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Cliffs Natural Resources, Inc. (NYSE:CLF)

Q2 2009 Earnings Call

July 30, 2009 10:00 AM ET

Executives

Steve Baisden - Director, Investor Relations and Corporate Communications

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

Laurie Brlas - Executive Vice President and Chief Financial Officer

Analysts

Kuni M. Chen - BAS-ML

Mark Liinamaa - Morgan Stanley

Luther Lu - FBR Capital Market

Wayne Atwell - Casimir Capital

Operator

Good morning. My name is Andrea, and I will be your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2009 Second Quarter and First Half Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. At this time, I would like to introduce Steve Baisden, Director of Investor Relations and Corporate Communication. Mr. Baisden.

Steve Baisden

Thank you, Andrea. Before we get started, 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 it's forward-looking statements are based on reasonable assumptions. Such statements are a 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 Forms 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 and available for replay for approximately 30 days. Joining me today are Cliff's 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 today. Considering the difficult economic environment, our team is managing through. I'm very pleased with our performance in a number of areas during the second quarter.

First, despite what many are calling the bottom of the cycle for steel production in the U.S. and Canada. Our North American Iron Ore segment managed to achieve $34 million and positive sales margin for the quarter.

Impressive for a business was such a tremendous fixed cost base. Second, our North American Coal business narrowed its sales margin loss on both year-over-year and sequential basis to $19 million. And finally, our Asia-Pacific Iron Ore segment is positioned to have a record year in terms of sales volume.

I'm extremely proud of the fact that operating results for the quarter were breakeven, adjusting for the $17 million related to retroactive pricing adjustments outlined in our press release.

This is now to say that we didn't experience our challenges. At Sonoma Coal, we are producing more thermal coal out of the current section being mined that was anticipated at this point in the year. An issue we expect to address through changes at our mind plan going forward. At normal (ph) continues to ramp at a slower pace and we would like or had expected. Of course, the market environment in North America continues to be extremely challenging and this have a tremendous impact on sales volume.

As previously announced during the quarter, we also undertook initiatives to enhance our financial flexibility through the public offering of 17.25 million common shares, raising $348 million along with the decrease in the quarterly dividend and reductions in compensation from the Board through all levels of management.

I would like to note that these decisions were not taken lightly and I recognize the scarifies all of our stakeholders are making, including our shareholders and employees throughout the organization. However, these steps have served to bolster our balance sheet and cash flow and where necessary, given the uncertainty at the time of the announcements.

They have also resulted in a meaningful lower cost structure with SG&A down 55% from the second quarter of 2008. Strategically, these steps give us the ability to fund capital expenditures pay down debt and the possibly take advantage of bolt on acquisitions where increase scale can support our long-term vision. As you know, our North American operations have taken the run of the macroeconomic decline, strongly reinforcing our geographic diversification efforts.

Our Asia-Pacific assets are providing revenue streams that are helping significantly to offset the weakness in North America. Offset the benefits of our Asia-Pacific operations, we would have no doubt experienced declines, and sales and profitability well beyond those currently expected for the year. Also reinforcing our strategy are the long-term sales contracts we've had in place for many years with steel producers in North America.

While the world pellet price has come down 48% this year, because of the formula based pricing and lag year adjustments contained in our contracts. We're estimating our average revenue per ton in North American Iron Ore will be down only by 15 to 20%.

Preliminary signs of stabilization in the North America still making industry are encouraging. Currently we believe that second quarter will mark our production low point in this cycle. As sales volume is rebound, we will gain leverage over fixed cost and improve profitability.

Nevertheless until sustainable progress is realized, management will continue to drive efforts to maintain flexibility, reduce cost and preserve cash flow. And our operation teams remained focused on striking a prudent balance between production and demand.

Recently steel makers in Europe and glass furnace pellet producers agreed to advice settlement decreased of approximately 48% with the Eastern Canadian producers subsequently adopting the same decrease.

This is provided more clarity regarding our North American pellet pricing. With regard to our Asia-Pacific Iron ore business, we are currently selling under provisional pricing to our customers in China consistent with the 2009 settlement for lump and fines reached between producers and other agent based consumers outside of China. I will provide additional details on the operations and outlook before we open the call for questions.

But we'll now turn the call over to Laurie for our financial review of the second quarter and the first half.

