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Executives

Steve Baisden – Director, IR and Corporate Communications

Joseph Carrabba – Chairman, President and CEO

Laurie Brlas – EVP and CFO

Analysts

David MacGregor – Longbow Research

Amir Arif – FBR Capital Markets

Jorge Beristain – Deutsche Bank

Meredith Bandy – BMO Capital Markets

Mark Liinamaa – Morgan Stanley

Cliffs Natural Resources Inc. (CLF) Q3 2008 Earnings Call Transcript October 30, 2008 10:00 AM ET

Operator

Good morning. My name is Michelle and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cleveland-Cliffs Natural Resources third quarter and nine months conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Mr. Baisden, you may begin your conference.

Steve Baisden

Thank you, Michelle. Before we get started today let me remind you that certain comments made will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Form 10-K and 10-Q and news releases filed with the SEC, which are available on our Web site.

Today's conference call is also available and being broadcast on our Web site at cliffsnaturalresources.com. At the conclusion of the call it will be archived and available for replay for approximately 30-days.

Joining me today are Cliffs's Chairman, President and Chief Executive Officer, Joseph Carrabba and Executive Vice President and Chief Financial Officer, Laurie Brlas.

At this time I will turn the call over to Joe for his prepared comments.

Joseph Carrabba

Thanks, Steve. We are pleased to join you today to report our strong third quarter and nine months performance, and to speak with you for the first time under our new brand Cliffs Natural Resources.

Today, Cliffs is a global mining and natural resource company with the primary focus on steel making raw materials. The company has operations in North America, South America and Australia, and markets products in North America, Asia and Europe. In rebranding the organization we chose to stay true to our roots. While recognized in our increasing mineral diversity expanded reach and genuine commitment to the environment. We expect the new brand to reinforce understanding of our business model envision in the industry. It also positions us well with junior miners looking for a strong international partner to help bring deposits to market as well as with the international finance centers as Cliffs looks to attract more diverse investor base.

Before Laurie presents an overview of our financial results I would like to take a moment to update you on our corporate development and operational achievements during the quarter. The most significant of which is our pending definitive merger agreement with our financial resources. If shareholders vote to approve the merger Cliffs Natural Resources will be positioned as a major global player and the leading independent supplier of critical raw materials to the North American and international steel industries. The industrial logic for this combination is rooted in the critical mass in met coal that would be achieved and the extended reach the combined company would have into world steel making markets. It also stands to reason that the combined company would participate and benefit from further consolidation in the industry.

This consolidation scenario and the benefits that accrue to shareholders as one that has already played out in other global production basis as well as in other industries. We have seen it and see more iron ore, we have seen it in global steel, and we believe it will eventually be seen in Appalachia. In fact, the current global disruptions, the oversold state of commodities today could prove to be the needed buying opportunity for those properly positioned in the industry. With that as a backdrop we have set the record date of shareholder meeting dates for the merger and look forward to continuing to make our case to all of you.

In addition to the Alpha deal during the third quarter Cliffs launched a tender offer for Portman Limited shares not already owned. Our offer of Australian 21.50 per share has resulted in a current ownership position of over 96.3% and places us over the threshold to achieve compulsory status for the remaining ownership. We expect to complete the mop-up by year-end.

In aggregate and at the current exchange rate we will pay approximately $370 million for the minority interest. This equates to about $26 a ton for high quality iron ore reserves. In the third quarter we also reached a deal to buy out of our minority partner at the United Taconoite mine in Minnesota. Consideration for this 30% interest includes 4.3 million shares of approximately $100 million in cash and 1.2 million tons of iron ore pellets. Based on current market prices this would total an estimated $380 million of consideration for 45 million tons of iron ore reserves and mine capital or about $8.50 a ton of finished pallets. Both of these deals illustrate Cliffs aggressive pursued organic growth opportunities that carry no integration or execution risk.

In our North American iron ore segment, we also announced the planned expansion project at our Empire and Tilden mines in Michigan. The project which will require approximately $290 million of incremental capital investment while allowing Empire to produce a 3 million tons annually through 2017 and increased Tilden mine production capacity at more than 2 million tons annually from its previous capacity.

