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Executives

Steve Baisden - Director of Investor Relations and Corporate Communications

Joseph A. Carrabba - Chairman, President and Chief Executive Officer

Laurie Brlas - Executive Vice President, Chief Financial Officer

Laurie M. Brlas

Analysts

David MacGregor - Longbow Research

Michael F. Gambardella - J.P. Morgan

Jorge Beristain - Deutsche Bank

Mark Liinamaa - Morgan Stanley

Philip Gibbs - KeyBanc Capital Markets

Brian Riley - Wachovia Securities

Cliffs Natural Resources, Inc. (CLF) Q4 2008 Earnings Call February 26, 2009 10:00 AM ET

Operator

Good morning, my name is Sarah and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2008 Fourth Quarter and Full Year Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers' remarks, there will be a.

At this time, I would like to introduce Steve Baisden, Director of Investor Relations and Corporate Communications. Mr. Baisden?

Steve Baisden

Thank you, Sarah. Before we get started today 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 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 website.

Today's conference call is also available and being broadcast on 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 Chairman, President and Chief Executive Officer, Joseph Carrabba and Executive Vice President and Chief Financial Officer, Laurie Brlas.

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

Joseph A. Carrabba

Thanks Steve and thanks to everyone for joining us to today. As you know, business conditions around the world have changed dramatically since we last spoke. Simply put, throughout 2008 Cliffs was operating in a peak cycle environment that ended abruptly in the fourth quarter. This was true not only for our company but for the mining and metals industries as a whole. It was a year of consolidation deals that ultimately fell way to the credit crunch and the global financial crisis. This included the second largest proposed merger ever between BHP Billiton and Rio Tinto.

Also around the same time, we terminated our proposed merger agreement with Alpha Natural Resources. We continued to believe that combine company would have had dramatically improved scale and an extremely important strategic market position. While the termination was disappointing, we have as an organization and management team moved on and will focused on the continued execution of our strategy.

Throughout the highs and lows of the demanding environment, our team has reacted rapidly. This means expanding production at the height of the market and quickly implementing measures to align reduction with lower demand at service near year-end. Including reduction curtailments and work force cut backs. While these decisions are difficult to never taken lightly, steep and swift declines in steel production by our customers in the U.S. and Asia to manner that we respond accordingly.

Actions taken since we spoke last conclude initiating the idling of furnaces and workforce reductions beginning in October at our North American iron business segment that have resulted in current annualized production rate of 15 million equity tons. Slowing production in our North American coal segment and suspending underground operations at Pinnacle mine in February and closely monitoring the Asian iron ore market to ensure we produce at a rate that matches current demand.

Specifically in Asia-Pacific iron ore we are maintaining our operating levels at over 8 million tons of production as we are seeing signs of demand on a customer-by-customer basis in China.

Not withstanding the market degradation late in the year, our annual results show we kept focus on taking advantage of the strong market that was present from the first nine months. In our North American iron ore segment 2008 revenue surged 36% to $2.4 billion, driven primarily by average selling price increases which were up 40% versus last year.

At our Asia-Pacific iron ore segment we realized a 73% increase in revenues again primarily driven by pricing as volume was down slightly from 2007; compared with 2007 average per ton sales revenues in Asia-Pacific were up 81%.

Our North America Coal operations contributed just over 345 million in revenues and the Sonoma Coal Project added another $123 million to this years consolidated revenues. All of this accommodated in a record $3.6 billion we reported last night which exceeded our prior revenue record said last year by 59%.

Operating income was up 146% from last year reaching $939 million and net income was up 91% over last year coming in at $516 million. On an execution stand point we successfully closed on a number of transactions represented no integration or execution risk including acquiring the 20% minority interest in Portman Limited not already owned by Cliffs and acquiring our minority partner's 30% interest in the United Taconite mine in Minnesota, resulting in an additional 1.6 million tons of equity capacity.

In addition to these transactions, in 2008 Cliffs also made two strategic equity investments in Australian junior mining companies. The first was in Golden West Resources. Cliffs currently owns approximately 17% and we paid approximately $22 million for our position. The strategic significance of our investment in this firm's high-gradable Wiluna West iron ore resource which is located near our Koolyanobbing operations and its geographic position makes our infrastructure the natural fit in some form to burn the resource to market in the future.

The second investment was in AusQuest, a mineral exploration company. Cliffs currently owns approximately 30% and we paid approximately $18 million for our position, under the strategic alliance with AusQuest we obtained the right to appoint a representative to the AusQuest's Port and directly with the company to most effectively -- efficiently capitalize on its first class exploration portfolio. AusQuest, currently holds more than 39,000 square miles (ph) of exploration title spread over 13 project areas. The burn is focused on exploring for several commodities including iron ore and manganese.

