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Executives

Jessica Moran - Director of Investor Relations

Joseph Carrabba - Chairman, Chief Executive Officer and President

Terrance Paradie - Chief Financial Officer and Senior Vice President

Analysts

Timna Tanners - Bank of America Merrill Lynch

Sohail Tharani - Goldman Sachs

Aldo Mazzaferro - Macquarie Research

Mitesh Thakkar – Friedman, Billings, Ramsey & Co., Inc.

Evan Kurtz – Morgan Stanley

Brian Yu – Citigroup Inc.

Kuni Chen – CRT Capital Group

Anthony Young – Dahlman Rose & Co.

Cliffs Natural Resources Inc. (CLF) Q4 2012 Earnings Call February 13, 2013 8:00 AM ET

Operator

Good morning. My name is Mimi and I'm your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2012 Fourth Quarter Conference Call. (Operator Instructions) At this time, I would like to introduce Jessica Moran, Director, Investor Relations. Ms. Moran?

Jessica Moran

Thanks, Mimi. I'd like to welcome everyone to this morning's call. In addition to announcing our fourth quarter and full year 2012 results, last night we also announced the details of our common and mandatory convertible preferred share offering. As a result of this announcement and the legal constraints of the process, the prepared remarks and discussion on today’s call will be necessarily limited to our 2012 results and 2013 outlook. If you have additional questions related to the filing, I would refer you to the respective supplements related to the offerings filed with the SEC.

Before I turn the call over, let me remind you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protection 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 website.

Today's conference call is also available and being broadcast at cliffsnaturalresources.com. At the conclusion of the call, it will be archived on the website and available for replay. We will also discuss our results excluding certain special items which are non-GAAP financial measures. A reconciliation for regulation G purposes can be found in our earnings release which is posted on our website at cliffsnaturalresources.com.

Joining me today are Cliffs' Chairman, President and Chief Executive Officer, Joseph Carrabba; and Senior Vice President and Chief Financial Officer, Terry Paradie.

At this time, I'll turn the call over to Joe for his initial remarks.

Joseph Carrabba

Thanks Jess and thanks to everyone for joining us this morning. Before I discuss the quarter’s results and in light of our offerings announcement, I’d like to start by discussing our Board’s recent decision to reduce the dividend. We considered many factors before making this decision, including our commitment to being investment grade, future free cash flow position and capital requirements related to our growth projects over the next two years. Additionally, we recognized that Bloom Lake is taking longer to ramp up than we originally expected. This has directly impacted our profitability in the near term. While frustrating, these challenges are not unique to Bloom Lake.

Sequencing all the necessary steps to bring new projects of this size and scale online is challenging and not atypical in the mine industry. Despite this, Bloom Lake is the future of this company and will become the flagship mine for Cliffs. I am confident we have the right management expertise in place and action plan to deliver this asset’s long term growth potential.

Due to the volatile pricing we experienced in the second half of 2012, we have taken deliberate steps to mitigate risk and manage through this volatility, including the temporary production curtailment and slowdown of expansion activities within certain mines in North America, disposing of our Sonoma and Amapa non-core assets, reducing 2013’s expected SG&A and exploration expenses and reducing our quarterly cash dividend rate by 76%.

We took all of these measures in order to ensure we maintain our growth trajectory while preserving financial flexibility and operating in a manner consistent with our investment grade profile. While we expect pricing volatility in the near term, we continue to believe the underlying growth fundamentals in emerging economies are intact. In 2012, China imported approximately 745 million tons of iron ore, an increase of 9% or over 50 million more tons than 2011. I would point out that this growth rate is more than our total company’s sales volume in one year. We believe that the higher year over year imports, coupled with declining iron ore stockpiles at the Chinese ports will support healthy iron ore pricing. We also expect to see mid-single digit increases in China’s crude steel production over the next few years.

For the U.S, we anticipate modest growth in 2013. We have seen a recent uptick in the North American steel making utilization rate which is currently running 75%. Now turning to the performance of our business segments for the quarter. U.S. iron ore's fourth quarter and full year sales volumes were 6.2 million tons and 21.6 million tons respectively. During the full year we successfully placed approximately 1.2 million of tons of pellets from the lower Great Lake into the seaborne market via the St. Lawrence Seaway. Sales volumes for both the quarter and full year decreased primarily due to lower demand for pellets in the Great Lakes.

As part of our deliberate steps in managing our production volume to meet market demand, earlier last month we idled two of the small, less efficient pellet production lines at North Shore mine. Should we see an improvement for U.S. pellet demand, we can resume production at this mine fairly easily. Similar to last year's production plan, we expect to idle our Empire mine beginning in the second quarter and throughout the summer months. We anticipate resuming Empire's production in the early fourth quarter depending on our partners needs.

I am happy to report that during the fourth quarter, we were able to successfully produce DR grade pellets at two of our U.S. iron-ore facilities. As DRI becomes more of a reality in the EAF market, we are putting the wheels in motion to capitalize on this new opportunity. For our U.S. iron-ore business, we expect our 2013 sales and production volumes to be approximately 20 million tons. Moving to our Eastern Canadian iron ore segment. Full year sales volume was 8.9 million tons, 21% higher than last year, primarily due to the May 2011 timing of the Bloom Lake acquisition. Our full year sales volume results were lower than our previous expectations primarily due to the timing of vessel shipments and the advancement of planned maintenance on Bloom Lake's concentrator.