As part of the expansion we plan to mine additional ore from Tilden, which is located adjacent to Empire and process it utilizing extra processing capacity at Empire. The utilization of this capacity will enable Tilden to increase production to more than 10 million tons annually. Bottom-line is this project will provide approximately 38 million incremental equity tons over the next nine years for an investment of approximately $6.50 a ton.

I would also like to acknowledge Northshore Minings-Babbitt Mine in Silver Bay, Minnesota for being recognized for its outstanding safety performance in 2007 and winning the industry coveted Sentinels of Safety Award. Congratulations should go to the entire Northshore team.

Before I continue with the discussion of our outlook and turning the call to Laurie for a financial review of the quarter, I would be remiss if I didn't recognize the highly for carriers economic environment we are currently operating in. I want to assure our investors that this management team is fully conscious of its challenges and will continue to take prudent steps to position Cliffs to weather any difficult times ahead.

As you saw in our release on Tuesday, we are idling [ph] three furnaces in our North American iron ore segment. This production curtailment is designed to bring our production in line with our customers announced production cuts. I have also challenged our operators and managers on upcoming capital projects and other planned expenditures and please be ensured we will continue to do so.

With that I will turn the call over to Laurie.

Laurie Brlas

Thanks, Joe, and good morning, everyone. In order to open the floor for questions in a timely manner I limit my comments today for the more critical financial metrics and not repeat all the detail found in the press release.

During the quarter we eclipsed the previous record revenue set last year with top line growth of 92% reported revenues for the third quarter of $1.2 billion considerably exceeded last year's $620 million.

Net income reached a $175 million, an increase of $118 million or 207% from the $57 million reported in the third quarter last year. Cliffs achieved diluted earnings per share of a $1.61, up 198% compared with the split-adjusted $0.54 reported last year.

As the U.S. dollar have strengthened significantly and suddenly against the Australian dollar, it has affected the currency hedging in our Asia-Pacific business. We had negative mark-to-market adjustment of approximately $94 million pretax in the current quarter. Excluding that adjustment Cliffs diluted earnings per share would have been $2.13 or 294% (inaudible).

Turning to the business segment results, for the quarter, North American iron ore generated record sales margin of $259.3 million, up more than 154% from the year ago period. This increase reflects a 42% jump in average realized pricing for last furnace pellets with revenue per ton reaching $92.73 compared with $65.15 last year.

Our North American iron ore segment benefited from higher benchmark pricing and higher steel pricing as well as renegotiated a new supply agreement with some of our customers.

Due to increasing royalty payment, fluctuating natural gas and diesel fuel costs, as well as deferred maintenance activities that will now be completed at Empire due to the expansion that Joe referenced, we are seeing significant year-over-year pressures on our costs.

Per ton cost in North American iron ore were $60.47 compared with $48.34 last year. In North American coal, average realized per ton price reached $100.34, an increase of 41% compared with the $70.92 realized in the two months of the previous year's third quarter that we own the business.

As we continue to enhance long-term mine planning and development activities, higher end trained miners and face rising supply service and royalty expenses, our North American coal segment continues to report much higher cost of goods sold compared with others in our industry.

Costs per ton in the third quarter was $115.22. However, much of this year's effort and activities are designed to optimize production and result in higher production and fixed cost leverage in two, three years.

In Asia-Pacific, iron ore average price realization for lump and fines rose 106% to $111.55 per tons of the quarter primarily reflecting the international benchmark settlement for Australian producers.

As we increase our ownership position in Portman, there will be a fair value adjustments to the fixed assets and mineral reserves which will increase our depreciation, depletion and amortization. In addition, accounting requires that we step up the inventory to fair value which temporarily drive the cost of goods sold until that inventory turn.

In the third quarter, cost of goods sold of $63.76 per ton was impacted by approximately $4 per ton resulting from the inventory fair value adjustment and $2, an additional depreciation, depletion and amortization related to the incremental 5% we acquired as part of Portman Limited share tender program.

