By Ben Levisohn

Nomura’s Curt Woodworth and team finally throw in the towel on Cliffs Natural Resources (CLF), as Casablanca’s strategy for turning the struggling iron-ore miner seems lacking. One of the big problems: The use of Cliffs Natural Resources’ cash:

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One of Casablanca’s largest criticisms of former Cliffs Natural Resources management was that they had squandered company funds while returning little cash to shareholders. Cliffs recently announced that they would implement a $200mn share buyback program, though in order to do so they agreed with their creditors to amend its revolver from $1.75bn to $1.25bn (under the previous Credit Agreement Cliffs Natural Resources was barred from buying back stock). While we agree that capital was misused over the last several years, we don’t believe that engaging in a share repurchase amidst worsening iron ore fundamentals is the best use of available cash, as it leaves the company with a very limited cash buffer in the event iron ore prices remain weak. Note that Cliffs Natural Resources only had $360mm in cash / equivalents at the end of 2Q-14 and note that at $80/t iron ore we estimate Cliffs Natural Resources would burn through its existing cash by the end of the year. The move also contradicts Cliffs Natural Resources’ goal to deleverage its balance sheet.

That’s just one reason Woodworth cut his rating on Cliffs Natural Resources to Reduce from Buy. Another: The declining price of iron ore. He explains:

The ~$55/tonne decline in iron ore prices in 2014 has significant negative implications for medium-term earnings and should severely limit strategic options with regards to potential asset sales. We estimate at spot iron ore prices of $78/tonne, Cliffs Natural Resources would generate EBITDA below $100mm annually.

Iron ore prices have fallen significantly below Nomura’s global commodity team’s deck of $95/tonne for 2015 and we now expect prices near $85/tonne or below are more likely given heightened demand-side concerns from China. Under our revised bulk material deck, our NAV for Cliffs Natural Resources has been reduced to $2.07. Our $5 price target assumes Cliffs Natural Resources trades at 9.4x 2016 EV/EBITDA (at $90/tonne ore deck).

Cliffs Natural Resources still trades at an expensive multiple of 17.2x 2015 EV/EBITDA and 11.4x 2016 EV/EBITDA. At $78/tonne iron ore, CLF FCF after dividends in 2015 is forecast at negative $556mm. Given Cliff’s weak balance sheet and cash flow outlook we expect Cliffs Natural Resources will cut its dividend likely in 2015.

Woodworth cut his price target on Cliffs Natural Resources to $5. The stock has dropped 9.2% to $9.08 at 10:26 a.m. today.