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Cliffs Natural Resources (NYSE:CLF)

Q3 2011 Earnings Call

October 28, 2011 10:00 am ET

Executives

Laurie Brlas - Chief Financial Officer and Executive Vice President of Global Finance & Administration

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

Steven Baisden - Vice President of Investor Relations & Corporate Communications

Analysts

Timothy P. Hayes - Davenport & Company, LLC, Research Division

Brian Yu - Citigroup Inc, Research Division

Jorge M. Beristain - Deutsche Bank AG, Research Division

Jessica Fung - BMO Capital Markets Canada

Kuni M. Chen - CRT Capital Group LLC, Research Division

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Unknown Analyst -

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

Arun S. Viswanathan - Susquehanna Financial Group, LLLP, Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Operator

Good morning. My name is Meme, and I'll be your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources' 2011 Third Quarter Conference Call. [Operator Instructions] At this time, I would like to introduce to you Baisden, Vice President, Investor Relations and Communications. Mr. Baisden?

Steven Baisden

Thank you, Meme. I'd like to welcome everyone to this morning'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 Form 10-K and 10-Q, and news releases filed with the SEC, which are available on our website.

Today’s conference call is also available and being broadcast at cliffsnaturalresources.com. At the conclusion of the call, it will be archived on the website and available for replay.

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

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

Joseph A. Carrabba

Thanks, Steve. And thanks to everyone for joining us this morning. Last night, Cliffs reported the strongest quarter in the company's history. Third quarter's results were driven by strong demand for our products throughout 2011. North American blast furnace utilization rates averaged 76% during the quarter, 5% higher than the prior year's comparable quarter average of 71%. Additionally, the Platts index for iron ore pricing averaged $178 per ton during the quarter, 31% higher than 2010's average third quarter pricing. Both of these factors, coupled with the additional sales from Bloom Lake's operations, drove our exceptional third quarter results. However, we do acknowledge the recent softening of iron ore spot prices. This is not entirely surprising given the immediate macroeconomic concerns over future growth rates in certain world economies and volatility in virtually all industrial commodities.

As many of you know, since the end of the annual benchmark pricing mechanism, Cliffs has been moving sales agreements to more narrow pricing periods that are closer to the shipping date. We anticipate our industry will continue in this direction, moving away from lagging pricing periods and towards those that are closer to shipping or landing dates. For Cliffs, while lower spot pricing will directly impact results given our exposure to the seaborne market, we expect to run a very profitable business at these iron ore spot prices. Fluctuation in pricing is expected and current reduced spot pricing is still very healthy and indicative of a strong global demand. We believe the megatrends underpinning our industry, in general, remain intact, including industrialization of emerging economies which continues to support our growth and expansion initiatives.

After the deterioration of benchmark pricing, we have often stated our belief that iron ore will trade within a pricing band, affected by certain realtime market conditions and dynamics. Barring any further material deterioration in European or North American economies, we expect 2012's pricing band will remain relatively consistent with 2011's range.

Now turning to the performance of our core business during the quarter. Sales volume in U.S. iron ore increased to 7.9 million tons compared with 6.9 million tons sold in last year's third quarter. This includes approximately 0.5 million tons of pellets from our U.S. operations going into the seaborne market during the quarter. Due to vessel availability and adjustments in customer pellet requirements, we are revising our full-year 2011 U.S. iron ore sales volume expectations to 24 million tons, down from our previous expectation of 25 million tons.

In 2012, we expect to see steelmaking utilization rates range between 70% and 75%. Based on this, we expect to produce and sell approximately 23 million tons from our U.S. iron ore business segment next year.

Now turning to Eastern Canadian Iron Ore. Sales volume for the quarter was 3.1 million tons, a 294% increase over last year's third quarter. This increase was a result of approximately 1.8 million tons of concentrate sales from Bloom Lake, an increased year-over-year sales volume at Wabush Mines. During September, Bloom Lake reduced at an 8 million-ton run rate for 10 consecutive days. Given that, we feel confident in reaching the 8 million-ton annual production rate previously indicated.