Turning to the balance sheet, I want to begin by saying that we have a strong focus on cash generation and ensuring a healthy balance sheet. Even during the last year's rising prices we made the relatively conservative balance sheet and that has positioned us well for the current uncertain economic environment.

At September 30, we had $388 million in cash and cash equivalents compared with $157 million at December 31st. The company had $525 million of borrowings outstanding including our recently closed $325 million private placement and $200 million of borrowing under our $800 million credit facility. This compares with $440 million in borrowing outstanding at the beginning of the year. What that means is despite the project we have undertaken this year we have driven our net debt down from $283 million to just $137 million.

Outside of the term loan we currently have no borrowing under our revolving credit facility. Our debt-to-EBITDA ratio is currently just 0.5 times and debt-to-total capital stands at 24% with net debt-to-total capital at only 6%. With cash on hand and unused capacity on our revolving credit facility at quarter-end, we had nearly $1 million in available liquidity.

As evidence of our management focus the rating agencies gave us an investment grade rating and despite the current credit environment we closed on an unsecured loan agreement led by JP Morgan for approximately $1.5 billion earmarked for financing our agreement with Alpha. Terms are competitive and the agreement will become effective upon closing of the transaction.

In the third quarter, Cliffs generated cash provided by operations of $499 million, bringing us to a nine-month total of $582 million. This is an increase of over 600% from the nine month period in 2007. For the full year we expect approximately $700 million to $750 million in cash from operations.

Capital expenditures for the nine months were approximately $148 million and we expect approximately $240 million in total for the full year. As such we will generate about $500 million in free cash flow in 2008 compared with $89 million in 2007.

Total operating expenses for 2008 excluding any currency hedge adjustments are projected to be about $140 million. We expect an effective tax rate of around 26% and depreciation, amortization of about $180 million. In short, we will have an extremely strong balance sheet, a tremendous ability to generate cash and diversified operations and assets.

With that I will turn the call back over to Joe.

Joseph Carrabba

Thanks, Laurie. Before we take your questions I will provide our expectations for 2008. However, it is important to note that given current economic uncertainty tightening of credit facilities and our customers affected reductions in steel production it reduces the degree of certainty with which we can forecast.

In 2008, based on supply agreement commitments we still expect sales of 25 million tons for our North American iron ore business with revenue per ton of $91 and a cost per ton of $57. In Asia-Pacific iron ore, 2008 revenue per ton is expected to be approximately $98 with cost per ton of $58. Sales and production volumes are both projected at approximately 8 million tons.

In North America coal we are developing short and long-term strategic plans making capital improvements and enhancing efficiencies. In 2008, we expect revenue to average $93 per ton and cost per ton of $97. Production is expected to reach 3.6 million tons.

Before moving on I want to take a few moments to talk to you about why we think from a production standpoint, 2009 will be a very different year in our North American coal business. Admittedly, the job of getting these coal mines up to Cliffs standard has been a tough one, and one we may have underestimated in hindsight. However, we spent a lot of time this year putting the right management team in place, sorting out a solid mine plan for next year, and procuring delivery of the right capital equipment to optimize production for these properties.

On the commercial side we also expect the strong pricing of met coal to significantly enhance our sales margins in this business. We are currently in the negotiating season and close to reach in a number of deals, but currently, remain uncommitted for the vast majority of our 4.6 million tons of expected production.

Again, though, continued volatility at the global financial markets has objected a high degree of uncertainty, visibility into the international market is now less clear because of recently announced production cuts by steel producers, because of this, it's nearly impossible to provide any reliable 2009 guidance.

Notwithstanding R&D – entire industry's lack of clarity in the current year, Cliffs continues to deliver strong performance and is successfully positioning the company. We are prepared to weather any difficult times lie ahead and we will continue to explore avenues – all avenues of creating value both in the short and long-term. We believe our approach will continue to serve us well going forward.

With that let me open up the call to questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of David MacGregor from Longbow Research. Your line is open.

