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Cliffs Natural Resources Inc. (NYSE:CLF)

Q4 2009 Earnings Call Transcript

February 18, 2010 10:00 am ET

Executives

Steve Baisden – Director, IR and Corporate Communications

Joe Carrabba – Chairman, President and CEO

Laurie Brlas – EVP and CFO

Analysts

Kuni Chen – Bank of America-Merrill Lynch

Brian Yu – Citigroup

Mitesh Thakkar – FBR Capital Markets

Mark Parr – KeyBanc Capital Markets

Tony Robson – BMO Capital Markets

Mark Liinamaa – Morgan Stanley

David MacGregor – Longbow Research

Tim Hayes – Davenport

Wayne Atwell – Casimir Capital

Nick Kovich – Kovich Asset Management

Bob Richard – Southridge Investments

Tony Rizzuto – Dahlman Rose

Operator

Good morning. My name is Jackie and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2009 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 question and answer session.

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

Steve Baisden

Thank you, Jackie. I would like to welcome everyone to today's call. Before we get started, let me remind you that certain comments made on today's call will include predicative 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 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 on the website 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 will turn the call over to Joe for his prepared remarks.

Joe Carrabba

Thanks, Steve; and thanks to everyone for joining us today. The early signs of stabilization we discussed in our third quarter call continued throughout the final quarter of the year. Our view that the low point in steel production manifested in the first half of 2009 was reinforced by a number of metrics as the year came to a close. Quarterly, we realized notable improvements in our operations and business outlook across the board. Highlights from the fourth quarter included; net income up more than 100% to $180 million or $0.82 per diluted share on revenues of $821 million. Nearly 7 million tons of iron ore pellets shipped from our North American and a 21% increase in shipments from our Asia Pacific iron ore business versus fourth quarter of 2008, helping us reach a new annual record of more than 8.5 million tons.

Despite an extremely challenging environment throughout most of 2009, we achieved the strong financial and strategic performances, delivering respectable earnings and ending the year in a position of strength. Full-year revenues reached $2.3 billion, with net income of $205 million or $1.63 per diluted share, and we ended the year with $503 million in cash and equivalents. This performance was the result of exceptional execution by our management team and operators, whose experience and professionalism allowed them to recognize 2009’s challenges early on and act swiftly and strategically to position the company to benefit from the opportunities that often accompany difficult business environments.

Other 2000 achievements included; raising $347 million of net proceeds from our May equity offering, the Wabush Mines acquisition, the acquisition of Freewest Resources and its valuable chromite deposits, establishing the Cliffs Natural Resources Global Exploration Group to form partnerships with prospects for commercially viable projects, and the recent addition of Cliffs to the S&P 500 Index. Each endeavor was undertaken with the objective of advancing our long-term strategy of enhancing Cliffs’ exposure to the world’s largest and fastest growing steel markets and achieving scale in the mining industry. Our Wabush and Freewest transactions are cases in point.

In October, we announced that we would exercise our right of first refusal to acquire US Steel Canada and ArcelorMittal Dofasco’s interest in Wabush. With the successful completion of the acquisition earlier this month, Cliffs now owns 100% of the operation that we have managed since 1965. With this $88 million transaction, Cliffs more than 50 million tons of additional iron ore reserves and 4 million tons of incremental iron ore pellet production capacity, with the capability to easily reach the seaborne market.

Subsequent to year-end, Cliffs closed its acquisition of Freewest resources, positioning the company to become the leading North American primary producer and exporter of chromite and ferrochrome, which are categorized by many countries as strategically important. We believe the projects high-grade chromite deposits, expected relative lower operating costs relative to other producers, and strategic position to serve markets in North America and Europe will make it a world-class project. This will mark our entry into the chromite business and is instrumental in our mission to broaden our mineral diversification in steel-making raw materials and capitalize on our expertise in open pit mining. Furthermore, this project will serve to expand our customer base beyond carbon steel producers. The next steps in bringing this project to fruition will include continuing to refine scoping and feasibility studies. Other major milestones will include completing all necessary environmental permits, as well as reaching an agreement with First Nations. Cliffs will also begin executing organization and staffing plans for the project.

As announced in yesterday's earnings release, Cliffs Global Exploration Group has been charged with seeking global commercial opportunities with junior exploration companies that offer commodity and geographical diversification and low-cost entry into potentially significant products. The Group was developed in 2009, with a mandate to grow our long-term project pipeline. In 2010, we are budgeting approximately $25 million to $30 million on these efforts. The Exploration Group will focus primarily on projects that are in a conceptual stage, with the maturity continuum, when the price of entry is low, but the rewards for project success are extremely high. As I have indicated to many of you, I believe our presence as one of the few independent midsized mining companies positions us as a preferred partner for many in the exploration community.

Additionally, we made substantial progress in 2009 in regard to our majority-owned renewable energy operation, with recent board approval, renewable fuel is moving forward with a $19 million capital project to build and operate a commercial scale plant in Michigan. The facility is expected to produce 150,000 tons of bio-fuel cubes. We anticipate production to commence in late summer.

Turning to a brief overview of Cliffs’ core projects, the North American scenario – the improving scenario in North American iron ore segment enabled us to end the year with most of our facilities operating at full capacity or taking steps to increase production. On the customer front, 25 out of 39 blast furnaces are running in North America. Recently, we have seen additional restart announcements from customers, and expect these will push North American steelmaking capacity utilization above the 70% threshold.

