Cliffs Natural Resources (CLF) is up 1% today after the beaten-down iron and coal miner said it would spend $200 million to buy back its shares. Citigroup’s Brian Yu would have preferred Cliffs using the cash to pay down its debt:
Reuters Cliffs Natural's Board approved a $200 mln share repurchase program that translates to 8.1% of current shares outstanding or 7.0% of outstanding if we include the mandatory convertible preferred. With net-debt of $3.1 bln at the end of 2Q14 and estimated leverage of 4.4x for 2014E, our expectation is that deleveraging would be more of a priority, especially with iron ore priced around $90/tonne, approximating Citi's 2015 forecast of $90/tonne. On our 2015E numbers, Cliffs Natural's leverage jumps to 6.0x, assuming the company idles Bloom Lake. If management opts to run Bloom Lake to facilitate a drawn-out sale, there would be downside risk to our numbers, holding all else equal.
In our opinion, the buyback program could make sense if the Board is more positive on iron ore prices vs our expectations and expects to fund the buyback with proceeds from asset sales. As well the high dividend yield of 3.8% is not supporting the current share price, in our view, and could be jettisoned as a source of funds for the buyback.
Shares of Cliffs Natural Resources have gained 1% to $15.96 at 1:37 p.m. today. They’ve dropped 39% so far this year.
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