At Its present Share Price CLF Is A No-Brainer

Cliffs Natural Resources (NYSE:CLF) is America's only pure play iron ore producer. It is solvent yet unloved. Its share price has dropped from above $12 to less than $6 within the past 90 days. I believe, subject to three unlikely caveats, that its share price is mathematically guaranteed to increase several dollars this year without any multiple expansion and that progression can continue because of the company's cashflow generation.

My caveats are:

1. America's economy and industrial production doesn't dramatically collapse
2. George Connell, former significant shareholder, didn't eliminate his position because of any undisclosed information
3. Company CEO, Lourenco Goncalves, is an excellent manager and has a solid understanding of his business and industry.

Why should I expect to be rewarded by Cliffs when the "market" and most financial analysts do not think it is worth buying? Firstly, I've owned businesses and turned around several. Next, I've listened carefully to the CEO's conference call discussions and monitored his execution of stated goals. Finally, mathematics, subject to my caveats will push the share price back up.

At present, CLF has an Enterprise Value (NYSE:EV) of $3B (1.7 MC+1.6 Debt - 3 Cash). There are, using round numbers 300M shares outstanding. Management has targeted having net debt reduced to 1B or less by year end and operating with EBITDA equal to net debt in 2018. That $600M improvement likely will accrue to shareholders. Pretty well locked in cashflow should raise the stock $2 or 30+ percent within 12 months. Not bad! Company still worth $3B but the shares worth $8.

Now if any positive catalysts provide a lift and the multiple mentality improves, Cliffs could move well past $8 and the old recent high of $12+. What catalysts are possible?

• Action on infrastructure spending and trade protection
• Steel wholesalers restocking inventory to normal levels
• Any announcement on additional DRI ready new customers, plant decision, or momentum swing on the Essar restructuring
• Broad based and significant insider purchases
• Better grasp of the benefits of customers being locked in and pricing that includes adjustments for inflation, IODEX pricing, Hot Rolled Coil pricing, and European pellet premiums. The world doesn't end if the Chinese spot prices decline. Management is running a company, not a lottery.

What happens if Cliffs stock price goes down further in spite of all of the above? Buy more shares and extend your time horizon. CLF has taken insolvency off the table by reducing debt and extending maturities so it should be able to still generate a significant cashflow that would be available to chip away at the remaining debt, maintain properties, and fund growth initiatives.

Second quarter results and forward guidance will be extremely interesting, however, as long as they are continuing to reduce the debt my belief is that the share price is going up.