David MacGregor – Longbow Research

Yes, good morning, everyone.

Joseph Carrabba

Good morning, David.

Laurie Brlas

Hi, David.

David MacGregor – Longbow Research

Just on the call in the minefield of course, you were in the middle of negotiations, your customers are probably all in this call as well, little surprised you guys are still uncommitted on the vast percentage of your production, you talked just unconceptually about how much your production do you like to get committed here over the next few weeks or next month or so or whatever – however long to get complete this negotiations, but, give us a sense just how much of that production you like to sell forward and then also with respect to 2010 as well?

Joseph Carrabba

Yes, David, as we said on the call, certainly things have changed, it's protracted the negotiations. Our coal – our Oak Grove and Pinnacle low-vol coal is still sort after coal within the marketplace, but it certainly been a difficult time I think for the buyers to come to grips with the high coal prices that are being maintained throughout this economic cycle that we're in right now. We would like to tie up the majority , the majority being 75%, 80% of our coal before year-end and we wouldn't mind keeping some coal open for spot as we go forward. In '010, as we talked about before we certainly want to take advantage of the market we think the met coal market is still short in supply, irregardless [ph] of the steel making capabilities being cut back, and we want to take advantage of that market, but we would entertain contracts in the two-to-three year range. We certainly don’t want to go long-term like we are in iron ore, the coal market just reacts differently to those types of situations.

David MacGregor – Longbow Research

Thank you. On the foreign exchange hedge, just knowing the Aussie buck moved to 17% in the third quarter, we're already down about 12.5% so far in the fourth quarter. Should we expect similar fourth quarter type of hit on the forex hedge or is something changed in terms of structure of that program?

Laurie Brlas

Well, if the dollar obviously continues where it is today, yes, you would have got something similar to happen at the fourth quarter. I guess it's anyone's guess where we will be at, at 12/31, if we get back up to the level we were at September 30th, there will be no adjustment so. Well, it's difficult to predict right now.

David MacGregor – Longbow Research

Okay, thanks. And then in North America you got take or pay protection on some of these contracts. How much of your sales plan for North America iron ore production is protected by take or pay?

Joseph Carrabba

There is a good junk of it, David, that's still protected by the take or pay, going into this year, the down ops of our contracts all those windows if you think of them gauged to go through have passed, so we are solid on the tonnage we think going into the rest of this year. And we still got some variables going into '09 on the rest of our take or pays, to give you a number today we would just be off if we did that, but it's a substantial portion of our business.

David MacGregor – Longbow Research

Would it be three quarters?

Joseph Carrabba No.

David MacGregor – Longbow Research

Less than three quarters?

Joseph Carrabba

Yes.

David MacGregor – Longbow Research

Okay. Last question, just on the Alpha, I guess, saw the sizable loss here double this quarter (inaudible) last quarter. Is that number going to get bigger on the fourth quarter or do we get smaller, do we just stay here to about $13 million for quarter rate? Help us understand just where the profitability on Alpha going on over the next year?

Joseph Carrabba

I mean the good news is always start with our hurdle rates is the facility is built. I say the majority they're just finishing off and doing the ramp up, the capital has been built for the plan, the mines is in predistributing mode, and producing ore, the railroad has been refurbished as well as the shipping, but given the long protracted negotiation between MMX and Anglo that went from January to August, Anglo is literally just getting their feet on the ground, as you know they are the managing partner of that, and I think you can suspect probably similar numbers well into the first half of '09 if not the latter half of '09, the ramp up is just very slow coming on we are disappointed about it as the equity holder of this business and we are working with Anglo's management with our technical people to try and get the ship right at there, but it is built, and we are just in the middle of management change that has taken a long time.

Laurie Brlas

There was also a case of foreign exchange loss in the current quarter. It's – again the dollar is strengthening, it's impacting a lot of things, so there is a piece of that too. Operationally, this quarter is in spite of that as it might appear.

David MacGregor – Longbow Research

Do you see how much of it was Forex, Laurie?

