Cliffs Natural Resources Inc. (NYSE:CLF) reported fourth-quarter and full-year results for the period ended December 31, 2016.
Fourth-quarter 2016 consolidated revenues of $754 million increased 58 percent from the prior year’s fourth-quarter revenues of $476 million. As a result of increased volumes sold, cost of goods sold increased by 32 percent to $573 million compared to $433 million reported in the fourth quarter of 2015.
For the fourth quarter of 2016, the Company recorded net income of $81 million compared to a net loss of $58 million recorded in the prior-year quarter. The Company recorded net income attributable to Cliffs’ common shareholders of $79 million, compared to a net loss attributable to Cliffs’ common shareholders of $60 million recorded in the fourth quarter of 2015.
For the fourth-quarter of 2016, adjusted EBITDA1 was $174 million, compared to $76 million in the fourth quarter of 2015.
Full-Year Consolidated Results
Full-year 2016 consolidated revenues of $2.1 billion increased 5 percent from the prior year’s revenues of $2.0 billion. Cost of goods sold decreased by 3 percent to $1.7 billion compared to $1.8 billion reported in 2015.
For the full-year 2016, the Company recorded net income of $199 million compared to a net loss of $748 million recorded in the prior year. The Company recorded full-year net income attributable to Cliffs’ common shareholders of $174 million, compared to a net loss attributable to Cliffs’ common shareholders of $788 million, recorded in 2015.
For the full-year 2016, adjusted EBITDA1 was $374 million, compared to $293 million in 2015.
Lourenco Goncalves, Chairman, President and Chief Executive Officer, said: “2016 was the year in which we finalized the execution of the operational, commercial and financial actions necessary to ensure Cliffs will have a great future. Among the actions accomplished last year are several new sales agreements entered with clients, including the renewal of our long-term supply contract with our largest customer, and a number of capital markets transactions that were successfully executed to reduce debt and extend our maturity runway.” Mr. Goncalves added: “Despite the undeniable fact that the underlying business environment was far from ideal during almost all of 2016, the environmentally compliant and safety oriented performance of the Cliffs teams in the United States and in Australia resulted in a very profitable year with strong cash flow generation.” Mr. Goncalves concluded: “We are excited about Cliffs and about our future. A much more favorable business environment in the U.S. and a newly adopted rational behavior in the international iron ore market support the work we have done internally in our company. With a much lower debt profile and extended maturities, and several new and more favorable commercial agreements that we put in place in 2016, we expect Cliffs to deliver strong and sustainable results in 2017.”
Given that the Company anticipates running its mines at full capacity going forward, Cliffs will provide more simplified disclosures with respect to reporting operating cost performance at its two business units. Accordingly, the Company will no longer separate cash cost of goods sold and operating expense rate into “cash production cost per ton” and “non-production cash cost per ton.” Idle cost was a significant component of non-production cash cost in 2015 and 2016.
U.S. Iron Ore pellet sales volume in the fourth quarter of 2016 was 6.9 million long tons, a 53 percent increase when compared with 4.5 million long tons sold in the fourth quarter of 2015. The increase was a result of improved steel market conditions driving increased pellet demand and new customer arrangements in 2016.
Cash cost of goods sold and operating expense rate2 in U.S. Iron Ore was $52.80 per long ton, down 8 percent from $57.19 per long ton in the prior year’s fourth quarter. The decrease was driven by the absence of idle costs and a supplies inventory write-off that were incurred in the prior-year quarter, as well as a favorable asset retirement obligation adjustment.
Fourth-quarter 2016 Asia Pacific Iron Ore sales volume of 2.9 million metric tons increased 1 percent from the prior-year quarter due primarily to the size of vessel shipments.
Cash cost of goods sold and operating expense rate2 in Asia Pacific Iron Ore was $36.40 per metric ton in the fourth quarter of 2016, an 8 percent increase from $33.70 in the prior-year quarter. The increase was attributable to higher royalties and an unfavorable exchange rate compared to the prior-year quarter. The change was also driven by increased mining and haulage costs as market conditions allowed the operating footprint to expand.
Other Income Statement Items
Cliffs’ fourth-quarter 2016 SG&A expenses were $36 million. This represents a 29 percent increase when compared to the fourth-quarter 2015 expenses of $28 million. The increase was driven primarily by higher incentive compensation due to stronger results. The increase was also driven by spending related to the research and development of alternative iron products, which is classified as SG&A.