Despite our ramp-up progress at Bloom Lake, we are reducing our full-year 2011 sales volume expectation in Eastern Canadian Iron Ore to 8 million tons from our previous expectation of 9 million tons. This lower sales volume expectation is partially attributed to pellet availability from Wabush and partially related to a transition in our marketing strategy to work more directly with end-users of the product and less with trading customers in Asia. We have delivered Bloom Lake concentrate to 2 of our Asia Pacific Iron Ore customers during the quarter and we'll continue working with our customers to test trial cargoes. We believe this strategic shift will provide increased sales flexibility over the long term and build stronger relationships among large seaborne customers.

Throughout the integration and optimization process within our Eastern Canadian operations, it is our goal to achieve the production reliability and consistency that has been established over time with our U.S. and Asia Pacific Iron Ore operations. I am pleased to report that our Phase 2 expansion at Bloom Lake is moving ahead as planned. The concentrating facility's exterior framework is complete and in the process of being enclosed. This work is expected to be finalized by year end, enabling interior work at the plant to move forward throughout the winter months.

For next year, we expect to produce and sell approximately 12 million tons from our Eastern Canadian Iron Ore segment, comprised of approximately 1/3 pellets and 2/3 concentrate.

Turning to Asia Pacific Iron Ore. Third quarter sales volume was nearly flat at 2.4 million tons when compared to 2010's third quarter. For the remainder of 2011, virtually all vessels and orders are booked through the end of November. We are maintaining our sales volume expectation for 2011 at 8.8 million tons. Our Asia Pacific Iron Ore expansion to 11 million tons per year is progressing well. All equipment deliveries are complete, along with the rail over paths in the town of Esperanza.

Considering the challenging labor and equipment markets in Western Australia, I'm very pleased about the team's success there in completing all required expansion-related stripping and other mine prep work. This is enabling project completion ahead of schedule and on budget. As such, we anticipate our 2012 sales and production volumes in Asia Pacific Iron Ore to be approximately 11 million tons. The product mix is expected to be similar to prior periods, evenly split between the lump and volumes.

Now turning to our North American Coal segment. As many of you know, production at our low-vol met coal mines was largely down during the quarter as a result of our previously disclosed carbon monoxide detected at Pinnacle Mine, along with restoration construction at the Oak Grove Mine. After receiving approval to restart operations, we commenced Pinnacle's longwall machine in early October. At Oak Grove Mine, the prep plan is expected to restart in December with customer shipments to resume in January.

Our high-vol met coal and thermal mines acquired last year from INR Energy continued to achieve record shipping levels, outperforming our plan for these assets. Near the end of the quarter, production began at Lower War Eagle, which is slightly ahead of schedule.

For 2011, we have reduced our sales volume expectation to 4 million tons from our previous expectation of 4.5 million tons. The decrease is primarily related to sales from Oak Grove resuming in January 2012 rather than our previous estimate of December 2011. We expect 2012 to be the turnaround year for our North American Coal business. We anticipate being well positioned for increased volumes and improved profitability. That said, we expect to sell 7.2 million tons and produce 6.6 million tons of coal from this business segment next year.

We are approximately 75% of our anticipated 2012 met coal volumes open for pricing. For the met coal tonnage already priced, we are at approximately $150 per short ton at the mine.

At this time, I'd like to turn the call over to Laurie for a review of the financial highlights. Laurie?

Laurie Brlas

Thank you, Joe. Following on Joe's comments, our record performance reinforces our strategic growth and diversification efforts. Despite the recent valuation declines for commodity producers in the market, we believe our long-term strategy will continue to add value for shareholders. Our growth profile is pointed at deploying the economically healthiest regions in the world. Our growth is based on organic expansion initiatives and is expected to result in significant cash flow generation in 2011's final quarter and well beyond.

To further support these efforts, during the third quarter, we replaced our $600 million revolving credit facility with the new $1.75 billion credit facility that has no meaningfully restrictive debt covenant. This solid capital structure will allow us to advance current projects in our global pipeline and remain opportunistic while at the same time, returning capital to shareholders. To that end, in the last 18 months, our board has tripled the annualized cash dividend to more than $1 per share and also authorized a $4 million share repurchase program.

During the quarter, we bought 3 million shares at an average price of $74 per share, lowering our current diluted shares outstanding to approximately 143 million. From a P&L standpoint, the third quarter of 2011 marked our 6th consecutive record-breaking quarter. Consolidated sales increased to an all-time quarterly record of $2.1 billion, which is 59% higher than the record $1.3 billion in sales set in last year's third quarter.

