Project Report on

Cliffs Natural Resources Inc.

(NYSE: CLF)
In partial fulfillment of the course Strategic Management-I

Submitted to:
Professor Veeresh Sharma

Submitted by:
Sourobh Das (15P052)
Section A, PGPM 2015-17

Management Development Institute, Mehrauli Road, Sukhrali, Sector 17, Gurgaon - 122007

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Acknowledgements
I feel obliged in submitting this report in partial fulfillment of the course Strategic Management-I. I would
like to take this opportunity to thank Prof. Veeresh Sharma for his timely suggestions, help, guidance and
encouragement during the project. I would also like to express my gratitude towards my institution, MDIGurgaon for generous access to research material that helped me carry out this in-depth analysis without
which this project would not have come to fruition. I would also like to express my gratitude towards my
peers whose valuable and honest opinions and inputs helped me bring this project to conclusion.
Last but not the least, I would like to thank all the people who have been involved with me in the project
directly or indirectly and who have supported me all throughout the course of this project.

Executive Summary
This report aims to unravel the corporate strategy and throw some light on the business aspects of one of
the leading mining and natural resources companies in the United States, Cliffs Natural Resources. The
report starts off with an overview of the company talking of its inception, the various milestones in its
history, its mission and core values that help in determining what kind of company it has been over the
years and where it aims to go forward.
In order to further understand the company, the report delves into the organizational structure of Cliffs,
investigating the various groups that constitute the company and how they work together in unison to
deliver results for the company. The employees have constantly rated Cliffs as a great place to work, over
the years. I have analyzed the factors that drive the corporate culture of Cliffs and make it so attractive for
existing and potential employees.
Next, we move on to analyze the external environment and examine the various factors that affect the
performance of Cliffs. I have analyzed this keeping political, economical, environmental, social and legal
factors in mind.With so many forces at play, I had to analyze them all to completely gauge the industry it
is in. In addition to using various reports and making use of the data published in the journals and articles,
I have also taken into account the entry and exit barriers to understand the profitability of the players of
the iron ore mining industry.
With so many competitors of Cliffs, it becomes imperative to do a competitor analysis to get a
comprehensive picture of where such global players stand financially and strategically and what are their
strengths and weaknesses compared to Cliffs. Every competitor is different in terms of size and
diversification and an understanding of their position in the iron ore mining value chain and their
offerings is very necessary to devise a strategy for Cliffs Natural Resources going forward.
The report then analyzes the value chain of iron ore mining and beneficiation. The analysis is applicable
for all players in the industry in general. We then move on to the TOWS (a variant of SWOT) analysis of
Cliffs to gauge how it can use its inherent strengths to utilize the opportunities it is presented with in the
current global scenario to the maximum.
The next part of the report goes into the financial analysis of Cliffs, exploring the financial condition of
the company and how it has been faring over the past few years. The data has been taken from the
NASDAQ website and the annual reports of the company.
Due to falling global demand, all the players in the industry are facing a really tough time and Cliffs is no
different. The report tries to give a perspective of how the future shall unfold for Cliffs and how it needs
to strategize to grow further in spite of the challenges it currently faces.

Cliffs Natural Resources

Table of Content

Acknowledgements..........................................................................................2
Executive Summary.........................................................................................3
Introduction.....................................................................................................6
Milestones [16], [17]...................................................................................................... 6
Vision and Mission [1]............................................................................................... 7
Core Values [1].......................................................................................................... 7
Products [1]............................................................................................................... 8
Operations [1]............................................................................................................ 8

Organization Structure.....................................................................................9
Culture...........................................................................................................10
External Environment....................................................................................10
1.
2.
3.
4.
5.
6.

Political Factors................................................................................................ 10
Economic Factors............................................................................................ 10
Social Factors.................................................................................................. 11
Technical Factors............................................................................................. 11
Environmental Factors..................................................................................... 11
Legal Factors................................................................................................... 11

Industry Analysis............................................................................................11
1.
2.
3.
4.
5.

Threat of New Entrants.................................................................................... 11

Threat of Substitutes....................................................................................... 12
Bargaining Power of Suppliers.........................................................................12
Bargaining Power of Buyers.............................................................................12
Intensity of Competitive Rivalry......................................................................12

Entry and Exit Barriers...................................................................................12

Entry Barriers........................................................................................................ 13
Exit Barriers........................................................................................................... 13

Competitor Analysis.......................................................................................13
1.
2.
3.
4.
5.
6.

Vale S.A........................................................................................................... 13
Arcelor Mittal................................................................................................... 14
U.S. Steel Corporation..................................................................................... 14
Peabody Energy Corporation...........................................................................14
BHP Billiton Limited......................................................................................... 14
Rio Tinto.......................................................................................................... 15

Internal Audit.................................................................................................15
Value Chain Analysis............................................................................................. 15

Financial Analysis...........................................................................................17
Income Statement................................................................................................. 17
Balance Sheet....................................................................................................... 18
Cash Flow.............................................................................................................. 19
Key Financial Ratios............................................................................................... 19

TOWS Matrix..................................................................................................21
Recommendations.........................................................................................22
SPACE Matrix Analysis........................................................................................... 23

Conclusion.....................................................................................................24
References.....................................................................................................25

Introduction
Cliffs Natural Resources, previously known as Cleveland-Cliffs, is a business firm that specializes in the
mining and beneficiation of iron ore. Its headquarters are located in Cleveland, Ohio. Cliffs Natural
Resources (NYSE: CLF) is one of the prominent mining and natural resources companies that supplies
iron ore pellets to the North American steel industry from mines and plants located in Michigan and
Minnesota. They also operate an iron ore-mining complex in Western Australia. [1]
Cleveland-Cliffs and Alpha Natural Resources merged in 2008 creating Cliffs Natural Resources.
The combined company became one of the largest U.S. mining companies. It was positioned as one of the
leading diversified mining and natural resources companies. Cliffs Natural Resources' collection of mines
included nine iron ore facilities and around 60-odd coal-mines spread across North America, South
America and Australia till 2015. The company's noteworthy position in both iron ore and metallurgical
coal made it a major supplier to the global steel industry, as well as provide a platform for additional
broadening of its operations both geographically and in terms of the mineral and resource products it sold.
It has now sold off its coal-mines and exited the coal business and the current strategy of the company is
to single-mindedly focus on the US iron ore mining operations. Its current market cap is approximately
$455 million.
Cliffs' primary operations were organized and managed as per the product category and geographic
location: U.S. iron ore, Asia Pacific iron ore, Eastern Canadian iron ore and North American coal. As of
now, only its U.S. and Asia Pacific operations are functional.

