Cliffs Natural Resources Inc (CLF), Walter Energy, Inc. (WLT): This Iron Ore Company Is A Buy

Valuation

Cliffs Natural Resources Inc (NYSE:CLF) has ended the quarter with $263.3 million of cash on hand. The company has paid down $110 million in debt from the revolving credit facility during the quarter. Cliffs is still highly leveraged with $3.3 billion of debt and a high 0.49 debt-to-equity ratio. In comparison, the diversified miner Rio Tinto plc (ADR) (NYSE:RIO) has a 0.46 debt-to-equity ratio. Walter Energy, Inc. (NYSE:WLT)’s results on this front are truly scary with a 2.76 debt-to-equity ratio.

Cliffs is attractively priced, trading at 12.63 its forward price-to-earnings ratio and 0.59 price-to-book. Rio Tinto plc (ADR) (NYSE:RIO) is trading at 8.15 its forward price-to-earnings ratio and 1.79 price-to-book. Despite the collapse of its shares this year, Walter Energy, Inc. (NYSE:WLT)’s 0.74 price-to-book ratio is higher than Cliffs’. No profit is expected from Walter Energy in the next two years.

Bottom line

Cliffs is a stable resource company that trades at attractive prices. The company has shown good dynamics and displayed its ability to stay profitable at current iron ore and met coal prices. Cliffs is dependent on the steel industry, as iron ore and met coal are two most important resources for production of steel. Once the steel industry rebounds, Cliffs is extremely well positioned to profit from it. In addition, the stock currently yields 3%.

Rio Tinto plc (ADR) (NYSE:RIO) is a dividend play that yields 4.03%. The company has a heavy exposure to iron ore. Rio Tinto continues to expand its capacity. All it needs now is the rebound in the prices. Once it comes, the company would be ready to extract money from it. Analysts’ mean target price suggests a 45% upside for the stock, and I believe this is possible in the longer term.

Walter Energy, Inc. (NYSE:WLT) could be facing liquidity issues. We will see whether this is true when the company issues its second quarter report at the beginning of August. Until then, I would not recommend taking any position in the stock, either long or short.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article This Iron Ore Company Is A Buy originally appeared on Fool.com is written by Vladimir Zernov.

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