The Rising Influence of Rising Affluence

[DewDiligence]

CLF’s 3Q12 CC contained no new information of great consequence, but there were some valuable nuances, IMO.

The ugly 3Q12 numbers can be summarized by noting that CLF is not a low-cost producer, and hence it suffers disproportionately compared to larger miners when iron-ore prices decline. (Note, for instance, that VALE is up sharply today on reporting its own 3Q12 results.)

CEO Joe Carrabba remains as confident as ever in the long-term premise for the company—i.e. the demand for iron and steel to support The Global Demographic Tailwind. I am equally confident in the long-term premise, but CLF has to get through the current tough times first, and its operational track record is less than stellar. (Something or other in CLF’s portfolio is always broken or out of whack—I can’t remember a quarter in which everything ran smoothly.)

Regarding the dividend (on which there were several questions from analysts), Carrabba sounded less sure of the sustainability than he did three months ago, and he deflected questions about the dividend by calling it a matter for the BoD to decide on. During the next quarter or two, CLF can clearly afford to continue to pay the dividend, but the funds to pay it will not come from free cash flow but rather from the balance sheet. Whether the BoD will agree to do this is unclear.

The ace in the hole for CLF investors remains the buyout vig. (#msg-71869156 is a dated from still worthwhile read on this.) As noted above, CLF seems to have more than its share of operational problems, and hence its assets might be more productively managed by one of the bigger companies in the industry. Moreover, there are not many quality mining assets to be had in such politically stable countries as the US and Canada, so one would think CLF would be an attractive target for BHP, RIO, or VALE (among others).

For now, I’m holding my shares.