Our long-term sales agreements with North America-based integrated steel producers substantially mitigated lower pellet prices during the downturn. We have posted a comparatively modest 11% decline in our average revenue per ton compared with the 48% decrease in seaborne price settlements.

We believe our North American Coal business is finally recovering from the profound impact of the recessionary conditions we experienced, particularly early in the year. Sales margin loss consistently improved on a sequential basis as we progressed through the year, and the outlook is getting brighter for 2010. Sales margin is expected to turn positive with lower costs and some help from higher pricing. Pricing is being driven by the rising tide of demand from metallurgical coal from China, and the tightening supply around the world. This is consistent with our original thesis, when we first made the decision to invest in met coal assets. With greater volumes and our operating improvement efforts to date, we expect our cash costs in this business will fall below $100 per ton in 2010. Based on these expectations, we are investing $75 million in 2010 and $20 million in 2011 in expansion projects in our North American coal mines. These investments are designed to enable production to ramp from 3.4 million tons in 2010 to a run rate of 5 million tons in 2011. These projects include the installation of a new long-wall mining system at Pinnacle, expected to be completed in the fourth quarter of 2010; an upgrade of the Pinnacle preparation plant, expected to be completed in the third quarter of 2011; and installation of the new mine shaft closer to current mining areas at Oak Grove, which is expected to be complete in the first quarter of 2011.

Cliffs Asia-Pacific Iron Ore segment continued to perform strongly during the quarter, leading to record sales volumes for the year and providing clear support for the logic behind our long-term diversification strategy. In saying this, we recognize the exceptional execution of our Asia-Pacific operating group. The chain reacted swiftly to strong steel demand in Asia, and without benefit of contributions from the Cockatoo Island joint venture during the year. It drove 2009 production levels well beyond previous expectations. For 2010, the demand outlook in Asia-Pacific remains positive, with China continuing to import record levels of iron ore.

Looking at developments at Sonoma Coal and the Amapa Iron Ore projects, at Sonoma Coal, the month of December marked record volume for the project since we began shipping in January 2008. Sales volumes were up 45% economic interest in Sonoma, for fourth-quarter 2009 was 405,000 tons versus 328,000 tons a year ago. Production at the mine is currently favoring thermal coal to met coal at about a 65%:35% split. During the fourth quarter, production at Amapa was approximately 900,000 tons. Equity losses were approximately $8 million for the quarter and $62 million for the year. As we have communicated in the past, we continue to discuss ways to improve the mine’s financial performance with our operating partner, Anglo-American.

And with that, Laurie will provide a financial review of this as well as additional details on our operations and outlook. Then, we will open the floor up to questions. Laurie?

Laurie Brlas

Thank you, Joe; and good morning, everyone. Compared with the same period a year ago, fourth quarter 2009 consolidated revenue was down 10% to $821 million from $916 million. Low price realizations around the world and lower sales volumes in our North American operations were partially offset by higher sales volumes in our Asia-Pacific operations. Despite lower sales margins, operating income expanded to $156 million from $147 million, an increase of 6% during the period. The change was primarily due to the $90 million acquisition termination costs recorded in the final quarter of 2008. However, given the year's unique challenges, we are very proud of our overall performance. The structure and philosophy of our company, combined with the efforts of everyone throughout the organization were key to the results.

Net income basically doubled to $108 million, compared with $54 million last year. Diluted earnings per share in the quarter were $0.82, versus $0.47 in last year's fourth-quarter.

Now turning to the business segments, North American Iron Ore sales volume of 6.6 million tons in the fourth quarter was up 19% sequentially from the third quarter and 1% from last year's fourth quarter. North American Iron Ore revenue per ton was down 9% to $81 for the quarter, reflecting the lower pricing for iron ore and steel. However, as Joe mentioned, absence of long-term supply agreements that employed pricing formulas for our North American customers, pricing would have been much lower. Cost per ton was down 2% from the year ago quarter. Part of this improvement is attributable to Cliffs’ purchasing pellets from our mine partners at variable cost, and reselling these on a merchant basis.

As we indicated last quarter, in North American Coal, development efforts at both the Pinnacle and Oak Grove facilities have resumed and are currently running five days a week, three shifts a day. Sales volume in the 2009 fourth quarter was 748,000 tons versus 773,000 tons last year. And cost per ton was down 8%, reflecting the impacts of cost reduction efforts at our mines. This resulted in the sales margin loss of $8.5 million versus last year's $7.6 million loss.

Fourth quarter 2009 Asia-Pacific Iron Ore sales volume increased 21% to 2.1 million tons compared with 1.7 million tons in the 2008 fourth-quarter. The increase was primarily the result of Cliffs operating team increasing production to record levels in order to take advantage of strong steel demand in Asia during the quarter. Revenue per ton for the fourth quarter decreased 26% to $64, compared with $87 in the prior year. Per-ton cost in Asia-Pacific Iron Ore increased 14% from the previous year to $55, reflecting unfavorable exchange rates. Excluding this impact, cost of goods sold per ton fell 15%, which I think is a testament to the cost-reduction efforts of our operating team in Australia.

Turning to the balance sheet, at December 31, 2009, cash and cash equivalents stood at $503 million versus $179 million at December 31, 2008. And we had no borrowings against our $600 million revolver. For the year, we generated more than $185 million in cash from operations. This does not include a $148 million customer payment that was due in December, which we did not receive until January 4. This is obviously not reflected on the year-end balance sheet, nor included in 2009 cash flow. Major uses of cash in 2009 included $116 million for capital expenditures, $70 million related to Amapa, and $27 million in investments primarily for initial investment in Freewest Resources. A strong focus on cash throughout the organization allowed us to be free cash flow positive in one of the worst years on record for our industry.

