hold and lowered their price target from $48 to $38. They cited dilution of 19 to 21 percent on the surprise share offering and questioned the timing of the move.
The stock was also downgraded by Citigroup (NYSE: C) from Buy to Neutral and the target price cut from $50 to $36. They cited "disappointing iron ore pricing guidance across various regions and cost guidance for Canada." The analysts added that "This was compounded by the dividend cut and proposed equity raise." New iron ore price assumptions in Citi's model also led the firm to cut its earnings outlook for Cliffs.
After the extended plunge in Cliffs' share price, the stock is trading at a rock bottom valuation. According to the latest Yahoo Finance data, CLF is trading at a Price/Book ratio of 0.82 and a trailing P/E below five.
Even at current low prices, however, the stock's PEG ratio is 1.77, reflecting estimates for uneven future growth. Analysts expect the company to report a sales decline of 6.80 percent in 2013 and then rise 8.40 percent in 2014. Earnings are expected to fall 9.10 percent this year and then jump 24.50 percent next year.
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