Milestones [16], [17]

1847
1850
1855

1890

1892

1925

1933
1940s
1954
1960
1962-63
1970

Cliffs earliest predecessor Cleveland Iron Mining Company was founded

Chartered as a company by Michigan
First Soo Locks opened, allowing iron ore to be shipped between Lake
Superior to Lake Erie
Merger with Cliffs Iron Company; name changed to Cleveland-Cliffs Iron
Company
Lake Superior and Ishpeming Railroad built to carry iron ore from the mines
directly to company-owned docks on Lake Superior.
618-foot-long (188 m) bulk cargo vessel William G Mather, named after
companys Chairman launched to carry Great Lakes commodities
Edward Greene replaced Mather as Chairman
Mather A Mine and Mather B shaft opened
First pellet plant built at Eagle Mills
First grate/kiln plant built at the Humboldt Mine
Other pellet plants at Republic Mine and Empire Mine added
High-grade iron-ore mine was opened in Western Australia with a 200-

1974

1974-83

1984
2002

2000s

2007
2008

2011
2011

2013

2014

2015

kilometre rail line for which the residential township of Wickham was built
Tilden Mine opened; only mine till date with the ability to produce both
hematite and magnetite pellets
Recessionary period. Cleveland-Cliffs minimized its operations, closing the
Mather B Mine and the Pioneer Pellet Plant and associated Ore Improvement
Plant in 1979. The Humboldt Pellet Plant closed in 1981 and the Republic
Mine was idled in 1981.
Cleveland-Cliffs withdrew from Great Lakes shipping industry
Stocks plummeted. President George W. Bush enacted steel tariffs that
helped domestically produced steel rebound.
A sharp increase in steel production in China and other developing countries
led to a significant increase in the price of global iron ore. Cleveland-Cliffs
benefitted and decided to expand globally and to diversify into other
minerals, leading to the acquisition of iron-ore properties in Brazil and
Australia and coal properties in Australia and the US
Cleveland-Cliffs purchased first domestic coal property
With its venture into coal, merged with Alpha Natural Resources and
changed name to Cliffs Natural Resources
Acquired Consolidated Thompson Iron Mines Limited for US$4.9 billion
Cliffs added to Fortune 500 list of companies; ranked at 477 based on its
performance in 2010
CEO Joseph Carabarra retired; Gary Halverson, formerly interim chief
operating officer of Barrick Gold Corporation Inc., was appointed President
and CEO
Former Metals USA executive Lourenco Goncalves appointed as Chairman,
President & CEO of Cliffs; company strategy moved away from global
diversification to a renewed focus on strengthening its U.S. iron ore
business; iron ore mines in Canada closed and idled off
Exited from coal business; sold its West Virginia and Alabama operations to
Seneca Coal Resources, LLC

Vision and Mission [1]

As per the Annual Report of Cliffs, the vision and mission is stated as such:

Cliffs Natural Resources is an independent, owner-operator mining company supplying the global
steelmaking industry.

Operational Excellence Is Our Foundation We have deep technical expertise and focus on
safety, responsible stewardship and continuous improvement.

Customer Excellence Is Fundamental We succeed together with our customers.

Financial Discipline Enables Our Success We achieve superior economic performance.

People Are Our Strength Attracting and developing industry-leading talent are vital
differentiators in achieving our goals.

We are a mining company that customers seek to establish a long-term partnership, communities value us
as a neighbour, and a place where employees want to work.

Core Values [1]

The core values of Cliffs Natural Resources that guides it forward (as given in the company website) are
given below:

Creating Economic Value Doing the right things right the first time, elimination of waste and
inefficiency, breakthroughs in productivity and technology.

Customer Focus Listening to the customer, being responsive and on time, meeting quality
expectations, helping the customer succeed.
Environmental Stewardship Going beyond compliance, being socially responsible,
anticipating and addressing potential impacts before they occur, personal accountability,
operating to preserve the environment for future generations.
Ethical Behaviour Conducting business with honesty, fairness, integrity and full compliance
with all applicable laws.
Group and Individual Accountability Behaving in line with our core values, being
responsible for our actions, providing plans/standards/expectations, holding yourself and/or the
group to a high standard of performance, walk the talk.
Recognize and Reward Achievement Celebrating successes, stress training and development,
an effective appraisal of performance, expressing a simple thank you.
Safe Production Record production with: lack of injuries, good housekeeping and orderly work
areas, well-maintained equipment, proper training and procedures, looking out for and correcting
each other, safe conditions and behavior, Sentinel of Safety qualification.
Teamwork Actively involve others in decision-making, know when to take a leadership role
and when to be an active member, recognize the value of teamwork and the synergy it creates.
Trust, Respect and Open Communication Open access to information, constructive conflict,
delegation to the appropriate level, toleration of failure in pursuit of business success,
encouraging and accepting different views , feeling an obligation to explain your actions to those
affected, gender and racial diversity.