Looking forward, we expect continued stabilization of the macroeconomic environment throughout 2010, and corresponding improvements in the demand for the raw materials used in steel production. To that end, we are increasing sales volume expectations for our North American Iron Ore business to approximately 25 million tons, from the previous estimate of 23 million tons on the strength of improving customer demand. These volumes reflect 100% of Wabush beginning February 1.

As you know, we don't yet have a price settlement, but we have projected an estimate for revenue based on current external estimates. Based on a 40% average increase in blast furnace pellets, revenue per ton for 2010 is expected to be between $90 and $95. This number reflects additional estimates including hot pan [ph] steel prices averaging $550 to $650 per ton, and no inflation for any other factors contained in our supply agreements. If you want to consider some sensitivities around these numbers, for every 10% change from the 40% estimate for blast furnace pellet price settlement, Cliffs average realized revenue per ton in North American Iron Ore to change by $4 to $5. And for every $25 change in the average hot rolled steel price, Cliffs would expect its average revenue per ton in North American Iron Ore to change by $0.40.

At the 25 million ton production level, 2010 cost per ton is expected to be $65 to $70. This expectation includes an approximately $5 per ton benefit from increased volumes. Somewhat offsetting this is the higher volume from Wabush, which carries a higher cost per ton than our other mines and thus raises the average. Also driving our costs higher this year are increased labor expense, primarily due to profit sharing, and maintenance expenditures that were deferred from 2009 to 2010.

In our North American Coal business segment, we are increasing sales volume expectations to 3.4 million tons, up from 3 million tons previously. We began 2010 with 1.4 million tons of coal priced and under contractual obligations, representing about 40% of current annual production guidance. Another 30% is committed, but not priced, pending 2010 benchmarks. We expect to sell the remaining 30% on a slot basis throughout the year. Taking this into account, and assuming hard coking coal settlement pricing equivalent to $125 per short ton FOB the mine, which would equate to about $170 per metric ton at the port. Cliffs expects annual revenue per short ton in North American Coal of $115 to $120. Cost per ton is estimated to be between $105 and $110, with $14 per ton of that representing DD&A.

Asia-Pacific Iron Ore sales volume is expected to be 8.5 million tons in 2010, with production of 8.6 million tons. Based on an assumption of 35% and 30%, Australian iron ore settlements for lump and fines respectively, we expect revenue per ton to be $80 to $85, with cost per ton of approximately $50 to $55.

Turning to our interests in Sonoma Coal and Amapa, in 2010, we expect total production at Sonoma of approximately 3.3 million tons, and sales volume of 3.5 million tons. Our sales mix is expected to be approximately 65% thermal and 35% metallurgical coal. We anticipate average revenue per ton of $85 to $90 and per ton cost to be $80 to $85. If we assume a 30% increase in iron ore pricing settlements for iron ore concentrate products, we would expect to report an equity loss of approximately $10 million to $20 million for our 30% interest in Amapa, which was a significant improvement over 2009.

Based on all this guidance, we expect to generate $900 million in cash from operations in 2010. Capital expenditures are expected to total about $200 million, of which 110 is sustaining capital. And we have earmarked about $90 million for expansion projects, including those Joe mentioned at our North American coal operations. Other expected major uses of cash include approximately $90 million related to the Wabush acquisition. We expect an additional investment of $30 million in Amapa to cover expected losses in capital spending. We also expect to use $70 million to pay down debt obligations at the Amapa project.

In summary, we are optimistic about strengthening demand for our products moving forward, and we believe we are well positioned for 2010 and beyond.

And with that, let us open the call for questions.

Steve Baisden

Jackie, can we go ahead and start taking questions?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from Kuni Chen of Bank of America-Merrill Lynch.

Kuni Chen – Bank of America-Merrill Lynch

Good morning, everybody. Good job and we certainly appreciate the additional detail bear on the revenue per ton sensitivity to the benchmark settlements. I think that was very helpful. I guess just first off on the North American iron ore production. If you look at total production on a 100% basis, you know, I think that puts you back to roughly 35 million tons or so. Can you sort of elaborate a bit on what you are seeing as far as blast furnace utilization and where you think that gets to in the second half of this year, you know, we were back to sort of an above an 80% utilization level at that level of iron ore consumption.

Joe Carrabba

Sure, Kuni, I will be glad to. That is certainly not what our plans are based on at this point in time, as we mentioned in the script just now. About 70% or maybe a little more to the 72% is what we are planning on in the business. That kind of works out with the 25 blast furnaces we see that have been announced that have either come on or are going to be in a restart mode somewhere this year. We don't see the outlook looking at the end markets of the steel industry really supporting rises into the 80%, but we are fairly confident in that. I guess more conservative, but I think more realistic 68% to 72% of utilization.

Kuni Chen – Bank of America-Merrill Lynch

Okay, got you. And then just as a follow up, on the met coal cost guidance, obviously, the costs have continued to come down pretty well sequentially. You know, just wondering on the cost outlook for 2010, why that is not sort of below the fourth quarter run rate?

