1 Coal Miner That's not Falling off a Cliff

The world's top value investors love it when their best stock ideas are selling at bargain-basement prices. For those rarified investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy one, get one" sale on their stocks.

Coal and iron ore miner Cliffs Natural Resources (NYS: CLF) has been taken down along with the rest of the coal sector as fears of an industry in decline weigh heavily on its performance. While you'll naturally want to do more due diligence before buying in, this still might be an opportunity to pick up a quality stock at a severe discount.

Cliffs Natural Resources snapshot

Market Cap $5.5 billion
Revenues (TTM) $6.7 billion
1-Year Stock Return (32.8%)
Return on Investment 13.7%
Dividend and Yield $2.50/6.5%
Estimated 5-Year EPS Growth 7.0%
52-Week High $76.73
Recent Price $38.36
CAPS Rating ****

Source: FinViz.com

Let's just make sure there's nothing more seriously wrong with it before you go and plug it into your portfolio.

A dirty word
Environmental regulation may be taking a toll on coal miners by causing utilities to shut coal-fired plants, but the real threat these days has been dramatically lower costs for natural gas. Patriot Coal's bankruptcy fed the fires of doubt about the industry's precarious condition, leading some to question whether James River Coal or Thompson Creek Metals (NYS: TC) even can withstand the greater risk.

Fortunately with only one thermal coal mine, Cliffs has less exposure to the energy side of coal than to the steel markets. It's the largest producer of iron ore pellets in North America, operating five met-coal mines and five iron ore mines in Michigan and Minnesota, with two more in Canada that provide iron ore for the Asia-Pacific region through the seaborne trade. It also has an interest in an iron ore mine in Brazil.

The Orient Express
The U.S. is Cliffs' largest market, but the Asia-Pacific region -- primarily China and Japan -- comprises nearly as much of its business. Japan's largest steelmaker Nippon Steel just joined with Sumitomo Metal to form the world's second-biggest steelmaker behind ArcelorMittal (NYS: MT) . The new company looks to expand in China and India, and wants to boost its annual output to as much as 70-million metric tons over the next decade.

Yet the economic slowdown in China could be as much of a concern for met-coal miners as the natural gas boom is for their thermal coal brethren. This is why when China announced its intention to boost infrastructure spending a few weeks ago the coal industry got a big bounce.

Word is bond
Whatever the risks to coal miners, though, I see that the pessimism is already more than priced into their stock valuations. I think Cliffs 50% decline from its 52-week high is overblown. It has the financial resources available to it to weather the storm and doesn't have the same debt profile as many of its counterparts. Many of the analysts' worries over James River, for instance, is due in large part to the debt that is coming due (and even then it's a few years away), Cliffs' debt maturities don't start until around 2020. Compare that to Arch Coal (NYS: ACI) whose debt starts coming due next year, or Alpha Natural Resources (NYS: ANR) , whose debt is due the year after.

At less than seven times earnings estimates, I find Cliffs represents a deep (and unfair) discount to its real value, which is why I've rated it to outperform the broad market indexes on Motley Fool CAPS, the 180,000 member-driven investor community. By doing so I hold myself accountable to readers for the CAPScalls I make here, and though that late-July rating has yet to pay off -- the stock has fallen nearly 17% compared to the S&P 500 rising more than 6% -- I continue to believe the market will soon understand the differences between the various miners.

Let me know in the comments section below if you think Cliffs Natural Resources has been unfairly lumped in with some of its riskier peers and will soon breakout from its current decline.

Have half a mind
Coal isn't the only industry counting on continued economic growth in China for sustenance. Heavy equipment makers like Caterpillar have a vested interest in the country's expansion. Despite some solid competitive advantages there are strategic risks confronting it and you can read all about them in the Motley Fool's brand new report. Just click here to access it now.

The article 1 Coal Miner That's not Falling off a Cliff originally appeared on Fool.com.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of ArcelorMittal. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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