Cliffs Natural Resources: How Bad Will Earnings Be?

Cliffs Natural Resources (CLF) reports its financial results tomorrow, which means that for at least a few minutes we can take out minds off the proxy battle between the iron miner and Casablanca Capital.

Reuters

Citigroup’s Brian Yu tweaks his models downward to account for lower commodity prices:

We are revising down our 2014 EPS estimate after adjusting our price realization expectations for Cliffs' Australia and Canada mines to better approximate the drop in 2Q average spot iron ore pricing. Our 2Q EBITDA estimate is now $200 mln (down from $220 mln) with the follow segment details.

US Iron Ore – We expect segment gross profit of $170 mln on sales of 5.6 mln l.tons, pricing of $104/l. ton and cash costs of $67/l. ton.

E Canada Iron Ore – We expect segment gross profit of -$42 mln on sales of 1.7mln tonnes, pricing of $84/tonne and cash costs of $87/tonne.

Asian Iron Ore – We are modeling segment gross profit of $26 mln on shipments of 2.7 mln tonnes, pricing of $82/tonne and cash costs of $59/tonne.

Axiom Capital’s Gordon Johnson is less kind to Cliffs Natural Resources:

With: (1.) Cliffs’ forward sensitivity guidance around iron ore spot prices and its  corresponding ASPs, (2.) iron ore prices avg'ing $102.66 in 2Q14, (3.) our assumption that Cliffs has lost some bus. as they are uncompetitive vs. foreign steel imports, & (4.) our assumption that Cliffs’ costs are slightly higher than originally forecast due to higher fixed cost absorption, we see acute downside to 2Q14/14/15 Consensus ests, as well as credit violation risk…based on our updated numbers, we see outsized risk of a ratings cut by both Moody's & S&P as likely (we see the net leverage ratio rising to above the "quintessential" 3.0x threshold)…

…we see a plethora of low-cost iron ore continuing to flood a market currently defined by structurally lower demand. This is NOT GOOD. We are lowering our 12-month price objective on Cliffs to $9/shr (~42% downside) from $10/shr prior.

Investors appear to be feeling optimistic, however. Shares of Cliffs Natural resources have gained 0.9% to $15.28 at 3:22 p.m., making it the top-performing iron miner today. BHP Billiton (BHP) has ticked up 0.1% to $73.33, Rio Tinto (RIO) has advanced 0.6% to $57.85 and Vale (VALE) has dropped 0.9% to $14.30.