Cliffs Natural Resources Inc.’s CLF Corporate Family Rating (CFR) and Probability of Default Rating were downgraded to B1 and B1-PD from Ba3 and Ba3-PD, respectively, by Moody's Investors Service. Moody's also downgraded the ratings on Cliffs' senior unsecured notes and senior unsecured shelf to B3 and (P) B3 from B1 and (P) B1, respectively.

Moreover, Moody’s assigned a Ba2 rating to the $500 million First Lien senior secured notes due 2020 and a B1 rating to the up to $1.25 billion Second Lien Senior secured notes due 2020. The speculative liquidity rating was raised by the rating agency to SGL-2 from SGL-3.

The CFR downgrade reflects expectations of weaker performance in Cliffs’ Asia Pacific Iron Ore (APIO) segment, which has a greater exposure to iron ore price swings in the seaborne market.

Weak steel production in China along with the demand and supply imbalance will keep the seaborne prices at low levels, thereby affecting performance. Further, higher supply of low cost iron ore from Australia and Brazil is expected to result in a low price environment in the seaborne market through next year. Even though the depreciation of the Australian dollar will favorably impact the cost position of the APIO segment, it will not be enough to offset the level of price impairment.

The rating also takes into account the increased liquidity provided by the refinancing undertaken by Cliffs. Cash is expected to increase to about $790 million from $291 million on Dec 31, 2014 from the issuance of the first lien notes and the second lien exchange notes. Following the execution of the $550 million asset backed credit facility (ABL), liquidity is expected to be in the band of $1.3 billion. While drawings under the ABL are expected due to seasonality in shipments, the company is expected to be free cash flow to break even or be modestly positive in 2015.

The downgrade of the senior unsecured notes reflect their weaker position in the capital structure under Moody's Loss Given Default Methodology following the issue of the first and second lien notes as well as the ABL facility.

The stable outlook is supported by the rating agency’s expectations that the company will be able to generate earnings before interest, tax, depreciation and amortization (EBITDA) in the range of $550 to $600 million, be at least free cash flow breakeven and retain solid liquidity boosted by a strong cash position.

Cliffs reported fourth-quarter 2014 net loss of $1.3 billion, or $8.25 per share, as against net income of $30.5 million or 20 cents per share in the year-ago quarter. The bottom line was hit by asset impairment charges, a major part of which are related to the Eastern Canadian Iron Ore unit due to the earlier announced exit of these operations.

Excluding impairment charges and other items totaling $1.4 billion, adjusted earnings came in at $1.00 per share, outpacing the Zacks Consensus Estimate of 15 cents.

Sales for the quarter came in at $1,284.7 million, down 15.2% from $1,515.8 million in the prior-year quarter. Sales, however, exceeded the Zacks Consensus Estimate of $1,251 million. The decline was due to lower revenues from the APIO and Eastern Canadian Iron Ore segments.
Cliffs is a Zacks Rank #2 (Buy) stock.

Other mining companies with favorable Zacks Rank include Newmont Mining Corp. NEM, Lake Shore Gold Corp. LSG and Pretium Resources Inc. PVG. All of these stocks hold a Zacks Rank #2 (Buy).