Cliffs CEO defies global trends, predicts strong 2016

Taconite pellets along train tracks. PHOTO: Michael Hicks, Flickr CC.

Taconite pellets along train tracks. PHOTO: Michael Hicks, Flickr CC.

In today’s earnings report, one in which earnings were less than expected, the CEO of Cliffs Natural Resources said that he sees the domestic iron ore business turning around later in 2016. Lourenco Goncalves said Iron Range mines at Northshore Mining and United Taconite in Eveleth would stay closed through March, but would reopen after that.

This comes in stark contrast to global reports on declining iron ore value through the year 2020, which I discussed earlier today. Goncalves suggests that growth in the American economy would be enough to fuel orders for new steel, necessary for American mines like those here in Minnesota to survive.

As this analysis shows, Cliffs estimates its cost of production to be $50-55 per ton, while newer Australian mines are producing at $25-30 per ton. That does reflect reduction in cost per ton by Cliffs, and comes with promises of cutting those costs even further.

The lowest cost producer on the Iron Range is Northshore Mining, which is why I assume it will be sure to reopen at some point this year. But United has had numerous problems. Its ore body is among the Range’s best, but its plant is in need of many expensive upgrades.

I must admit my first reaction to this news was that Goncalves must be insane. This is literally the only good news about the demand for American iron ore that I’ve seen in almost a year, unless you count the fact that one of the Western Hemisphere’s biggest producers of iron ore was shut down in a disaster, eliminating a major competitor. And you really shouldn’t.

Goncalves announcement is in such mind blowing contrast to the picture he painted himself just months ago when he feared that Essar Steel would somehow consume Cliffs’ ability to sell pellets on the open market. Now that Essar is hopelessly stuck, we hear that everything in Cliffs-land is hunky-dory.

I think it’s possible that Cliffs reopens these mines in 2016, but I would be skeptical of claims that it will be some huge recovery. If the mines do reopen, they would be at risk of closing again later in the year once orders are filled.

So is Goncalves crazy? Goncalves has proven himself to be a showman. Today’s earnings announcement offers hope to a lot of people looking for hope, but it would be reasonable to fear that it’s just part of Goncalves’s show.

Cliffs stock, at this precise moment, is trading at $1.58 per share, roughly the same price as before the announcement. That would suggest that the market is not biting too hard on Goncalves’s hook.

The other idled Iron Range mine is Keewatin Taconite, operated by U.S. Steel.

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