"large acquisitions" planned by CLF

New Credit Rating: Cliffs Natural Resources

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Morningstar is initiating credit coverage of Cliffs Natural Resources CLF with an issuer rating of BBB. We consider Cliffs, North America's largest iron ore producer, a fairly strong credit relative to most "pure-play" mining companies, thanks to the volatility dampening price mechanism that governs its North American iron ore sales.

Cliffs' North American iron ore business accounts for the majority of total sales (68% in 2009) with smaller Australian iron ore (19%) and North American coal (11%) operations accounting for the remainder. In contrast with most iron ore producers around the globe, for whom annual price swings of 50% or more have not been terribly uncommon in the past few years, Cliffs' North American iron ore business experiences relatively modest price volatility. This is a consequence of an atypical pricing mechanism, by which prices are set according to three factors: the Eastern Canada pellet export price, some form of PPI, and steel prices. While this arrangement effectively prevents Cliffs from realizing price increases commensurate with those garnered by seaborne iron ore producers when times are good, it also mitigates the risks associated with dramatic declines in the spot market for iron ore. As such, the key risk for Cliffs is not so much price as it is volume and the attendant ill effects on fixed cost dilution.

Cliffs' liquidity position is solid. The firm ended 1Q 2010 with $550 million in cash against total debt of $725 million. Maturities are fairly evenly spaced, with $270 million due in 2013, $55 million due in 2015, and $400 million due in 2020. We note two prospective catalysts that could diminish the company's credit profile: potential revisions to the current iron ore price mechanism and large acquisitions intended to further broaden the company's geographic and mineral exposure