This pushed our revenue for the September 9-month ended period past $5 billion, which exceeds 2010's full-year record revenue of $4.6 billion. In addition, our year-to-date September diluted EPS of $10.12 per share well exceeds 2010's full-year diluted EPS of $7.49. Increased prices for iron ore products and sales from our recently acquired Bloom Lake operations contributed to the quarter's standout performance.

Sales margin expanded 81% to $863 million compared with $477 million in last year's third quarter. This resulted in quarterly operating income of $820 million, more than doubling the $390 million posted in 2010's third quarter. Net income attributable to Cliffs shareholders reached $590 million or $4.07 per diluted share, exceeding last year's record of $297 million or $2.18 per diluted share.

Included in net income for the quarter is a $17.5 million net of tax, noncash loss from discontinued operations. Due to our previously settled pricing arbitration and a favorable pricing environment, Cliffs' minority partners interest in Empire Mine increased to a positive equity position during the quarter. As a result, Cliffs is now fully consolidating Empire Mine with the partner's interest reflected on the noncontrolling interest line item on the P&L. Historically, Cliffs reported Empire Mine as a captive cost entity. The net impact of fully consolidating was an $83 million reduction to earnings attributable to Cliffs shareholders, of which $68 million is related to prior quarter adjustments within 2011. The total adjustment had an impact to the quarter's earnings per share of $0.57 per share.

In addition, our third quarter effective income tax rate was 2% as a result of the combined impact of fully consolidating Empire Mine, along with strategic tax planning and certain discrete items. The benefits in the quarter to our tax expense are primarily related to changes in foreign currency, which ultimately impact tax liabilities, along with other discrete items. As a result, we now expect our full-year effective tax rate to be an estimated 18% including discrete items. This is lower than our previous expectation of 26%.

I would also point out that during the quarter, we incurred $152 million attributable to noncontrolling interest. Approximately $34.5 million of this is related to our minority partner's 25% interest in Bloom Lake Mine, with the remaining attributable to the full consolidation of Empire Mine. Noncontrolling interest for both mines will be recurring items in our financial statements in future reporting periods.

Turning to our U.S. Iron Ore reporting segment, in last night's release for comparison purposes, we included 2 tables as appendixes related to the full consolidation of Empire Mine's impact on our U.S. Iron Ore segment and also on our consolidated income statement. These adjustments had no impact on U.S. Iron Ore sales margin dollars reported for the quarter. For comparability, it's helpful to look at U.S. Iron Ore excluding the adjustments for Empire Mine.

On this basis, sales volume for the quarter increased 9% to 7.4 million tons from the previous year's third quarter. Revenue per ton was $125, up 24% from the previous year, driven by higher pricing and volume. Cash costs were down to $57 per ton, primarily due to greater fixed cost leverage versus the prior year's quarter. As I mentioned, the adjustments related to Empire Mine had no impact on U.S. Iron Ore sales margin dollars, which increased 82% to $481 million from $264 million last year. Our Eastern Canadian Iron Ore business generated revenues of $517 million compared with $124 million in the third quarter of 2010. Sales prices averaged $166 per ton, up about 5% compared with last year's $158 per ton.

Impressively during the third quarter, Bloom Lake contributed approximately $155 million in cash sales margin to the company's results. Cash cost per ton in the Eastern Canadian Iron Ore segment averaged $87, down 6% from last year's $93 per ton, reflecting lower realized cost related to production at Bloom Lake, partially offset by higher cash costs at Wabush Mine as a result of increased royalty rate, labor cost, shipping, stripping and transportation rate.

Bloom Lake's cash costs were $74 per ton during the quarter, higher than second quarter's cash cost of $66 per ton. The increase is primarily driven by approximately $14 per ton related to lower production in the quarter, as well as mining costs related to the Phase 2 expansion. Although higher quarter-over-quarter, we anticipate Bloom Lake's cash cost to be approximately $60 per ton by year end. While this is slightly increased from our previous expectation of $55 per ton, we believe the long-term benefit of making the investments today is the most effective way to manage the mine for the future.

Wabush Mine's cash cost per ton were $106 during the quarter, lower when compared with second quarter's cash cost primarily due to increased sales and production volumes during the quarter. Also during the quarter, the company incurred a noncash, nonrecurring expense of $11 million associated with the step-up of inventory at Bloom Lake.

