Cliffs’ Bloom Lake faces uncertain future

Struggling U.S.-based iron ore and coal miner Cliffs Natural Resources (NYSE: CLF) may close its Bloom Lake iron ore mine in eastern Quebec, as it bids farewell to Canada.

Cliffs’ new president and CEO Lourenco Goncalves was quoted by the Globe and Mail as saying that “I’m walking away from Canada big time — Canada for Cliffs has not been a good thing.”

Goncalves took the helm of the company in August, as part of a board shakeup by activist investor Casablanca Capital, which argued Cliffs should focus on its profitable U.S. core iron ore assets, and spin off its foreign projects to boost shareholder returns.

The Cleveland-headquartered firm recently reported it was pursuing “exit options” for its Eastern Canadian iron ore projects.

The news comes just weeks after Goncalves told analysts on a third-quarter earnings call that Cliffs was in talks with three potential equity partners to move ahead with the phase-two expansion at Bloom Lake to bolster production, trim costs and make the mine profitable. 

Cliffs said it would need US$450 million to finish construction and another US$750 million for a tailings pond, bringing the total investment to US$1.2 billion. The firm had expected each new equity partner would buy a 10% stake in the project’s Canadian parent company by year-end in exchange for long-term offtake agreements.

But in a Nov. 19 release, Goncalves said that despite the partners’ interest in Bloom Lake, “the potential investment is not achievable within a time frame acceptable to Cliffs.”

The producer says closure costs range from US$650 million to US$700 million in the next five years.

BMO Capital Markets analyst Tony Robson writes that although he had expected Cliffs’ Canadian operations would close in 2015, he was surprised by the cost estimate. Robson had projected closure costs of US$100 million, in part because Bloom Lake is “a new mine with limited environmental impact.”

Cowen and Co. analyst Anthony Rizzuto notes most of those costs are for “third-party rail take-or-pay contracts, with the remainder coming from miscellaneous costs, including asset retirements and severance.”

The firm currently uses the North Shore and Labrador railway, operated by Iron Ore Co. of Canada, to move its products from Bloom Lake to a port facility. The termination fee for the rail contract has not been made public. The mine employs 500 people.

Rizzuto says the high closure costs could further depress shares, given the company’s high debt load. Cliffs shares closed Nov. 21 at US$9.91, down 62% since the start of the year.

Both analysts say Cliffs has a chance to sell Bloom Lake, but warn that won’t it be easy to attract buyers, partly due to the declining iron ore prices due to oversupply and slowing Chinese demand. The spot price of iron ore recently dropped to a five-year low of US$70 per tonne.

The weak environment for iron ore as well as for coal, the firm’s other product, led Cliffs to take an after-tax non-cash impairment of US$5.7 billion in the third quarter. The impairment includes US$4.5 billion for Bloom Lake, US$28 million for the recently shuttered Wabush iron ore mine in Labrador, US$390 million for its Asia Pacific iron ore division and US$539 million related to its North American coal projects. The remaining US$245 million relates to impairments for the idled chromite project in Ontario’s Ring of Fire region.

At the end of September, the firm said its iron ore sales margin was US$32 per tonne for its U.S. assets, US$3 per tonne for its Asia Pacific division and negative US$35 per tonne for Eastern Canada, which consists of the Bloom Lake mine. 

The sales margin for North American coal was negative US$13 per short ton.

Adjusted earnings were US21¢ per diluted share, down from US88¢ per diluted share a year ago. 

At the quarter’s end, it had US$244 million in cash and equivalents and US$3 billion in long-term debt.

BMO’s Robson has a US$10 target, while Cowen’s Rizzuto has a US$12 target on Cliffs. Both rate the stock as “market perform.”