Laurie Brlas

I don't have that number off the top of my head, but we can get that to – Steve, get it that anyone is interested.

David MacGregor – Longbow Research

I guess just can you make us comfortable that technology works you don't have another circle red going down there?

Joseph Carrabba

The technology works. It's just a matter of getting the metallurgical balances and the water balances in place. We had almost complete changeover at the top of the mine level of the management team as you might imagine they got some handsome bonuses when this deal was done. We got a good manager down there now, then we have got a lot of faith in and he is starting to make some changes already. But no, the technology works; it's a relatively simple process.

David MacGregor – Longbow Research

Okay, thanks, Joe. Good luck.

Joseph Carrabba

Thanks, David.

Operator

Your next question comes from the line of Amir Arif from FBR Capital Markets. Your line is open.

Amir Arif – FBR Capital Markets

Good morning, guys.

Joseph Carrabba

Good morning.

Amir Arif – FBR Capital Markets

I had a couple of additional questions. Just in terms of the natural gas, the diesel fuel prices dropping, how long will it take before we start seeing that in your numbers?

Joseph Carrabba

I think it will be well into the first half of the year. What you see is spot and what we can buy more on the long-term agreements are lock in – there is a considerable lag that goes with that, but I think we will start seeing significance, I mean, we are certainly getting some benefit in the fourth quarter.

Laurie Brlas

We are getting some in the fourth quarter. Yes, we are hoping to offset some of our increased labor costs.

Joseph Carrabba

But I think to really catch up with the lag of as always with the pricing that you see on a spot market versus the contracted gas and diesel fuel that we buy, will be into the first half of the year.

Amir Arif – FBR Capital Markets

And in terms of the production curtailments that two of the (inaudible) iron ore mines, can you give us a sense of – is there a lot of variability in the cost of the (inaudible) mine that you shut in versus the one that you're still operating?

Joseph Carrabba

Well, these were the lines, not the mines, I mean, in UTAC and Northshore, but there is a lot of variability between the lines that's cost in out. Again, it's always size, the smaller to Northshore alliance that went down our highest cost lines of production and the UTAC line needed some significant maintenance anyway. So we went ahead and took it on down. And we can also supply the UTAC furnace right now with the concentrate stock pile that we have so that was the logic behind that and we will continue to measure and monitor our production capacity and make sure it matches up with sales as we go forward.

Amir Arif – FBR Capital Markets

Okay. And then just on the '09 outlook I know you hate [ph] this too much uncertainty give you any number, but on the three quarters or on the vol commitment I should say for '09 you mentioned little less than 5%. Is that half of your '08 sales numbers or is that half of your current production run rate?

Joseph Carrabba

The half of the run rate. They are almost identical. There is not a lot of difference between sales tonnage and production.

Laurie Brlas

For the '08 rate.

Joseph Carrabba

For the '08 rate, so they are pretty close.

Amir Arif – FBR Capital Markets

Okay, terrific, thanks.

Joseph Carrabba

Sure.

Operator

Your next question comes from the line of Jorge Beristain from Deutsche Bank. Your line is open.

Jorge Beristain – Deutsche Bank

Hi, good morning, Joe. Jorge Beristain from Deutsche Bank here. Just had a question about the coal business. Could you quantify how much of the third quarter cost of goods sold it was a one half in nature? And generally speaking, if you expect any absolute reductions in cost on the coal side, going forward, I don't know if it similar to the iron ore site sensitive to the fuel and energy and things like this that could see some easing in the cost there?

Joseph Carrabba

We didn't have a just eruptive change that I could point to, like the geological disruptions we've had in the past. The costing really is to continue to develop the mines to get ahead of these long wall panels to make sure we can get as far out ahead as we can. We do have a Longwall move scheduled one starting in the next couple of weeks and one in December and both at the mines that will set us up for '09, so we had spent a lot of money to get ahead of that, to set up us for '09 which we think is going to be a healthy pricing year that goes on. And quite frankly, the underestimation that we've got is for the most part giving the long lead time on the capital equipment this older equipment where we are still doing the work with UA [ph] we barely replaced any other continuous miners or any of those types of things just for the lead times and we did underestimate the difficulty of maintaining those old machines and I am happy to say we got two continuous miners coming in here in the next couple of weeks. So finally – so just purely an underestimation of the maintenance on those old machines.