Products [1]

Iron Ore Pellets (North American Market)

Lumps and Fines (International Market)

Operations [1]

US Iron Ore Cliffs owns and runs interests in five U.S. Iron Ore mines that are located in

Michigan and Minnesota. The Minnesota was closed in 2015 but it shall be functional again from
April 2016.The U.S. Iron Ore mines yield from deposits situated within the Biwabik and
Negaunee Iron Formation, categorized as Lake Superior type iron-formations formed under
comparable sedimentary conditions in shallow marine basins approximately two billion years
ago.
Asia Pacific Iron Ore Cliffs' Asia Pacific Iron Ore business unit comprises of The
Koolyanobbing Operation a combined term for the operational hematite and goethite iron ore
deposits at Koolyanobbing, Mount Jackson and Windarling. It is located in Western Australia,
around 54km north of Southern Cross.Mining in the region began in the 1950s.BHP Billiton and
Portman Iron Ore owned this operation earlier. Cliffs acquired Koolyanobbing from Portman in
December 2008.Cliffs Asia-Pacific operations have a remaining life of about five years. The
management does not have any plans of developing more of its iron ore reserves in the region.
Thus, Cliffs plans to exit its Asia-Pacific operations once its Koolyanobbing mine in Australia
stops production, unless a buyer can be found for the same. [6]

Eastern Canada Iron Ore Cliffs had operated two iron ore mines located in Eastern Canada.
But both mines were idled and closed in 2014 and early 2015 due to unmanageable high cost
structures, representing a widespread check of the companys Eastern Canadian iron ore
operations. In December 2015, Champion Iron Ltd revealed its intention to purchase Bloom
Lake's mine and rail assets. During 2014, 2013 and 2012, Cliffs sold 7.2 million, 8.6 million and
8.9 million metric tons of iron ore pellets and concentrate, respectively, from its Eastern Canadian
iron ore mines. [4]

North American Coal Cliffs had controlled two low-volatile metallurgical coal-mines situated
in West Virginia and Alabama with a rated capacity of 6.5 million tons of production annually.
Each mine is positioned near rail or barge lines for access to international shipping ports, which
exports the product to global unified steel and coke producers in North America, Europe, China,
India and South America. In December 2015, Cliffs stated that it had sold its West Virginia and
Alabama operations to Seneca Coal Resources, LLC, thus exiting from the coal business. During
2014, 2013 and 2012, Cliffs sold 7.4 million, 7.3 million and 6.5 million tons of coal,
respectively, from its North American Coal mines. [4]

Organization Structure

Source:
http://www.cliffsnaturalresources.com/EN/CorpResponsibility/Sustainability2013/OurCompany/Pages/default.aspx#globalcomm

The image above has been taken from the 2013 annual report of Cliffs. With the recent developments,
Cliffs will no longer have the Coal Mining arm in its structure.
Cliffs is structured through a global commercial group, which is responsible for sales and delivery of its
products and a global operations group, which is responsible for the production of the minerals that it
markets.

Global Commercial Group The Global Commercial Group develops strategic customer
relationships to aid the trade of iron ore, and runs the global transportation and logistics functions
of the operations. On one hand, Cliffs is uniquely positioned as the principal provider of pellets
to United States-based blast furnaces, its operations in Eastern Canada and Australia are
positioned to supply the emergent Asian consumer base. It has readjusted sales and marketing
management responsibilities from a local style to a global structure, permitting it to cope with the
challenges and opportunities that arise from serving numerous customers in several markets. The
global commercial structure allows it to enhance its customer service to existing customers and
polish its superiority in targeting new customers. [1]
Global Exploration Group The Global Exploration Group creates partnerships with mining and
exploration companies, towards its objective to secure resources through direct venture and
supportive investigation efforts. Cliffs relationships with exploration companies enable it to
invest capital in prospects for many products throughout the world. [1]

Culture
The culture at Cliffs Natural Resources is very employee-friendly. Commitment to safety is one of its
prime objectives. It is driven through a systems approach, which takes into account governance and
structure, proactive initiatives, site implementation plans etc. Cliffs also puts a lot of focus on research
and development learning. Cliffs has an excellent corporate culture and most of the employees rate it very
highly in terms of growth and work-family balance. The hierarchy is kept minimum and the senior
management is easily approachable. Since the focus on employees well-being leads to great
compensations and excellent benefits, employees remain fairly satisfied. [9] It supports the career growth
of employees and encourages them to pursue many areas to better themselves. There are many challenges
currently facing the mining industry with falling iron ore prices, hence the company is forced to do more
with fewer people but it still remains an employee-centric company.

External Environment
1.

Political Factors
Mining regions the world over have high political risk. Nationalization is the greatest political
risk for many mining companies. This kind of risk is especially high in South America or Africa.
The logistical solution is often a bottleneck for many miners since they have to produce millions
of tons annually to be profitable.

2.

Economic Factors
The profitability of mining companies is dependent on the iron ore price premium and costs.
There are good reasons to believe the iron ore price will keep falling in the future. The access to
capital is often an obstacle for many miners. The capital costs for mining infrastructure, buildings
and equipment are often very large. The global economic conditions are not too bright, with the
slowing growth in China and recession in Europe. That will have a significant impact on the iron
ore prices.

3.

Social Factors
Mining companies are dependent on a skilled and motivated work force to work in often harsh
environments. The relative high unemployment rate has incentivized many people to relocate.
The high cost of labour is one of the greatest deterrents to profitability in this industry. However,
Cliffs is known for being a very employee-centric company.

4.

Technical Factors
New technological innovations have enabled higher production and lowered costs of production.
The improved technology has also enabled more mining companies to produce a product of
higher quality. A downside risk is if more mining companies upgrade to the latest technology,
then the supply of high grade iron ore will increase.

5.

