Credit Suisse
Downgrading Our Target Price to $10/Share
We are revising our target price to $10/sh (from US$30/sh) and maintaining an UNDERPERFORM rating.
¦ We believe that there are structural changes taking place in CLF’s key Great Lakes market that will compromise its pricing power and erode the earnings potential of the US Iron Ore business. This report includes a more granular analysis of this subject than investors are likely to have seen previously - including long term supply/demand modeling for the Great Lakes, an explanation of the pricing dynamics, a summary of CLF’s existing contractual commitments, and estimates of the earnings and valuation impact for CLF.
¦ CLF’s recent capital raise bought some time, but we do not see it as a permanent solution to the company’s balance sheet issues. Within the next 12 months we believe that CLF will need to consider more drastic solutions. We evaluate a number of potential balance sheet solutions; such as selling the APAC iron ore assets, selling part of the USIO business, or completing a multi-billion dollar equity raise. Our normalised valuation model suggests that these solutions would be value accretive on a 62% IODEX scenario below $120/t, but dilutive on higher price scenarios. $120/t is an interesting inflection point; Consensus LT price expectations are around $90/t, but we think that CLF uses something closer to $120-130/t LT.
¦ Simply extrapolating CY13 guidance puts earnings based valuation support somewhere between $0-$10/share. We think that CLF could get interesting as an acquisition target in the $10-15/sh range, and our $10/sh target is a blend of these two approaches.
Market Data 
Markets 
AI