Turning to the Asia Pacific Iron Ore operations. Average revenue per ton in the quarter increased 33% to $170 from last year's $128. Average cash cost was up 63% to $58 per ton compared with $42 per ton last year. This was due to higher royalty expense, accelerated mining cost related to our capacity expansion and unfavorable currency exchange rates. Nonetheless, per ton sales margin continued to expand 25% to $91, up from $73 in last year's comparable quarter.

In our North American Coal segment, average revenue per ton was $99 versus $118 last year. This reflects a greater percentage of lower-priced, high-vol and thermal coals year-over-year. Based on the lack of volume from Pinnacle and Oak Grove, we reported an increase in average cash cost per ton to $135 compared with $108 last year. We estimate that approximately $47 per ton of additional cash cost realized in the third quarter were due to the production curtailment.

Looking at the balance sheet, as I mentioned previously, during the quarter, we continued our effort to transition the company's capital structure for the longer term. We replaced our $600 million revolving credit facility with the new $1.75 billion facility. We used approximately $250 million of this to pay down a portion of our term loans. At the end of September, we held $545 million in cash and equivalents and long-term debt of $3.9 billion, including the borrowings on our revolver. The company generated $1.5 billion in cash from operations year-to-date. This is a 145% increase over the comparable 9-month period in 2010.

Looking ahead to the balance of the year, we intend to continue integrating recently acquired assets and working to bridge capacity expansion to bring capacity expansions online as expected. For our U.S. Iron Ore business, as Joe mentioned, we are lowering our full-year 2011 sales volume guidance to 24 million tons, down from 25 million tons. This reflects adjustments with customer pellet requirements and shipping vessel availability. Per ton revenue expectations have changed as a result of the full consolidation of Empire Mine, but outside of this would have remained the same. We now anticipate revenue per ton in the range of $135 to $140. Note we provided in our press release a detailed discussion of the assumption on which this pricing is based. It does include an assumption of $140 per ton for iron ore finds throughout the remainder of 2011.

We expect pellet production volume in U.S. Iron Ore to be approximately 24 million tons in 2011, with average cash cost per ton between $60 and $65. The increase, again, attributed to the full consolidation of Empire Mine. DD&A is expected to be $4 per ton. Sales volume at our Eastern Canadian Iron Ore segment is expected to be approximately 8 million tons, down from our previous expectation of 9 million tons. This is driven by an adjustment to Bloom Lake's current shipping plan and pellet availability at Wabush Mines, as Joe indicated earlier. Average revenue is anticipated to be in the range of approximately $160 to $165 per ton for 2011. Average cash cost per ton for 2011 is expected to be between $90 and $95, slightly higher than the previous guidance.

Eastern Canadian Iron Ore segment DD&A is anticipated to be $16 per ton. In addition, Bloom Lake's noncash inventory step-up expense is expected to be approximately $8 per ton for the year. In our Asia Pacific Iron Ore segment, we're maintaining our expected sales volume of 8.8 million tons and production volume of 9 million tons. Per ton revenue is expected to be $155 to $160, and cash cost per ton between $60 and $65, with approximately $11 of DD&A.

Sales and production estimates for 2011 at our North American coal segment have been reduced to 4 million tons from 4.5 million tons, primarily as a result of adjustments to our sales volume plans from Oak Grove in December. We expect to sell approximately 1.6 million tons of low-vol met coals and 1.4 million tons of high-vol met coal with the balance seeing thermal product. Average revenue per ton for the full year is now expected to be in the range of $115 to $120 per ton. Cash cost per ton in North American Coal is projected to be between 1 ton and 1.15, with approximately $20 of noncash DD&A.

Cliffs' 2011 full-year estimate for SG&A expense is approximately $290 million, which includes $35 million related to profit sharing at Sonoma and $25 million in nonrecurring acquisition-related cost related to the acquisition of Consolidated Thompson.

In addition, we anticipate incurring a total of $40 million for exploration activities and approximately $45 million related to our Chromite project. Based on our current expectations, we intend to generate approximately $2.2 billion in cash from operations in 2011. Our CapEx budget is being revised down from the previously anticipated $1 billion to approximately $900 million, as a result of timing and slower-than-anticipated cash outlays for our growth projects, which all remain on schedule.

And with that, I'll turn the floor back over to Joe for a final comment before we begin the Q&A. Joe?

