Moody's Lowers Outlook on Cliffs Natural (CLF) to Negative; Notes Drop in Met Coal, Iron Ore Prices

Moody's Investors Service changed the outlook for Cliffs Natural Resources (NYSE: CLF) to negative from stable and affirmed the Baa3 senior unsecured ratings.

The change in outlook to negative results from the continuing challenges facing the company following the significant drop in iron ore prices as well as metallurgical coal prices. Given relatively weak steel conditions globally, new low cost iron ore capacity coming into the market and macro-economic concerns, iron ore prices ( the dominate driver of Cliffs earnings and cash flow generation), currently trading around $92/ton 62% Fe China fines, are unlikely to recover to levels seen earlier in 2014 and likely remain pressured to the downside.

Outlook Actions:

..Issuer: Cliffs Natural Resources Inc.

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Cliffs Natural Resources Inc.

....Multiple Seniority Shelf Feb 11, 2016, Affirmed (P)Baa3

....Senior Unsecured Regular Bond/Debenture Jan 15, 2018, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture Oct 1, 2020, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture Oct 1, 2040, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture Mar 15, 2020, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture Apr 1, 2021, Affirmed Baa3

RATINGS RATIONALE

Cliffs' Baa3 senior unsecured rating reflects the company's significant position and reserve base in the North American iron ore markets as well as its good position in the Asia Pacific markets. The rating also considers the moderate degree of financial leverage based upon the company's debt/EBITDA ratio (2.7x for the twelve months through March 31, 2014) although earnings contraction is causing this ratio to increase. Given the company's acceptable debt coverage ratios there is some cushion in the rating to absorb some impact from the drop in iron ore prices; however this could be limited should market conditions continue to exert downward price pressure over the next several quarters.

Cliffs' weak first quarter 2014 performance evidences the impact of weather conditions and logistical challenges in moving material, which is likely to also have some residual impact in the second quarter. Although some improvement is expected with the normalization of operating conditions, given Cliffs' higher cost iron ore mines, particularly at its Canadian sites, as well as its high cost coal operations earnings are likely to contract from 2013 levels. US Iron Ore operations are expected to remain modestly positive while the Eastern Canadian Iron Ore and North American coal operations are expected to incur losses. However, given the reduction in capital expenditures to around $300 million in 2014 from $862 million in 2013, we expect the company to be free cash flow generative in 2014 and continue to maintain a solid liquidity position.

Given the negative outlook, weakening earnings and cash flow generation as well as contracting debt protection ratios, upward rating movement is unlikely. The rating could be pressured should the EBIT margin and the EBIT/interest ratios not be sustainable above 9% and 5.5 times, respectively. The rating could also be negatively impacted should the company undertake a significant debt financed acquisition or other capital investments, the debt/EBITDA ratio trend above 3.0 times, or (operating cash flow less dividends)/debt trend below 20%, all on a sustainable basis over the next several quarters.

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