Replies to post #4540 on The Rising Influence of Rising Affluence

[DewDiligence]

Key paragraph in Barron’s write-up on CLF (from your post):

There have been concerns about growth in China and other emerging markets of late, but as long as China's hunger for steel stays relatively on track, miners like Cliffs will enjoy high prices, as stretched capacity around the world keeps supplies of iron ore tight.

Although CLF is a significant producer of metallurgical coal required for steelmaking, iron ore is the major determinant of CLF’s fortunes, and the prospects are bright, IMO, despite the symbolic lowering of China’s GDP growth target from 8% to 7.5% (#msg-73088662).

See #msg-71869156 (Bloomberg re buyout vig) and #msg-71437978 (prior article in Barron’s) for related stories.

[DewDiligence]

CLF has had a few small and medium insider buys in the past few weeks…

• Kelly Tompkins (EVP) bought $272K cumulative worth of stock at $62/sh on 5/1/12 and at $57/sh on 5/10/12:
http://www.sec.gov/Archives/edgar/data/764065/000120919112025499/xslF345X03/doc4.xml
http://www.sec.gov/Archives/edgar/data/764065/000120919112027614/xslF345X03/doc4.xml

• Andres Gluski (director) bought $72K worth of stock at $53/sh 5/11/12:
http://www.sec.gov/Archives/edgar/data/764065/000120919112028396/xslF345X03/doc4.xml

• James Michaud (SVP) bought $25K worth of stock at $49/sh on 5/21/12:
http://www.sec.gov/Archives/edgar/data/764065/000120919112029798/xslF345X03/doc4.xml

These transactions aren’t bug enough to really impress me, but they do show that multiple insiders thought the share price was undervalued.

[DewDiligence]

ML downgrades CLF to neutral based on 2013 expected iron-ore price of $120/tonne (vs prior expectation of $140/tonne):

#msg-76119775

Discussion: ML’s new price target is $60 (down from the prior target of $84) based on ML’s expectation of 2013 EPS of $6.20. Note that CLF had 2011 EPS of $11.48 (#msg-72282856) and 1Q12 EPS of $2.63 (#msg-75223487), which is an annualized rate of more than $10.50 insofar as the first calendar quarter is seasonally CLF’s weakest period when Great Lakes ports are frozen.

In other words, ML is expecting a very sharp reduction in CLF’s 2013 EPS relative to 2011 and 2012 to date. Moreover, even if ML’s 2013 EPS forecast of $6.30 were to come true, the current share price of $50 is only 8x ML’s 2013 EPS forecast.

Let’s also bear in mind that CLF recently raised its dividend substantially (#msg-73237761, #msg-73261185) and that insiders have been buying shares on the open market (#msg-75995329). Thus, it’s reasonable to surmise that CLF’s insiders do not fully concur with ML’s view on the iron-ore market and the company’s business prospects.