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Cliffs Natural Resources to Record $1 Billion Charge in Fourth Quarter


The charge is related to the acquisition of Consolidated Thompson Iron Mines.


Cliffs Natural Resources Inc. (NYSE:CLF) announced that it will incur a $1 billion charge in the fourth quarter of 2012 related to the acquisition of Consolidated Thompson Iron Mines Ltd. It will be recorded as a goodwill impairment charge and as a non-cash expense for the year ended December 31, 2012.

Cliffs expects to incur the charge due to the project's lower long-term volumes and higher capital and operating costs. Delay in the Phase II expansion of the Bloom Lake mine also led to the impairment. Cliffs also expects to incur $100 million to $150 million in other charges related to its Eastern Canadian iron ore business.

Cliffs also stated that it will record $542 million in valuation allowances in the fourth quarter related to two deferred tax assets. The allowances are based on lower long-term pricing assumptions and the related effects on profitability and expected future tax payments.

Few days ago, it was announced that Cliffs, along with Anglo American Plc. (PINK:AAUKY), is set to divest their Amapa iron ore operation in Brazil to a single entity. Ohio-based Cliffs stated that the value of Amapa will be adjusted to reflect the fair value of its investment. Cliffs holds a 30% stake in the Amapa mine while the rest is owned by Anglo American. Cliffs expects to incur a non-cash pre-tax impairment charge of around $365 million related to the divestiture in the fourth quarter.

Similar to Cliffs, another steel maker ArcelorMittal (NYSE:MT) is set to record a goodwill write-down of $4.3 billion for its European businesses in the fourth quarter of 2012. The charge is in accordance with the results of its goodwill impairment test as per the IFRS accounting standards. The write-down will be in the form of a non-cash impairment charge.

Cliffs released its third-quarter 2012 results in October 2012. The company posted earnings of $.59 per share in the quarter, down 85.8% from $4.15 reported in the year-ago quarter. Declining iron ore prices and higher costs led to the slump in earnings. Earnings from continuing operation came in at $.61 per share in the quarter. By that measure, it largely missed the Zacks Consensus Estimate of $1.05.

Sales for the quarter came in at $1,544.9 million, down 26% from $2,089.1 million in the prior-year quarter, missing the Zacks Consensus Estimate of $1,742 million. The decline in revenues resulted from a 36% year-over-year drop in seaborne iron ore pricing and higher labor, mining and maintenance costs.

Cliffs is slated to release its fourth-quarter 2012 results on February 13. Currently, it retains a Zacks Rank No. 3 (Hold). Another company in the iron mining industry, Kumba Iron Ore Ltd. (PINK:KIROY), carries a Zacks Rank No. 1 (Strong Buy).

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