During the quarter we reported an impairment charge on our investment in Golden West as well as our position in Polymet the North American junior with development projects in Minnesota's Masobi (ph) range. I think it is important to understand the impairments and the result of the stock market value change as we've seen and virtually all commodities related companies.

In the case of Golden West particularly, the impairment isn't indicative of the strategic value it may have for the company in future years. Despite our record financial results and fulfillment of many corporate development objectives in 2008, we realized we must adapt to the realities of the new environment we're living in. We're consciously watching end markets, but believe we have the right operating plan and flexibility for 2009.

With that, I'll let Laurie go through the financials of the quarter. Laurie?

Laurie Brlas

Thanks Joe and good morning everyone. Despite the dramatic change witnessed at year-end revenues for the 2008 fourth quarter grew to $916 million surpassing the record of fabulous last year by 17%. Moreover this increase does not include revenue recognition on approximately 1.2 million tons of iron ore or an estimated $80 million. We did however as our supply agreements require, receive cash payment for additional work from our customers.

The cash payments were received as a result of the unique structural design of our North American supply agreement. These supply agreements are designed to optimistic cash flow in the event of difficult economic environment such as the one we are currently in. Reported net income for the quarter was $54 million or $0.47 per diluted share compared with $94 million or $0.88 per diluted share for the year ago period.

Fourth quarter results this year included number of non-recurring items totaling $209 million pre-tax related to the costs associated with the terminations of Alpha merger negative mark-to-market adjustments in our currency hedges and the impartment of the securities that Joe mentioned. Excluding these factors diluted earnings per share for the fourth quarter would have been $1.72 or roughly 95% higher than the $0.88 we reported last year.

Turning to the business segment results. For the quarter, North American Iron Ore generated record sales margin of $208 million, $53 million higher when compared with the year ago period. This increase reflected 34% higher average realized pricing for blast furnace, with revenue per ton reaching $89.16 compared with $66.42 last year.

Our North American Iron Ore segment benefited during the quarter from higher benchmark pricing for iron ore and higher steel pricing, both components in our pricing formula. Per ton cost in North American Iron Ore increased 20% to $57.25 versus $47.76 last year. The increase was driven primarily by a couple of things. First, approximately $3.40 per ton higher labor cost associated with our new collective bargaining agreement with the United Steel workers.

We also had approximately $2.60 per ton in higher fuel and supply costs primarily due to fuel related products used at the mines such as maintenance materials to mine and grind ore and approximately $1.50 per ton related to our expansion project in Michigan.

In North America Coal average realized revenue for the quarter was $100.78 per ton, an increase of 43% compared with $70.72 per ton realized in the previous year fourth quarter. As we continue our ongoing long-term mine planning and development activities and combine with rising supply service and royalty expenses, we continue to report high cost of goods sold.

In the quarter these costs were $110.61 per ton. Our focus in the segment is to position the mines to be more efficient producers for the time when market demand improve. Asia-Pacific iron ore experienced the greatest degree of margin improvement. With average price realization increasing 47% for the quarter versus the prior year fourth quarter, primarily reflecting the international benchmark settlements for Australian producers.

Cost of goods sold per ton increased just 5% for the quarter. Costs were negatively impacted due to fair value accounting adjustment and higher depreciation and amortization related to our acquisition of Portman minority interest as Joe mentioned. Cash cost improved from $39.37 per ton in the fourth quarter last year to $31.83 per ton this year. Sales margin jumped $42 million to $67 million for the quarter compared with $25 million in 2007.

Turning to the balance sheet; at December 31, 2008 cash and cash equivalents stood at $179 million versus $157 million at December 31, 2007. Long-term debt was $525 million including the $325 million private placement we closed earlier in the year, before the height of the difficult credit environment and our $200 million term loan. Its worth noting that we remain in a position of great financial flexibility. Our revolving credit facility in term notes loan are not due until 2012, and the first trunk of the senior notes is not due until 2013.

We currently have $600 million of capacity under our revolver. At year end, our ratio of debt to 2008 EBITDA was 0.6 times and our debt-to-total capital stood at 23%. With cash on hand, the remaining capacity on our revolving credit facility and our credit facilities in the Asia-Pacific business. At year end, Cliffs had approximately $750 million in available liquidity.

Our effective tax rate was 20% down from our nine month rate of 25% and was actually a benefit in the fourth quarter. This was due to some planning initiatives that are likely to result in recovery of previous Australian payment along with deductions related to the output termination at a rate greater than our normal effective rate.

Our operators continue to scrutinize capital projects and other planned expenditures, as you can see in the fact CapEx came in at $183 million for the year, well below our guidance of $240 million. As we've moved some projects into 2009, we're expecting expenditures this year of approximately $200 million. We will proceed consciously with investments this year, but let me assure you we will only spend to ensure we are properly positioned when the market improves.