Environmental Factors
Environmental impact has become one of the top concerns for many mining companies. The large
size of many mining operations and the long distance transportation has a negative impact on the
environment. One of the most important considerations would be the ability to rehabilitate and
restore used up mining facilities. An iron-ore mine causes significant problems for the
environment. Pollution of water bodies, pollution due to explosive fumes, noise pollution etc. are
the unwanted consequences that an iron ore mine causes.

6.

Legal Factors
There are various government rules and regulations to get into and maintain the business of ironore mining. Another legal factor to consider is property rights and taxes.

Industry Analysis
The industry analysis will assess the attractiveness of the iron ore industry and to determine whether
Cliffs has a competitive advantage. A competitive advantage is critical to achieve a return that is higher
than the cost of capital. We shall be using Porters Five Forces to analyse the mining industry.

1.

Threat of New Entrants

The threat of new entrants is relatively low. Due to shortage of natural resources, there is a very
limited capacity and supply available in the global market, which restricts new entrants in the
market. Due to a fall in the commodity prices, the demand of iron ore from China has slowed
down by more than half. This is likely to be a significant deterrent for the new entrants rather than
the existing ones. For the new entrants, it will take some time to upgrade to improved
infrastructure, latest state-of-the-art technologies and qualified staff to offer superior quality
products to the market. Several companies have made extensive moves across Africa, India and
China for natural resources but the threat of these companies remains moderate to low.

2.

Threat of Substitutes
The threat of substitutes is quite low when it comes to iron ore, as there are not many substitutes
that can provide the advantages of steel in terms of durability and strength. But increased focus
on renewable resources makes the threat of substitutes moderate for coal.

3.

Bargaining Power of Suppliers

Suppliers have bargaining power in labour, materials, energy, shipping, and energy costs. As the
company affirms reduced capacity through superior operations, the total costs from suppliers
have shot up as well. In the categories mentioned above, there are few substitutes available,
which augment the strong bargaining power of suppliers. Government rules and regulations also
pay a big part.

4.

Bargaining Power of Buyers

Buyers value lower prices and better contract terms. However, their bargaining power is moderate
to low as any price rise can be passed along to the consumer because of the strong demand and

inadequate supply of natural resources in the market. There are not many substitutes available in
great quantities, which diminish the bargaining power of buyers. The demand for iron ore by the
steel industry plays a significant role in setting prices of the commodity. Though a large chunk of
Cliffs iron ore has the North American steel industry as its customer, sales agreements are fixed
against international iron ore prices. We know that the international iron ore prices are primarily
influenced by Chinese demand, as it is the Chinese steel industry that purchases nearly two-thirds
of the worlds seaborne iron ore supply. Weak demand for steel has translated into weak demand
for iron ore. [7]

5.

Intensity of Competitive Rivalry

The rivalry among the companies is tough. This is because several natural resources companies
are competing for entry into the reserves existing across the world, and retaining qualified staff
and building infrastructure, improving transportation and erecting new development projects.
There is a geographic overlap in most areas worldwide on the reserves side, and to retain trained
staff has greater labour wages. However, in spite of the strong rivalry, the industry remains
lucrative due to strong profit potential.
On the supply side, growing iron ore production by chief iron ore mining companies such as Vale,
Rio Tinto, and BHP Billiton has led to a situation of oversupply. The worldwide surplus of
seaborne iron ore supply is likely to touch 437 million tons in 2018, from the surplus of 184
million tons in 2015. The state of oversupply has resulted in a sharp drop in iron ore prices. [7]

Entry and Exit Barriers

The iron-ore mining industry is one with high entry and exit barriers. Such market structures give rise to
recurring cyclic markets. Subject to the number of competitors that the industry can sustain, returns on
capital over time can vary from dismal to fairly good. Cyclicality of profitability for businesses in such
industries is generally determined by the presence of exit barriers. Any demand-supply mismatch where
supply exceeds demand is fixed by price cuts as existing competitors strive to secure market share. [14]

Entry Barriers
There are considerable entry barriers in the form of large initial capital investments, an enormous scale
of operations and the time it requires to develop a new mine, which ranges easily from five to seven
years. The total capital cost for iron ore mining can range from US$240-450 per ton for the largest
miners. Compared to these, the cash cost of production per ton currently is at US$15 per ton.[15]

Exit Barriers
The iron-ore mining industry has high exit barriers as an iron-ore mine does not have much significance
otherwise. As a result, we get sub-par profitability for the complete business cycle. The intensity of a
price war in such an industry with high exit barriers will depend on the fundamental cost structures. The
intensity of competition generally varies directly with the proportion of fixed costs in the cost structure.
Higher the fixed costs, higher the intensity of competition. The price wars are generally severe in an
industry like this. The likely consequence of such an industry dynamic will be that as long as the
oversupply condition continues, we shall get below-par returns on capital for all businesses in this
industry. [14]

Source: http://www.symantaka.com/entry-and-exit-barriers/

Competitor Analysis
1. Vale S.A.
Vale S.A. is a metals and mining company. The company is also a producer of iron ore and iron
ore pellets, and nickel. The company also produces manganese ore, ferroalloys, metallurgical and
thermal coal, copper, platinum group metals (PGMs), gold, silver, cobalt, potash, phosphates and
other fertilizer nutrients. The company operates through four business segments: Bulk Material,
Base metals, Fertilizers and Other. The Bulk Material segment includes the production and
extraction of ferrous minerals, and the extraction of coal and its logistic services (railroads, ports
and terminals). The Base metals segment produces and extracts non-ferrous minerals. The
Fertilizers segment produces three groups of nutrients, such as potash, phosphate and nitrogen.
The Other segment includes sales and expenses of other products, services and investments in
joint ventures and associate in other businesses. [19]
Vale is much larger than Cliffs, operates at higher margins and produces in more product
segments, but Vale is an international leader in mining iron ore, especially in China. Vale is a very
mature company and what Cliffs strives to be in the materials industry. [20]

