Cliffs Natural Resources to take $6 billion charge

Cliffs Natural Resources Inc., a major operator of iron ore mines in Minnesota, said it would write down the value of its coal and iron ore assets by $6 billion due to weak prices, putting it in breach of debt covenants and sending its shares down around 7 percent.

Cliffs said the non-cash charge would increase its debt-to-capital ratio over the 45 percent threshold set by its credit facility, and it was working with bankers to amend the covenant.

"... We believe this will result in higher interest rate on revolver borrowings going forward," FBR Capital Markets analysts wrote in a note.

Cliffs said the third-quarter charge was related to iron ore for export and coal used in steel-making.

The company's shares hit a low of $8.77 before recovering a little to $8.91. They have more than halved this year.

Cliffs Natural replaced its chief executive in July and said it would sell underperforming assets after New York-based fund Casablanca Capital triumphed in a proxy battl
"It essentially confirms ... that the vast bulk of the company's investments in the last decade prior to the appointment of new CEO Lourenco Goncalves was misspent," BMO Capital Markets analyst Tony Robson wrote in a note.

Cleveland-based Cliffs Natural employs about 1,850 people with a payroll of $256 million at mines in Silver Bay, Babbitt, Eveleth, Forbes and Hibbing. It has said it has no plans to cut workers at the mines.

Iron ore prices sank to a five-year low last month as output from Australia and Brazil continues to rise even as top Consumer China imports less.

Cliffs Natural said the charge was related to iron ore for export and coal used in steel-making.

The company said in May it expects seaborne iron ore and metallurgical coal prices to remain weak in the near term, which would reduce revenue in most of its businesses.

FBR Capital Markets said it believed the biggest contributor to the writedown would be the Eastern Canadian iron ore business, including its Bloom Lake iron ore mine in Quebec.
Cliffs said in February it could idle, sell or work out a deal with a strategic partner at Bloom Lake.
It bought Bloom Lake as part of its takeover of Consolidated Thompson Iron Mines Ltd in 2010 but higher-than-expected costs at the mine have weighed on Cliffs' earnings.
Cliffs delayed expansion of the mine in 2012 and took a $1 billion goodwill writedown related to the deal.

The company said on Friday the charge would increase its debt-to-capitalization ratio over the 45 percent threshold set by its revolving credit facility, and it was working with its banking group to amend the covenant.

Cliffs Natural, due to report quarterly results on Oct. 27, is expected to post a quarterly loss of 1 cent per share on revenue of $1.29 billion, according to Thomson Reuters I/B/E/S.

The company said the charge would not impact its cash flows from operations or any future operations.

The company said it had no drawings on its $1.25 billion revolving credit facility as of Sept. 30 and expects to have closed the third quarter with about $250 million of cash on hand.