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Weekly Metals And Mining Notes: U.S. Steel, Silver Wheaton And Cliffs Natural Resources

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The metals and mining space witnessed a flurry of activity this week. U.S. Steel announced plans to idle two facilities producing tubular steels, in response to a fall in oil prices. Silver Wheaton announced changes to two of its existing silver streaming agreements, in response to changing business conditions. Lastly, Cliffs Natural Resources is engaged in talks with the Government of Quebec about the possibility of restarting its Bloom Lake mining operations. Here are the major events of the week for companies that Trefis covers in the metals and mining space.

U.S. Steel

U.S. Steel (NYSE:X) announced plans to idle two plants producing tubular steel due to the recent downturn in oil prices. [1] The company will idle its plants in Lorain, Ohio and Houston, Texas. These plants are a part of the company’s Tubular Products division, which produces and sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe, and mechanical tubing. These goods are primarily sold to customers in the oil, gas, and petrochemical markets. [2] The downturn in oil prices has negatively impacted the prospects of the Tubular Products segment. Crude oil prices have witnessed a significant decline in recent times. West Texas Intermediate (WTI) crude oil spot prices stood at levels of around $53 per barrel at the end of December, around 50% lower  compared to their values in June of last year. [3] U.S. Steel has decided to idle two of its tubular steel plants as it faces weak demand for its products.

We have a $25 price estimate for U.S. Steel, which is nearly at par with the market price. We estimate revenues of $17.9 billion in 2014 for the company and an EPS of $3.22, as compared to a consensus estimate of $3.46.

Silver Wheaton

Silver Wheaton (NYSE:SLW) announced an amendment to its silver streaming agreement with Barrick Gold (NYSE:ABX) and the termination of its streaming agreement with Nyrstar Mining Ltd (EBR:NYR). [4]

The amendment to the agreement with Barrick Gold is primarily due to the issues pertaining to Barrick’s stalled Pascua-Lama gold and silver project. Barrick had announced the temporary suspension of construction activities at the Pascua-Lama project in 2013. [5] As per the previous amendment to the agreement in October 2013, Barrick was expected to complete construction at the Pascua-Lama mine to at least 75% of design capacity by the end of 2017. [4] Silver Wheaton was entitled to silver production from the Lagunas Norte, Pierina, and Veladero mines to the extent of any production shortfall at Pascua-Lama, until the end of 2016.[4] As part of the revised agreement, Silver Wheaton is entitled to production from Barrick’s other mines until March 31, 2018. [4] In return, Silver Wheaton has extended the completion test deadline for Barrick to June 30, 2020. [4]

In addition, Silver Wheaton also reached a settlement with Nyrstar Mining for the termination of its streaming agreement for the Campo Morado mine. Silver Wheaton will be entitled to 75% of the silver produced at the Campo Morado mine on or before December 31, 2014, as per the terms of its streaming agreement. [4] As per the terms of the settlement, Silver Wheaton will receive $25 million from Nyrstar before January 31, 2015. [6]The company will also be granted a five-year right of first refusal on any silver streaming or royalty transaction in relation to any Nyrstar group property, globally. [4] The termination of the streaming agreement was primarily due to a continuous reduction of ore grades at the Campo Morado mine. As a result of lower expected future production from the Campo Morado mine, Silver  Wheaton recorded an impairment charge of $31.1 million in Q3 2014 pertaining to its streaming agreement for the mine . [7] The company estimates the value of the recoverable silver under its streaming agreement with Nyrstar at $25 million, which is the payment due to Silver Wheaton under the terms of the settlement.

We have a $21 price estimate for Silver Wheaton, which is nearly at par with the market price. We estimate revenues of $676 million in 2014 for the company and an EPS of $0.84, as compared to a consensus estimate of $0.78.

Cliffs Natural Resources

The Government of Quebec is in talks with Cliffs Natural Resources (NYSE:CLF) about the possibility of restarting operations at the Bloom Lake mine, which is located in the province. [8] Cliffs ceased mining operations at the loss-making Bloom Lake mine at the end of December. [9]  The decision to cease operations at Bloom Lake was a part of the company’s ongoing response to poor market conditions for iron ore.

Cliffs’ management had stated last year that Phase I mining operations at Bloom Lake are not economically viable. [10] In order to reduce average costs of production and make mining operations viable, Cliffs needs to undertake Phase II expansion of its Bloom Lake mine. [11] However, the capital expenditure requirements for Phase II expansion at Bloom Lake amount to approximately $1.2 billion. [10] Given that poor market conditions for iron ore are likely to persist for the next couple of years, we feel that Cliffs should not resume Phase I mining operations at Bloom Lake. A restart of mining operations at Bloom Lake should be contingent upon finding equity investors for the mine, in order to reduce the company’s capital expenditure outlay for Phase II expansion.

We have a $8 price estimate for Cliffs Natural Resources, which is around 12% higher than the market price. We estimate revenues of $4.3 billion in 2014 for the company and an EPS of $0.20, as compared to a consensus estimate of $0.13.


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