Laurie Brlas

Thank you, Joe. Good morning, everyone. The dramatically weaker year-over-year global demand for steel making raw material was reflected in volume and pricing reductions during the quarter, leading to the 61% decline in consolidated revenues to $390 million.

We reported net income of $45 million or $0.36 per diluted share in the second quarter compared with $270 million or $2.57 per diluted share for the year ago period. As Joe said, we're very pleased that after adjusting for the $17 million retroactive impact, first quarter sales had and operating income in the second quarter at the operating income line we were breakeven.

However, because of these adjustments, our six months comparisons are much more indicative of actual operating results then what you see on the quarterly P&L. With the first six months of 2009, consolidated revenues declined 43% to $855 million from $1.5 billion in the same 2008 period. Compared with the year ago, operating loss for the first half of 2009 was $6 million versus operating income of $452 million. In the earnings, 38 million net income $0.132 per share versus $287 million or $2.73 per diluted share in the first half of 2008.

To provide more insight into actual operating performance, in our earnings release issued last night and our discussion today, we've adjusted our quarterly segment information for retroactive impact of price settlement from the first quarter sales in both years.

In North American Iron Ore, we reported positive sales margin of $34 million. This compares to the $273 million and sales margin generated in the second quarter of 2008. The year-over-year decline primarily reflected the 58% decline in sales volume. Lower pricing related to decline in hot band steel, pellet settlement another factors as well as deleveraging the fixed cost.

Per ton revenues in North American Iron Ore decreased slightly during the second quarter to $98.88 compared with last year's $102.4. Total costs including DD&A were up 59% to $84 per ton. As a result of shutdown to balance production with demand, our cost per ton includes a significant component of vital cost. This vital cost component for the quarter was $22 per ton. On a cash basis or per ton cost increased 53% to $78 from $51 a year ago.

In North American Coal, average realized revenue for the second quarter was just under $94 per ton, an increase of 2% from the $92 per ton realized in the second quarter of 2008.

However, much higher average cost of good sold of approximately a $150 per ton like to the $66 per ton sales margin launch for this segment. Similar to North American Iron Ore, lower volumes which were down 49% to 300,000 tons have resulted in much more leverage of our fixed cost.

In our Asia-Pacific Iron Ore business, revenue per ton averaged about $59 for the second quarter. This represent a decline of 47%, reflecting the current year's lower pricing is significant mix change year-over-year emphasizing Fine versus Lump Ore as well as a foreign exchange impact.

We continued to successfully place tons with Chinese steel makers that are accepting shipments under provisional pricing arrangement consistent with those reached between large Australian minors and other Asia based fuel producers.

On the cost side, average per ton cost of good sold increased 3% to approximately $59 during this quarter.

Contributing to this was $4 per ton related to inventory step up, resulting from our Amapa acquisition of the former Portman limited last year. On a cash basis; cost per ton declined from $50 to about $38 or %24 from last year.

Favorable exchange rates, lower mining cost and lower royalties are all combined to lower cash cost, during the quarter. Turning to Cliff's 45% economic interest in Sonoma Coal. The operation generated $23 million in revenues and a $7 million loss in sales margin for the quarter.

Per ton cost were $104. However for the year, we are expecting cost per ton of between 75 and $85. As Joe indicated, we also had a higher than expected proportion of Thermal Coal production versus Met Coal.

Production at Amapa more than doubled from last year's second quarter to approximately 500,000 ton. Equity loss was $25 million, primarily reflecting unanticipated non-operating items including a $3.4 million inventory write-down and $7 million asset impairment charge, as well as an unfavorable variance in exchange rates.

We maintaining our estimate of 50 to 60 million in total equity losses for the full year, including the current quarter non-operating items.

Turning to the balance sheet, our liquidity position remains strong. At second quarter end 2009, cash and cash equivalents stood at $275 million versus a $179 million at December 31, 2008. Major uses of cash year-to-date was $51 million in PP&E and 38 million related to investments in the Amapa operations. Cash used by operating activities with a $151 million, primarily due to the lower earnings.

Long-term debt was $525 million, none of which is due prior to 2012 and we have no borrowings under our $600 million revolver. Also as Joe mentioned previously, we rate $348 million from our equity offering in May.

As many of you know, the primary reason for equity offering was to improve our ability to maintain financial flexibility. With iron ore settlements occurring at the lower end of our expected range. We are carefully monitoring our operating forecast and resulting financial position. Our result over the next several quarters will be dependant on a number of factors including exchange rates, customer shipping schedules and hot band steel pricing.

