Cleveland Cliffs - A Man Among Boys

By: TraderMark Tuesday, June 24, 2008 10:22 AM

Symbols: CLF

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In early 2005, flush with cash, the company bought into an Australian iron ore company called Portman Ltd. The move didn't sit well at the time with Cliffs investors who chastized Brinzo. They thought a better use of Cliffs' new-found wealth was to buy back shares, thereby rewarding current shareholders with instant gains.

Last year, Cleveland-Cliffs expanded again under Brinzo's successor Joe Carrabba, this time into metallurgical coal. Cliffs' paid $450 million and absorbed $150 million in debt for PinnOak Resources LLC, which included coal mines in West Virginia and Alabama.

Metallurgical coal, as opposed to the thermal variety burned to make electricity, is converted into coke. It's then mixed with iron ore in a blast furnace to produce molten iron, the first step in the steel making process.

Carrabba said he expects coal contracts that now pay an average of $94 per ton to renew for at least $250 per ton when they start to expire at the end of this year in the United States and next April for European customers. About 60 percent of Cliffs' coal is exported, with much of it going to ArcelorMittal plants in Europe.

"I would say over the last four or five years there really isn't anything they've done wrong," said David MacGregor, analyst with Longbow Research in Independence.

While Harbinger likes Cliffs' business fundamentals, it's also thinking the company could be a takeover target at a premium price. Among those speculated to be interested in Cliffs is steel giant ArcelorMittal. It's already Cliffs' largest customer, commanding 44 percent of its North American iron ore sales.

Unlike oil, iron ore is not traded on a commodities exchange and elicits little speculation from investors, he said. (this is also why I like iron as opposed to some other commodities - along with longer term contracts)

(Mar 7: Starting 2 Mining Positions Emphasizing Iron Ore)
(Feb 22: Didn't Realize Cleveland Cliffs had Coal Exposure)

Long (not enough) Cleveland Cliffs in fund; no personal position

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