This maintenance which was pulled forward from January resulted in six days of unplanned downtime which negatively impacted volumes by approximately 120,000 tons during the quarter. Despite the maintenance activities Bloom Lakes' fourth quarter sales volume was 1.4 million tons. As we have previously discussed, determining a mine's ore characterization is key in capturing the long-term profitability of an asset. Over the last year we have been mainly blending ore from two working faces on Bloom Lake's ore body.

During December, we successfully introduced the West Pit ore to our previous ore blend in a meaningful way. This contributed to our production volume record of 600,000 tons in the month of December, which would equate to our 7 million tons on an annualized basis. To consistently deliver this level of throughput, we will need to continue our development of the West Pit through 2013. This will require a significant amount of overburden removal and pit development work. Currently, we have the equipment and the people in place to advance this development, position us well for the startup of phase two.

As announced in November, we have delayed construction of the concentrator and load out facility at phase two's expansion. This was primarily driven by the pricing volatility experienced in the third and fourth quarters of 2012. We are moving forward with projects that will support both phases of Bloom Lake including the overland conveyor system, in-pit crushing, tailings and water management infrastructure, and an ore shed. Moving forward with these particular projects will enable us to hit the ground running with phase two's ramp up.

By 2015, we expect to be producing at a 14 million ton annual rate. Our objective of increasing our customer and geographical diversification for Bloom Lake's product progressed well during the quarter. We continued to target markets in China, Japan, South Korea and Europe. We found that customer's appreciate the chemistry of Bloom Lake's product with its premium iron content and low impurities. We will continue to work with future customers to promote the benefits of using Bloom Lake's concentrate as a high grade center feed product.

For 2013, we expect to produce and sell 9 to 10 million tons from our Eastern Canadian iron ore business segment, comprised of approximately 6.5 to 7 million tons from Bloom Lake, and the remainder from Wabush.

Turning to Asia Pacific iron ore. Fourth quarter sales volume increased 56% to 2.8 million tons from 1.8 million tons sold in last year's comparable quarter. For the full year we sold a record 11.7 million tons, increasing our year-over-year sales volumes to 35%-36%. Both the quarter and year increases were driven by the successful completion of our Koolyanobbing expansion project. In the fourth quarter, we did not produce or sell any low grade volumes like we have in previous quarters, but our lump and finds products did contain a slightly lower iron grade versus the mine’s historical product.

As we continue to develop the new pits that were opened as part of the expansion project for 2013, we expect to produce and sell our products with a similar iron grade as we saw in the fourth quarter. For 2013, our expected sales and production volumes are 11 million tons which includes no volume from Cockatoo Island

Now turning to North American coal. Our full year sales volume increased 57% to 6.5 million tons from 4.2 million tons last year. During the quarter, we sold 1.9 million tons, a 94% increase from 2011’s comparable quarter. Looking back at 2012, we have significantly improved the production reliability from our mines, setting production volume records twice during the year. The increased production has enabled us to enhance our customer base to include new customers in the U.S, Europe and Asia. Also, our cash costs continued to improve quarter over quarter, making our low-ball met mines lowest quartile cost producer.

I’m also happy to report that last week two of our North American co-operations were awarded the ISO14001 certification. The Environmental Management Systems Certification was awarded to Pinnacle and our Logan County co-operation in West Virginia. Also, Oak Grove was recently recommended for an ISO14001 certification. This award internationally recognizes our exceptional environmental practices and our commitment to being a sustainable operator. For 2013, we expect to sell and produce approximately 7 million tons, largely comprised of metallurgical coal.

During 2012, we achieved a major project milestone by successfully advancing our Tier One Chromite project from the pre-feasibility stage of development to feasibility. While most aspects of the project have advanced according to plan, resolution of certain critical elements of the project’s future are not solely within our control.

Last May, we signed a term sheet with the province that among other things enabled the decision to locate the furnace operation in Ontario. While negotiations and a binding agreement with the government have slowed, and dialogue has been suspended during the provincial government transition, recent conversations with newly seated Cabinet Minister Gravelle indicates the province is committed to get a deal done. It’s imperative however that the right deal is completed for both Cliffs and Ontario, even if it delays our previous project schedule. We remain prepared to resume the discussions with Ontario’s new leadership and its position.

For 2013, we expect to spend approximately $60 million to complete the feasibility stage of our development for this project. In light of our stalled dialogue with the government, we are evaluating adjustments and our spending rate which could impact the amount we invest in this project during 2013 and the project’s overall schedule. While we remain enthusiastic about this opportunity, we cannot predict how quickly the definitive agreements will be in place allowing the project to continue and until the feasibility phase is complete, we will not speculate on the overall project schedule.

In closing, our U.S mines continued to deliver consistent results. The completion of our large scale capital projects in Asia Pacific and North American coal are beginning to show consecutive quarters of record operational achievement. Our management efforts are now entirely focused on Bloom Lake. As I mentioned at the top of the call, this is the future of our company. Over the next two years, we will thoughtfully invest our time and capital in this project.

And with that, I’ll turn the call over to Terry for his review of the financial highlights. Terry?

