Cliffs Natural (CLF) Posts Loss in Q2, Revs Miss

Cliffs Natural Resources Inc.CLF reported second-quarter 2014 net loss of $2 million, or a penny per share compared with a net income of $133 million or 82 cents per share in the year-ago quarter, hurt by a double-digit decline in sales. The loss was narrower than the Zacks Consensus Estimate of a loss of 8 cents per share.

Sales for the quarter came in at $1,100.8 million, down 26% from $1,488.5 million in the prior-year quarter. It also missed the Zacks Consensus Estimate of $1,150 million. The decline was due to significantly lower market pricing for iron ore and metallurgical coal, and a 24% reduction in the company's iron ore sales volumes.

Segment Performance

U.S. Iron Ore: U.S.Iron Ore pellet sales volume was 4.3 million tons in the second quarter, compared with 5.7 million tons in the year-ago quarter. The decline was due to reduced vessel shipment availability due to the freeze on the Great Lakes, resulting in a delayed start of the 2014 shipping season, as well as lower export and other spot sales.

Revenues per ton were down 3% year over year to $106.80 due to lower realized pricing from certain customer contracts and reduced year-over-year market pricing for iron ore.

Cash cost per ton decreased 1% year over year to $66.73 due to the absence of idle costs at the Empire and Northshore mines, which were partly idled in the second quarter of 2013.

Eastern Canadian Iron Ore: Sales volumes in the reported quarter increased 3% year over year to 2 million tons and only reflects Bloom Lake Mine concentrate sales.

Revenues per ton for the segment decreased 21% year over year to $87.48 due to a 19% decline in iron ore market pricing and product mix.

Cash cost per ton dropped 24% to $87.48 due to absence of the Wabush Mine's higher-cost production and improved cash costs at Bloom Lake Mine.

Asia Pacific Iron Ore: Sales volumes in the segment declined 3% to 2.9 million tons due to the timing of vessel shipments. Revenues per ton were $80.38, down 26% from $109.36 in the prior-year quarter, due to a 19% year-over-year decrease in iron ore market pricing, an unfavorable foreign exchange hedging loss, increased freight rates and also unfavorable impacts due to more contracts being priced at the point of discharge versus loading.

Cash cost per ton in the segment fell 16% to $53.38 due to improvements across the operation.

North American Coal: Sales volumes decreased 2% to 2 million tons, led by lower sales to certain customers due to lower domestic nominations for metallurgical coal sales. Revenues per ton decreased 31% to $72.84, due to lower market pricing for metallurgical coal products, coupled with positive impact in the prior year's second quarter related to tons that were priced at a higher rate.

Cash cost per ton was $83.01 which included a $7 per ton lower-cost-or-market inventory adjustment. Excluding the inventory adjustment, the cash costs per ton fell 14% to $76.

Financial Position

Cliffs had $359.9 million in cash and cash equivalents as of Jun 30, 2014, compared with $263.3 million as of Jun 30, 2013. Long-term debt stood at $3,293 million as of Jun 30, 2014, compared with $3,323.3 million as of Jun 30, 2013.

Capital expenditures reduced 77% year over year to $61 million in the second quarter and depreciation, depletion and amortization amounted to $145 million.

Cash used in operations was $41 million in the reported quarter compared with $414 million generated in the prior-year quarter.

Outlook

For the rest of 2014, demand for Cliffs' steelmaking raw materials in North America is expected to be backed by continued improvements in the labor market, construction activity and motor vehicle production.

Cliffs forecasts demand for steelmaking raw materials in China to remain high, as Chinese officials remain committed to achieving their targeted real GDP growth rate of roughly 7.5%. However, the company believes that increased seaborne supply could continue to put pressure on pricing for steelmaking raw materials.

For full-year 2014, the guidance for selling, general and administrative (SG&A) expenses has been maintained at roughly $185 million, which excludes severance and proxy-contest-related costs. Cliffs is also maintaining its full-year cash outflows expectation of $15 million for exploration and also expects to incur roughly $100 million in costs related to the idling of Wabush Mine for 2014.

Cliffs expects its full-year 2014 depreciation, depletion and amortization to be roughly $560 million. The company reaffirmed its 2014 capital expenditures budget of roughly $275–$325 million.

U.S.Iron Ore Outlook

For full-year 2014, Cliffs expects sales and production volume to be 22 million tons which is at the bottom end of its earlier guidance range of 22 million tons to 23 million tons. Cash-cost expectation is maintained in the range of $65–$70 per ton. Depreciation, depletion and amortization for full-year 2014 are expected to be roughly $5 per ton, down from the previous expectation of $7 per ton.

Eastern Canadian Iron Ore Outlook

For full-year 2014, sales and production volume is expected to be 7 million tons, which is at the top end of the earlier expected range of 6—7 million tons.  Cliffs reduced its full-year 2014 cash-cost-per-ton forecast for the segment to $80—$85 from its previous expectation of $85—$90, mainly driven by an updated mine plan that includes lower strip ratios and reduced contract labor. Depreciation, depletion and amortization for full-year 2014 are expected to be roughly $23 per ton.

Asia Pacific Iron Ore Outlook

For 2014, Cliffs expects sales and production volumes to around 11 million tons, which is at the top end of its previous guidance range of 10—11 million tons. The product mix is expected to be around half lump and half fines iron ore. The company also trimmed its cash cost per ton guidance to $55—$60 from its previous expectation of $60—$65. Depreciation, depletion and amortization is anticipated to be about $14 per ton for the year.

North American Coal Outlook

For 2014, Cliffs expects sales and production volumes to be around 7 million tons, which is at the bottom end of its previous guidance range of 7—8 million tons. Cliffs lowered its expectations for revenues-per-ton to $75–$80 from its previous outlook of $80–$85. The revision is mainly due to lower market pricing for metallurgical coal products.

Cliffs reaffirmed its full-year cash-cost-per-ton expectation of $85–$90. Full-year 2014 depreciation, depletion and amortization is expected to be about $16 per ton.

Cliffs currently carries a Zacks Rank #5 (Strong Sell).

Other mining companies with favorable Zacks Rank include Alderon Iron Ore Corp. AXX, Atlatsa Resources Corporation ATL and Paramount Gold and Silver Corp. PZG. While Alderon sports a Zacks Rank #1 (Strong Buy), both Atlatsa and Paramount Gold hold a Zacks Rank #2 (Buy).

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