Joe Carrabba

Well, we still have some continuing development to do, I think as we have said in previous calls, you know, we are not going to get ahead of ourselves on development, push the long-wall ahead of development, then have to go down for a substantial period of time. We have pretty well mapped us out with our development. We have also got to put in place, Kuni, that new long-wall system in Pinnacle in the fourth quarter, so all that has to be carefully timed with the mine plans. So there is still some further development work to really get ourselves for 2011.

Kuni Chen – Bank of America-Merrill Lynch

Got you. I will turn it over, thanks.

Joe Carrabba

Thanks.

Operator

Thank you. Our next question is coming from John Sullivan of Citigroup.

Brian Yu – Citigroup

This is actually Brian Yu. Hi, Joe; hi, Laurie.

Joe Carrabba

Hey, Brian.

Brian Yu – Citigroup

A question for you. Could you help me break out the 25 million ton production guidance, like how much of it is minimal contractual obligation, and how much is about that domestic and does that 25 million include any export sales?

Joe Carrabba

Well, I will start with the 25 of the export sales; that is the easier part of your question on the break-out is the export portion of that will come from the additional sales that we now have the incremental tonnage that comes out of Wabush, which I think we have cited at about 4 million tons. That will also be priced at world pellet price; that is not contractual, as to contractual obligations around it from there.

Laurie Brlas

Yes, I mean really, well over 90% of it is under contract now. That is not the – if you are thinking about the take or pay minimums, but we have already gotten nominations for 2010 from our customers. So those types of things won't come into play as much in 2010 as they did in 2009. So really, we have got a contractual obligation in one form or another for well over 90% of that number.

Brian Yu – Citigroup

Okay. And then, just switching over to the Asia-Pacific, how are you selling the iron ore in terms of pricing during Q1? Is this still under last year’s contract? Because it seems like some of the big diverse (inaudible) are going to a spot-based or even core (inaudible). So, just want to get your perspective.

Joe Carrabba

Well, it will be a mixed answer, Brian. You know, we have some contracts that are annual and right now, what we are still working off with our customers is a provisional benchmark just like we did last year and we have done in the past when we don’t have settlements and our – you know, just as a reminder, our customers are the – the smaller customers, more in the long products than the flat products to go forward, they don't carry big stockpiles, they don't have big working capital balances to work off of, and they are more comfortable with provisional pricing and settlements. We did the same thing last year and we have done that in previous years as we go. The only spot times we would have this year as we go into that market would be if Cockatoo Island, which has some small tonnage and is going to have a very short life of about two years wants that project to extend the sea wall a little bit is completed. We might get some tons out of that, third or fourth quarter, and that would be price spot into the marketplace. So, we are still primarily almost 100% committed into the benchmarks system at this point in time.

Brian Yu – Citigroup

All right. Thank you.

Operator

Thank you. Your next question is coming from Mitesh Thakkar of FBR Capital Markets.

Mitesh Thakkar – FBR Capital Markets

Hi, guys. Good job on the quarter. Good morning. Just a quick question on your Asia-Pacific Coal. What are the underlying assumptions for your coal realization guidance of $85 to $90 range for 2010?

Joe Carrabba

It is the mix of thermal and met coal based off of that 65%:35% range. I don't have the numbers in front of me of what that is.

Laurie Brlas

It gives us a separate price for each one, but that saves on the mixture and the benchmark settlements and expectations.

Joe Carrabba

Mitesh, I think one of the areas you may be looking at is for our met coal out of Sonoma is priced at a discount to the hard coking coal price, and maybe that is where some of the discrepancy in your model would be. It gives a slight discount for the BFP hard coking coal price.

Mitesh Thakkar – FBR Capital Markets

And do you have any feelings with respect to, you know, some royalty payments which you need to make to take coal out of Sonoma?

Laurie Brlas

Well, any royalty payments are based, are included in our cost per ton in terms of what we expect to be profitable and how we expect the full year results to play out; that is already included in our cost per ton guidance.

Mitesh Thakkar – FBR Capital Markets

Okay. That sounds good. And one follow-up question on your North American Iron Ore business. How much of the deferred tonnage is included in this 25 million tons guidance for 2010? Like I remember we have about 2 million tons from your last guidance.

Laurie Brlas

Probably about 2 million tons is doubly pretty consistent still.

Mitesh Thakkar – FBR Capital Markets

Still 2 million tons? All right, sounds good. Thank you.

Operator

Thank you. Our next question is coming from Mark Parr of KeyBanc Capital Markets.

Mark Parr – KeyBanc Capital Markets

Hey, thanks very much. Good morning.

Joe Carrabba

Good morning, Mark.

Mark Parr – KeyBanc Capital Markets

Nice job on the quarter.

Joe Carrabba

Thank you.

Mark Parr – KeyBanc Capital Markets

And glad to see that markets continuing to look better. That is all very encouraging.

Joe Carrabba

Aren’t we all?

Mark Parr – KeyBanc Capital Markets

I had one question, Joe. Related to your comments on the Exploration Group, you talked about a $25 million to $30 million budget for that group in 2010. How does that compare with what you spent in 2009?

