Report puts pressure on Cliffs’ WA mines – by Matt Chambers (The Australian – April 05, 2013)

US-BASED Cliffs Natural Resources of Cleveland has dismissed suggestions a looming US iron ore supply glut will force it into the $US1.75 billion ($1.67bn) sale of its Koolyanobbing iron ore mines in Western Australia to pay down debt.

In an extraordinarily bearish report from the US last week, Credit Suisse analyst Nathan Littlewood slashed his target price on Cliffs from $US30 to $US10, claiming the company was likely to need to consider selling assets or a multi-billion-dollar equity raising.

“We see the Asia-Pacific iron ore business as the most marketable asset in Cliffs’ portfolio and the most likely to be sold,” Mr Littlewood said.

“The recent Posco bid for Arrium tells us that there is interest from Asian steel mills in Australian iron ore outside of the Pilbara.” Posco walked away from a bid for Arrium, the former OneSteel, late last year when the target would not engage at the offer price.

In 2011, Cliffs agreed to sell its mined-out Cockatoo Island iron ore mine in the Kimberley region of Western Australia to Pluton Resources, leaving as its remaining asset the Koolyanobbing operation, which exports about 11 million tonnes of ore a year from near Esperance.

Cliffs acquired its Australian assets in 2005 when it took over Portman Mining.

At the time, the mines were producing about four million tonnes of iron ore a year.

Mr Littlewood said that based on Koolyanobbing earnings before interest, tax, depreciation and amortisation of $US300 million to $US350m, the operation could be worth between $US1.5bn and $US1.75bn.

A Cliffs spokeswoman rejected the suggestions it might need to sell the assets.

“The analyst is speculating and creating a scenario that does not represent our current business plans,” she told The Australian.

“Cliffs’ Asia-Pacific iron ore operations continue to be a viable business segment for the company.”

The Credit Suisse report says new supply in the Great Lakes region of North America could turn it into a net exporter of iron ore, rather than an importer.

That could mean Cliffs would have to shut down production, thus cutting into profitability.

A net debt of $US3bn on its balance sheet also is not helping.

“The company is now in a position of financial and operational leverage that it was not burdened with in previous cycles,” Mr Littlewood said.

“Major reform is required if this business is to survive the next commodities cycle.”

Credit Suisse’s target price downgrade comes five months after the bank dropped its target price for Cliffs, the biggest US iron ore miner, from $US50 to $US30.

The stock has slumped 74 per cent to $US18.18 in the past year, making it the worst performer on the S&P500 index in that time and giving it a market value of less than $US3bn.

Cliffs chairman and chief executive Joseph Carrabba did not talk up the value of the company’s Australian assets in the company’s February earnings call.

Mr Carrabba said grades were declining and that a high strip ratio that had pushed costs higher was likely to remain.

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