Deutsche Bank increases their price target on Cleveland-Cliffs (NYSE: CLF) from $115 to $150 and reiterates their Buy rating. The firm increases their 2008 EPS estimates from $5.77 to $6.69 and 2009 EPS estimates from $9.57 to $12.52.
The firm said, "Our expectations for Cliffs realization prices were upped for both iron ore and coal. Our previous estimates for 2008 were based on a 65% increase for fines in Asia Pacific which has already been superseded by the announcement of the ~80% increase reached by Rio Tinto with Chinese steelmakers. For 2009, main changes stem from DB's revised commodities forecasts, which now call for a 5% increase for pellets (vs. 0% previously), +20% for fines (vs. previous +10%), and higher realization prices given a ~US$230/mton price assumption for standard hard coking coal. These new benchmarks imply realization prices at around US$99/lton for NA pellets, ~US$154/ston for NA coal, and ~US$113/mton for AP fines."
Year founded: 1847
Business: Iron ore and metallurgical coal
Headquarters: Downtown Cleveland
2007 revenue: $2.28 billion
Employees: 5,300 worldwide; 150 in Cleveland.
Locations: Mines in United States, Canada, Australia and Brazil.
Cleveland-Cliffs Inc. has seen its stock price rise more than 300 percent since the beginning of 2007.
But that's nothing.
If you go back to January 2001 -- the height of the steel crisis -- Cliffs' stock price has gone up some 5,000 percent, from about $2 a share to more than $100 today.
That means a $20,000 investment then is worth $1 million now.
And get this. The stock might not have peaked.
Global growth, especially in China, and a weak U.S. dollar have been the drivers, pushing up demand for steel made here and abroad. Cliffs mines in Michigan, Minnesota and Canada supply blast furnaces across North America with iron ore, the main ingredient in making steel, while their mines in Australia ship to China and Japan.
Cliffs recent foray into metallurgical coal is expected to pay off in a big way, too.
The company, one of the oldest in Cleveland, has come a long way from the dark days earlier this decade. It has made all the right moves, beginning with a decision to expand its iron ore reserves in North America at a time when bankrupt steel companies were looking to unload them.
Adding reserves at bargain prices proved brilliant, as Cleveland-Cliffs had more iron ore to sell once the steel industry consolidated and surged back to life.
The company's then chief executive John Brinzo didn't stop there. In early 2005, flush with cash, the company bought into an Australian iron ore company called Portman Ltd. The move didn't sit well at the time with Cliffs investors who chastized Brinzo. They thought a better use of Cliffs' new-found wealth was to buy back shares, thereby rewarding current shareholders with instant gains.
But Brinzo held his ground. The deal went through. Since then, Portman's stock has increased about 400 percent.
Cleveland-Cliffs CEO Joseph Carrabba
Last year, Cleveland-Cliffs expanded again under Brinzo's successor Joe Carrabba, this time into metallurgical coal.
Metallurgical coal, as opposed to the thermal variety burned to make electricity, is converted into coke. It's then mixed with iron ore in a blast furnace to produce molten iron, the first step in the steel making process at mills like the one owned by ArcelorMittal along the Cuyahoga River in Cleveland.
Cliffs' paid $450 million and absorbed $150 million in debt for PinnOak Resources LLC, which included coal mines in West Virginia and Alabama. The investment has fueled the continued rise of Cliffs' stock price, said Mark Liinamaa, an analyst with Morgan Stanley & Co., with coal revenue expected to rise substantially after current contracts expire.
Carrabba said he expects coal contracts that now pay an average of $94 per ton to renew for at least $250 per ton when they start to expire at the end of this year in the United States and next April for European customers. About 60 percent of Cliffs' coal is exported, with much of it going to ArcelorMittal plants in Europe.
"I would say over the last four or five years there really isn't anything they've done wrong," said David MacGregor, analyst with Longbow Research in Independence.
Among those investors along for the ride is New York hedge fund Harbinger Capital Partners, which has steadily added to its stake in the company in recent months. It owned more than 17 percent of Cliffs' common shares -- valued at more than $1.6 billion at Wednesday's closing price of $105.50 a share.
Harbinger senior managing director Philip Falcone did not return a call seeking comment, but his investment group has shown broad interest in the metals industry. It owns a stake in Fortescue Metals Group, a start-up iron ore company in Australia, and at last count was the largest shareholder of U.S. steelmaker AK Steel, based near Cincinnati.
While Harbinger likes Cliffs' business fundamentals, it's also thinking the company could be a takeover target at a premium price, MacGregor said. Among those fueling takeover speculation is Jim Cramer, the bombastic host of CNBC's "Mad Money" stock-picking television show. He often touts Cliffs on his show.
Harbinger has played both active and passive roles with investments. For example, it forced the sale of steel processor Ryerson Inc., while Carraba said Harbinger has been strictly passive in its dealings with him.
Among those speculated to be interested in Cliffs is steel giant ArcelorMittal. It's already Cliffs' largest customer, commanding 44 percent of its North American iron ore sales.
Carrabba would not comment on any possible suitors, but said if an offer is made, it's the company's duty to consider it. Currently, mining giant BHP Billiton Ltd. is looking to take over rival Rio Tinto Ltd.
For his part, Carrabba expects the good times to continue. He does not believe iron ore is trading in a bubble like some think is the case with oil and other commodities. Unlike oil, iron ore is not traded on a commodities exchange and elicits little speculation from investors, he said.
Also, while previous surges in iron ore prices have led to substantial increases in supply, that's not happening this time around, he said.