Joe Carrabba

We are really just starting the group. We just won the group, Mark in 2009, and they are just really getting their legs underneath them and getting the organization up. This is a very small group of three people. I think right now, we are trying to take advantage of some of the exploration folks that we do have in the group that were fortuitous to have. They have got a lot of global knowledge in the areas that we are interested. With that so, it is a new, emerging look at how we did growth in the business. You know, Cliffs has traditionally not been in the mining business, had any exploration attached to it, and it is time that we try and get, if you will, the third leg of the stool, you know, organic growth, M&A activities we have always been involved in. This is kind of exploration or right to, this isn't putting drills and lots of geologists in the field, this is more working contacts and working with juniors, looking to move objects from exploration into funded projects such as you see at Freewest that is coming on with the chromite deposit. So, this is a new venture for us and we are kind of going into it pretty cautiously.

Laurie Brlas

Yes, and I would say in 2009, with that group in the startup process probably spent a few million dollars, but not significant, as Joe said. There were still really just getting organized for the most part.

Mark Parr – KeyBanc Capital Markets

Okay. So given that there is not a lot of people here, so the P&L impacts for 2010 and most of the money you are talking about would be balance sheet related or investment type activity?

Laurie Brlas

No, it would be expense, Mark.

Mark Parr – KeyBanc Capital Markets

Fully expense?

Laurie Brlas

It would be paid to outside third parties or different things like that. It would be – I am assuming that it would be for the most part expense; there may be some that ends up on the balance sheet, but that would not be my assumption.

Mark Parr – KeyBanc Capital Markets

Okay. All right, terrific. Well, thanks very much. I will get back into queue. Congratulations on your results.

Joe Carrabba

one Thanks, Mark.

Operator

Thank you. Our next question is coming from Tony Robson of BMO Capital Markets.

Tony Robson – BMO Capital Markets

Laurie and gentlemen, good morning. Good to see you finishing the year in such a positive strong way. Can we have a little bit of quarterly guidance please in terms of the iron ore sales from North America and US met coal sales? You have obviously got a couple of projects that are tied into Pinoke [ph]. And obviously, there is some cold weather, the locks being close in the first quarter or the pellet size, any color there please?

Laurie Brlas

Well, we never give specific details on the quarters, obviously, but I think our seasonality will be fairly similar to what it has been in prior years in terms of volumes shifting out throughout the year. I don't see any major change on that front.

Tony Robson – BMO Capital Markets

Okay, and turning into projects for Pinoke, any impact there on tonnage?

Joe Carrabba

No, we are only going to be a little further out, Tony, on those, they are just starting the shaft work and finishing up the permitting over at Oak Grove, but that is a way in distance from where they are currently mining. From that, the long-wall is just being shipped and assembled for testing within the US up in Pennsylvania and the prep plant is still under permitting and we have just started ordering the long lead times. So, no, there won't be any interference with those projects right now.

Tony Robson – BMO Capital Markets

Okay, great. Last question if I could, please. Pellet pricing, again good to see that sensitivity you had quoted. Do I get the impression that your leverage to the global pellet price changes is increasing, if my back envelope metrics is correct, and is that because of the Wabush acquisition, which is –

Joe Carrabba

Exactly, you are spot on. Tony, that is the reason not only in the pricing and having the knowledge of the Wabush asset with minimal integration risk, but this really gave us some nice exposure to export world pellet price.

Tony Robson – BMO Capital Markets

Good. Okay, thank you.

Joe Carrabba

Thanks, Tony.

Operator

Thank you. Our next question is coming from Mark Liinamaa of Morgan Stanley.

Mark Liinamaa – Morgan Stanley

Your North American coal costs, presumably tends to being inflated as you try and get the development and head of the long-walls. Is that correct?

Joe Carrabba

Yes, it is. Yes, there is still some more development work to be done as we try and get those next couple of panels ahead of us, in case we hit any geological conditions underground.

Mark Liinamaa – Morgan Stanley

And so from a normal run rate operating perspective, if you weren't doing extra development, roughly, where do you think costs would be and where do you think they would be at a 5 million ton targeted run rate?

Joe Carrabba

Well, I think as we have got into – you know, we think we are going to be below $100 on cash cost.

Mark Liinamaa – Morgan Stanley

But that includes, presumably, some excess development costs.

Joe Carrabba

It does, yes. When we get there with it, the 5 million tons out in 2011, while we think we are going to start getting competitive in the long-wall costing with that at the 5 million tons, I don't know that we have given –

Laurie Brlas

We will probably be below 80, we think definitely below 80 is doable.

Mark Liinamaa – Morgan Stanley

Below 80. And just – you talked in the past about wanting to either get bigger in coke and needed to reach a critical mass-type level. Would you consider taking an operating joint venture partner to create that mass, maybe artificially?

Joe Carrabba

We will consider all avenues for growth, if it is the right thing for the shareholder, Mark. As you know, we have worked in a variety of different arrangements throughout the globe and this company has done that for a number of years from a minority managing partner to such as in Amapa, where we have got a 30% stake without the management rights. So, we wouldn't take anything off the table if it advanced our aspirations in the coal business.

Mark Liinamaa – Morgan Stanley

So you could sell down in interest and what is your preferred avenue for the North American Coal business?

Laurie Brlas

I think it really depends on the value of each one of those opportunities. I think as Joe said, we are open to a variety of options, but if you had to kind of go through the exercise of determining which one actually adds the most value, there is a lot of moving parts to any analysis like that, as you know.

Mark Liinamaa – Morgan Stanley

Great. Thanks very much, guys. Good luck.

Joe Carrabba

Thank you, Mark.

Operator

Thank you. Our next question is coming from David MacGregor of Longbow Research.

David MacGregor – Longbow Research

Yes, good morning, everyone. Can you hear me?

Joe Carrabba

Yes, good morning, David.