Cash generated from operations in just the fourth quarter was $271 million. This compares with approximately $208 million in the same quarter last year. We think it's particularly important to note that this occurred despite the environment we are currently operating in. For the full year, cash from operations totaled $853 million. This was a 195% increase versus 2007.

Also in light of the current environment, I wanted to provide some commentary around Cliffs' very manageable position on our pension and OPEB liability. At year end, our total liability was approximately $1 billion. Of that amount, we are currently funded at $540 million. To reach our minimum funding level required, we expect to make an estimated cash contribution in 2009 of approximately $67 million. While this is $23 million higher than our 2008 contribution, the amount will not be problematic based on our liquidity and our expectations for strong cash generation in the back half of the year.

With that, I'll turn the call back to Joe.

Joseph A. Carrabba

Thanks Laurie. Before we take your question, I'll discuss our current outlook for 2009. Our priority in 2009 is to generate and preserve cash until visibility returns. The continuing production cuts by steel producers and low capacity utilization make it extremely difficult to provide realistic guidance.

Moreover, negotiations for benchmark iron ore settlements in international met coal contracts are ongoing and will have a meaningful impact on our forecast for revenue per ton. There are limited data points and little visibility. As such, we are unable to provide guidance for revenue in each of our business segments today. However, we will tell you, our goals around where we are currently operating.

As I said previously in North American Iron Ore, our annualized production rate is currently at approximately 15 million equity tons. At this rate of production our cost per ton for 2009 is expected to be between $70 and $80 per ton. The increase for 2008 will be the result of lower fixed cost leverage as about a third of our cost of goods sold in 2008 is fixed.

We also previously said that we have contractual obligations for North American Iron Ore sales of approximately 18 million tons in 2009. These commitments combined with the eventual revenue recognition of the aforementioned 1.2 million deferred tons will total approximately 19 million tons of sales volume for 2009. The number assumes, we will recognize build and wholesales anticipated to occur in the fourth quarter of 2009. It goes without saying, we will continue to monitor the marketplace and adjust production up or down as needed.

In North American Coal, we have initiated similar production curtailments. We are currently operating at an annualized production rate of approximately 3.6 million tons. In terms of sales volume, we currently have approximately 1.6 million tons of coal contracted. This is approximately 45% of our current production rate and is priced at an average of $108 per ton which includes production earmarks to fulfill obligations or tons deferred as a result of task production disruptions.

As we and others in the industry are in the midst of negotiations for international contracts, we're not in a position to provide average revenue guidance for our uncommitted 2009 production. Throughout the year, we will continue our long-term mine planning and development work, including taking delivery of our new continuous miners and at the Pinnacle mine. As a result, cost per ton is expected to be in the $110 to $120 range.

As I mentioned we are seeing some positive signs out of our Asia-Pacific based businesses. Our Asia-Pacific Iron Ore business segment is expected to produce sales volumes of 8.4 million tons. We are looking for cost per ton of approximately $50 to $60.

Once the relevant price negotiations have concluded, we should be able to provide additional guidance and our outlook for the year. Despite the year's radical shifts, I am extremely proud of Cliffs' performance in 2008. In addition to our financial results, we continue to make progress in our strategy to build scale through diversification.

Today, I expect the wisdom of adopting this strategy which included creating multiple revenue streams through product and end-market diversification will become extremely apparent in the coming year. I also believe we are well positioned to meet the challenges ahead and we'll be ready to capitalize on opportunities that these difficult times can yield.

With that, we will open the call for questions.

Steve Baisden

Sarah, we're ready to go ahead and take questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of David MacGregor from Longbow Research. Your line is now open.

David MacGregor - Longbow Research

Yes, good morning everyone.

Joseph Carrabba

Good morning, David.

Laurie Brlas

Good morning, David.

David MacGregor - Longbow Research

Joe, what assurance can you offer investors that the 18 million tons of North American take-or-pay is a number we can rely upon?

Joseph Carrabba

Well David I would say we have contracts as you know in place that have withstood the test of time. These are long term contracts that at times we have used different mechanisms both from of the customer and our side to resolve disputes. So we think they're extremely strong from a legal sense and they well understood by ourselves and by our customers.

And I think in the current environment, the most positive evidence that I could give you or assurances is that year-end the 1.2 million tons that will be consumed sometime in 2009, those payments where made in full by those customers on that take-or-pay arrangement.

David MacGregor - Longbow Research

Is it possible that you would negotiate a portion of that 18 million tons into 2010, much the same way as that 1.2 occurred transitioning into '09?

Joseph Carrabba

I think anything is possible David, given this environment and I don't think there are any absolutes. But at this point in time, we're pretty firm on that volume.

David MacGregor - Longbow Research

Okay. And then what's the carry forward with respect to pricing in '09 in terms of benefit? You've expressed in the past in terms of nothing else changes, pricing would be up X, I am just wondering what that number is?