Given our nature, should we see any covenant issues we would proactively engage with our bank partners to ensure we continue to maintain maximum flexibility under any circumstance.

Moving to our outlook for the balance of 2009, we expect to generate cash from operation in the range of 200 million to $250 million for the year. This is the result of our strong focus on cash cost and working capital and limited SG&A spending combined with cost collections from customers in the second half of the year.

Cash collections will be significantly higher as we typically generate 60% of our revenue in the back half of the year and we will collect cash for our traditional stock pile sales. This would imply positive free cash flow generation for the year based on our expectation of a $130 million in CapEx.

With regard to income taxes, you may have noticed we reported a income tax benefit for the quarter. We expect a 29% tax benefit for the full year. This is the result of the greater amount of income being derived from tax jurisdictions with lower rates then the U.S. statutory rate, combined with benefits from percentage depletion. This is in contract to our historic rate of about 25%.

Before I turn the call back to Joe, I want to spend a movement to address our hedging program in Asia-Pacific and our current portfolio. As you know, exchange rate fluctuations have varied widely over the last year and had dramatic impacts on our P&L. The legacy of our hedging program hasn't reached in the former Portman Limited being a publicly-traded Australian company with results reported in Australian dollars and sales in U.S. dollars.

Now that Cliff's owns a 100% of Portman, we've changed our program to a U.S. based firm. We expect the size of our hedge book to be correlated more to costs than revenue and as a result the total hedge book will be smaller. This will reduce the volatility in our P&L and better match the hedge book to our exposures.

Over the recent weeks, we've been active in the market setting some of our positions in order to close that gap and have reduced approximately 25% of our overall hedge exposure.

And with that, I'll turn the call back to Joe for an operations review and other expectations for the balance of the year.

Joseph A. Carrabba

Thanks, Laurie. I'll begin with our North American Iron Ore operations where we have contractual obligations for 17 million tons of iron ore pellets in 2009. We expect to collect cash in the current year on this tonnage. As of today, we expect four to 5 million tons of stock pile sales that are unlikely to meet revenue recognition requirements.

As a result, we expect to book 13 to 14 million tons of sales volume. As I touched on previously with iron ore producers and consumers agreeing to a decrease of 48% from blast bonus pellets along with the impact of the other pricing factors, we anticipate average revenue per ton of approximately 75 to $80 this year and average cost return based on 15 million tons of production up between and 70 and $80.

In North American Coal, we continue to anticipate an increase in real demand from North American and European based steel producers, the natural market for our coal production. When this occurs, we expect to better leverage our fixed cost and produce at a much lower per ton cost levels than the 150 to $160 per ton, we are guiding to for the full year. This estimate also includes $23 per ton of DD&A.

Sales volume in North American Coal is expected to be approximately 1.5 million short tons with an average revenue between 95 and a $100 a short ton at the mine now.

Our Asia-Pacific Iron Ore business continues to generate encouraging sales activity with our full year sales volume estimate at 8.5 million tons; up from the previous estimate of 8 million tons.

Based on the estimates that have occurred which are the basis of our estimates on the I'm sorry based on the settlements that have occurred which are the basis of our estimates, we expect to achieve per ton revenue averaging 60 to $65 and cost at 45 to $55 per ton.

At Sonoma, we are projecting sales volume of 1.4 million tons for our 45% economic interest and as Laurie just mentioned, cost per ton of between 75 and $85. We expect average revenue per ton of a 100 to $105.

And with that, we'll open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our next question comes from the line of

Kuni Chen from Bank of America. Your line is open.

Kuni Chen - BAS-ML

Hi. Good morning, everybody.

Joseph Carrabba

Good morning.

Laurie Brlas

Good morning.

Kuni Chen - BAS-ML

Just to start off on the bill and hold sales with 4.5 million tons. Does that I can recognize this revenue in 2010 or kind of does that end up pushing tons from 2010 into 2011 and so forth. Can you also talk about the accounting treatment for bill and hold still seems a little bit uncertain there when you expect to get more clarity on that issue?

Laurie Brlas

When we would get the cash in the current year. So that we have clarity on and that the revenue would be recognized as those ton shift and at this point we see no a reason not to expect that they would all shift in 2010.

Kuni Chen - BAS-ML

Okay. And then on the accounting treatment?

Laurie Brlas

The accounting treatment, we get the cash and so we have debit to cash and a credit to liability that we owe the ton to the people and then we get we book revenue when we shift the ton.