Joseph A. Carrabba

Thanks, Laurie. In closing, we believe management actions during the last several years to broaden Cliffs' customer base and the market it serves, as well as amplifying Cliffs' exposure to the fastest-growing economies in the world are producing lasting value. Our long-term philosophy is not overly reflected by the short-term fluctuations in commodity markets. However, we are mindful that we operate in a cyclical business subject to our external dynamics. In addition, our operations are more flexible and we are better equipped to respond in a timely manner for varying market conditions than ever before. Further, we believe our financial condition and cost structure position the company to create value for shareholders at any point during the macro business cycle.

Steve, at this point, let's open the call for questions.

Steven Baisden

Thanks, Joe.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jorge Beristain of Deutsche Bank.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Congratulations on the strong headline results, although obviously a little complex on the accounting side.

Joseph A. Carrabba

Indeed.

Jorge M. Beristain - Deutsche Bank AG, Research Division

What I wanted to clarify is on the guidance, in North America, for the U.S., you're basically paring back your full-year guidance by 1 million tons but you're also carrying the benefit, I'm assuming, of the 500,000-roughly ton step-up from the consolidation of Empire. So would it be correct that you're sort of cutting your second half guidance by closer to 1.5 million tons in the U.S. and should I read into that, that there's a faster-than-expected weakening in the U.S. steel demand because of that?

Laurie Brlas

Yes, there's a little bit of rounding to be clear on that. But it's probably a little over 1 million, but it's not as high as 1.5 million.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Okay. And on the Wabush pellet availability, would you not simply be able to ship the concentrate from -- consolidated from Bloom Lake separately in order to keep up the tonnage there because you're also pulling back that guidance by 1 million tons?

Joseph A. Carrabba

Jorge, we have the ability to do it, however, as all these things we're doing some blending and some testing right now, at this point, just to see how the pellets perform. This will obviously change the quality of the pellet as well with the less manganese but, nevertheless, change the quality. So we're really not ready to introduce a quality pellet to the marketplace that we can consistently give quality parameters around.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Okay. And then lastly, just from an accounting point of view, the consolidation of Empire, one would assume that if it had already been consolidated as a net cost item for the past 2 quarters that there should be no change in the attributable profit from that business just because you simply restated it as a revenue and a cost line recognition. So what I'm trying to understand is what changed there to trigger the change in profitability and why is it going back now for 3 quarters. Is this because of a recent legal settlement that then allowed you to get retroactive pricing for that mine's contract?

Laurie Brlas

No, it's not a legal settlement at all. It's when we incurred better pricing and it slipped to this kind of treatment and, as you'll see when we file our Q, there's probably more detailed disclosures. But it's really a retroactive adjustment that should have been recorded in the second and third quarter.

Operator

Our next question comes from Brian Yu of Citi.

Brian Yu - Citigroup Inc, Research Division

My question is a bit of a follow-up on Jorge. Just with your reduction in North American shipments, it doesn't seem, from our standpoint, that there's that big of a change in blast furnace production. I was wondering if you can comment on what the weakness in spot pricing or has that kind of eliminated some of these opportunistic exports out of the Great Lakes? And then also, there's been other companies out there on steel side talking about magnetation. Is that, in any way, entering into your projections for next year?

Joseph A. Carrabba

That's a lot of questions, Brian. So I'll try and answer them as fast as I can. In North America, if you can think about the blast furnace ranges, and that's really what we spend most of our time on, on predictions and where the industry is right now. It's been fluctuating between 70% and 75%, 76%. We're just at the lower end of that range of 70% and if you think about where we came in, in 2011 at 70%, it built up to 76%. We do not have any knowledge right now of blast furnaces being idled like they were in '09, to our knowledge. We have had some of the blast furnaces of our customers, the maintenance has been pulled forward with that. So a lot of it is around the shipping and the timing, and of course the customers have to think about going into the winter and where their winter lower lake inventories go with it. So that's a difficult one to answer other than what we -- I think we stated as we went through the script that we're still within the balance of blast furnace utilization and don't have any knowledge of blast furnaces being idled at this point in time. We've read the reports obviously in the press releases around magnetation and they're aware of it. We don't see the impacts in '12 and quite frankly, really haven't dug down into it to analyze it that far, but we don't think that's sending any impact on the business in '12.

Brian Yu - Citigroup Inc, Research Division

And what else of the opportunistic exports that you've talked about maybe early in the year and have you dialed back some of those assumptions for next year or...