Laurie Brlas

Yeah, the number that we talked about in June which is about $107 per ton, that math still stands and that was a... and assuming nothing else changes. So if you want think about the sort of third relationship that we've talked about in start with that and then think about what you think is going to happen with pellet pricing and what you think is going happen with steel and PPI. So, if it's still good starting point.

David MacGregor - Longbow Research

You had expressed that the pass in terms of the percentage increase year-over-year, could you give that for me here?

Joseph Carrabba

David, it was I think, at the time we said a 26% increase. So it just the matter of taking and we were at a lower average revenue per ton in 2008 basement. It's just a matter of taking where we ended up for 2008 revenue per ton which in North America Iron Ore was $86. So whatever the percentage change between that 86 and 107 that would be -- that's how we got to that percentage.

David MacGregor - Longbow Research

Okay. And just a couple of final questions. We launch the better part of $200 million on our currency hedge in 2008. I guess I realize you want to hedge against the weak U.S. dollar, but the weak U.S. environment is typically accompanied by a stronger spot market pricing for iron ore. I am just wondering is there an alterative to engaging in these hedges where we get these massive margin costs such as maybe, adjusting your contracts to spot mix to favorable a little more spot so that you can get benefit of the for that relationship with the dollar?

Laurie Brlas

Yeah, definitely.

David MacGregor - Longbow Research

Or how you deal with these big margin costs?

Laurie Brlas

Yeah, I definitely understand your point there David. I think to understand thus we have to go back to the fact that Portman was a separate publicly traded company on the ASX and so they had we had shareholders there. And the approach is a little different because they have revenue in the U.S. dollar and cost in the Aussie dollar.

David MacGregor - Longbow Research

Right.

Laurie Brlas

One of the advantages that we see now in 100% ownership is the way that we can look at things like hedges and we're taking a different look at it. And really believe that we have some natural hedges within the company.

David MacGregor - Longbow Research

Right.

Laurie Brlas

So we will be less likely to enter into hedges of that magnitude in the future.

David MacGregor - Longbow Research

Okay. And then last question just on Amapa, that was a much bigger expected loss in '09 and I think most people are anticipating. Can you just give us an update on what's going on there and what's the possibility that you come back mid-year with an even bigger loss expectation?

Joseph Carrabba

Yeah. David, I would be happy to address Amapa. What really occurred in 2008 from our Greenfield mine, we got it built within the parameters of the cost that we look for where our work was reworked and ready to go and is ready to go, as well as the Port.

The deal between MMX, the lead partner, the 70% partner at Anglo was announced mid-January of 2008 and that deal wasn't concluded until mid-August of right in 2008, right in a critical time of the Amapa start up. And I would have to say there was a little bit of Anglo could not get in a position to manage it. And I think a few people took their eye off the ball as ramp ups are always difficult.

As you go into 2009, my congratulations to the Anglo team that has taken over the management of Amapa down in Brazil. We've got a new management team in place they are focused, the numbers are heading the right way, and the costs are just a matter of activity versus inactivity in the ramp up pace. So we think the numbers are firm, we've also put our own some on those numbers if you will in a very conservative fashion and we think they're in good shape.

David MacGregor - Longbow Research

Joe, what's the production plan for Amapa now for '09?

Joseph Carrabba

The production plan is to hit the ramp up range if you listen to the Anglo call of the 6.5 million by year-end and we're looking at about 3 million tons from our side, David.

David MacGregor - Longbow Research

Okay.

Steve Baisden

David I just want to clarify to and just spoke on our North American Iron Ore revenue per ton for 2008, it was actually $93 as we reported in the release.

David MacGregor - Longbow Research

Right. Okay. Thanks very much.

Joseph Carrabba

Yeah. Thanks, David.

Operator

Your next question comes from the line of Michael Gambardella from J.P. Morgan. Your line is now open.

Michael Gambardella - J.P. Morgan

Good morning Joe, how are you.

Joseph Carrabba

Hi Mike, doing well.

Michael Gambardella - J.P. Morgan

Good. Hey Joe, what is your kind of plan B for operating North American Iron Ore and Coal if the market kind of stay at this ridiculously low level for the whole year?

Joseph Carrabba

Well Mike, we worked very hard on this scenario plan both on the upside as well as the downside. We do have a firm plan B. We know the cost per line of production units in all of our mines, our business improvement folks are very much focused on the cost reduction side.

And as you saw in the recent announcements where we're going to take Northshore a 100% mine owned down in April for a month. We've taken the Pinnacle mine down for a month. And so we will continue to match production with sales and particularly keep an strong eye on inventories. But there is a very strong plan based on focusing on cash to balance these mines that could be enacted very quickly throughout the year.

Michael Gambardella - J.P. Morgan

And is there anything you can do to bring down those costs at the coal operations in the North America, they've jumped quite a bit?