Terrance Paradie

Thank you, Joe. Before I jump to the results, I want to discuss recent changes in the financial covenants and our term loan in revolving credit facilities. Subsequent to quarter end, we received the unanimous support from our lenders to suspend the total funded debt to EBITDA leverage ratio for all the quarterly reporting periods in 2013. Within the amendment, we are temporarily at a total funded debt to total cap covenant and a minimal tangible network covenant during such periods.

Although we weren’t required to take this step, especially considering today’s iron ore pricing of $155 per ton, this proactive measure demonstrates our commitment to maintaining financial flexibility in supporting an investment grade profile as we execute phase two expansion at Bloom Lake. It also reflects the favorable relationships and transparency we have with our banks.

Full year revenue was $5.9 million, 11% lower than previous year, driven by a 23% decrease in year-over-year seaborne iron ore pricing. The formula based long-term contract in place in our U.S. iron-ore business provided support from realizing the full impact of lower pricing. Full year cost increased primarily due to higher labor, mining and maintenance expenses.

As previously disclosed, we recorded a non-cash impairment charge of approximately $1 billion related to our 2011 acquisition of Consolidated Thompson. The timing of the impairment was related to the delay in phase two and the result of the normal fourth quarter goodwill impairment testing. The impairment was primarily driven by the project's lower annual volumes and higher capital and operating costs, which I will address later in the call.

Also included in the fourth quarter results were $415 million in non-cash asset impairments related to Amapa and Wabush. The impairments were a result of lower carrying values versus the respective asset's fair values. We also recorded $541 million in non-cash tax valuation allowances related to Australia's MRRT, and the Altman Tax in the U.S. These valuation allowances were primarily driven by lower long-term pricing assumptions and the related impact on profitability and expected future tax payments.

Excluding the non-cash impairment charges, our adjusted net income attributed to Cliffs' shareholders was $493 million or $3.45 per diluted share. Due to pricing volatility we experienced last year, we are adjusting the way we provide our business segment revenue per ton guidance for 2013. We will use the January year-to-date average iron ore price of $150 per ton as a proxy for the full year average price. We intend to actualize and update this average each reporting period. This allows us to provide revenue sensitivities for each of our iron businesses. The sensitivity table is included in the outlook section of last night's earnings release.

In U.S. iron ore, revenue per ton increased to $112 from last year's fourth quarter revenue of $120 per ton. The decrease is due to lower year-over-year pricing for seaborne iron ore and customer mix. Cash cost per ton decreased to $65 from $66 in 2011's fourth quarter. The year-over-year improvement was primarily driven by lower employment related expenses. Our 2013 cash cost per ton expectation in U.S. iron ore is $65 to $70. This is slightly higher than the 2012 full year results of $65 per ton due to lower expected year-over-year sales volume and resulting unfavorable impact on fixed cost leverage.

In Eastern Canadian iron ore, Bloom Lake's revenue per ton decreased to $89 down 26% when compared to prior year's fourth quarter. This was driven by lower year-over-year seaborne iron ore pricing and the timing of cargoes to certain customers. During the quarter Bloom Lake's cash cost increased 16% to $86 per ton, which was higher due to increased fuel, contract labor, and maintenance and supply cost. At year-end, Bloom Lake's cash cost were in the low $70 per ton range, higher than our year-end targeted run rate of $65 per ton. For the longer term, we continue to target a mid-$60 cash cost range, however, until both phases are optimally producing at a target of 14 million ton run rate, we are increasing our targeted cash cost for phase one to $70 to $75 per ton.

We expect Bloom Lake's cash cost to include approximately $15 per ton of additional expenses related to mine development, stripping, and water management. With that, total cash cost at Bloom Lake are expected to be $85 to $90 per ton for 2013. Turning to Asia Pacific iron ore. Revenue per ton decreased 23% to $100 per ton from $130 per ton, primarily driven by lower year-over-year seaborne pricing. Also the lower iron grade Joe discussed earlier in the call unfavorably impacted revenue by approximately $7 per ton during the quarter.

Cash cost decreased 5% to $66 per ton compared with $69 per ton in the year ago quarter. The decrease was primarily attributed to improved volumes and the resulting favorable impact on fixed cost leverage. This was partially offset by increased mining cost. Our cash cost expectation for 2013 is $70 to $75 per ton. This expected range of slightly higher than 2012's cost due to absence of low grade volume sold in 2012, which has a lower weighted average cost.

In our North American coal segment, revenue was $110 per ton, down 12% from previous year results, primarily driven by lower year over year market pricing for both metallurgical and thermal coal.

During the quarter, we placed 300,000 tons to customers in Asia. While this enabled us to increase our shipments for the year, it impacted our realized revenue per ton due to additional freight required.

For 2013, we have committed and priced approximately 70% of our expected 2013 sales volume at an average price of $111 per short ton at the mine. With a significant portion of our coal volumes committed, we expect our revenue per ton to be $110 to $115.

Our cash cost relatively flat from last year’s fourth quarter at $98 per ton. In January and early February, we experienced adverse geological conditions at Pinnacle mine which we belie we have passed. Due to the record production volume that Pinnacle achieved in the second half of 2012, we have sufficient inventory on hand to fulfill customer orders. We expect these conditions to negatively impact our first quarter cash costs. However, our full year volumes and cash costs should not be affected. Should the challenging mine conditions reappear, the development work on the next longwall panel is completed. In 2013, we expect to achieve cash cost of $95 to $100 per ton.