2. Arcelor Mittal
ArcelorMittal is a global steel producer. During the year ended December 31, 2010,
ArcelorMittal had steel shipments of approximately 85 million tons and crude steel production of
approximately 90.6 million tons. ArcelorMittal produces a range of finished and semi-finished

products. ArcelorMittal produces flat products, including sheet and plate, long products, including
bars, rods and structural shapes, and stainless steel products.[19]
Arcelor Mittal is one of Cliffs biggest competitors in the iron ore mining industry but also a
partner in some sites. Arcelor is a vertically integrated steel producer and the third biggest miner
of iron ore in the United States and second largest in Canada. It has slimmer margins than Cliffs,
similar growth and a higher beta. [20]

3. U.S. Steel Corporation

United States Steel Corporation (U. S. Steel) is an integrated steel producer of flat-rolled and
tubular products with major production operations in North America and Europe. U. S. Steel has
annual raw steel production capability of 31.7 million net tons (tons) (24.3 million tons in North
America and 7.4 million tons in Europe). The company is also engaged in other business
activities consisting primarily of transportation services (railroad and barge operations) and real
estate operations. US Steel is the second largest iron miner in the United States and is a vertically
integrated steel producer. [19]
It has better EBITDA growth through 2013, primarily due to a terrible 2009 and 2010, but US
Steel has the worst margins of any comparable company. US Steel is the best pure play
competitor has it has the second highest production of iron in the US, while also being very
similar in size to Cliffs in comparison to the other companies. [20]

4. Peabody Energy Corporation

Peabody Energy Corporation is a coal company. The company owns majority interests in 28
coal-mining operations located in the United States and Australia. In addition to mining
operations, it markets, brokers and trades coal. [19]
Peabody Energy is one of the most similar coal companies to Cliffs. Peabody has similar margins,
EBITDA growth and beta to Cliffs, while also primarily operating in metallurgical coal mining.
[20]

5. BHP Billiton Limited

BHP Billiton Limited is a diversified natural resources company. The company operates nine
customer sector groups (CSGs): petroleum, aluminum, base metals (including uranium),
diamonds and specialty products, stainless steel materials, iron ore, manganese, metallurgical coal
and energy coal. BHP Billiton is one of the main three iron ore producers in the world and has
large inroads in the Chinese iron ore market.[19] They are what Cliffs strives to be. Despite its
large size, BHP has very similar growth, slightly lower beta and higher margins but some of the
lowest for the metals mining industry. [20]

6. Rio Tinto
Rio Tinto Plc (Rio Tinto) is an international business involved in each stage of metal and mineral
production. The company produces aluminum, copper, diamonds, coal, iron ore, uranium, gold
and industrial minerals. The companys businesses include open pit and underground mines,
mills, refineries and smelters, as well as a number of research and service facilities. [19]
Rio is another one of the main three international material producers along with Vale and BHP. It
is much larger than Cliffs but has smaller growth, slightly higher margins and a lower beta. [20]

Internal Audit
Value Chain Analysis

Source: http://www.riotinto.com/documents/From_mine_to_market_driving_business_value_from_sustainable_logistics.pdf

The internal value chain analysis strives to identify the activities in and around the organization that
combined create the companys product. The essence of value creation is explained by the underlying
business activities. This qualitative analysis examines the core competencies and competitive strengths
contribution to value for Cliffs.
Exploration and extraction and mining beneficiation [13]
Iron ore is a cyclical product globally, making prices quite volatile. Good quality deposits of iro ore of
material scale are not common and are majorly concentrated in countries like Brazil, Australia, West
Africa and South Africa (Northern Cape). There has been huge demand for imported iron ore in China
and the developed countries of Asia, the Middle East and Europe for quite some time but is soon
diminishing due to the global economic scenario. Given the geographic disparity between supply and
demand and the fact that iron ore is comparatively cheaper to transport than finished steel, there is a large
and strong market for seaborne iron ore. Transport costs are substantial and both operating and capital
costs that these bulk logistics systems like railways, ports, ships have are often higher than the mining and
mining beneficiation operating costs and investments. Exploration companies can have more than one
exploration license in various parts of the state and can be in different stages of exploration at the same
time, like an exploration company may be steering low impact activities on one exploration license and
drilling on another.
At every phase of the exploration process, exploration companies provide progress reports to their boards
and shareholders. They may also look to arrange for additional funding from the financial market to carry
out more exploration activities.
There is no specific timeline for each stage of the exploration cycle. If all steps are encouraging, the
market is positive and the shareholders continue to invest, it is probable a potential find may reach the

point of mining within six or seven years from discovery. That being said, the time needed from initial
discovery to a probable mine depends on various factors, making it very challenging to determine when,
or if, mining may begin. [2]

Source: http://www.gapso.com.br/wp-content/uploads/2013/04/SOP3_Producao_PelotasEng_ok.png

Developing Projects [13]

There are opportunities for investors to work with companies on more advanced exploration and
developing projects by forming joint venture partnerships or product agreements and contracts.
Mining operations [13]
Major operating mines mostly have already established agreements and term contracts to supply products.
However, supply and service companies are able to discover opportunities particularly with companies
that have the permission to mine but are still determining finances and their supply chain.
Processing [13]
Opportunities exist to work with significant on and off-site mineral refineries that import local and
interstate ore and scrap metal for processing.
Cliffs specializes in mining and beneficiation of iron ore. Its expertise in exploration of mines, their
development, the mining of iron-ore and its processing to pellets makes it one of the most trusted and
renowned names in the world of iron-ore mining. It has advanced processes and technologies to
efficiently mine iron-ore and process it. It adds value to the value-chain in these three steps.
Service and Supply [13]
There are also opportunities for investment in research and development and in service and supply chain
industries.