Joseph Carrabba

Certainly as Mike what we have done in the initial plan is through 2008 we struggled to get the machinery we needed to get ahead of the development in long haul that is the continuous miners. And certainly to get the people that we could get in place than to use that new equipment. Well as you can imagine the new equipment has come in.

We have accepted delivery of the continuous miners. And at this point in time we are continuing all of our developments, so we can get ready for the upturn of the business. But everything is discretionary in this business. And if we need to drop those costs and drop the development back once we feel like we're in a little safer position going forward, we can certainly do that.

Michael Gambardella - J.P. Morgan

And last question on Portman. Earlier in the year, the beginning of the year when we were talking, you mentioned that the Portman operation was seeing a decent order book coming out of China for iron ore. Anything... any update on that?

David MacGregor - Longbow Research

I think the order book is strong Mike, through the first half of the year. It's not full, but it is certainly strong. I think the strategy that the guys in Australia and sitting in China on our behalf, pointing their tonnage at this good solid second tier mills that are supplying... that are producing long products, where the China stimulus is certainly paying off for us, but it's a very strong order book at this point in time.

Michael Gambardella - J.P. Morgan

And then several other Australian iron ore properties have had interest in actual bids by Chinese for these iron ore properties in Australia have you discussed any of that to Portman?

Joseph Carrabba

We have not. We have not had any discussion or any phone calls around Portman.

Michael Gambardella - J.P. Morgan

Okay. Thanks a lot Joe.

David MacGregor - Longbow Research

Thanks, Mike

Operator

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

Jorge Beristain - Deutsche Bank

Hi, Joe, Laurie and Steve. Jorge Beristain from Deutsche Bank here. Just following up on that coal question again the guidance on coal, several quarters now sequentially continues to be a negative surprise and I just wanted to understand you quoted very clearly your revenue per ton previously contracted was about $108. You're quoting your unit costs projected in a $110 to $120 range.

So it's pretty easy to figure that unless you get a price increase in the upcoming negotiations, you're going to below water on those coal operations. So my question is, is it a zero, one thing where if you don't get a minimum price that you're seeking, you will then back away from the un-contracted volume forecast and just as you said those costs become discretionary. Could you elaborate on that?

Joseph Carrabba

Yes, I certainly can, Jorge. Certainly the $108 blended revenue price that we have for the committed tons, as you can imagine, it's a blend of carry over tons which is about 50% and new contracted tons that we have sold. So, we are anticipating prices above that as we go forward with the uncommitted tons. It would be very difficult for us to sell tons below what our production tons are, if we can't hold discretionary cost down as well in conjunction with the pricing that we see and the visibility then we certainly won't run these mines at a negative margin this year.

Jorge Beristain - Deutsche Bank

I am sorry could you clarify, you certainly will run them at a negative margin or you would not?

Joseph Carrabba

Right Jorge, we will not.

Laurie Brlas

We will not.

Jorge Beristain - Deutsche Bank

Okay. And my... just a follow-up can you give us a sense of the profile of unit costs expected in the coal business in medium term next two or three years, because you guys keep putting in a lot of money down there, and we're just trying to get a sense of will the unit cost there ever kind of comeback down?

Joseph Carrabba

I think they will, Jorge, obviously, I will be the first to admit as I have to many investors and shareholders that we are behind in turning these mines around. We do have specific projects in mind that will also help the operating cost and the productivity of both Oak Grove and Pinnacle. We have chosen not to spend that capital yet until the market clears a little bit.

But we have the engineering in those projects ready to go. And also it's very volume sensitive at the 3.6 million tons, one there is now a selling constraint if you will with the market backing off. But we also expect to get these mines into the 5 to 6 million ton range as well over the next couple of years.

Jorge Beristain - Deutsche Bank

Okay. And then just lastly on the iron ore business in North America, I mean the data through mid-February I guess is pointing down, roughly down 50% year-on-year. I think based on your current sales volume guidance if I recall correctly, you expect sales to be down roughly 20% year-on-year including the carryover of, is it now 4.2 million tons from last year?

Laurie Brlas

No, 1.2.

Joseph Carrabba

1.2 Jorge.

Jorge Beristain - Deutsche Bank

Right. But I also thought our side. But there is also 3 million tons in inventory that you plan to also sell.

Laurie Brlas

But that wouldn't be added to. That wouldn't be in move of producing additional ton.

Joseph Carrabba

Right.

Jorge Beristain - Deutsche Bank

Yes. So I guess, what I'm trying to ask is do you think that your sales volume expectations are still realistic in light of what the data that we've seen year-to-date of steel output still being down roughly 50% in the U.S.?

Joseph Carrabba

We believe given the way that our contracts are written and administered that yes, that volume is still secured.

Jorge Beristain - Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from the line of Lloyd O'Carroll from Davenport and Company. Your line is now open.

Unidentified Analyst

Hi this is Chris for Lloyd. In the North America Coal segment your cost guidance, what volume does that assume?