Moving to the balance sheet. In the fourth quarter of 2012, the business generated $239 million in cash from operations, versus generating $743 million in the fourth quarter of 2011. We also collected $141 million in net cash proceeds related to the previously announced sale of Sonoma Coal.

In December, we successfully raised $500 million by issuing senior notes in a public offering with an annual interest rate of 3.95%, maturity date in 2018. We used most of the net proceeds to pay off the $325 million in private placement notes which were higher cost and maturing in 2013 and 2015. The remainder of the net proceeds were used to pay down a portion of our revolving credit facility and term loan.

At yearend, we held $195 million in cash and cash equivalents and our debt stood at $4.1 billion. We had $325 million drawn on our $1.75 billion revolving credit facility. We are increasing our full year CapEx expectations to approximately $800 million to $850 million from our preliminary expectation of $700 million to $800 million. The increase of $50 million is related to additional investments that we would characterize as license to operate. Our expected 2013 CapEx includes approximately $300 million of sustaining capital. The remainder is growth and productivity capital and is largely related to the shared infrastructure investments at Bloom Lake which will support both phase one and two.

As part of our capital allocation strategy, we have determined that investing phase two at Bloom Lake is the best use of our anticipated future cash flows. Since taking ownership, we’ve invested about $730 million in expansion capital related to this project. We expect the remaining capital requirements to be approximately $900 million which includes the completion and the ramp up of phase two’s concentrator. We anticipate spending this remaining capital roughly equally over 2013 and 2014. To reiterate Joe’s comments, this asset will be the flagship mine of our portfolio and we believe it’s imperative to our company’s future if the proper time and capital is invested.

We are reducing our expected year over year SG&A expense by nearly $50 million to approximately $230 million for full year 2013. This is driven by continued focus on reducing companywide expenses. We are also decreasing our expected exploration spending by more than half when compared to 2012 to approximately $25 million in 2013. We expect 2013 working capital adjustments of approximately $200 million to $250 million and our full year cash tax rate to be approximately 20% to 25%.

With that, Jess, I think we’re ready to open the call for questions.

Jessica Moran

Mimi, can you please prompt the questionnaires in the queue and how to ask the questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Mitesh Thakkar of FBR. Your line is open.

Mitesh Thakkar – Friedman, Billings, Ramsey & Co., Inc.

My first question is just on Bloom Lake. Can you help us understand, what has changed between the last quarter and this quarter that you have to increase the guidance range. And just a follow-up on that, if you are spending additional CapEx versus your previous guidance, is that in some way going to help you bring Bloom Lake up a little bit?

Terrance Paradie

Yes, Mitesh. From a cash cost increase from $65 to $70, we are looking at -- for 2013 we are looking at $70 to $75 for Bloom Lake with $15 of additional items related to stripping, opening up the new pit and continued cost for tailings and water management to get us to the $85 to $90 range for 2013. From a capital standpoint, when we were looking at the preliminary numbers of $700 million to $800 million was early in our planning process. As we went through the detailed plan through the year-end, we needed to invest additional capital relating to tailings management and water management. And that was driving the additional increase in capital.

Mitesh Thakkar – Friedman, Billings, Ramsey & Co., Inc.

Okay. So is it fair to say that you will need to spend another $400 million or so in 2014 to get the phase two up and running. And can you also explain us a little bit on the schedule of that.

Joseph Carrabba

Yeah, I can. Mitesh, this is Joe, I can talk about that. The work that’s continuing through this year is primarily around the in-pit crushing system, the conveyor belt to the plant and the ore shed, which again lowers cost as you might imagine versus trucking it into the facility as it goes in from there. It's also an expansion of the tailings and water management system that goes with it. We have taken a long-term view rather than build short-term sells if you will, to preserve capital. We want to get that footprint out there and particularly, all this is gearing up to get ready for phase two. So that’s where the bulk of the time and money will be spent this year. What we did stop was the concentrator and the load-out system from that. So the next phase as we move in into the new year in 2014, will be essentially around those two pieces. Really executing mostly on getting the concentrator. The equipment is set for the most part. The mill is set. When we stopped, we were still studying equipment that we had. We are into the piping and starting some of the wiring to go with it. So we need to complete the final stages of the concentrator and then build the load-out system. The second load-out system for the rail facility. So that will come in the latter half. We could start up phase two and get going on the ramp up without the second load out. So we will build that as the last stage of the construction.

Operator

Our next question comes from Timna Tanners of Bank of America Merrill Lynch. Your line is open.

Timna Tanners - Bank of America Merrill Lynch

A lot to digest, so just wanted to ask a similar question but more to the point of what happened in the last time we got an update from you. So this time more and not in terms of Bloom Lake but in terms of the decision in terms of the capital structure.

Terrance Paradie

Well, as we have started looking at 2013 and looking at our balance sheet, we wanted to make sure that with volatile pricing environment that we had the flexibility and the liquidity to get through these cycles. So with pricing and what happened in the third quarter through the fourth quarter. So where we are at today, you can see the volatility. So when we looked at our balance sheet and we looked at our growth platform, we said, we need to shore up balance sheet, and therefore that’s why we are looking at it from a capital standpoint. We went through the amendment process and where we are at today.

