Cliffs Natural Resources: Bloom Lake Bankruptcy on the Horizon, JPMorgan Says

By Ben Levisohn

JPMorgan’s Michael Gambardella and Tyler Langton expect Cliffs Natural Resources (CLF) to put Bloom Lake into bankruptcy by the end of January–and that’s not necessarily bad news. They explain why:

Bloomberg News

…Cliffs recently ceased production at its Bloom Lake eastern Canadian iron ore facility. Mr. Goncalves stated that he has aggressively attempted to sell a 30% interest to Nucor (NUE) and two Japanese steelmakers over the past few months. While talks continue with these potential investors, it appears that Cliffs cannot allow the cash burn at Bloom Lake to continue and took action in late November to terminate production and lay off most of the workforce. Mr. Goncalves estimated shutdown costs at $650-700 million with the take-or-pay rail component at about $450 million ($150 million per year for the next three years). These take-or-pay costs are paid by the company on a monthly basis. In our opinion, we expect Cliffs to put its Bloom Lake business into bankruptcy by the end of January. Mr. Goncalves reiterated his belief that Bloom Lake can be put into bankruptcy with minimal obligations to Cliffs Natural Resources. We estimate that Cliffs would incur cash cost related to the Bloom Lake shutdown of less than $100 million under a bankruptcy scenario instead of the $650-700 million shutdown costs. This is a critical factor that is clearly not a consensus view by the market and could positively impact the company’s stock and bond prices.

Shares of Cliffs Natural Resources have fallen 5.2% to $6.78 at 10:20 a.m. today, while Nucor has dropped 3.4% to $46.14.