Laurie Brlas

Yeah 3.5 million tons.

Joseph Carrabba

Yeah.

Laurie Brlas

We're currently producing at.

Unidentified Analyst

Okay. So you're relatively confident that you will be able to sell that volume once the contracts are negotiated?

Joseph Carrabba

We think so, these are low volatile mines. They don't have a lot of competition than other mines and they do an export feature that they goes with them so yeah, at this point in time that's where we are facing those cross figures often.

Unidentified Analyst

Okay. Turning to the hedges in Asia-Pacific, how far off did hedges go?

Laurie Brlas

We have some that go out three years, but most of them were a real loss in the current year and 2010. There is a really good detailed table in our 10-K which should be filed today or tomorrow.

Unidentified Analyst

Okay. And then can you just quickly talk about the tax benefit you received in the quarter?

Laurie Brlas

Sure. There are several tax planning strategies that we've got in place and some of them are we're not able to trigger because of the 100% ownership of Portman, some of them are involved maximizing or depletion credit. The other thing is that because of depletion the rate we pay on mining income is lower than actually the benefit we get on certain things like the asset terminations. So we got a higher benefit rate on that than the raising pay on our income.

Unidentified Analyst

Okay. Thank you.

Joseph Carrabba

Thanks.

Steve Baisden

Thanks, Chris.

Operator

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

Mark Liinamaa - Morgan Stanley

Good morning.

Joseph Carrabba

Good morning, Mark.

Laurie Brlas

Good morning.

Mark Liinamaa - Morgan Stanley

Can you comment at all on what volumes you have under contract for iron ore in 2010, and also give a little bit more detail around any price floors that you may have in the iron ore business for this year? Thanks.

Laurie Brlas

I don't think we give a lot -- I mean our contract run out through an average of six years at this point in time. So I don't know an exact number and I don't think we would give an exact number. But there wouldn't be a material change in the volumes that we would have under contract for 2010.

Mark Liinamaa - Morgan Stanley

Okay. And any -- can you comment at all what downside protection is?

Laurie Brlas

The formula in it -- of itself is our downside protection on and there are as you saw on the way up some caps and colors and some things that create a little bit of a slowing. Overall the formula based pricing takes up volatility. So we go up slower than everyone else and we will go down slower than everyone else. And then that's what these contracts are designed to do and I think that we're going to see them come into play now.

Mark Liinamaa - Morgan Stanley

So, if we did get a 30% fall in global iron ore prices and probably coal prices staying roughly where we are, where are we roughly with that put?

Laurie Brlas

We are waiting to get some more visibility on that before we give absolute numbers, but certainly if you think about as small as 30% and only about a third of drop through to us with our formulas that's a 10% decrease. And obviously if steel price income down, we get a little bit more than a 10% decease but we wouldn't get the full 30.

Mark Liinamaa - Morgan Stanley

Okay. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Mark Parr from KeyBanc Capital Markets. Your line is now open.

Philip Gibbs - KeyBanc Capital Markets

Hi, this is Phil Gibbs for Mark. How are you?

Laurie Brlas

Good morning.

Joseph Carrabba

Good morning Mark. Hey Phil, how you're doing?

Philip Gibbs - KeyBanc Capital Markets

Doing okay. That 45% backlog for say against your production in the North American coal business, I mean how do we look at the other 55% that's not contracted for the year? Is that a reflection of lack of export demand given the macro realities recently?

Joseph Carrabba

Well it certainly is Phil. I think it's that and the buying season if you will is open right now, remember Europe works on an April-to-April basis. So there's still time for the international buyers to lock their contracts up. And given the uncertainty of the environment and where coal supplies are in Europe right now it's just been a very quite negotiating season at this point in time.

Philip Gibbs - KeyBanc Capital Markets

And what sort of volume assumption do you have around that $110 to $120 as far as the cost per ton?

Joseph Carrabba

About 3.5 million.

Philip Gibbs - KeyBanc Capital Markets

Okay. In the North American cost structure this year, North American Iron Ore, how are you looking at that? I mean you provided $70 to $80 per ton range but what are put and takes relative to 2008, given energy and supplies and I know labor cost have likely gone up but what you've done is head count reductions and have had productions curtailments in some facility, temporary closures, how do we weigh those against each other as far as puts and takes?

Laurie Brlas

There is a big component that is this one-third of our cost base in 2008 was fixed. So you have to factor that in when you come down from our production levels in '08 to the 15 million that we're adding in 2009. In addition to that, there was a the Union contract that was settled which we'll add to that days after you that... the fixed variable ratio to calculate a number.

And then there are certain cases were are just some of the costs come up I know a lot of people are looking for a flow through, the decrease in natural gas and diesel fuel and it doesn't work that quickly. We had some hedges in place, not all of it certainly was hedged, but the percentage gets higher as your production comes down. So, if we had our target percent of natural gas hedged, we're little over hedged on a percentage basis as that comes down.

