As Cliffs Resources makes $400m public offering, S&P assigns ‘BBB-‘ rating

Standard & Poor's approves of Cliffs Natural Resources' plan, which bets on the resurgence of global steel markets, and will result in some product diversification.

RENO, NV - 

As Cliffs Natural Resources Wednesday announced a $400 million public offering of senior notes, Standard & Poor's assigned a ‘BBB-‘ rating to the Cleveland-based largest producer of iron ore pellets in North America.

Last year Cliffs' revenue decreased by 35% due to weak North American and European steels markets. North American iron ore sales volumes fell 28% while the company's coal production incurred a loss due to the market environment.

Cliffs manages and operates six North American iron ore mines, two coking coal mines in West Virginia and Alabama, as well as Asian Pacific iron ore operations.

In October 2009 Cliffs entered into an $88 million deal to acquire 100% of the Wabush Mines iron ore joint venture in Labrador, Canada. In January of this year Cliffs acquired Freewest Resources, which owns high-grade chromite properties, in order to enter the chromite business.

The company also developed a global exploration group last year and has been building a bio-energy fuel plant. Cliffs is also investing $75 million in 2010 and $20 million in 2011 in expansion projects in its North American coal mines.

In their analysis, S&P said, "We believe Cliffs has sufficient liquidity to meet its obligations in the near term" including $500 million in cash and available borrowing capacity of $570 million."

S&P credit analysts also expected Cliffs to generate about $800 million in free operating cash flow through next year "due to improved operating results from improving steel industry fundamentals, resulting in higher iron ore and met coal prices."

"We expect Cliffs to maintain its annual dividend of about $50 million, although we have factored modest annual increases into the ratings."

Cliffs hopes to use the proceeds from its senior notes offering to refinance a portion of its outstanding term loan, repay a portion of the debt obligation for the Amapá iron ore project in Brazil, and for general corporate purposes. This may include funding capital expenditures.

"The stable outlook reflects our belief that operating performance will improve over the intermediate term due to expectations for continued stabilization of the macroeconomic environment and corresponding improvements for steelmaking as material demand," said S&P credit analyst Maurice Austin. "In addition, the outlook incorporates our expectation that Cliffs will continue to conservatively manage its balance sheet and finance its pursuit of growth opportunities, whether for acquisitions or shareholder-friendly actions, in a way to maintain credit measures consistent with the ratings..."

S&P said it could raise its ratings "if Cliffs successfully enhances its business risk profile by materially improving end-market diversification, without a current deterioration of credit measures and financial risk profile."

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