David MacGregor – Longbow Research

Good morning, Joe. Just on the North American iron, you have increased your volume guidance from 23 to 25. I think you had two additional lines in Northshore. Is that where the incremental tonnage comes from?

Joe Carrabba

No, we are just as we ramp up and the productivity of the existing lines have come up and into, we don't have those small furnaces up at Northshore at this moment, yet they are the high-cost producers, so we are really not pushing the tonnage there, it is just coming out of the existing assets.

David MacGregor – Longbow Research

So what is the upside for 2010 in terms of iron? I mean, if we got a good market, could you do 27, could you do 28, I mean.

Joe Carrabba

Well, I am sure the guys will push as hard as they can, but two limiting factors we have, and it is really you know helping to – when you look at that cost line, you know, as the volumes rise and you know, why aren’t the costs coming down even further is we have got to put a writing ring on one of the large kilns up at Tilden, which you know, these are the types of capital projects that shut the process down. So that is one and it is hard to make any tonnage up off of that when you come to a full stop. And the other is, as we have got a car on loader system that is on its last legs up at Northshore internally into the plant, and that is going to take about a 30 day shut as well, and that will bring Northshore to a full stop at that point in time. So while they will try and push and get some more out in other places, you know, (inaudible) is projected to come up May 1, certainly now that we own the Wabush assets, we will try and start pushing some tonnage out of there as well. Those two limiting factors, we just can’t get around in this year, and we held them off last year and it is time to do the maintenance on them.

David MacGregor – Longbow Research

Are you seeing incremental demand in terms of steelmaking or do you think the 2 million tons is more just furnished yard replenishment?

Joe Carrabba

No, I think we are seeing incremental demand around the world and there does seem to be – certainly, in the pellet market, I will speak for that, a very tight supply again worldwide with the customers we deal with as well as internally in the US on pellet supply.

David MacGregor – Longbow Research

Okay. The North American Coal, you are talking about 5 million tons in 2011, once you get all the work done.

Joe Carrabba

Right.

David MacGregor – Longbow Research

What is the opportunity to exceed that number?

Joe Carrabba

Well, I think we will get through this one first, David.

Laurie Brlas

Yes, 2010 first and then 2011.

David MacGregor – Longbow Research

I really just wanted to get your expectations around that 5 million tons and you have been down a difficult road with that operation, but can you give a sense of just what is achievable there over the next maybe two to three years in terms of –

Joe Carrabba

Well, it has certainly got the reserves. I mean, if the business is anything like people or the expectations in the marketplace on met coal, with certainly both mines has the reserve base to look at expansion-type opportunities, but you know, they would be big, they would be second long-walls, which would require long lead times and then you would need an additional prep plant or a large expansion to a prep plant. I mean, it would be that type of expansion, which would be expensive and long as far as putting those types of expansions in to get it. But the reserves are certainly there to support it if the demand is there.

David MacGregor – Longbow Research

Just last question on Amapa, it was nice to see fourth quarter, you got back up to I think 900,000 tons. When you forecast $10 million to $20 million loss for 2010, on what kind of volume is that forecast based?

Joe Carrabba

Well, about 3.8 million tons. We are following Anglo’s guidance and their mine plan and operating plan this year, David, they have had their technical folks in over the third quarter to make some recommendations. They have got a new management team, they are starting to take hold and improvement is coming on down there. We continue to give our suggestions and talk about the pathway to profitability on that, but they have had some improvements late in the fourth quarter.

David MacGregor – Longbow Research

Just the same question there, can you talk about the upside in volume, what is potentially achievable down there?

Joe Carrabba

You know, I think 5 million tons. I mean, I think our original aspirations were all for 6 and we have de-rated the plant at this point in time. The biggest problem we have is the ore is just harder than we had anticipated and if we do want to move it up beyond that, and even to get to those levels, we are questioning technically right now whether we need to bring another crusher and another grinding mill in to help get the product production down across the spiral. So I would put 5 million tons as the new capacity and the goal to get to in the next few years.

David MacGregor – Longbow Research

And the bottleneck behind just that crushing in the drum mill, would be what, another concentrating line?

Joe Carrabba

No, I don't think we would need that. I think we just got to get the product sized appropriately, so it doesn't get, you know, lost out to the tailing spawn.

David MacGregor – Longbow Research

And your Aussie dollar assumption under the guidance for 2010?

Joe Carrabba

About $0.90. And I have no speculation beyond on FX. We target at $0.90.

David MacGregor – Longbow Research

Yes, it is tough enough on the call on the iron. Thanks very much, Joe.

Joe Carrabba

Thanks, David.

Operator

Thank you. Our next question comes from Tim Hayes of Davenport.

Tim Hayes – Davenport

Good morning.

Joe Carrabba

Good morning, Tim.

Tim Hayes – Davenport

A question on the North American iron ore on the cost side. The guidance for 2010 is above the level or the cost rate in Q4, even though volumes are going higher. Do we read that as it that all because of the addition at Wabush or is there some other cost pressures that are going to occur?

Laurie Brlas

There are some other things. There certainly is the addition of Wabush, which had a significant impact. There is also some maintenance that everyone did, we were very, very focused on cash in 2009 and so we really just did a bit of maintenance. So there is some of that coming into 2010 as well. And in Q4, you do need to look at kind of the full year number, so Q4, there is maybe a little bit of an – slightly artificial, if you will, the crush into the cost per ton. So, look at the full year number and you will see a better picture of a comparison of 2009 versus 2010.

