04/11/2014 – Cliffs Natural Resources: What If Bloom Lake Is Worth More Than Nothing

Heading into 3Q14 earnings, expectations for the potential value Cliffs could secure from Bloom Lake were negative given its high cost and burdensome rail take-or-pay contracts. However, as noted in our post-earnings report, management stated the Canadian subsidiary (which holds Bloom Lake) could be put into bankruptcy without any recourse to Cliffs. This effectively reset the Bloom Lake value to near zero with a positive upside should a JV be finalized to develop Phase II and take the increased production. A report in the Wall Street Journal refocused sentiment on the potential upside, naming Nucor and two Japanese steel mills as the potential partners in Phase II.

The company is approaching the one year anniversary of the initial startup for the largest single [direct-reduced iron, or] DRI module in the world located in Louisiana. With deep water access and infrastructure to add a second module, Nucor’s interest in building Phase II centres on the possibility of securing a captive source of iron ore for its DRI capacity along with its fully integrated feed. While Bloom Lake has premium Fe content required to make DRI pellets, it does not have a pellet plant and in the past struggled to balance silica content with production volume and costs. In our view, Nucor’s ultimate desire to participate in a Bloom Lake JV is likely contingent on securing low silica (~2%), DRI grade iron ore but would also require the investment to build a pellet plant.

Source – Barrons.com