Joseph A. Carrabba

We haven't really gotten into the assumptions. That's far for next year. We started out pretty modest this year. This was our first year of really, fully getting to the export market. Certainly, the -- if the rates continue with where they are at the spot prices, that'll put a squeeze on it -- the exports but we really haven't dialed that number back that far at this point in time.

Laurie Brlas

And we also had, if we go back to the beginning of 2011, we had between 500,000 and 1 million tons that were really carryover tons from 2010. So we're really projecting fairly flat 2012 over 2011. We're not really projecting a decline.

Operator

Our next question comes from Shneur Gershuni of UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

I guess just a follow-up on the '12 guidance questions. You sort of talk about a utilization range of 70% to 75%, yet you kind of have a very specific guidance with respect to your volumes. I was wondering if you can tell us the sensitivity around it? Should we just be thinking, you're thinking the middle of the blast furnace range? Any kind of color as to how you arrived at that number with respect to the range that you put out?

Joseph A. Carrabba

Well, as you can imagine, it's a lot of calculations by a lot of people that go through a blast furnace by blast furnace type of calculation along with building in the maintenance planning that goes with it. I mean, if you think about it in totality, the difference between 0.5 million and 1 million tons, a lot of it sometimes can be inventory adjustments that come with going into the winter season versus the spring, and coming out of it as well. But again, ending up the year at 70%, looking at the GDP numbers yesterday, we think it's only upside going into '12 with the low range of the utilization.

Laurie Brlas

And we obviously pick a point to guide to in terms of volumes, but I assume we would vary a little bit around that. We wouldn't expect everyone to assume we would be exactly on point.

Joseph A. Carrabba

Right.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

So this is somewhat conservative, if I understand your comments right?

Joseph A. Carrabba

Well, we think given the marketplace with what it is, yes, I would think it would be somewhat conservative.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. And a follow-up question with respect to the Canadian cost. They continue to appear to be challenging and so forth. You have the big expansion coming as we move forward. Can you sort of give us some color as to -- I guess not specific outlook for 2012 cost size, but where the trends are, where the hiccups are, and how they're going to be solved and so forth?

Joseph A. Carrabba

Sure. We took some as -- I think it was in Laurie's section, we took some very deliberate steps this quarter as some ships have moved around and a little bit of volume has slacked up there. This mine is still in ramp-up phase, as I've said. We're very encouraged by hitting the 8 million-ton mark with that. But at the same time, we're still adjusting some spirals and some balances there, and we're also adjusting the mine plan and putting better ore feeds. Again, we think that some of the synergies and a lot of the value that we bring to the mine from the great job the Consolidated Thompson did when they built the mine. We're just starting to smooth the edges off, if you will, and we do anticipate the cost to come down. Those learnings that we're getting right now, we're incorporating into the new design of the new plant that comes on and we expect we can stabilize these costs down into the $60 raise that Laurie talked about.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Final question, if I may. You mentioned you've been active on the buyback during the quarter. Is the plan to complete the plant itself or do you plan to use it more on an opportunistic way?

Laurie Brlas

We'll continue to monitor the market, obviously. We're in blackout at this point in time and can't predict exactly what we'll do. But I think that our behavior in the past would roughly be indicative of how we'd expect to act in the future.

Operator

Our next question comes from Timna Tanners of BfA Merrill Lynch.

Timna Tanners - BofA Merrill Lynch, Research Division

I wanted to talk -- you made some comments about the iron ore price that the court just corrected sharply recently, you'll be, being that the things stay where they are in terms of U.S., European economic outlook then you would expect the iron ore prices to trade in the range next year. Can you give us any color from what you're seeing in Asia maybe now that you have a little closer relationship there on what supports your view of a recovery from here?

Joseph A. Carrabba

Yes, sure, Timna. I mean, we've always had -- with our Asia Pacific Iron Ore even before us, but many of the consistent players from the Forman days, we've traded in directly with customers for a number of years now in Asia and not only just with Eastern Canada. The credits squeeze is certainly tightening up the market, as you know right now, with the steel production and then on to the customers. I think there's always been a belief of -- within the industry that there is also a floor, a natural floor that Chinese production will come off. We seem to be testing that floor right now and we'll see from there. So I think the balance would be more of Chinese production coming off if indeed the industry is correct in their assumptions on the floor pricing, the floor cost, rather for the Chinese producers. And that's really where it would be made up in the first half of the year, for sure, and if credit were to ease a little bit in China, that may give it some momentum in the second half of the year.

