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Cliffs Natural Resources (CLF) Gets Some Much Needed Love

April 1, 2013 9:17 AM EDT Send to a Friend
Get Alerts CLF Hot Sheet
Price: $14.14 +1.43%

Rating Summary:
    4 Buy, 15 Hold, 8 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 12 | Down: 13 | New: 39
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Trading near 52-week lows and downgraded 8 times since December 2012, to say that Cliffs Natural Resources (NYSE: CLF) is one hated stock may be an understatement. However, today shares are getting some love.

J.P. Morgan added the stock to its Analyst Focus List and reiterated a Buy rating and price target of $40, which follows two recent bearish reports citing concerns about overcapacity in the company’s core earnings base (Great Lakes iron ore) and continued bearish calls for seaborne iron ore prices to collapse under $100/tonne.

"It is not surprising to see a heavily shorted stock like CLF with operational credibility issues react negatively to headlines from two reports that insinuate the company's USIO earnings driver will soon begin grinding to a halt as new iron ore supply floods the Great Lakes market," analyst Michael F. Gambardella said. "However, we were surprised to see the stock down 14% in a day, even during a holiday shortened week, based on two bearish calls with similar analyses that differ materially from ours, and conclusions with which we strongly disagree."

He continued, "We believe the feared flood will ultimately result in a trickle based on a simple, common sense analysis of the three potential projects (U.S. Steel Keetac, AK Steel Magnetation and Essar) in question. In our opinion, U.S. Steel’s and AK Steel’s proposed projects will have no impact on Great Lakes supply and Essars’ will come online much slower and at a higher cost than expected. Just assuming the Great Lakes iron ore supply/demand model from one of the recent bearish notes and correctly eliminating the U.S. Steel and AK Steel tonnage would increase Great Lakes iron ore utilization rates from the feared low 80% to 99% of capacity in 2015 and 2016. In addition to these supply flaws, we believe the bear case on domestic iron ore is overlooking (or misinterpreting) the potential demand from new DRI capacity, which should actually increase Great Lakes iron ore demand as most of the incremental DRI will be replacing imported pig iron made with foreign iron ore."

Gambardella doesn't think the Big 4 global iron ore producers will blindly follow announced capacity additions. He said CLF "presents an attractive buying opportunity following the unduly flamed fears in the key Great Lakes iron ore markets, signs of emerging stability in global seaborne prices, and an upcoming quarter supported by a strong 1Q13 average iron ore market where extremely negative sentiment (20% of the float is short) suggests merely meeting guidance will help re-link the shares to iron ore prices and potentially trigger positive earnings revisions."

For an analyst ratings summary and ratings history on Cliffs Natural Resources click here. For more ratings news on Cliffs Natural Resources click here.

Shares of Cliffs Natural Resources closed at $19.01 yesterday.




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