Will Cliffs Natural Resources Inc (CLF) Go Bankrupt? – by Troy Kuhn (Bidnessetc.com – December 19, 2014)

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Cliffs Naturals Resources Inc stock has plunged over the last year, and its weak balance sheet points to a grim future

Cliffs Natural Resources Inc (NYSE:CLF) has had a miserable year.

The company has lost around three-quarters of its market capitalization, and Credit Suisse recently downgraded the iron miner’s price target to $1. Cliffs stock has been targeted by investors and traders as a prime candidate for a short sell, as falling iron-ore prices continue to take a toll on the miner’s earnings.

Cliffs generates 83.7% of its revenue from iron-ore sales, and iron-ore assets represent 85.8% of its overall assets. Cliffs has been in trouble for a couple of years now.

Casablanca Capital LLC recently won a proxy fight against Cliffs, which forced several changes to the miner’s board. Cliffs’ CEO and chairman Lourenco Goncalves took over the company’s management after the proxy fight.

Casablanca was of the view Cliffs should sell off its Bloom Lake mine, along with its US coal operations and Australian mines. In August, Mr. Goncalves announced a share repurchase program of $200 million, and sold a minority holding in a graphite mining company.

Credit Suisse Downgrade

Cliffs received another blow this week, after Credit Suisse analyst, Nathan Littlewood, downgraded the company’s price target from $10 to $1. Credit Suisse acknowledged that the miner had made significant efforts to rescue its failing business, but felt “some handicaps are just too great.”

The analyst has based this downgrade on three reasons: cautious CY15 guidance; no long-term valuation support; and the “handicaps” mentioned earlier.

However, the analyst was impressed with the progress the miner made after its annual general meeting under new management. Credit Suisse sees Cliffs’ initiatives to aggressively cut costs and close Eastern Canada operations as positives. The sale of coal assets and proceeds from it also gave a positive surprise. Credit Suisse expects further progress on a number of fronts.

Credit Suisse feels the positives have been outweighed by several handicaps, which have dragged down Cliffs’ profitability. Cliffs Natural Resources’ balance sheet handicap “is simply too great.” Credit Suisse points out Cliffs has a net debt position of $2.8 billion, translating into a net debt to EBITDA multiple of 8.9 times.

This is “a function of a failed empire-building attempt by prior management,” the analyst said.

Credit Suisse sees Cliffs’ near-term earnings potential as insufficient to hold up the company’s current level of indebtedness. Most of Cliffs’ output is needed by the US steel industry, but the company’s assets are incapable of “sufficient mid-cycle earnings generation to support the balance sheet.”

Credit Suisse has concluded that in the next year or two, Cliffs would need to recapitalize, and therefore the price target has been reduced.

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