Joseph Carrabba

That’s right. And I would just add to it. Probably what happened, the actual event that happened was in the third and fourth quarter when prices sunk through below $100 for several weeks with that. And I think for most of the folks in the iron ore that did cause a time for pause and for people to reassess going forward on numerous projects. Where pricing was going to end up, nobody knew, late in the third quarter or the fourth quarter. And we did exactly the same. That’s when we took some pretty immediate action on shutting down phase two, so we could preserve capital to see there the pricing was going to end up with. And then have a look at our balance sheet.

So you got to think about this balance sheet work that we are doing right now is risk mitigation not future forecasting of iron ore pricing. We are still bullish on the cycle. We do still think there will be a lot of pricing volatility that we have seen given these new pricing regime that we are only in the second or third year of, and we just want to make sure that balance sheet is in shape to handle another one of these jolts, if it were to occur.

Timna Tanners - Bank of America Merrill Lynch

Okay. That’s helpful. I wanted to get your perspective. And then drilling down a little bit more in Eastern Canada. Can you talk to us about Wabush and how you are looking at the future of Wabush and then how long you think the discounting of the concentrate might have to continue so that we can get a perspective on pricing more medium term.

Joseph Carrabba

I think always we’re looking at a number of operating strategies I think as we reported back with that. We’re starting to hone in on that. As always it’s a trade up of CapEx versus OpEx that goes with it. I do think that when we do look at the new Wabash if you will with that, we’ve got to reduce some CapEx pretty significantly for that facility and we’ll probably be shrinking the footprint of Wabash. We should have work completed this quarter and be able to get on with our operating plan and be able to report back. On your reference to the guided concentrate, I think that goes back to the Bloom Lake, not the Wabash.

Timna Tanners - Bank of America Merrill Lynch

Yes.

Joseph Carrabba

I think as we continue to move into the new markets as I discussed in my earlier comments, with that we’re continuing to get test trials into the marketplace. We continue to diversify the product and we’ll use the commercial tools that we need well into getting all of the product placed, including going into the 14 million ton. So it will come in a variety of ways through a variety of different customers where we’re at with different stages of negotiation and trial.

Operator

Our next question comes from Evan Kurtz with Morgan Stanley. Your line is open.

Evan Kurtz – Morgan Stanley

Actually I have a bit of a follow up to that last question. If you look at the Canadian revenue per ton guidance, I was pretty surprised. The discount between that and the seaborne price is unusually wide and I know some of that can be explained by higher volumes in Bloom Lake and lower volumes at Wabash. I was wondering if you can actually delineate of that 9 to 10 million tons, what is Wabash versus Bloom Lake and also what are you assuming for prime pellet premium in 2013?

Joseph Carrabba

As I said earlier in the script Evan if you will that the Bloom Lake volume is 6.5 to 7 million tons and the remaining is Wabash tonnage that goes with it. I think what you have to apply on the pricing factor off of spot is the freight. I think that’s what you’re probably missing there when you’re looking at the number and you’ve got to back the freight out of the spot price depending on where you’re shipping to and from around the world.

Evan Kurtz – Morgan Stanley

Okay. And then what are you looking for pellet premium in 2013?

Joseph Carrabba

It varies. In Asia right now it’s a pretty small premium. It’s a $5 to $10 premium from there and in Europe we track right along with whatever Valet is getting essentially as they set the pricing premiums throughout Europe. So it’s up higher than that, but it tracks with the Valet premium.

Jessica Moran

Evan as you know, we’ve seen the pellet price Woody go up to $40 during 2010 and then come down even to nil probably or close to nil in the back half of last year. So it moves all over the place, but we do take an average and bake that into our guidance, as Joe indicated.

Evan Kurtz – Morgan Stanley

And just one more on Bloom Lake just on the cost side. You were running at the 7 million tons annualized rate in December. Were you hitting $70 to $75 cash cost in or did you actually get down to the $60 to $65 a ton type of numbers that you thought you would at those types of volumes a few months back?

Terrance Paradie

Evan, yeah. We were in the low $70 to $75 price range when we were running at those tons during that period of time and that’s why we’ve reset for forward looking $70 to $75 until we get ramped up to the 14 million ton so we can get that fixed cost leverage from all the infrastructure to get us down into the 60s.

Joseph Carrabba

Yeah. I think on the one month operating range in December that was satisfying us is one is our radical ore blend of the west pit and the other two pits did come to fruition. We did see the mill perform and the process perform in the capacity that we needed and then the quality we got out on the other end. Keep in mind that in those costs the in-pit crusher was not running as the overland conveyer was not running with that and we’re continuing to strip very heavily on the west pit and we will through 2013. The reason the one month trial is we’ve just got to get ahead of the stripping on the west pit so we can get a consistent blend for 12 months to go and we’re nowhere near that yet. We’re making progress. As I said we’ve got the people, we’ve got the equipment in place, but we’ve just got to get to stripping in advance now to get out ahead of it. So there’s the numerous phases you can see to reduce the cost once we’re fully operational in those other areas, but we were very pleased with the mill results of the blend.

Operator

Our next question comes from Brian Yu of Citi. Your line is open.

Brian Yu – Citigroup Inc.

Great. Thanks. I wanted to follow up to Evan's question before. Was the pricing discount -- is this the typical gap that we should expect on a go forward basis, translate to somewhere between $20 to $30. Or is there something else going on within 2013 that we expect that to narrow.