Tim Hayes – Davenport

Okay, thanks. And then, for the realizations for the segment, the 2010 guidance, what impact are the cash and lags having, is that a plus or a minus for 2010 versus 2009?

Laurie Brlas

That would be a negative, because we are expecting prices to go up, but we are not going to get the full benefit of that, just like in 2009, we didn't take the full hit of the decline. So usually, you will just kind of see a little bit of a lag to what happens to us.

Tim Hayes – Davenport

Right. Okay, thank you.

Operator

Thank you. Our next question is coming from Wayne Atwell of Casimir Capital.

Wayne Atwell – Casimir Capital

Good morning.

Joe Carrabba

Good morning, Wayne.

Wayne Atwell – Casimir Capital

Could you share your thoughts on your new global exploration initiative, which commodities you are going to attack and just a little more detail on how you are going to approach this?

Joe Carrabba

We are still, Wayne, targeting primarily into the steel sector. We are still looking at the minerals there. Our strategy of diversification within the steel sector hasn’t moved out from that, but as you know, Mother Nature isn’t perfect in that. So some other minerals as by-products or co-products may drag along as they come in with it. But we are looking at, you know, trying to be geologically a little more unique and the approach was some of the deposits that we are looking at. I don’t think just straight out heavy duty exploration is going to get us anywhere and that is certainly what we are not trying to do, and with that, we are going to try and take advantage of our processing knowledge on some of these deposits, and also size, you know, I mean, where some of the larger mining houses may not look at some of these deposits just strictly from a size basis, you know, that is really more on our wheelhouse and sizing in a mid-tier basis could offer some advantages as well. But, haven't changed our tune a lot and Mother Nature won’t be perfect in some of the things. I am sure there will be some by-product, co-product that will go with it, but we are still heavily focused in the steel sector.

Wayne Atwell – Casimir Capital

Okay. And another question. The iron ore industry seems to be moving in some respects toward spot pricing. Have you given any thought to that and putting some of your product out on a spot basis?

Joe Carrabba

We have given a lot of thought to it, and you know, I think what we also try and think about too as I mentioned earlier is our customer base, and their needs and desires as well. Again, if you go to the Asian market, primarily, we have got smaller customers, and we have viable customers, they are in the long products, as I mentioned, which we think it really makes sense, the infrastructure in China will continue, and maybe some flat products might slow down with the rest of the global recession and slow down that goes with it. And our customers, you know, don't sit with large stockpiles and lots of cash, Wayne, out there. They need to take the volatility out of their business, so we have been working with them and you know, they certainly came through in 2009 versus 2010. But we will continue to debate the spot market, continue to look at the spot market as it goes and I mean, try not to be dinosaurs in this business if the world moves to that, eventually, we will as well. We are not afraid of it, but the formula seems to be working pretty well with our customer base.

Wayne Atwell – Casimir Capital

Okay. Thank you very much.

Operator

Thank you. Our next question is coming from Nick Kovich of Kovich Asset Management.

Nick Kovich – Kovich Asset Management

Good morning. As we model 2009, you have got North American production forecasted at 25 million tons. As we look at Northshore, I know there would have been several questions about that in 2006, 2007, and 2008, you produced 5 million to 5.5 million tons. Is that range a reasonable estimate for 2010, somewhere around 5 million, 5.5 million tons for Northshore production in 2010?

Joe Carrabba

Yes, Nick. After the call, I can take some individual – give you some individual information on the mine, but we typically don't drill down into detail by mine. If we can take that off-line, I would appreciate it.

Nick Kovich – Kovich Asset Management

Okay, that is great. Thank you very much.

Operator

Thank you. Our next question is coming from Bob Richard of Southridge Investments.

Bob Richard – Southridge Investments

All right. Great quarter. Just a quick question on your fourth-quarter 2009 North American order volume, a little bit under plan. Just for clarification, that is mostly due to revenue recognition this quarter, Laurie?

Laurie Brlas

Certainly there is some revenue recognition in there. You know, we get cash, we don't ship, and then we also had the one customer as we mentioned, that did not pay us until January 4. So obviously, if we didn't ship and we didn't get the cash, that certainly is going to be some revenue that is not going to get recognized in the quarter.

Bob Richard – Southridge Investments

It just seems like with your October guidance, you had guided to 17.4 million of order shipments and then at 16.4 million. That is a pretty big miss. I was just wondering if anything surprised or if it was just totally revenue recognition?

Laurie Brlas

You know, we don't really, I mean, that is probably the most of that, at least three-quarters of it is probably the revenue recognition issue. And I don't know that we consider that as real significance in a large mix –

Joe Carrabba

I don't think so, Bob, and I think also the two vectors you need to put in as steel mills were ramping and you know, the lock is always closed. And again, I need to remind everybody, by law, on certain dates and reopened the core of engineer in certain dates. You know, people were scrambling pretty hard to get as many tons down through the locks. Of course, there wasn't shipping capacity. A lot of the boats in the shipping business were on dry dock, they weren't going to come out for a couple of weeks or a month even if they could have scrambled. And so – and we also hit some weather. As you know, December was a pretty tough month, it was the last shipping month. So if you add all that together, you know, the million tons really came from those factors.

Bob Richard – Southridge Investments

Okay, I appreciate that color. And just a quick follow-up, you mentioned Asian trials on your met coal, how did those go?