Philip Gibbs - KeyBanc Capital Markets

And what about the production curtailments in the temporary facility closures you're doing in Minnesota? Is that supposed to take any meaningful absolute cost out of the business?

Laurie Brlas

Well that's a variable piece. So if you think about we brought volume down and you've got your fixed component, your variable have to come down as your production comes down. And the way you do that is by not spending on supplies but also taking out a variable labor piece.

Philip Gibbs - KeyBanc Capital Markets

Okay. I was just wondering if you wanted to just put any sort of range around how you came to that... how you came to that number as far as the costs?

Laurie Brlas

Its really the... its rolled up from the bottom and the easiest way to get at the math is to really think about the fixed and variable piece and assume that fixed cost base gets spread over whatever production tons that we've got, whether its 15 or something less so or something more or whatever it is. And then you got the variable piece and our guys in operations job to make sure that that variable piece stays variable and it floats up and down with production.

Philip Gibbs - KeyBanc Capital Markets

Okay. Thank you.

Joseph Carrabba

Thanks.

Steve Baisden

Thanks Phil.

Operator

Your next question comes in the line of Wayne Atwell (ph) from Cazenove. Your line is now open.

Unidentified Analyst

Good morning.

Joseph Carrabba

Good morning, Wayne.

Laurie Brlas

Good morning.

Unidentified Analyst

There's obviously a lot of changes going on the economy some of which unfortunately may be permanent with the auto industry scaling down and manufacturing coming off the steel industry may not come back to its old size. You have long-term contracts in iron ore for your iron ore sales have any of your customers come to you and talked about maybe modifying these contracts and pulling down the volumes maybe stretching it out, but taking less over the next few years.

Joseph Carrabba

Of course Wayne, all we're in discussions with all customers just as we are in discussions with all of our vendors on the same types of scenarios that maybe going on. It would be only be prudent for in this environment for everybody to be in a number of conversations. But certainly we've had conversations with our customers given the economic times.

Unidentified Analyst

So is there anything you can give us in terms of heads-up, can you maybe give us a probability that there might be a change, presumably they would be coming down that up. And would you say that there is a good change you can hold your volumes or there is a high probability you have to modify them on the downside or can you give us a little breathing on what might happen?

Joseph Carrabba

It's really hard for me to lookout into give the doom state scenario which we just pinned at in manufacturing autos to do that. But what I will tell you again today as we speak, we honored our contracts as things were on the way up, as you know we were well below oil pricing in our contracts that our customers took benefit of.

And we expect those contracts to be honored on the downside as well, which is our minimum take or pay in the volumes as they go forward. And our pricing formula as you know is build to take as Laurie said volatility out on the way up and volatility out on the way down. So that's how these were constructed and we are quite comfortable with the language in those contracts.

Unidentified Analyst

Thank you. And if we could talk about coal for a second, if we think about the long-term pricing for metallurgical coal over the last number of years, your cost structure is about inline with maybe a little higher than the average metallurgical coal pricing. Is there any probability that you can take your cost down materially $20-$30-$40 a ton to put you in a better margin outlook for that particular product or can you talk to us about the outlook for costs over the next three to five years?

Joseph Carrabba

Sure. As you know the Appalachian coal basin is certainly continuing to be constricted. As far as expansion, there was very little expansion again with the high prices we saw last year and obviously everybody was trying very hard to sell more coal. When you put the new environmental laws and restrictions that are coming in to Center Appalachia the new install safety regulations which let me say we highly endorse within the mines, but certainly has been a loss of productivity which are increasing costs and make less -- make fewer mining properties in the coal basin available to be mined profitably.

Certainly we've got some ideas on how to lower costs, that's why we bought these mines, we feel that's where we are very good at. As I described earlier in the call we have specific projects that do require some capital and we are just not going to trigger those until we can see the events unfold in 2009. But it's certainly our thoughts and our strategy to lower the cost in those two operating coal mines that we have.

Unidentified Analyst

Can you give us any kind of broad thought in terms of how much you might be able to pull cost down on those properties?

Joseph Carrabba

I really can't at this point in time, Wayne sorry.

Unidentified Analyst

Okay. Thank you.

Steve Baisden

Sarah, there are no more questions. We'll go ahead and conclude the call. Go ahead, I am sorry.

Operator

There is one more question from Brian Riley from Wachovia Securities.

Joseph Carrabba

Good morning, Brian.

Brian Riley - Wachovia Securities

Good morning. Yeah I was just wondering this is sort of balance sheet or a cash flow question, but if you exclude your balance sheet changes could you give me a -- what I call a net cash flow number or the year-end for Q4 if you have that available?

Joseph Carrabba

I don't Brian if you want we can talk about it offline. I can give you a call and we can walk through.

Laurie Brlas

The full cash flow statement with the company information will be in the 10-K as well.

