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UPDATE: Morgan Stanley Downgrades Cliffs Natural Resources (CLF) to Underweight, Two Factors Not Priced Into Stock

March 27, 2013 6:40 AM EDT Send to a Friend
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Price: $10.26 -0.68%

Rating Summary:
    4 Buy, 15 Hold, 8 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 25 | Down: 18 | New: 23
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(Updated - March 27, 2013 3:14 PM EDT)

This morning Morgan Stanley downgraded Cliffs Natural Resources (NYSE: CLF) from Equalweight to Underweight with a price target of $14 (from $36).

Shares of Cliffs Natural Resources trade near multi-year lows and the downgrade raised eyebrows on Wall Street. Interestingly, the downgrade coincides with an upgrade from Sell to Neutral by analysts at Goldman Sachs. Clearly, Morgan Stanley is convinced performance at Cliffs Natural Resources is about to get a lot worse, and it relates in part to the company's key US iron ore business.

"CLF stock has dropped ~44% YTD on deteriorating operational outlook (especially for Bloom Lake) and a surprise dividend cut and equity/convertible preferred raise. We see further downside as two issues are not priced in by the market," said analyst Evan L. Kurtz .

These issues include "deteriorating US iron ore market balance" and "reserve depletion."

"We believe that the supply-demand balance in the isolated Great Lakes pellet market will deteriorate as up to ~13 mt of new supply comes online over the next ~3 years in a ~60 mt market. As the only non-steelmaking producer in the region, we believe CLF will be most impacted. US Iron Ore segment EBITDA could halve vs. 2012 levels," said Kurts.

The analyst continued by raising concerns about the company's Asia-Pacific Iron Ore segment which he thinks could be depleted in 6 years.

"This depletion drives cost risk as the mine nears end-of-life, and we believe that investors will rethink the multiple they assign to the Asia-Pacific earnings stream," added Kurtz.

For an analyst ratings summary and ratings history on Cliffs Natural Resources (NYSE: CLF) click here. For more ratings news on Cliffs Natural Resources click here.

Shares of Cliffs Natural Resources closed at $21.43 yesterday.




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