Cliffs Natural Resources (CLF) spiked as high as 29% at Monday's open, but it may be too soon to put too much stock in the company's rise or the broader rally in iron-ore prices.
Last week, Cliffs announced the results of a debt exchange offering, and analysts at CRT Capital Group said these were "not so stellar."
The Ohio-based company announced in January that certain existing bondholders had the opportunity to exchange their notes for newly issued 8% 1.5 lien secured notes due 2020. Priority was given to its nearest level maturity, 3.95% notes coming due in 2018, which -- while on an upswing -- currently trade for 35 cents on the dollar.
Of the total offering of $710 million, only $219 million new notes were issued, and only $17.6 million of the $311.2 million outstanding were tendered in the exchange. In a statement announcing the results, CEO Lourenco Goncalves said the exchange reduces debt by $293 million and annual interest expense by $14 million, which was in line with the company's expectations.
However, Amer Tiwana of CRT Capital took a slightly less optimistic view, as the objectives of an exchange offering are to delever and address the nearest maturity.
"The exchange wasn't able to take care of the elephant in the room," Tiwana said in a phone interview with Real Money on Monday.
While Cliffs continued rallying as of midday trading, the past year has not been kind to the company.
Shares tumbled 41% over the last year and are now trading for less than $4. (To be sure, year-to-date, shares of the company rallied 117% as iron-ore prices have also rallied.) In January, the company's debt was downgraded to CC from B by Standard & Poor's Ratings Services. On Friday, Moody's reaffirmed its Ca rating on Cliffs -- in line with Standard & Poor's.
Additionally, while Cliff's may face issues tied to its own balance sheet, there is evidence that the recent rally in iron-ore prices may not be reliable.
On Monday, a Goldman Sachs analyst team led by Christian Lelong said that despite the recent rally in spot iron ore prices -- up 24% year to date -- the bank's bearish case for the commodity is still intact.
"We expect the current rally to be short-lived in the absence of a material increase in Chinese steel demand," Lelong wrote.
While Lelong acknowledged that January's "unexpected increase" in China's total social financing suggested that there would be higher construction activity, that indicator alone is insufficient for predicting steel demand. Instead, investors should look at the growth in total social financing adjusted for the issuance of local government bonds, as seen in the chart below.
"Our China economists believe that the pace of credit growth in January is above the government's comfort zone and is therefore unlikely to be sustained long enough to have a material impact on steel," Lelong wrote.
Goncalves said during a call with analysts that under his leadership, Cliffs has focused more on its U.S. business, and he predicted a slowdown in China. However, investors should be aware that even if the company has a domestic focus, the global market still affects Cliffs.