Jessica Moran

Yeah, I think, Brian, the thing we consider is, as we are establishing our strategic customer base for Bloom, we don’t have a one pricing mechanism, like in our Australian business that we may -- it's a more narrow pricing mechanism with how we price the cargoes. But at Bloom Lake, since we are trying to develop this customer base, it's a different pricing mechanism. So you may sell a cargo at a certain price or you may take an average. And that kind of, I think, skews the differential between the benchmark and our realized pricing. But I would expect that to narrow as we continue to establish our customer base through our efforts throughout the year.

Brian Yu – Citigroup Inc.

Okay. And then the Canadian operations, and that sounds like an area where you are trying to essentially get more established in the marketplace. Australia, I think, Joe, you mentioned that that has a lower FE content on a go-forward basis. So rather than the $10 to $15 discount we have seen historically, that’s the portion where we should expect this widening to persist for the foreseeable future.

Jessica Moran

Yeah. As we open up the pit, Brian, in Australia, we are seeing a lower FE grade than our traditional product that we have seen. So as we develop those pits that could change. I mean it’s dependent on the geology that we are mining through. So you know the big differential again is going to be freight. I mean it's usually about $11 between Esperance, the port of Esperance and North China. But you will see in the immediate quarters a little bit of a discount just like we saw in fourth quarter, because of the grade differential. But that is the opportunity to become less that’s' the geology would be more favorable, we have set this date.

Brian Yu – Citigroup Inc.

All right. And quickly on the Bloom Lake's cash cost. You incurred about $15 per ton in incremental cost. Would you expect that $15 to get absorbed into the phase two operations once that ramps up? Or is there a certain amount of that, that’s going to be an ongoing expense even after phase two ramps?

Joseph Carrabba

No, we expect that to get fully absorbed as we go up to the 14 million tons and with the additional improvements that I discussed previously and getting a lot of the pre-strip out of the way so that we can get back to a normal stripping rate throughout the mine as well, and get our tailings and water established. We expect that to be absorbed and go away with the improvements we are putting in place, Brian.

Operator

Our next question is from Sohail Tharani of Goldman Sachs. Your line is open.

Sohail Tharani - Goldman Sachs

Joe, there has been clearly some change in the strategy of the company. You have been saying for the past several months that you would sacrifice growth over dividend but now, obviously, looking at growth as the main driver. And also you are diluting the shareholders to protect your debt rating and balance sheet. I was just wondering, are you preparing, just in case we get a similar situation as we had late last year and iron ore fell to $85-$90. Is that what is in the back of your mind?

Joseph Carrabba

Certainly the uncertainty in both the macros of the economies of the world, Sohail, as well as the pricing volatility, as I said earlier, has really caused us as well as many of the mining companies around the world to take pause. To look at this risk which is a very high one on the downside. A company of our size, a quarter or two of this type of price spiking really upsets the balance sheet and all of the ratings that we need to go with it. So, yes, it has forced us to change our position on the dividend. But at the same time you can see the bullishness we have of the market going forward and of Bloom Lake to do what we need to do to get restarted so we can get phase two in. So I think this is going to be very beneficial in the future for the shareholders and for the company as we go forward. And we are very excited and feel very confident we can place this material into the market as we go forward.

So unfortunately we are taking half a step back but we think we are going to be more than a full step forward when we get our growth up and running and get that 14 million tons placed in 15.

Sohail Tharani - Goldman Sachs

Okay. One more question on the U.S. operation. You mentioned that you expect modest growth in the U.S. in 2013 but utilization rate you are assuming is 70% versus U.S. land at 75%, above 75% in 2012. So it should be higher this year. I’m wondering, what are you factoring in for 70% utilization rate? And along with that, any comments on how does the latest news that Essar Minnesota has a contract with ArcelorMittal 40.5 million tons pellet for the next 10 years impacts your sales outcome or your volume going forward?

Joseph Carrabba

Let me comment on the modest growth if you will to start with. As you know in the U.S steel industry, it’s still strongly underpinned with auto sales with projection going into ’13 and once again there’s a very strong projection in auto sales once again and it’s the drilling and all the pipe and equipment that’s related to the shale gas that’s going on. Those are the two underpinnings of the steel industry right now that goes with it. We’re seeing modest improvement in construction rates within the U.S as well that can only help off of this number from there. But the big gap that the steel industry is grappling with right now is because the economies in Europe are down, China has slowed and has overcapacity, there’s been a tremendous import surge within the U.S from numerous countries around the world putting a lot of steel into this industry.

So the gap that people are looking for as to why isn’t the steel industry healthier as the metrics move forward in the U.S economy, it’s all about import surge right now and we’re really taking it on the chin as an industry on those imports that we’re seeing flood into the industry. As far as the recent announcement of the contracts, as you know, Empire has been coming offline and is coming to the end of life at 2014. That’s been an expected outcome for quite some time that we’ve been working with, with our partner as well. So the end of life is coming. The pellets are going off the market if you will from there and it’s also our highest cost mine that is going away as well as you can imagine at the end of life when things get deeper and start slowing down from there.