Financial Analysis
Income Statement
Period Ending
Total Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Research Development
Selling General and Administrative
Non Recurring
Others
Total Operating Expenses
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Income Before Tax
Income Tax Expense
Minority Interest
Net Income From Continuing Ops
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares

31-Dec-15
20,13,300
17,76,800
2,36,500
-

31-Dec-14
33,73,200
24,87,500
8,85,700
-

81,900
3,300
-

31-Dec-13
38,90,800
24,06,400
14,84,400
-

1,20,100
6,35,500
-

89,800
14,300
-

1,51,300

1,30,100

13,80,300

3,90,300
5,41,600
2,28,500
3,13,100
1,69,300
-900
1,43,700

26,900
1,57,000
1,76,700
-19,700
-86,000
10,87,400
56,400

-3,000
13,77,300
1,86,400
11,90,900
2,37,600
51,700
8,78,900

-8,92,100
-

-83,68,000
-

-7,49,300
-38,400
-7,87,700

-5,17,100
-

-72,24,200
-51,200
-72,75,400

4,13,500
-48,700
3,64,800

Source: Yahoo Finance

Balance Sheet
Period Ending
Assets
Current Assets
Cash And Cash Equivalents
Short Term Investments
Net Receivables
Inventory
Other Current Assets
Total Current Assets

31-Dec-15

31-Dec-14

31-Dec-13

2,85,200

2,71,300

3,35,500

2,12,300
4,40,000
45,200
9,82,700

3,40,700
3,78,700
4,34,600
14,25,300

3,44,100
6,07,400
2,73,000
15,60,000

Long Term Investments

Property Plant and Equipment
Goodwill
Intangible Assets
Accumulated Amortization
Other Assets
Deferred Long Term Asset Charges
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Other Liabilities
Deferred Long Term Liability Charges
Minority Interest
Negative Goodwill
Total Liabilities
Stockholders' Equity
Misc Stocks Options Warrants
Redeemable Preferred Stock
Preferred Stock
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholder Equity
Total Stockholder Equity
Net Tangible Assets

1,11,53,400
93,800
4,75,900
3,67,000
1,75,500
41,500
21,35,500
31,47,200 1,31,21,900
10,59,000

10,70,500

2,97,500

4,08,500

8,55,500
69,900
1,60,100
10,85,500
30,22,600
9,83,000
11,46,500
8,14,800

2,84,200
5,81,700
26,99,400
6,66,000

5,46,000
9,54,500
28,26,500
11,00,500
-

1,69,800
-

-3,03,000
-

41,16,900
-

45,78,500

7,51,100
-47,48,400
-2,65,000
22,98,900
-18,000
-19,81,400
-19,81,400

70,52,400
-

7,51,100
-39,60,700
-2,85,700
23,09,800
-2,45,800
-14,31,300
-14,31,300

7,51,100
34,07,300
-3,05,500
23,29,500
-1,12,900
60,69,500
60,69,500

Source: Yahoo Finance

Cash Flow
Period Ending:
Net Income

12/31/2015
($749,300)

12/31/2013
$413,500

12/31/2012
($899,400)

$134,000
$572,900

12/31/2014
($7,224,200
)
$504,000
$8,249,800

Depreciation
Net Income Adjustments
Changes in Operating Activities
Accounts Receivable
Changes in Inventories

$593,300
$131,000

$525,800
$1,516,300

$369,100
($62,000)

($82,800)
$37,800

$138,800
$30,800

($74,800)
$39,900

Other Operating Activities

Liabilities
Net Cash Flow-Operating
Cash Flows-Investing Activities
Capital Expenditures
Investments
Other Investing Activities
Net Cash Flows-Investing
Cash Flows-Financing Activities
Sale and Purchase of Stock
Net Borrowings
Other Financing Activities
Net Cash Flows-Financing
Effect of Exchange Rate
Net Cash Flow

$0
($227,700)
$37,900

$0
($38,300)
$358,900

$0
($109,800)
$1,145,900

$0
($366,100)
$514,500

($80,800)
($29,200)
$6,800
($103,200)

($284,100)
$155,000
$25,500
($103,600)

($861,600)
$0
$50,300
($811,300)

($1,127,500)
$152,600
$13,100
($961,800)

$100
$198,600
($45,900)
$61,000
($1,400)
($5,700)

($25,700)
($58,700)
($60,200)
($288,300)
($11,600)
($44,600)

$1,018,000
($1,010,300)
($52,000)
($171,900)
($22,400)
$140,300

$95,400
$372,200
($40,800)
$119,600
$1,300
($326,400)

Source: NASDAQ

Key Financial Ratios

Period Ending:
Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio
Profitability Ratios
Gross Margin
Operating Margin
Pre-Tax Margin
Profit Margin
Pre-Tax ROE
After Tax ROE

12/31/2015

12/31/2014

12/31/2013

12/31/2012

169%
93%
49%

149%
110%
28%

144%
88%
31%

119%
67%
14%

12%
8%
16%
37%
16%
38%

26%
4%
1%
214%
1%
505%

38%
35%
31%
11%
20%
7%

20%
5%
9%
15%
11%
19%

Source: NASDAQ

A quick analysis of the different ratios for Cliffs will lead us to the following:
Current Ratio A current ratio of 1.69 means it has good short-term financial strength, although
it is still lower than the industry median of 1.82.
Quick Ratio It has a quick ratio of 0.93 that is lower than the industry average of 1.37. It means
it is not in the state to fully pay back its current liabilities.
Cash Ratio It has a cash ratio of 0.49. It does not have sufficient liquidity to pay off its
liabilities.But most businesses do not want a cash ratio of 1.00 or above i.e. at same level as
current liabilities as a portion of the idle cash can be used for profit generation.
Gross Margin The gross margin being pretty low at 12% indicates that there is no sustainable
competitive advantage. The gross profit needs to be big enough to cover related costs of labour,

equipment, rental, marketing/advertising, research and development etc.