Laurie Brlas

But with the volume in Q4 we do expect a pretty significant improvement in Q4 from what you saw in Q3. There is a lot of volume dependency on that.

Jorge Beristain – Deutsche Bank

And on the coal side of the fence, again, I appreciate your negotiations right now, but two things, one is could you talk a bit about the psychology of the buyers obviously in a hindsight you locked in fairly low old prices, particularly, met coal for 2008. Is there some sense that you guys left pricing on the table in '08 and that is something that declines – appreciate? And secondly, could you talk a little bit about given the strong change in the dollar at the margin are we seeing less demand for US metallurgical coal exports and at the margin are you seeing any impact of increasing imports due to the changing exchange rate?

Joseph Carrabba

What I think you are seeing more than anything from the buyer side and I can't blame them for business ways, it's just that overall nervous on the economy and trying to react to the cuts in the steel business, at their respective companies are going through. So as I said before I think the negotiations are just very protracted and very cautious. I don't think there is – nobody gains points anymore for – or appreciation for money left on the table last year. It's just the way business is conducted when it comes to that. So I don't see it there. As you know the European season just kicked off last week with coal trends and again, I think the buyers are going to take their time before they settle in and they are going to watch this thing little longer. So I think it's just nervousness to the overall market more than anything, it's just extending these contract discussions.

Jorge Beristain – Deutsche Bank

Okay. Sorry, this is my third question, I would leave into it. Look for U.S. steel output has changed on a dime in the past three months, and obviously, your brown out of these pelletizers do you have a sense of how long this might be? Do you see this business sort of a steel coming down to just clear out inventories bracing for just a massive decline in U.S. steel demand. What's your sense of how bad the downtrack could be and what the length could be based on what you know today?

Joseph Carrabba

I wish I had that answer already. I would be sitting in a different office probably. I think, our read on, on this thing is, our folks were just in China, two weeks ago, talking to customers there from Portman [ph]. We think the Chinese business will come out quicker in '09, and we think at least we are planning for a very long year in the U.S. in 2009. We think the recession will hold longer and you got to think about the supply chain. We really started seeing economic difficulties in this country towards the end of '06 with housing and credit, and it has really taken this long on the lag side for it to reach raw material suppliers in the United States. So I think the inventory is in just in the steel industry is got to accrue to the auto industry, the housing market, and everything else. So, I guess it will be a very long protracted recession in '09 and that we are going to have to weather through.

Jorge Beristain – Deutsche Bank

Great. Thanks.

Operator

Your next question comes from the line of Meredith Bandy from BMO Capital Markets. Your line is open.

Laurie Brlas

Good morning, Meredith.

Meredith Bandy – BMO Capital Markets

Hi. Just some of these questions have been sort of already been touched on. When you say that the North American pellet lines that were idled versus higher cost – at the higher cost end. Would that imply that you are going to have a lower cost mixture or with the lower volume are you going to be flat or what is the direction of the cost next year just given that – ?

Laurie Brlas

I would think that it will go up and this is definitely a volume impact. There is some variable cost if you take off, take off the highest cost lines, but there is a fixed amount that wouldn't – would cost be overall cost to increase. We are not really ready to give magnitude in full obviously indications for '09, but I would say up.

Meredith Bandy – BMO Capital Markets

And then the $91 per ton guidance that you recently gave I am assuming that still based on $75 average hurdle coal [ph] is that right?

Laurie Brlas

Yes.

Joseph Carrabba

Yes, it is.

Meredith Bandy – BMO Capital Markets

And the hurdle coal price you confirmed about is really the one I think it's (inaudible) metal, operations, wood bear [ph] realizing that, correct?

