UPDATE 1-Cliffs shares drop after downgrade, price target cut

Wed Mar 27, 2013 11:18am EDT
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* Morgan Stanley cuts miner to "underweight"

* Sees surplus coming in Great Lakes iron ore market

* Credit Suisse says Cliffs must consider "drastic solutions" (Adds Goldman Sachs upgrade, updates share move)

March 27 (Reuters) - Shares of Cliffs Natural Resources Inc dropped more than 14 percent on Wednesday after Morgan Stanley downgraded the miner's stock and Credit Suisse slashed its price target on the shares to $10 from $30.

A big increase in the supply of iron ore pellets in the Great Lakes region over the next three years could hit earnings from Cliffs' U.S. iron ore segment hard, Morgan Stanley analyst Evan Kurtz said in a note to clients.

Credit Suisse analyst Nathan Littlewood, who also sees a looming pellet surplus in the Great Lakes, said Cliffs may need to consider "drastic solutions" to shore up its balance sheet in the next 12 months, from selling iron ore assets in the Asia-Pacific region to a multibillion-dollar equity offering.

"Major reform is required if this business is to survive the next commodities cycle, in our view," Littlewood said in a note to clients.

Kurtz downgraded the stock to "underweight" from "equal-weight."

U.S. iron ore was responsible for about 60 percent of Cliffs' earnings before interest, taxes, depreciation and amortization (EBITDA) in 2012, Kurtz said, and the segment's EBITDA could drop by half.   Continued...