Kuni Chen - BAS-ML

Right. All right that's fine. I guess next question, can you perhaps maybe give us a sensitivity around your sales volumes and how you expect that's the correlated steel utilization rates improved. So for example, what level of sales in North American Iron Ore would you expect to see it, I would say 60, 70% and 80% utilization rates?

Joseph Carrabba

But we would certainly see, if those projections on utilization we're to pick up. Certainly we would see the volumes come across then where we are right now. And would be more of I think of effect on the stock piles at year-end and then of course that would translate into higher volumes.

I don't have an absolute number for there is so many variables around an industry average of 60 -- 70% utilization capacity moving up versus the individual glass furnaces and the stock piles have sit between them in the mind at this point in time.

Kuni Chen - BAS-ML

Right. And then last question on acquisitions; would you consider Met Coal to be basically off your radar screen at this point. Do you think it's a good idea to increase your scale in that coal or perhaps add more to your management strength in that area. Can you just comment on whether or not that's strategically appealing?

Joseph Carrabba

Certainly, our strategy is still firm and I think our results that we've indicated today on the call, indicated the diversified minor approach, the global minor approach is certainly where we want to be versus just to confined a North American integrated glass furnaces. I am still extremely bullish on the Met Coal market in the future years. If you see what's going on in China right now, enquiries are picking up. We do by mine such as the Plano (ph) properties that we bought to build out of a platform. And we're still quite interested in growing the Met Coal business and bullish on the Met Coal market in the future.

Laurie Brlas

Great, thanks. Well, turn it over.

Operator

Your next question comes from line of David Macgregor from Longbow Research. Your line is open.

Unidentified Analyst

Hi, guys. This is actually Rob filling in for David.

Joseph Carrabba

Hi Rob.

Laurie Brlas

Hi Rob.

Unidentified Analyst

Hi. A quick question regarding the bill and hold agreement. Were there any favorable concessions that you guys got better pricing, anything that we can expect to impact 2010?

Joseph Carrabba

We're really just managing the contract. We've had a contract, a long-term contract in place with the majority of the volume that we'll see in bill and hold in those stock piles. And we're managing to the contract and the customers are honoring the contract.

Laurie Brlas

And the contracts require the customers to pay for the tons in 2009 which they will do. In terms of revenue recognition that's a matter of when they actually take it up our hands and that's not as required -- that's not really required by the contracts for them to move with that quickly.

Unidentified Analyst

Okay. And moving on to some of the SG&A savings that you guys had. What -- if you had to quantify what percentage of that would be variable. And then if you could add some color on maybe what's less moving forward if there is a more to come.

Laurie Brlas

I don't know that you'll see much more cut on SG&A beyond the level that we've guided to for the current year. Some of that certainly is variable. If it's a good year -- if they were a different year some of the things will be different. There is variable compensation in that but we've also really watched very closely all of the dollars that we spent.

Joseph Carrabba

Right. Generally, it's a real balance of how far you go and in this business or in all the businesses to cut your strength, your management strength with an SG&A, your CapEx so that when you do -- when things do turnaround and come back up we're able to support the higher volumes. If we had to we were obviously we can always take more cuts. But at this point in time, we're feeling very comfortable with where we are, employees for the upturn.

Unidentified Analyst

Okay. One more question, regarding your Amapa earnings, excluding the one-time items, it appears that it maybe its recovering little bit faster than you originally expected. If pricing was flat heading into 10, and you guys were able to sell everything that you could produce, what would you look at in terms of your expectations for 2010 profitably.

Laurie Brlas

We really haven't start 2010 planning process at this point. So we're really not prepared to comment. We've certainly expected to get a bit better than it is in this year, but we're not ready to give a number at this point in time or a magnitude.

Unidentified Analyst

Okay. Great. Thanks a lot.

Operator

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

Mark Liinamaa - Morgan Stanley

Good morning.

Joseph Carrabba

Hey Mark.

Laurie Brlas

Good morning, Mark.

Mark Liinamaa - Morgan Stanley

In your iron ore segment, you comment about the fixed cost absorption how that was moving cash cost. Can you do the same with the coal business and kind of what a normal run rate cost would be embedded in that 150 to 160 costs you've got?

Laurie Brlas

It's probably 50 to $60 an idle costs in that number.