Brian Riley - Wachovia Securities

Right. And that will be added in another day or so?

Joseph Carrabba

Yeah. That's right.

Brian Riley - Wachovia Securities

Yeah. And so I can call and get the quarter number?

Joseph Carrabba

Sure, I can walk you through that.

Laurie Brlas

Okay.

Brian Riley - Wachovia Securities

Okay. And then the CapEx I came on later I apologize, did you give CapEx guidance for the year?

Joseph Carrabba

We did 200 million.

Brian Riley - Wachovia Securities

200. And acquisitions you anticipate spending on acquisition in '09?

Joseph Carrabba

Well certainly we -- our business development group is still on board they're still looking at lots of opportunities, but we are very cautious in making any moves. I would hate to exclude all the 2009 the things do turn around. But we're certainly going to be very cautious in the first half of the year until we can get some visibility into where the economy is going.

Brian Riley - Wachovia Securities

Great, and good. Thank you very much.

Joseph Carrabba

Thank you.

Operator

Your next question comes from the line David MacGregor from Longbow Research. Your line is now is now open.

David MacGregor - Longbow Research

Just a couple of follow-ons. When you look at the fixed cost absorption associated with going... went through your cost and 2008, and going from 22 odd million down to 18 million it looks like negative productivity is about $6 a ton, I just wonder or thinking about the correctly.

And if that's the case, taking where you were in '08 to the midpoint of your '09 guidance is about $18 increment, so that would be about one-third. It seems like the energy might be a bigger part and I was just wondering if you could give us some sense of what the energy in that over hedged position might be contributing to the costs story?

Laurie Brlas

We can walk you through the detail. But I think your $6 is a bit low on the volume.

David MacGregor - Longbow Research

Okay. So is the one-third kind of a rough approximation, is actually maybe a little bit of a bigger proportion for fixed cost?

Laurie Brlas

Yeah. It's one-third of our '08, so we translated into well over $10 of the increment.

David MacGregor - Longbow Research

Okay.

Laurie Brlas

And then we've got the labor contract which is another piece of it.

David MacGregor - Longbow Research

What does that represent in terms of per ton?

Laurie Brlas

It's probably $3 or $4.

David MacGregor - Longbow Research

Okay. Just the recent news on China that they're going to consolidate down into three groups, does that going to impact your Portman business over 2009 maybe 2010?

Joseph Carrabba

Thanks, David. I mean again credit to the Portman Group that we bought. The Portman has been around for quite some time in this business. When they went through and did their customer selection many years ago, they actually took this into consideration, have a lot of foresight and have tried very hard to tend to work with quality customers through the year. And I think through the years I think that's paying off now and will pay off in the future.

David MacGregor - Longbow Research

Okay. So, there is no real risk to that business at this point.

Joseph Carrabba

We don't believe so.

David MacGregor - Longbow Research

Okay. And then finally just your met coal business, your overall hard coke and coal and I realize that's kind of the upper-end of the met coal complex. You talk -- can you talk about what might a little bit different with respect to pricing for that grade of coal rather than maybe the broader met coal complex and some of the softer grades and the PCI grades?

Joseph Carrabba

We certainly feel that it carries a higher premium than the grades that you just mentioned. And it has less competition in the marketplace. Certainly the overall coal in Alabama and that Blueprint seem has been world where we -- this is this the same coal that your most of mines down there and has a very nice exportable feature out of the Port of Mobeo (ph), that coal has always commended a high premium. So we would have expectations and so in that at a premium price when benchmark pricing has finally settled.

David MacGregor - Longbow Research

Do you have any control over pricing at all or are you a complete price taker on your coal?

Joseph Carrabba

On the coal we do have a... it is much more negotiated than the iron ore, which we are price taker on. But it's certainly individual negotiations and it depends on the blends that the customers need and the sources that they can get their low raw materials from.

David MacGregor - Longbow Research

Okay. And then your year-end iron ore inventories?

Joseph Carrabba

David I think we would add about 3.5 million tons.

Laurie Brlas

Yes. And that's right 3.5 million.

David MacGregor - Longbow Research

2.5 million tons?

Laurie Brlas

Yes. Right in that range.

David MacGregor - Longbow Research

And use LIFO accounting for the North American Iron Ore?

Laurie Brlas

Yes.

David MacGregor - Longbow Research

Is that correct?

Laurie Brlas

Yeah.

David MacGregor - Longbow Research

Okay. Great, thanks very much.

Joseph Carrabba

Hey, thanks

Operator

There are no further questions at this time.

Steve Baisden

Great. Well thanks everyone for joining us on the call today. Please feel free to follow-up with me on any additional questions you might have. Thank you, Sarah.

Joseph Carrabba

Thank you.

Laurie Brlas

Thanks.

Operator

This concludes today's conference call. You may now disconnect.

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