Joe Carrabba

They went well. There was good acceptance with the coal with the customers and yes, they were quite pleased with that. Now, you know, as always, it comes down to price and freight rates, and will they pay for it.

Bob Richard – Southridge Investments

Okay, thanks so much. Great quarter.

Joe Carrabba

Certainly, thank you.

Operator

Thank you. Our next question is coming from of (inaudible) of Dahlman Rose.

Tony Rizzuto – Dahlman Rose

Thank you very much for taking my question. Good morning. As you look to identify mineral resources, does it make any sense to possibly join up with sovereign wealth funds and I think about, you know, the kind of skill sets that you bring to the table. And I think about the possibility of sovereign wealth funds that could maybe help you to navigate in certain parts of the world and certainly help you with financial firepower. Have you given that any thought?

Joe Carrabba

Well, we have always – if it gets passed across the bow, you know, I won't say in the financial meltdown as much as it used to, but I guess two factors on that. One is, we seem to be binding plan to do in countries that we don't consider to be risky for us. Now, that is for Cliffs, you know, we are not built for some of these countries that other people are in and that is just the profile that we have. The second thing is, you know, I think you would go to sovereign wealth and those types of things if you needed the cash to drive your exploration. We feel we are on the right pace. Our metrics of dollars spent fall in line with the big mining houses, if you will, and with our three geologists that I mentioned, not a big staff. We think that is about as fast a pace that they could go to. So we are not cash restricted in this and we think the pace that we have set and the money we are going to spend is right in line with where we need to be.

Tony Rizzuto – Dahlman Rose

Thanks, Joe. That is great insight.

Joe Carrabba

Thank you.

Operator

Thank you. (Operator Instructions). Our next question is coming from Mitesh Thakkar of FBR Capital Markets.

Mitesh Thakkar – FBR Capital Markets

Hi, guys. One more question. Can you give us a little bit of color on the progress you have made on Freewest after the acquisition and you know, kind of your thought process going forward in terms of, you know, where to deploy your excess cash?

Joe Carrabba

Yes, sure, I will be happy to. We are certainly well into thinking about the organization that we need to put forward and identifying the right people for that and the execution phase of the processes. The good thing is, in the Freewest acquisition is we worked with Freewest for about 12 months prior to this. So we have got a pretty good knowledge of the ore body going into this. And I would say we are well into the scoping phase of this business. There has been a lot of environmental baseline studies, for example, have been done, so that we can get the permitting and those types of things. We just added two senior executives in Thunderbay a week or two ago, meeting for the first time with the First Nations Group and introducing ourselves as well as with a lot of the top officials within the Ontario mining space and with the government. So all those introductions are being made. We are looking carefully about the execution phase in setting that organization and lines so that we can do that and talking to the consultants that are well into the scoping phase to make sure those are the right people to carry forward. So carefully working our way through the early days of this.

Mitesh Thakkar – FBR Capital Markets

That is definitely good color. Just, you know, on the follow-up, what kind of other avenues – I remember you mentioning that you might consider a JV partner for your Freewest project. Is that still the plan or you know, just looking at the cash flow from operation expectations, you know, a bit of the change in that?

Laurie Brlas

The spending in the next year or so is pretty minimal. So we keep that certainly as an option that is available to us, but we will explore that as time goes on and if the spending ramps up, what we think is the most appropriate structure for the company.

Mitesh Thakkar – FBR Capital Markets

All right, sounds good. Thank you. Thank you very much.

Joe Carrabba

Thanks, Mitesh.

Operator

Thank you. Our next question is coming from Tony Robson of BMO Capital Markets.

Tony Robson – BMO Capital Markets

Hi, back again. Thank you for taking my second call. Just sort of elaborating on the gentleman's previous question, you have got a very strong balance sheet. You will generate several hundreds of millions of dollars in cash this year. And I understand Cliffs has obviously got a very strong growth focus and I think the last 12 months showed that we do need cash on balance sheets much better than this. By the end of the year kind of like a point in time, if you cannot find a suitable target, would you consider returning some of that cash to shareholders, or do you think you would want to keep that cash and let it build up for things that might come up in 2011? Thank you.

Laurie Brlas

Well, first thing we have to do is earn it. That is our first philosophy. We don't like to spend it before we have earned it and we will certainly evaluate as the year goes on what the marketplace is like and what the opportunities out there are and review all those options with the Board and hopefully make the appropriate decision.

Joe Carrabba

And I think so and I just want to add a little color on that. I just – you know, we don't feel if these cash projections come forward, we don't feel compelled to do a deal just to do a deal for growth. I mean, we are pretty patient and I think as you can see with the quality of the deals that are coming for us, while people are asking questions like gee, what is next, we don't see anything. As you can see, there has quite a lot of progress on things that do come our way, being the mid-tier mining company, being well-capitalized, I think have been the right ethical approach when it comes to the junior exploration companies. So I just want to make assurances that we are not compelled to do a deal for a deal’s sake.

Tony Robson – BMO Capital Markets

Okay, good to hear. Joe, Laurie, Steve, thank you.

Joe Carrabba

Thanks, Tony. Jackie, since we are approaching the top of the hour, we want to be respectful of everyone's time, so we are going to go ahead and conclude the call today. Of course, as always, I will be available for follow-up questions anyone may have. Thanks everyone for joining us.

Laurie Brlas

Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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Source: Cliffs Natural Resources Inc. Q4 2009 Earnings Call Transcript
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