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(B)(N) CLF Cliffs Natural Resources Incorporated

April 17, 2013

Drama. The “Ring of Fire” is a nearly inaccessible, water-logged, and unforgiving terrain between Thunder Bay and James Bay in Northern Ontario (please see Exhibit 2 below) and it is said to contain vast resources of nickel and copper, some gold and platinum, and a massive deposit of the mineral chromite which is refined into ferrochrome and used to make stainless steel. Cliffs Natural Resources is betting over $3 billion, which is the current “market value” of the firm, that it can get in there to mine those resources, and it is planning to build a new smelter in Sudbury, Ontario, and a “road” between there and, well, you know where.

The question is, How can we, as “risk averse” investors – we want our money to be safe and to obtain a hopeful return above the rate of inflation –  regardless of our age and time horizons, invest in a “dream”? For example, the stock of Cliffs Natural Resources is $17 today, down from $90 two years ago (please see Exhibit 1 below), and it has an estimated downside due to ambient volatility of as much as minus (-$13), a trigger that anxious investors could pull, especially if they are buying on “margin”  (Reuters, April 16, 2013, Analysis: Miner Cliffs woes could douse hopes for Canada’s Ring of Fire).

On the other hand, Cliffs is expecting to pay a quarterly dividend of $0.15 per share, or $96 million per year on its 160 million shares outstanding, for a current yield of 3.4%, which certainly beats inflation. Moreover, the July put at $17 can be bought today for $2.27 and an offsetting sold or short call at $18 on our long position can be sold for $1.88, so that for a net cost of $17 for the stock and $0.39 per share ($2.27 less $1.88) for the “collar”, we can expect no less than $17 and no more than $18 for the next several months, and collect our dividends while we wait for more information to become available, and pray that our “dream” comes true.

Exhibit 1: (B)(N) CLF Cliffs Natural Resources Incorporated – Risk Price Chart

(B)(N) CLF Cliffs Natural Resources Incorporated - April 2013

Cliffs Natural Resources Incorporated is a mining & natural resources company, based in Cleveland, Ohio, producing iron ore pellets, fines and lump ore, and metallurgical coal.

(Please Click on the Chart to make it larger if required.)

It is a major player in that market and the company has total assets of $13.6 billion and a shareholders equity of $4.6 billion, somewhat offsetting its current and uncertain market value of $3 billion.

Exhibit 2: Ontario’s “Ring of Fire” – Courtesy of Ontario Nature


Marten Falls is the nearest town on the road to Sudbury which is 10 hours and 420 miles to the southwest, through Timmins, Ontario. For more on the prospects and excitement of mining in Ontario, please visit the website and journal of The Republic of Mining.

(Please Click on the Chart to make it larger, and again, if required.)

And for more on the “price of risk” and the travails of investors, please see our recent Post, What’s A Girl To Do, April 2013, and other references therein.


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