Moody's Cuts Cliffs Natural Resources (CLF) to 'Ba1'; Outlook Negative

Moody's Investors Service downgraded the senior unsecured debt ratings of Cliffs Natural Resources (NYSE: CLF) to Ba1 from Baa3 and the senior unsecured shelf rating to (P)Ba1 from (P)Baa3 and assigned a Ba1 Corporate Family Rating (CFR) and a Ba1-PD Probability of Default rating. At the same time, Moody's assigned a Speculative Grade Liquidity Rating of SGL-1. This concludes the review for downgrade initiated on July 25, 2014. The rating outlook is negative.

The downgrade in the senior unsecured ratings to Ba1 and assignment of the Ba1 CFR reflects our expectations that, despite Cliffs' progress in reducing costs, particularly in its Eastern Canadian and Asia Pacific iron ore operations, continued headwinds pressuring fundamentals and pricing in the iron ore and metallurgical coal industry will result in compression of debt protection metrics and increased leverage through at least 2015. Key debt protection metrics such as EBIT/interest and debt/EBITDA contracted for the twelve months ended June 30, 2014 to 2.1 and 3.6 respectively from 4.2x and 2.2x in fiscal 2013 and given the weak price fundamentals in the iron ore and met coal markets, we expect these metrics to remain under pressure. While some of this contraction can be attributed to the impact of difficult weather conditions through the first and into the second quarter of 2014, there remains more significant ground to be recovered in a pressured iron ore price environment, which we believe will result in a longer time frame for Cliffs to evidence metrics appropriate for an investment grade rating.

Given the material new iron ore capacity that has come on line in 2014 together with slower growth rates in Chinese steel production, 62%Fe iron ore prices have fallen, on average, roughly 30% since January 2014 and remain relatively range bound in the $95/tonne trading range. Given our expectation for continued Chinese steel production growth rates in the 3% range in 2014 and comparable rates in 2015, we do not anticipate meaningful improvements in seaborne iron ore prices through 2015. Our current sensitivity analysis applies a iron ore price trading range between $95 - $105/tonne (62%Fe). In addition, met coal prices remain under pressure for similar reasons and we expect the coal operations to continue to operate at a negative cash margin. Although the company's US iron ore operations are contract based, with the seaborne price being one component of the pricing equation, its Asia Pacific operations and Eastern Canadian operations are more exposed to price movements in the seaborne market. Factoring these elements together, we believe that leverage is likely to increase to over 4x but at our sensitivity levels remain within a range of 4x to 4.3x. In addition, the timing by which higher cost iron ore production in China and elsewhere is idled or closed remains uncertain and additional low cost capacity additions are still planned by the major seaborne market players such as Rio Tinto and Vale over the next several years.

..Issuer: Cliffs Natural Resources Inc.

Downgrades:

....Multiple Seniority Shelf Feb 11, 2016, Downgraded to (P)Ba1(LGD4) from (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba1(LGD4) from Baa3

Assignments:

.... Probability of Default Rating, Assigned Ba1-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-1

.... Corporate Family Rating, Assigned Ba1

Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

Cliffs Ba1 CFR is supported by its strong position in its US iron ore operations, which in 2014 are expected to produce 22 million tons - the majority of anticipated consolidated production - and the contract nature of this segment. In addition, the rating considers the progress the company is making in lowering cash costs in its operations, particularly in its Eastern Canadian operations (Bloom Lake) and its Asia Pacific operations.

The SGL-1 rating reflects the company's solid liquidity position, characterized by approximately $360 million in cash at June 30, 2014 and availability of roughly $1.5 billion under its $1.75 billion senior unsecured revolving credit facility. In addition, the company recently amended covenants in this facility, eliminating the debt/EBITDA covenant requirement and replacing it with a total debt/capitalization ratio. In addition, this ratio allows for $1.0 billion in impairments to be taken without impacting the required covenant metrics. Given the company's nominal debt maturities and reduced capital expenditures, we expect liquidity to remain more than sufficient relative to requirements. In addition, the first half of 2014 evidenced a significant working capital build, principally in inventory, due to the winter weather impact, which we expect to reverse through the balance of 2014.

The Ba1 rating on the senior unsecured instruments under Moody's loss given default methodology reflects the fact that virtually all debt is pari passu in the capital structure. Should the mix of secured and unsecured debt in the capital structure change, the rating on the senior unsecured notes could be negatively impacted.

The negative outlook reflects potential head winds still facing the iron ore industry. While we believe the downward price movement has abated, the uncertainty as to growth in Chinese steel production, timing of high cost capacity shut downs, and continued likely new supply are likely to exert a ceiling on any material degree of price escalation through 2015. In addition, we expect prices to continue to show volatility.

The outlook also reflects the uncertainty as to the future strategic direction of Cliffs given the change in composition of the board of directors, following the success of Casablanca Capital in its proxy battle, and the steps that will be taken with respect to the future business profile of Cliffs.

Given the industry headwinds facing the company and the uncertain strategic direction under the new board, a rating upgrade over the next twelve to eighteen months is unlikely. The rating could be downgraded should EBIT/interest be viewed as sustainable below 3x, debt/EBITDA be sustained above 4x or (cash flow from operations less dividends)/debt be sustained at below 20%. The rating could also be downgraded if there is a significant contraction in liquidity.

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