Net Margin Net Margin is a good indicator of the competitiveness and health of a firm. But it
is not very reliable. Compared to the industry average of -0.66, Cliffs has a net margin of -37.22.
Operating Margin In the same industry, a company with higher operating margin is more
operationally efficient. It is also more stable in times of industry slowdown or recessions. Cliffs
has a far better operating margin than the industry average, thus showing it is more efficient than
most of its competitors.

Cliffs current Altman-Z Score is -1.39. The Z-score is given by:

Z = 1.2*x1 + 1.4*x2 + 3.3*x3 + 0.6*x4 + 1.0*x5
Where x1 = Working Capital, x2 = Retained Earnings/Total Assets, x3 = EBIT/Total Assets, x4 = Market
value of Equity/Total Liabilities and x5 = Revenue/Total Assets.
To give a proper perspective to this, the zones of discrimination are as such:
When Z-Score is less than 1.81, it is in Distress Zone.
When Z-Score is greater than 2.99, it is in Safe Zone.
When Z-Score is between 1.81 and 2.99, it is in Grey Zone.
This does not bode well for Cliffs and it needs to take immediate measures to improve its Z-score. It has
been historically been in the Distress Zone mostly but with the current global scenario, it has reached an
all-time low.

TOWS Matrix
TOWS MATRIX FOR
CLIFFS NATURAL
RESOURCES

Strengths S

Opportunities O

Mergers with South African

and west African Iron Ore
companies
Emerging markets in
developing countries give
Cliffs the scope to acquire
large market share by
lowering prices and upset
established players.
Acquisition of Consolidated
Thompson can provide
Cliffs with large reserves of
ore and superior leverage
and penetration in China

Huge market share in the

industry
Largest iron ore producer in
North America through
Consolidated Thompson
acquisition in Canada
Sales more focused on Asia
as of now
Supply chain is mature and
well-developed
Good brand value
Known for operational
efficiency

Weaknesses W

Not as diversified
as some others
players in the
industry
Not ventured into
emerging
economies for
business
Weakening
financial position

SO Strategies

WO Strategies

Leverage brand value and market

share to merge with South African
companies and increase presence in
the African continent

Venture to China for

business and keep prices
low

Threats T

Global economic
conditions uncertain and
weak
Reduced demand in China
due to devaluation of Yuan
Strict and unfavourable
government regulations
and policies

ST Strategies

WT Strategies

Utilize the knowledge and maturity

of supply chain and strong
operational efficiency to venture into
countries with low demand. Once
economic condition improves, it will
bear huge rewards

Single-minded focus on
US market

Recommendations
For any iron ore mining and beneficiation company, there is potential to significantly grow if there is
appropriate support from the government (e.g. regulatory, energy, transport and water). This would
generate several jobs, materially add to the national fund and deliver significant growth momentum to the
local economies. The demand for iron ore is driven by international steel production and not by domestic
consumption. It will also be important to invest significantly in VIU research (chemical balancing of iron
ores to increase productivity of steel mills) to guarantee this sizeable volume of iron ore can be used
effectively by domestic steel manufacturers. Investments can be made in beneficiation plants too, which
Cliffs already does.[2]
Profitable pricing Profitability of iron ore mining still depends primarily on steel prices. Despite the
current pressures, this powerful metric can still be used to a companys advantage and that too faster
than the other major elements of operational excellence. Companies need to strengthen strategic pricing in
two main ways: by setting and enforcing prices that will provide healthy conditions and by closing the
leaks where prices do not reflect the true value-in-use of products and contracts for the customer. In the
current climate and for the conceivable future, continuing steel prices to preserve or restore profitable
margins should generally always take priority over market share growth.
T Operations effectiveness Comparisons of leaders and followers reveal that room for improvement
continues to exist for most companies. Outpacing competitors will take more than just productivity
improvement, such as labor productivity or cost cutting on supplies. It will be essential to leverage the
assets and better utilize those assets by improving equipment effectiveness. Stepping up productivity thus
indicates site and cross-site optimization, including closing uncompetitive orunused assets, which Cliffs
has done in its case. It shall close down its West Australia operations too once the mines become useless.
In the end, the objective has to be to maximize throughput per unit of capital and labour. For this,
removing bottlenecks has to be considered very important. Cliffs has to reduce the occurrence and
duration of breakdowns and optimize maintenance schedules. The IT and HR systems have to be
streamlined to reduce labour content and enhance overall effectiveness. [18]
Product innovation Changing customer requirements are fueling demand for steel with properties that
can cope with increasingly severe applications, most notably for lighter-weight vehicles and more robust
offshore equipment. As in the past, many steel companies in developed countries can succeed by focusing
on the high-value products with higher margins than for commodity steel. To do so, however, it is no
longer enough to invest in top-notch technical research and innovation. Steel makers need to
communicate more effectively with customers about new products, and both development and marketing
must be backed by more sophisticated market coverage.
T Technological process innovation Product innovation will remain important, but the highest attention
now should be paid to making steel processing more efficient. This is a major savings parameter, and
across the global steel industry, the potential to cut energy consumption, for example, exceeds 12%. [18]
Cliffs is quite good at operational efficiency and needs to continuously maintain that. In the long term, it
will be crucial to produce steel at much lower CO levels.

