Axiom's Johnson Sees Cliffs Natural 'Between A Rock And A Hard Place,' Starts At Sell

Axiom Capital's Gordon Johnson initiated coverage of Cliffs Natural Resources Inc (NYSE: CLF) with a Sell rating and a price target of $2, expressing concern that the company had a presence in an "oversupplied commodity market."

Commending the execution by the company's new CEO, Johnson said, "From divesting its former Bloom Lake "money pit", as well as its high-cost Logan County Coal assets, to slashing OPEX, and successfully placing a new $540mn debt exchange set to replace its revolver (freeing it from restrictive covenants) and lower total debt, we "tip our hat" to CLF on its execution and new course."

Johnson added, however, that the company was faced with structural risks that "pose an existential threat." Iron ore was in structural oversupply, and Cliffs Natural Resources' "apples-to-apples USIO cash cost" at $54.59/mt positioning the company as "the marginal producer."

This, along with the company's new high interest loan, resulted in "outsized risk" to the consensus EPS.

Johnson stated that the recent devaluation of the Yuan was the "Nail in the Coffin" for Cliffs Natural Resources. By weakening its currency, China was opting for structurally lower credit availability, which was the "life's blood of its real estate sector," as well as deflation. Against this backdrop, China's real estate sector appeared "structurally impaired," and this sector was the "key driver of global steel demand."