Analysts See More Growth for Cliffs Natural Resources

Shares surge on news that the mining giant inked a long-term supply deal with its top customer for iron ore pellets.

Shares of Cliffs Natural Resources (CLF) rallied 38% in midday trading Tuesday to $4.37, following news the Cleveland-based mining giant inked a 10-year contract to supply iron ore to steelmaker ArcelorMittal (MT).

J.P. Morgan Securities, which upgraded CLF to Overweight from Neutral Tuesday, say Cliffs Natural shares are likely to climb as high as $7 by December, through a combination of rising steel prices and reduced uncertainty over Cliffs' ability to build much-needed partnerships.

The deal with ArcelorMittal, Cliffs' top iron-ore client whose shares also jumped more than 3% on the day, helps to remove uncertainty over whether Cliffs will be able to sustain a partnership in which two crucial contracts are set to expire in the next 12 months, the analysts said. (ArcelorMittal purchases represented 49% of Cliffs' 2015 U.S. iron-ore sales last year.)

"The location of Cliffs' iron ore mines around the Great Lakes is a major competitive advantage, and CLF remains the best and cheapest source of iron ore pellets for all the integrated steel mills (except U.S. Steel) in the U.S.," J.P. Morgan Securities analyst Michael Gambardella said in a Tuesday report, noting that U.S. steel has a major presence in the region and supplies its own iron ore pellets.

J.P. Morgan Securities also revised their 2016 earnings-per-share estimates for Cliffs Natural Resources to $0.80 from $0.52, and 2017 forecasts to $1.09 from $0.48.

Cliffs Natural Resources shares are down roughly 17% over the past 12 months, largely due to the waning market for U.S. steelmaking, which has been pressured by a decline in prices and what many producers have argued to be a flood of cheap Chinese imports.

But the industry has begun to show broad signs of recovery, following a steady rise in metal prices over the year and the March announcement that the Department of Commerce will impose a 266% tax on Chinese steel imports in an effort to facilitate a rebound in the U.S. market.

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