-- We expect U.S.-based Cliffs Natural Resources Inc.'s
operating performance and liquidity will be worse than we
previously estimated due to lower-than-expected iron ore and
metallurgical coal prices.
-- We are affirming our ratings on Cliffs, including the
'BBB-' corporate credit rating, and are revising our outlook to
-- The negative rating outlook reflects our view that
Cliffs' debt burden is high relative to its EBITDA and cash flow
generation in the current price environment.
On Dec. 5, 2012, Standard & Poor's Ratings Services revised
its outlook on Cleveland-based mining and natural resources
company Cliffs Natural Resources Inc. to negative from stable.
At the same time, we affirmed all of our ratings on Cliffs,
including the 'BBB-' corporate credit rating.
The outlook revision reflects our view that 2012 and 2013
operating performance and liquidity will be worse than we
previously expected, owing to lower-than-expected iron ore
prices and metallurgical coal prices. In response, Cliffs
recently announced significant changes to its 2013 operating
plan, which included the delay the expansion of its Bloom Lake
mine in Eastern Canada, as well as idling a portion of its U.S.
iron ore production.
Our base case scenario uses the assumption that 2013 iron
ore prices will remain around current levels of $120 per ton. As
a result, we anticipate that Cliffs will generate 2012 and 2013
adjusted EBITDA of $1.4 billion and $1.2 billion, respectively,
down from our previous estimates of $1.8 billion to $2 billion
for each year. As a result, debt to EBITDA is likely to be
between 3x and 3.5x in 2012 and 2013, compared with our previous
estimate of 2x to 3x for both years. Our new estimates are weak
for the current rating. Furthermore, we now believe Cliffs will
burn cash in 2012, and cash flow generation in 2013 will be
The ratings on Cliffs reflect our view of the company's
"satisfactory" business risk profile and "intermediate"
financial risk profile. These assessments reflect the company's
domestic market position in the North American iron ore market,
high barriers to entry, and potential to generate significant
cash flow throughout a cycle. However, our rating also
incorporates the highly cyclical nature of the iron ore business
(given exposure to the volatile steel industry), Cliffs'
significant customer concentration, the company's relatively
high cost structure, and the high capital expenditures
associated with bringing its Eastern Canadian operations fully
Cliffs is the largest producer of iron ore pellets in North
America, a major supplier of direct shipping lump and fines iron
ore out of Australia and Canada, and a producer of metallurgical
(met) coal. Based on the location of the company's reserves in
North America, we consider Cliffs a high-cost producer of both
iron ore and met coal relative to competitors. While we think
Cliffs' Eastern Canadian operations will lower its overall cash
costs once it is fully online, the delay in its expansion will
cause costs to remain relatively high.
Cliffs is highly exposed to the cyclical steel industry,
which we estimate accounts for more than 85% of revenue. As a
result, operating results fluctuate with economic cycles, albeit
to a lesser extent than other parts of the industry, given the
contract-driven nature of the iron ore business. While the
longer-term outlook for the worldwide steel industry remains
relatively positive, given the expected increase in demand as
emerging regions continue to develop, steel remains a commodity,
and both iron ore and coal prices will fluctuate.
Given our expectation for reduced EBITDA, we believe the
headroom on the 3.5x leverage covenant that governs Cliffs'
credit facility will narrow, which has caused us to revise our
assessment of Cliffs' liquidity to "adequate" from "strong." Our
view of the company's liquidity profile incorporates the
-- Liquidity sources (including balance sheet cash and
availability under the company's $1.75 billion revolving credit
facility) over the next 12 months will exceed uses by at least
-- Sources of cash would continue to exceed uses even if
EBITDA were to decline by 15%.
-- The company would remain in compliance with financial
maintenance covenants if EBITDA dropped 15%.
As of Sept. 30, 2012, Cliffs had total liquidity of about
$1.5 billion, comprising $36 million of balance sheet cash and
borrowing capacity of $1.4 billion on its $1.75 billion
unsecured revolving credit facility due 2017.
Under our current price assumptions, we expect Cliffs to
burn cash in 2012 and generate negligible cash flow in 2013,
based on capital expenditures of $1 billion and $750 million,
respectively. We estimate maintenance capital expenditures of
about $300 million annually. In addition, we believe Cliffs will
maintain its current annual dividend of about $300 million to
$350 million annually, although we would expect Cliffs to
rationalize its dividend policy if its cash burn accelerates.
Cliffs' credit facilities are governed by a 3.5x maximum
leverage covenant and a 2.5x minimum interest coverage covenant.
We believe headroom under these covenants will diminish as a
result of the low price environment, and is one of the factors
in the revision of our assessment of Cliffs' liquidity to
"adequate" from "strong."
Cliffs' nearest maturity is 2013, when its $270 million of
private placement notes mature. We expect that Cliffs will
address the maturity in a timely manner.
The negative rating outlook reflects our view that Cliffs'
debt burden is high relative to its EBITDA and cash flow
generation in the current price environment. We could lower the
rating if credit metrics remain above 3x for an extended period,
cash burn accelerates, or if we reassess Cliffs' business risk
to be "fair" as opposed to "satisfactory" because of adverse
changes in the competitive environment (including sustained low
Conversely, we could revise the outlook to stable if iron
ore prices increase, causing Cliffs to generate
better-than-expected EBITDA and cash flow, or if Cliffs sells
additional assets or reduces its dividend to preserve cash,
which we would expect Cliffs to use to reduce its significant
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix
Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For
Global Corporate Issuers, Sept. 28, 2011.
-- Key Credit Factors: Methodology And Assumptions On Risks
In the Metals Industry, June 22, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April
Temporary contact information: Megan Johnston
(917-715-3892), Marie Shmaruk (61-3-9631-2040)
Ratings Affirmed; Outlook Negative
Cliffs Natural Resources Inc.
Corporate Credit Rating BBB-/Negative/--
Senior Unsecured BBB-