Joseph Carrabba

It's based on one of our customers facilities, we haven't ever commented on –

Meredith Bandy – BMO Capital Markets

Okay. Sorry. and then can you give us any guidance about $75, I know that the steel prices are obviously come way down, but if that operation realizing below sort of what we would see on Bloomberg or an index of U.S. hurdle?

Laurie Brlas

That's the full year average for the site. And we actually give projections from them that we utilize and they have the mix of contract and just like anybody else. So it maybe very different and maybe consistent with what you would see on Bloomberg, I am not –

Joseph Carrabba

I think, Meredith, is that like we talk about with diesel and natural gas what you see is spot. And the actions have come to that is the same way there is always a lag feature on the way up and on the way down and all of these pricing scenarios.

Meredith Bandy – BMO Capital Markets

That's great. Thank you very much.

Joseph Carrabba

Thanks.

Operator

Your next question comes from the line of Mark Liinamaa from Morgan Stanley. Your line is open.

Laurie Brlas

Good morning, Mark.

Mark Liinamaa – Morgan Stanley

In past presentations and conferences what have you talked about different commodities you would like to expand into is any of that changed given the recent change in economic outlook? And if the Alpha deal where else might be look as far as different one?

Joseph Carrabba

Nothing has changed, something else has strengthened our position really when we look at I mean raw materials go into making steel despite a recession haven't changed marks or basic premises is still very strong. And like many of us, many of the companies out there are trading at just a small multiple of '09 and '010 multiples as they go forward. So we have not changed our view, we have not changed our view on the growth of the steel industry. I think all of us are still very bullish that the super cycle is here. We are in a hiccup that wasn't caused by a supply/demand functions of the industry, particularly, on the supply side overwhelming the demand side and we think we were just sort of pause, but we would still continue to look at other steel making materials as well as met coal in the future.

Mark Liinamaa – Morgan Stanley

Okay. Can you comment on the decision to idle the pellet lines, was that done in communication with customers based on their outlook, or was it kind of preemptive thing to, to make sure you didn't over build?

Joseph Carrabba

It's a little above. I mean this is the very seasoned management team that has seen the downside, as you know, market in this business as well as the upside when we saw the first signs of this thing starting to come off we try to react extremely quickly, to move forward to preserve cash and not put it in working inventory that would have to be worked off, and even through our '09 planning session we are certainly putting a very cautious plan together as well for '09 which again, can always be released if the world gets better, but this is a seasoned group of people that have seen us before and they knew the right moves to make and we took them very quickly.

Mark Liinamaa – Morgan Stanley

Okay, and just finally, you spent a fair amount of time, money, effort with that coal operations, I guess what do you think trend, cost might look like?

Joseph Carrabba

I think again once we get the equipment in the Longwall exchanged out down a Pinnacle we will start getting back into the benchmark, of other current operations and similar operations with Longwall as they go in. Oak Grove does not have a Longwall schedule for another year, year and a half and we may take a long serious look given the capital expenditures of those Longwall, and where the market is at that point in time. And we may suffer right now with more operational costs versus the needs and supply of our products. So I can see if you don't do anything, the cost can't react, we are certainly doing a lot of Pinnacle, got a great management team at OakGrove, but we haven't put a lot of new equipment down here at this point in time.

Mark Liinamaa – Morgan Stanley

So there is no reason to predict any substantial improvement –

Joseph Carrabba

I don't see it in Oak Grove for the first half, certainly, like I say in Pinnacle, there are some new continuous miners coming in here, they should be arriving in the next week or so, and we should get some impacts out of that in the maintenance plants we are putting in.

Mark Liinamaa – Morgan Stanley

Thanks very much.

Steve Baisden

We don’t have any more questions. We will go ahead and finish the call up.

Operator

Okay. There are no further questions at this time.

Steve Baisden

Great. Everyone, thanks for joining us today. I will be around for the rest of the day if you have follow up questions. And we thank you for taking the time to listen today. Thank you all.

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Source: Cliffs Natural Resources Inc. Q3 2008 Earnings Call Transcript
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