Mark Liinamaa - Morgan Stanley

50 to 60 cash cost related to idle

Laurie Brlas

Idle cash cost. No.

Mark Liinamaa - Morgan Stanley

Not all cash including -- so that would include the DD&A.

Laurie Brlas

Yes. But that's the idle cost portion of the total cost per ton that will be reporting this year.

Mark Liinamaa - Morgan Stanley

Okay. Thanks. And just to help me get to the almost $100 per ton pellet price this quarter. Can you help me reconcile that and what the moving pieces are to go the full year guidance.

Laurie Brlas

There is a bit of a mix. It just depends on which customers you're expecting to does have some effect on it and when your volumes are lower like this, one shipment can move the numbers a little bit more than normal.

Mark Liinamaa - Morgan Stanley

So the high-end -- what is the high-end that you're correcting some customers for pellets these days?

Joseph Carrabba

We don't really review our pricing with customers Mark and we wouldn't do it at this point in time. It just there is variable pricing just as they're with any business and as Laurie said that the volume is just so sensitive right now being on the low end.

Mark Liinamaa - Morgan Stanley

That was a pretty strong number relative to I think most people are looking for and maybe just finally a lot of talk about our move internationally to more of a spot price mechanism certainly related to the Chinese which would affect you.

Can you talk about how that might affect your pricing dynamics both in Australia and in the United States?

Joseph Carrabba

Sure I think it's obviously a very big topic of conversation in the iron ore business and certainly the pricing settlement structure is changing as we watch with it. And I think you have to separate the two, Mark the Lump and Fines as you see with one of the major Australian producers is driving to an index part time pricing. With that they've announced yesterday as you saw a mix of about two-thirds benchmark in a third I think index or spot. That's probably a pretty healthy mix for our company that has that much volume to work with.

We do not sell any spot in Australia at this point in time going into our Chinese customers. And I think like any dynamics of a pricing structure that's changing you're going to have a mix bag probably for a few years before that get settles. And we will in Australia both Lump and Fines will work with the customers and work through those issues on what they're comfortable with. Not everybody, particular the smaller customers that we deal with, really want the variability of indexed pricing. There is a lot of customers that are quite comfortable with the benchmark as it goes.

North America, people are lumping all that into an index pricing. And I think you have to remember this is pellet market, and the size of the pellet market is rather small when you compare it to the natural ores. And I really haven't seen a mechanism for an index for a pellet pricing at this point in time and well I'm sure you can always be done if they on a relatively small base and you know if you will in North America, I mean we are the market.

Mark Liinamaa - Morgan Stanley

So you expect to see some sort of Eastern Canada benchmark price that you're going to still be setting our contracts to for the foreseeable future?

Joseph Carrabba

For the foreseeable future, I do. Yes they might be some modifications but I haven't worked out or have been asked for a different mechanism for pricing for pellets.

Mark Liinamaa - Morgan Stanley

Okay. Thanks and good luck with that.

Joseph Carrabba

Thanks, Mark.

Operator

(Operator Instructions). Your next question comes from the line of Luther Lu from FBR Capital Market. Your line is open.

Luther Lu - FBR Capital Market

Good morning, Joe and Laurie.

Joseph Carrabba

Good morning, Luther.

Laurie Brlas

Luther?

Luther Lu - FBR Capital Market

Question on this bill and hold, if you don't deliver this year would that impact to 2010 volume at all?

Laurie Brlas

No the 2010 contract year is the 2010 contract year. These are just volumes that are part of the 2009 contract year. And we had bill and hold sales like this last year. Its just the size of the numbers little bigger this year then it was last year.

Luther Lu - FBR Capital Market

Are you seeing the -- as u are the equity partners with your mines, are they cutting back their own production in order to need your minimum take or pay agreements.

Joseph Carrabba

They have and as witnessed Luther, just a few weeks ago the partners which were the minority partner at Hibbing made an announcement to shut Hibbing down until -- Hibbing Taconite down until the spring of 2010.

Luther Lu - FBR Capital Market

Okay. Switching gear to North American Coal. Do you have any contract position for 2010 at all at this point?

Joseph Carrabba

We do not. No.

Luther Lu - FBR Capital Market

Okay. So, if say, from 2010 -- January 2010, are you going to essentially idle the mines again?

