Now That’s a Short Squeeze: Cliffs Natural Resources Gains 22% on Earnings Beat

By Ben Levisohn

Cliffs Natural Resources (CLF) has jumped today after easily topping the Street’s earnings forecasts. Now the focus turns to the future.

Bloomberg News

Cliffs Natural Resources reported a profit of 21 cents a share not including its massive write offs, beating the Street consensus for a loss of four cents. Revenue fell 16% to $1.3 billion but beat analyst forecasts for $1.28 billion.

That was good enough for investors at the open–Cliffs shares traded up 2.9% at the first tick–but its stock has traded lower since then and are off 0.4% at $9.20 at $9.46.

Update: My, how things have changed since I hit publish on this post. About 15 minutes after I wrote this, shares of Cliffs started heading higher–much higher–and were halted after triggering a circuit breaker. They have since resumed trading and are up 22% at $11.22 at 11:15 a.m., with some on Twitter attributing the move to the long-predicted short squeeze. Once again, Gordon Johnson, good call.

Stifel’s Paul Massoud and Anthony Shen think Cliffs Natural Resources is making progress but worry about its Bloom Lake project:

Despite continuing to see negative margins in its ECIO and NAC businesses, Cliffs was able to show better than expected cost controls across all reported segments. Higher volumes in ECIO, APIO, and NAC all led to increased fixed cost absorption. Lower depreciation and continued mining cost controls should help 4Q margins. The bigger concern to us is the rail take-or-pay contract which would require even bigger cash payouts in 2015 if Phase 1 at Bloom Lake is shutdown…

Management said Phase 1 at Bloom Lake is unfeasible and would have a solution by year end. We believe this has to do with ongoing negotiations with QNSL over the current take-or-pay contract. Currently, Cliffs pays about $60 million/year as a penalty for not having Phase 2 tonnes (through 2019). Shutting down Phase 1 would incur an additional ~$140 million/year in penalties for the estimated life of mine (20-25 years) before severance costs. We think the delay in reaching a solution on whether to continue operating Bloom Lake has to do with negotiating down penalty payments with QNSL.

Cliffs Natural Resources, remember, is also a coal producer and its big gain comes in tandem with sharp moves higher in coal miners like Alpha Natural Resources (ANR), Peabody Energy (BTU) and Walter Energy (WLT). Alpha Natural has gained 5.5% to $2.13, while Peabody Energy has climbed 4.5% to $10.46 and Walter Energy has soared 12% to $2.41.