Evan Kurtz, Lourenco Goncalves is not going to take your questions anymore. Remember what happened to Wells Fargo analyst Stan Dubinsky?

Cliffs Natural Resources: Lower Iron Ore Prices Offset Bloom Lake Plans, Morgan Stanley Says

By: Ben Levisohn
Nov 5, 2014

Cliffs Natural Resources (CLF) has rallied more than 35% during the past month, as management’s efforts to solve the Bloom-Lake problem and cut costs have forced short sellers to cover their positions. None of that, however, is enough to offset lower iron-ore prices, write Morgan Stanley’s Evan Kurtz and team. They explain why:

We are reducing our price target to $6/share from $10/share previously, as our lower mid-cycle iron ore price assumption more than offsets the company’s cost cutting targets. Using our sum-of-the-parts methodology, we estimate that the stock’s current ~$11 share price implies a $97/t mid-cycle iron ore price after accounting for cost cutting targets. Our previous $10/share price target was based on a mid-cycle iron ore price of $114/t. With the spot price now at ~$77/t and given our outlook for continued weakness, we are lowering the mid-cycle iron ore price we use in our valuation to $87/t. This assumption is based on our commodity team’s average iron ore price forecast over the next five years. Accordingly, our bull and bear price assumptions fall to $109/t and $71/t, respectively, using the same methodology. The negative impact from a lower mid-cycle price is partially offset by cash cost savings in the US and Australia that management hopes to achieve over the coming 12-18 months, as well as lower Bloom Lake exist costs. We use a 6.0x EV/EBITDA multiple, in line with both the average since 2011 and iron ore-focused Rio Tinto’s (RIO) 2015 multiple.

But even management’s Bloom Lake plan won’t be east to pull off, even if Kurtz thinks its good enough to warrant a big reduction in its cost:

Based on management’s comments on Bloom Lake, we now assume an exit cost of $328m, far lower than our previous assumption of $776m. We think Cliffs’ ability to find Phase II partners will prove difficult since the NPV break-even on the project would require an average iron ore price of $95/t, assuming costs can fall to $55/t from the current level of $82/t. We think Cliffs would need to offer LT fixed price contracts at or below current spot to entice partners, which is not feasible given the project’s economics and risks.

Shares of Cliffs Natural Resources are unchanged at $11.33 at 12:59 p.m. today, while Rio Tinto has gained 0.7% to $47.82.