Cliffs’ net interest expense during the fourth quarter was $44 million, a 27 percent decrease when compared to the fourth-quarter 2015 expense of $60 million, as a result of numerous liability management activities executed by the Company during 2016. The Company noted that of the $44 million expense, $36 million was a cash expense and the remainder is considered non-cash.
Debt and Cash Flow
Total debt at the end of the fourth quarter of 2016 was $2.2 billion, versus $2.7 billion at the end of the fourth quarter of 2015. Fourth quarter cash and cash equivalents totaled $323 million, compared to $285 million at the end of the fourth quarter of 2015.
At the end of the fourth quarter of 2016, Cliffs had net debt3 of $1.8 billion, compared to $2.4 billion of net debt3 at the end of the fourth quarter of 2015.
Capital expenditures during the quarter were $23 million, in line with the prior-year quarter. Full-year 2016 capital expenditures were $69 million, a 15 percent reduction compared to $81 million in the prior year.
Cliffs also reported depreciation, depletion and amortization of $27 million in the fourth quarter of 2016.
In 2017, Cliffs expects to generate $510 million of net income and $850 million of adjusted EBITDA1. This expectation is based on the assumption that iron ore and steel prices will average levels consistent with the full month of January throughout 2017. In future quarters, Cliffs anticipates continuing to update 2017 net income and adjusted EBITDA1 guidance.
U.S. Iron Ore Outlook (Long Tons)
As previously disclosed, for 2017, Cliffs expects full-year sales and production volumes of approximately 19 million long tons from its U.S. Iron Ore business. This compares to 18.2 million long tons of sales and 16.0 million long tons of production in 2016.
Cliffs’ full-year 2017 U.S. Iron Ore cash cost of goods sold and operating expense2 expectation is $55 – $60 per long ton, which compares to $56 per long ton for the full-year 2016.
Asia Pacific Iron Ore Outlook (Metric Tons, F.O.B. the port)
Cliffs’ full-year 2017 Asia Pacific Iron Ore expected sales and production volume is approximately 11.5 million tons. The product mix is expected to contain 50 percent lump ore and 50 percent fines.
Based on a full-year average exchange rate of $0.75 U.S. Dollar to Australian Dollar, Cliffs’ full-year 2017 cash cost of goods sold and operating expense2expectation is $34 – $39 per metric ton, which compares to $34 per metric ton for the full-year 2016. The increase in range is attributable to higher expected royalties and increased mining and haulage costs as market conditions have allowed the operating footprint to expand.
SG&A Expenses and Other Expectations
Full-year 2017 SG&A expenses are expected to be approximately $100 million, an $18 million reduction from the full-year 2016 expense. Cliffs also notes that of the $100 million expectation, approximately $25 million is considered non-cash.
The Company’s full-year 2017 interest expense is expected to be approximately $175 million, compared to $201 million recorded in 2016. Consolidated full-year 2017 depreciation, depletion and amortization is expected to be approximately $100 million.
Capital Budget Update
Cliffs expects full-year 2017 capital expenditures to be $105 million, which includes approximately $40 million related to the completion of the Mustang Project at the United Taconite mine.
Shares of Cliffs Natural are up nearly 8% to $10.26 in pre-market trading Tuesday. CLF has a 1-year high of $10.90 and a 1-year low of $1.67. The stock’s 50-day moving average is $8.97 and its 200-day moving average is $7.43.
On the ratings front, CLF has been the subject of a number of recent research reports. In a report issued on February 6, FBR analyst Lucas Pipes maintained a Hold rating on CLF, with a price target of $10, which represents a potential upside of 5% from where the stock is currently trading. Separately, on January 12, Credit Suisse’s Curt Woodworth maintained a Sell rating on the stock and has a price target of $6.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Lucas Pipes and Curt Woodworth have a yearly average return of 11.9% and 11.0% respectively. Pipes has a success rate of 55% and is ranked #388 out of 4384 analysts, while Woodworth has a success rate of 59% and is ranked #469.
Sentiment on the street is mostly neutral on CLF stock. Out of 4 analysts who cover the stock, 2 suggest a Hold rating , one suggests a Sell and one recommends to Buy the stock. The 12-month average price target assigned to the stock is $8.67, which implies a downside of 9% from current levels.
Cliffs Natural Resources, Inc. operates as an international mining and natural resources company, which engages in the exploration and production of iron ore and high and low volatile metallurgical coal. It is organized through a global commercial group responsible for sales and delivery of its products and a global operations group responsible for the production of the minerals. Its primary operations are organized and managed according to product category and geographic locations: U.S. Iron Ore, Asia Pacific Iron Ore, North American Coal and Eastern Canadian Iron Ore.