Joseph Carrabba

Well, it will depend on our whole bunch of factors, Luther. Obviously between pricing and volumes as we get into the New Year and all those discussions take place. You know, management has taken quick reaction to shut the mines down and bring them back up as business requires and we wouldn't hesitate to continue to do that. We wouldn't operate a mine and just burn cash and put it out on the ground. So we'll continue to operate these on a variable mode as the business dictates.

Laurie Brlas

But in our business model in any year -- a very good year, we wouldn't expect to have contract at this point in time already for 2010. The fact that we don't is not indicative of what we expect volumes to be next year.

Luther Lu - FBR Capital Market

Okay. So for the remainder of 2009, where are you producing these 700,000 tons of a coal that's to be shipped, is in Alabama or in Pinnacle mine?

Joseph Carrabba

It's about it'll be primarily more in Oak Grove in Alabama than it will be in Pinnacle. But there will be some continued shipments out of Pinnacle as well.

Luther Lu - FBR Capital Market

Okay. Got you. Thank you.

Operator

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

Unidentified Analyst

Hi, this is actually Jon Tongu for Brian. I just had a quick question -- I was wondering if you give a little bit more detail on the forces which we led to the tax benefit on the quarter just given where the segment sales margin fell out?

Laurie Brlas

Yeah, it's a interesting question isn't it. It something that we expected a lot of people to have some questions around. We have a couple of things going on and these things actually have a bigger impact again because of our earnings for the year being closer to a breakeven level. A lot of the positive things in our tax profile like depletion are a fixed number.

And so as the earnings get lower they become a larger percentage of that. So that's what we mean by this percentage depletion has a much a bigger effect on our results this year than it did last year. We also have as a percentage of total, our earnings are more in countries with a lower rate the statutory rates in the U.S. So those things combined to get us a benefit for the year.

Unidentified Analyst

Okay. Great, thanks.

Operator

Your next question comes from the line of Chris Hamblin (ph) from Davenport & Company. Your line is open.

Unidentified Analyst

Good morning. Can you just touch on the any impact that the 1.2 million tons that was deferred from '08 to '09 may have had on pricing in the quarter.

Laurie Brlas

I don't think...

Joseph Carrabba

We collected a cash for that last year.

Laurie Brlas

We collected the cash in '08. And so any of the impact just it would be changes in some of the PPI's or steel pricing as those flow-through they could have an impact on pricing.

Unidentified Analyst

So have you all shift any of that tons this year that was deferred from last year.

Laurie Brlas

Yes.

Unidentified Analyst

You have in -- so that shows up in your revenue in the segment is that right.

Laurie Brlas

Yes.

Unidentified Analyst

Good. And then on the balance sheet decline in your deferred revenue line is that simply the change in your shipments what you shipped this year from deferrals last year.

Laurie Brlas

Yes that's what it is. You're right.

Unidentified Analyst

Okay. And then turning to the income statement, can you just touch on the 17 million reported on the miscellaneous line?

Joseph Carrabba

Yeah. What that is Chris -- its inner company financing loans that are denominated on Australian dollars that just the currency change on. And if you want I can watch it through that after the call.

Unidentified Analyst

Okay. All right. That's it. Thank you.

Operator

Your next question comes from the line of Jessica John (ph) from BMO Capital Markets. Your line is open.

Unidentified Analyst

Hi. Good morning.

Joseph Carrabba

Hi, Jessica.

Unidentified Analyst

I just had a question about the revenue line, actually. And I'm trying to reconcile revenues from the divisions with the revenues on the income statement. This is when I have the revenue from the divisions I get about 410 and it looks like your earnings statements that's 390?

Joseph Carrabba

Yeah. Jessica I think its...

Laurie Brlas

Freight minority interest.

Joseph Carrabba

Yeah, between the freight minority interest that we have that and that the absolute product revenues.

Unidentified Analyst

Okay.

Joseph Carrabba

Yeah, it's fell out in the 10-Q, you want to take a look...

Unidentified Analyst

Okay.

Joseph Carrabba

When that files later today.

Unidentified Analyst

Okay. Thank you very much.

Operator

Your next question comes from line of Mark Parr from KeyBanc. Your line is open.

Unidentified Analyst

Hi, good morning guys. This is actually Jason (ph) filling in for Mark.

Joseph Carrabba

Hi Jason.

Unidentified Analyst

Hi. I just one question, I was curios what was the broad value of your shipment expectations for North American Ore? I guess by two or 3 million tons over the last three weeks since your last release early July. I think at that point you were still guiding toward around 16 million tons this year?

