Cliffs to Supply Iron Ore to ArcelorMittal for 10 Years

Cliffs Natural Resources Inc. CLF has announced a 10-year iron ore pellet supply agreement with ArcelorMittal USA LLC, part of ArcelorMittal MT. The contract ensures that Cliffs will remain ArcelorMittal USA’s sole outside iron ore pellet supplier until 2026. This will also replace existing agreements expiring in Dec 2016 and Jan 2017.

The new contract has raised the minimum pellet supply tonnage to 7 million long tons, higher than the combined minimum level of the previous two contracts, and allows Cliffs to supply up to 10 million long tons.

Cliffs is among the world’s lowest-cost producers of iron ore, manufacturing customized pellets that are fed directly into customers’ blast furnaces. Currently, the industry is facing a huge problem of oversupply. However, Cliffs’ concentration on its core business in the U.S. and long-term contracts with customers helps it stabilize its revenue model.

The new contract between Cliffs and ArcelorMittal USA highlights both the companies’ desire to work in a more stable and sustainable environment. The mutually beneficial agreement reinforces a strong business relation between the two companies. The pricing of the supplied pellets will be adjusted by the U.S. domestic market and general inflation indices. Cliffs expects the price of iron ore pellets to increase in 2017, leading to an improvement in revenues per ton for its U.S. Iron Ore business next year compared to the current projections for 2016.

The supplied iron ore will meet the entire requirement at ArcelorMittal’s Indiana Harbor West and Cleveland Works steelmaking facilities, while continuing the current level of pellet supply to ArcelorMittal's Indiana Harbor East facility.

Cliffs recorded earnings of 62 cents per share in first-quarter 2016 as against a net loss of $4.26 per share recorded a year ago. Adjusted loss was reported to be 7 cents a share for the first quarter, narrower than the Zacks Consensus Estimate of a loss of 29 cents.

Sales for the quarter fell 32% year over year to $305.5 million but beat the Zacks Consensus Estimate of $300 million. The company’s U.S. Iron Ore segment saw a 9.5% decline in revenue per ton in the quarter. Sales volume also declined 34.5% to 1.9 million long tons due to termination of customer contracts as well as weaker demand in the U.S. market.

However, the company lowered its cost of production per ton by 26.3% to $47.88 in the reported quarter. To further lower its costs, Cliffs recently entered into multiple contracts with Minnesota Power, a utility division of ALLETE Inc. ALE, to purchase power in the long term.

Shares of Cliffs surged around 41% in the trading session on Tuesday, closing the day around 39% higher at $4.28.

Cliffs currently sports a Zacks Rank #1 (Strong Buy).

Another well-ranked company in the mining space is Southern Copper Corp. SCCO, also sporting a Zacks Rank #1.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>