SPACE Matrix Analysis

There are four dimensions to be considered here:

Two Internal dimensions (financial strength [FS] and competitive advantage [CA])
Two External dimensions (environmental stability [ES] and industry attractiveness [IA])
Financial Strength
(FS)
Return on Investment
4
Liquidity 2

Competitive
Advantage (CA)
Market Share -4

Industry Attractiveness
(IA)
Profit Potential 3

Product quality -5

Environmental
Stability (ES)
Technological Changes5
Rate of Inflation -3

Working Capital
2
Cash Flow 2

Product life cycle -5

Demand Variability -2

Growth Potential 2

Customer loyalty -3

Resource Utilization 6

Inventory Turnover5

Capacity utilization -4

Price range of
competing products-5
Barriers to Entry -5

Earnings Per Share 1

Technological knowhow -6
Control over suppliers
and distributors -3

Competitive Pressure -2
Ease of exit from
market -4

Financial Stability 4

Ease of entry into market

5
Productivity/capacity
utilization 4

Average FS =2.7

Average CA =-4.3

Average ES = -3.7

Average IA = 4

Given the scores obtained from SPACE matrix, we find that Cliffs currently lies in the Defensive
quadrant.
Now we know a firm in the Defensive quadrant has all or most of its aspects performing poorly. Firms
in this position are weak and failing and their situation can be improved only by improvement in the
external environment. Such firms have to retreat from all businesses except the ones they are the strongest
at, as all the resources have to be concentrated for a turnaround in the fortunes of the company. Cliffs is
doing precisely that. It had one of the strongest financial positions in the mining industry but it is
weakening due to the global economic scenario. It has moved out of the coal business and shut down
most of its overseas mines to focus solely on its U.S. iron ore business.

Conclusion
T Throughout this report, we have analyzed the various aspects of Cliffs Natural Resources and tried to
decipher its current situation in the global scenario. Once the company with the strongest financial
condition, its situation is worsening due to the global economic conditions. The different aspects gave us
a holistic vision of where the company stands now and based on that, we tried to figure out its future path.
Over the past few years, natural resources/mining companies the world over have seen the costs rise and
the productivity fall, as they strived hard to meet the ever-increasing global demand for iron ore. But the
demand is no longer what it was. If these companies still stick to their previous cost structures, it will be
difficult for them to sustain themselves in this period of falling prices. We saw how Cliffs had generated
huge returns a couple of years back and made its way to Fortune 500 but now it is suffering from the
after-effects of that boom. Now in all likelihood, the price pressure will continue for some time now
owing to the global economic conditions i.e. the slowing growth in China, recession in Europe etc. There
is also competition from mines of emerging economies like Indonesia and Mongolia. In such a market, we
cannot have growth strategies based on rising prices. The unjustifiable cost structures will continue to
suppress profits. Of late, Cliffs has been marked by low productivity and high costs. This will only
magnify the impact of the falling prices. Thus we came to the recommendations where we saw how Cliffs
can alter the cost structure of the company to reduce costs. It has already exited its coal business and shut
down its operations in other countries except West Australia. The idea is to wait till the external
environment improves. The focus is only on the U.S. iron ore business, as of now. Commodity prices are
too high at present to consider new investments or continue in businesses where the core competency of
Cliffs does not lie. Going forward, Cliffs has to decide what differentiates it from its competitors, given
all are facing the adverse effects of the fall in global demand. Profitability can be augmented by
developing low-cost deposits and use of technology to further reduce the extraction costs. With decades
of experience in iron-ore mining, Cliffs can leverage its technological prowess and operational efficiency
to drive down costs. Process efficiency and supply chain optimization are very important for Cliffs
future. More importantly, project rationalization is of utmost importance. Our analysis has shown it very
clearly that Cliffs needs to release cash flow and focus on its core business. It has to eliminate or
consolidate redundant projects and non-performing lines of business.

References
[1] http://www.cliffsnaturalresources.com
[2] http://www.angloamericankumba.com/~/media/Files/A/Anglo-American-Kumba/investorpresentation/iron-steel-2final.pdf
[3] http://www.isc.hbs.edu/resources/courses/moc-course-at-harvard/Documents/pdf/studentprojects/South%20Africa_Iron%20Ore_2013.pdf
[4] Paradie, Terrance M. (February 25, 2015). Form 10-K (Annual Report) Filed 02/25/15 for the Period
Ending 12/31/14 (PDF) (Report). Cliffs Natural Resources.
[5] http://www.startribune.com/taconite-maker-cliffs-natural-resources-lost-58-million-in-4q/366710901/
[6] http://www.forbes.com/sites/greatspeculations/2015/12/23/cliffs-exits-coal-mining-business-as-partof-larger-u-s-iron-ore-focused-strategy/#166cca204fe7
[7] http://www.forbes.com/sites/greatspeculations/2015/09/14/cliffs-completes-bond-buyback-as-part-ofongoing-measures-to-tackle-challenging-business-conditions/#3b5189726d9e
[8] http://seekingalpha.com/article/3882996-long-term-bullish-cliffs-natural-resources
[9] https://www.glassdoor.com/Reviews/Employee-Review-Cliffs-Natural-Resources-RVW3036829.htm
[10] http://www.forbes.com/sites/greatspeculations/2014/04/11/an-overview-of-cliffs-north-americaniron-ore-business/#27acf1e65fb5
[11] http://www.mining.com/us-midwest-poised-for-a-copper-and-iron-ore-mining-rebirth-77098/
[12] https://www.mbendi.com/indy/ming/iron/am/p0005.htm
[13] http://minerals.statedevelopment.sa.gov.au/invest/minerals_industry_value_chain
[14] http://www.symantaka.com/entry-and-exit-barriers/
[15] http://www.smh.com.au/business/mining/bhp-inches-ahead-of-rio-in-game-of-cents-20150906gjg4yl.html
[16] "Cleveland-Cliffs Inc". Encyclopedia of Cleveland History. Case Western Reserve University.
[17] "Cleveland Cliffs Iron Company: GLMS 62". Historical Collections of the Great Lakes. Bowling
Green State University Library. Archived from the original on December 11, 2011.
[18] http://www.strategyand.pwc.com/media/file/Strategyand_Profits-in-a-Slowdown.pdf
[19] http://in.reuters.com/finance/

[20] http://uoinvestmentgroup.org/wp-content/uploads/2011/05/Final-CLF.pdf