With Essar Algoma, as you know we do have contracts for 100% supply through 2016 and we continue to use that and we’re obviously quite aware and have been for some time. They’ve been building their own capacity from that. Other alternatives that we’re looking at as the competitive forces do come in and we don’t ignore them. We have to work with what we’ve got is we’re certainly looking at expansions into the DRI business as I commented. We’re pretty enthusiastic that two of our facilities through test runs and trials and scoping studies have the ability to produce DRI pellets. With that, we continue on with our engineering studies. So we’ll be in place if a DRI facility is to be built in the Midwest region of the area as alternatives. And we continue to grow as you can see our export market for pellets out of the lower great lakes.

So we do have some options as we go from there. On the opportunistic side, if the new plant that was in the press release yesterday doesn’t come up by 24 ’14, it certainly gives us the opportunity to sell additional pellets in that market as it comes up with it. So we’re a good supplier. We give a premium quality as well as established with freight lines that go into our customers with that and we have a good cost base to compete in this marketplace as well. So we’re very bullish on the future of the U.S with a number of alternatives our way and the Empire shut down and the loss of those pellets comes as no surprise to us.

Operator

Our next question comes from Kuni Chen of CRT Capital Group. Your line is open.

Kuni Chen – CRT Capital Group

Just a quick follow up on eastern Canada. As you continue the pre-stripping in the west pits, is that fairly consistent throughout the year? Or is that perhaps more heavily weighted in the first half and then you start to see some benefits later on in the year as that slows down?

Joseph Carrabba

Kuni, we’ve committed to the full year so it’s consistent throughout the year.

Kuni Chen – CRT Capital Group

What has changed overall in the plan there? It seemed like more of a near term thing that stripping would come to an end by the end of 2012 and then you’d start to see more of the benefits going forward. I guess what changed as far as the stripping plan?

Joseph Carrabba

I think it’s the mix of the ore blend that’s now about a third, a third, a third out of the three pits that come with it. So when we rebalance the mine planning that came with that, we had to add the additional stripping on the West Pit as the blend increased from there. And we also took a step back and we decided in 2013 to, as we stabilized phase one, if we are to have all those construction folks on site and all the activity on site. We took a pause with that, particularly in the stripping and the water management and tailings. And decided to get all that in shape for phase two. Not to be in a panic, if you will, when phase two came on and have to do another catch up phase of the stripping.

Jessica Moran

And just to add to Joe's point there, just to clarify. We just opened up the West Pit. We just took delivery of the equipment to move all the glacial tail and what have you, to open up the pit like in late August, early September. It wasn’t until December that we started to put some of the ore in a meaningful way from the West Pit through the concentrator at that ideal blend that Joe was talking about. So as we move forward through 2013, we will continue to do that development work on the West Pit. Which is kind of an ongoing thing here to ideally get that one third mix consistently throughout next year. We will slowly get better throughout the year and that will help us achieve the volumes that we are targeting.

Operator

Our next comes from Aldo Mazzaferro of Macquarie. Your line is open.

Aldo Mazzaferro - Macquarie Research

I just had a question on the DR pellets that you are developing. Could you give us an idea which divisions you might be shipping from and what the premium pricing of those DR pellets maybe relative to the averages you laid out in your guidance.

Joseph Carrabba

Well, it would be North America. The two mines would be the UTAC mine in Minnesota and the North Shore mine. Although that looked more favorable in the processing and the less weight recoveries there. The better weight recoveries when we get through the separation and the loss of the silica as it came through. Premium pricing, this is theoretically a new market in the U.S. This is a new developing technology that’s coming on while it’s used all over the world, it's not used in the U.S. And we haven’t really developed any pricing, we are just developing plans right now, as you can see, to get through the engineering phase. Make sure we the product in place. Know what our cost base is as we go out. So as potential customers come through the door, we can start those conversations. But we don’t have any mines yet on premiums.

Aldo Mazzaferro - Macquarie Research

From a chemistry point of view it includes a higher degree of the purifiers, is that the difference?

Joseph Carrabba

It's really how fine you have to grind the materials and what your weight losses are on your recovery to remove the silica to get down to about 2% silica, is the general definition for a DR grade pellet with that. And it's just a recovery curve that you have to look at and how much it costs you as you go down the recovery curve and the weight loss.

Aldo Mazzaferro - Macquarie Research

My second question on the -- you commented there was timing issue on some of the shipments in the Great Lakes. Could you describe that in a little bit more detail? Was it the water levels that caused the delay or was it some other issue?

Terrance Paradie

No, I think it's just the way we recognize revenue with our customers when we load the ships at the of the month and when cash and title changes hands. So it was just a timing issue around year-end.

Joseph Carrabba

Yeah. We are not suffering from the -- the water is down in the Great Lakes and we have dealt with that before. We just load the vessels a little bit lighter in the Great Lakes. This isn’t anything although if you are thinking about the Mississippi river and what's going on down there, that we are not in a crisis mode in the Great Lakes in any stretch of imagination. And as you know or if you don’t know, over here in late January, by law the core of engineers does shut the locks down for the shipping season, for maintenance and the ice that comes on. And they restart in late March. So first quarter shipping times, it’s always getting that last boat out than the first boat in. It's always a little tricky and dependent on the weather.

Aldo Mazzaferro - Macquarie Research

Great. And, Joe, can I ask you a little philosophical question? You talked about your concern about the possibility of a drop off in the pricing in the iron ore. But at the same time it seemed China was pretty good and I think the North America and the European markets have gotten about as weak as they are going to get. If those things hold together, do you see any other factors such as possibly increased supply out of China. Do you see any other factors that would really cause you to worry about the pricing?

