Axiom Raises the Red Flag on Cliffs Natural Resources Inc

Cliffs Natural Resources (NYSE:CLF) shares are down 7.66% today after analyst Gordon Johnson of Axiom downgraded the shares to Sell and reduced the price target to $2.00 (from $9.00), which implies a downside of 65.5% from current levels.

Johnson explained, “At $6.27/shr, CLF has an equity market cap of $961mn. Based on our ests., CLF will have net debt at the end of this year of $2.8bn, representing an enterprise value of $3.7bn (excluding pension liability). Thus, on our numbers, ‘15 EV/EBITDA is 55x, &’16 EV/EBITDA is negative.”

Furthermore, “Given where iron ore prices are, there’s not much more they can do to raise cash other than eliminate the dividend (which they did in C4Q14) and/or raise equity. Their revolvers ($900mn outstanding) and various bullet loans all have financial covenants, the most restrictive of which is a recently amended interest-coverage-ratio minimum of 2.0x. Given gross debt at 12/31 was ~$3.2bn (implying C1Q15 interest expense of $40.1mn), and our est. for C1Q15 EBIT at $16.3mn, we see CLF as very far in violation of the 2.0x interest-coverage-ratio covenant, on an LTM basis, entering C3Q15 (implying another necessary restructuring is imminent).”

According to, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Gordon Johnson has a total average return of 18.7% and a 69.7% success rate. Johnson has a 46.4% average return when recommending CLF, and is ranked #167 out of 3508 analysts.


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