Laurie Brlas

We were talking about the contract and the cash expectations. We didn't really go into the shipment expectations in that release. We still have the same cash expectations, cash collection and holding that the customers are within the contract year. And the best thing provided as cash. And that hasn't changed its just the shipping schedule has firmed up and that for us to share those with you.

Unidentified Analyst

Okay. All right. Thank you.

Operator

Your next question comes from the line of Wayne Atwell from Casimir Capital. Your line is open.

Wayne Atwell - Casimir Capital

Good morning.

Joseph Carrabba

Hi Wayne.

Laurie Brlas

Hi Wayne.

Wayne Atwell - Casimir Capital

We are not to come out of this recession with the smaller steel industry. Have you given any thought to downsize your capacity? If you did which capacity would you take off?

Joseph Carrabba

Well we certainly have again and it would go to which blast furnace would come of. But we run these scenarios constantly in the business we're in today and the world we live in have numerous scenarios with that, Wayne. So it would depend on what the volume was, where the blast furnace was and all of those types of reiterations. But certain we have a pretty active model on that?

Wayne Atwell - Casimir Capital

Can you give a handicap in terms of what the probability is that you have to cutback some capacity permanently?

Joseph Carrabba

I really couldn't Wayne not at this point in time. I think the industry is too far up in the air. I think we've got to watch to whole U.S. economy and someone has to back into units of cars and units of houses and where the stimulus construction will come in next year. I think we'll see a blip in that in the spring construction season. So I think it's -- that's probably three to six months premature before that someone can handicap that.

Laurie Brlas

And really we expect the blast furnaces don't come back. They will be smaller and less efficient ones which have less of an impact on our business and we can have a year that is below that last year's production level and still we wouldn't feel the need to closure any mines or do anything like that. So I don't think that we expect the steel industry to go into a real dyer situation.

Wayne Atwell - Casimir Capital

All right. Well, it to seems to every cycle. Some blasts furnaces about to dust and my guess is here will be no different. You're reserve base of Portman, do you feel comfortable with that or you going to expand, or going to put some money to expand on that or how do you stand?

Joseph Carrabba

We're spending about $15 million a year in near mine exploration. We've got good leases weighing around the mine and we continue to do the in-field drilling. As you know it's a series of small pits out there. So there is a lot of room we've been successful in replacing the reserves at year end and year out since we've owned Portman. Again, I think as we believe said, these are branded iron ore deposits. So we don't see a large bind out there. But we're still comfortable with our near mine work that we can do some replacement. So, we're comfortable in the near term with our reserve base.

Wayne Atwell - Casimir Capital

And as you expand your reserve basis, it is contiguous to your operations or you're going to have to step out at some point and maybe spend some capital to modify your footprint.

Joseph Carrabba

We'll have to step out again these are small reserves that are spread across and we would have to continue to step out and spend capital as we chase the deposits.

Wayne Atwell - Casimir Capital

Great. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Joe Flannigan from Fundamental Equities (ph). Your line is open.

Unidentified Analyst

Joe here. Partner in Brazil, the management has got into lot of publicity lately. I wonder that is reflecting at all your business relationship down there and the operations of the Brazilian company?

Joseph Carrabba

Well, we continue to work with Anglo through this is as you know they are the managing partner of Amapa as we go through this. Mines are always difficult to start up particularly iron mines that are direct shipping but concentrators with this. So we continue to work through the issues with Anglo. We still have a lot of confidence in Anglo with what we're doing with them but we're all pushing hard with that. So we've -- on a local basis this is a very small property for Anglo and we think the local management is focused and not lost in the bigger issues, Joe.

Unidentified Analyst

Okay. And Laurie what is the approximate effective tax rate in Australia.

Laurie Brlas

A tax that's statutory rate in Australia is 30%.

Unidentified Analyst

But you would give credit size close that would bring that down.

Laurie Brlas

Yeah.

Unidentified Analyst

Okay. And that's an element in here effectively?

Laurie Brlas

Yes, it is. You're right.

Unidentified Analyst

Thank you.

Laurie Brlas

Thank you.

Operator

There are no further questions at this time. I'd like to turn the call back over to yourself.

Steve Baisden

Thanks Andrea. If there are no further questions, we'd all like to end by thanking you for joining us on today's call and I'll be available for the rest of the day if you have follow-up questions.

Joseph Carrabba

Thank you all.

Laurie Brlas

Thanks.

Operator

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

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