Joseph Carrabba

No, not really. I think it's more of the cautious nature and the conservatism of, if you will, this group. Although, Cliffs is 165 old. We have survived wars and droughts and depressions and everything else and I think that’s why we’ve done it is to keep things pretty conservative. The tailwinds for pricing is actually pretty good right now going into the Chinese New Year. As you know we’ve got 52 week loads of stocks in the ports in China. The new government has been placed in China. The soft landing last year has been achieved. As you know there’s talk in all the newspapers about government stimulus potentially coming in the spring after the Chinese New Year and the absence of the Indian ore exports right now and the problems they’re having in India. There’s a lot of good news in the marketplace too for indicators of pricing going forward. But if you look at the last two years and I would suggest only the last two years and the trends that go with it, we also at times see a trailing off in the second half of pricing for whatever reason in each of those years. So there’s some cautious nature there, but there’s also some very good tailwinds and good factors going forward to suggest the other side of the argument.

Operator

Our next question is from Anthony Young of Dahlman Rose. Your line is open.

Anthony Young – Dahlman Rose & Co.

I’ve got a question about if you look generally over the next couple of years Joe and think about some of your mines. Obviously in Australia I believe you’ve got a relatively short mine life at your operations there. U.S obviously you’ve got older mines. So I heard the comment earlier about ore grades that they might pick up in Australia, but generally I’m seeing a lot of ore degradation around the world, particularly in Australia, Brazil, elsewhere. I wonder if you can talk a little bit about how you see those ore grades and stripping ratios on a more normalized basis changing over the medium term.

Joseph Carrabba

Well, for our facility in Australia we started out in 2005 when we purchased Portman at a nine year mine life at 4 million tons. It’s now 2012 and we have a nine year mine life at 11 million tons, Tony. So the guys have done a good job. We do spend a considerable amount of time and money in near mine geology. As you know these are very small pits we’re at in Australia. It’s not like the big deposits of the Pilbara. We’ve done a pretty good job on maintaining our ore rates against our depletion rates when it comes from there.

The ore grades out there though nevertheless like every place else are beginning to decline in the grade and FE quality slowly, but they are as we open new pits and get into less favorable geology in some of the different areas. The strip ratios we’ve hit the high for us right now. We took a big step up over the last two years with that and our strip rates are pretty well solid right now with where they are. But that’s where the costs have jumped up on us in Australia as the dramatic increase in strip rates. So we’ve worked our way through that and we will continue along at those extremely high strip rates.

And as you say, while the one side is negative of declining ore grades and higher stripping rates and higher costs across Australia and Brazil, the positive of that comes back over to Eastern Canada which can supply the chemistry if you will now with the superior chemical grades to really supplement and sweeten if you will these ores that are degrading. So we think we’ve got the best blend going around the world to go into our customers within Asia and we provide a blending stock of what you’re seeing throughout the world as well as the very high quality products that are coming out of Canada.

Anthony Young – Dahlman Rose & Co.

When we think about Bloom Lake and the transition, obviously you’ve got the higher pre-stripping costs and your development expenses now. When you bring that phase two on by 2015 and I think there was an earlier question about are we going to see some carryover effects in 2014, do you expect that a good portion of that will dissipate in 2014 calendar or how do you see that playing that out?

Joseph Carrabba

I think a good portion of it will. Again we won’t start the concentrator up until mid-year if you will and on that ramp up. We won’t see the full production tonnage of the next 7 million tons. But we will see a good portion of it and then the second half after the concentrator starts up in ’14 you’ll start seeing the costs come down as the costs get absorbed with the new concentrator.

Anthony Young – Dahlman Rose & Co.

Okay. And I see that Canadian National Railway I guess has put a pause on building a new rail line and I know you guys were – you did fund part of the feasibility study there. Is that going to have any impact on what you are doing at Bloom Lake.

Joseph Carrabba

No, we have got all of our rail and port contracts up secured through the QNS&L. So we are good to go through for phase two as far volumes go down the rail. The Canadian National Railroad just gives us a very good option that we felt was worth exploring to see if they could give enough volume and that it made economic sense to put in a new public rail system.

Anthony Young – Dahlman Rose & Co.

Okay. And just a follow up on the DR. I know you have been getting a few questions on that and I know it's relatively early as you guys are now producing the material. But I heard you mention about finer grinding. Is there some type of guidance you can give us about the additional cost required to get down to that type of metallurgy, chemistry to try to reduce the silica. What is the additional cost required in doing so?

Joseph Carrabba

It's just a little too early. We have run these through some plant trials by maneuvering some different product streams and things like that, and segregation. That’s what the scoping study is about right now. It's just a little too early to give you some definitive numbers. Let me just say that the CapEx and the OpEx looks favorable to move forward with this project if our testing continues to prove out everything that we have seen preliminarily. If it's isn’t the scoping study, we would have stopped. It's too soon to give a number yet.

Jessica Moran

That’s all of everyone's time. That concludes our remarks and I will be available throughout the rest of the day to answer any follow up questions. You can please give me a call or email me. That would be great. Thanks a lot.

Joseph Carrabba

Thank you all very much.

Terrance Paradie

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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