Timna Tanners - BofA Merrill Lynch, Research Division

Okay, great. And I guess I wanted to follow up taking a step back, if we could, on the Coal business since it's been an area that you've talked about a lot over the years and in terms of go, no go decision. Clearly, you've got an impersonal role to move forward but can you just guide us to how you're thinking about the business strategically and what kind of parameters you're looking for to -- for next year to decide how to proceed in the business?

Joseph A. Carrabba

Sure I'd be happy, Timna, to talk about that very openly with everybody, I think, on the call and many of the investors as we should be talking about it. We did hire David Webb, a long-experienced coal executive. We're very pleased to have Dave on board and some of the changes he's making already. We've got hit with 2 events this year that really didn't allow us to properly evaluate the 2 legacy coal mines that we've got. As you know the tornado, which will come out in late December, so shipments will come in January now instead of December. So we've got to get that mine up and running and give Dave and his gang a chance to see where that is. And also that new shaft that we've talked about will be in production as well, so we should get something from there. Over at Pinnacle, again, obviously, we got hit with the carbon monoxide that kept us down for well over 100 days of getting -- the ramp-up is going very nicely. The longwall and the associated systems are performing very well with that, so we've got some encouragement. But '12, it should be a clean year for us, with all of the 3 projects that we've talked about in the past being in place with where they are and we're going to have make some serious calls on that. One thing that I would like to highlight as well, and by no means is this a defense for the legacy coal mines, but our iron ore assets that we purchased a year ago are performing very well and above the plans that we had and we're quite pleased with them. But we've got to get the whole business in place now.

Operator

Our next question comes from Arun Viswanathan from Susquehanna.

Arun S. Viswanathan - Susquehanna Financial Group, LLLP, Research Division

I guess, could you guys give us a little bit more detail on what you see on the cost side on Eastern Canadian Iron Ore and in the U.S. It seems like costs have been trending a little bit higher. What would you expect for both Bloom Lake and Wabush over the next several quarters? Where do you think we can get on a steady-state on cost, cash costs?

Joseph A. Carrabba

Well, I think, just, if you will, just to repeat myself on Eastern Canada on the Bloom Lake, I think I gave that explanation pretty thoroughly that we still thought we'd be in the $60 range as we get there, but we're shaking the mine down and we've taken, again as things have been a little bit slower, deliberately taking some actions to improve the process going into '12. So we're quite comfortable there, both in terms of hitting the 8 million tons and where we think we'll also be. Wabush, we think the cost will maintain and will rise slightly higher with the labor cost as they always go up year in and year out. These are union contracts at Wabush, so they're already built into the projections. We do not see a dramatic drop or rise in Wabush and it's sustained at about that level of cost for quite some time with inflation in it. In the U.S., again, there is inflectionary pressure that's coming on, I think, because most of the mining companies have reported with it. We don't see it as dramatic in North America right now as we're seeing in probably Australia and Asia Pacific, but costs are definitely on the rise just as they've been in the past with high commodity prices and volumes.

Laurie Brlas

Well, yes. Since royalty, they're a fair component of cash cost. It's usually a good thing when it goes up from that perspective because that means pricing has been up.

Joseph A. Carrabba

We did demonstrate also a lot of price or a lot of cost discipline in this quarter. If you look at that and if you can take the exceptional items out, pretty outstanding to watch the cost flat to just slightly down for the quarter.

Arun S. Viswanathan - Susquehanna Financial Group, LLLP, Research Division

And then just to confirm, so on the last call, I think that you did provide some pricing outlook for 2012. And so given the volatility, you've pulled away from that, is that a fair assumption? And you'd kind of revisit that as we progress through the year or...

Laurie Brlas

We didn't provide any guidance for 2012. I think we've said all along that the spot price, we do expect we'll trade in a band, and we're seeing it trade in a band, and so now we're kind of at the floor and we've seen some of the higher points earlier this year but that's what we said on this call and we wouldn't have said anything more specific than that in the prior call for 2012.

Operator

Our next question comes from Kuni Chen of CRT Capital Group.

Kuni M. Chen - CRT Capital Group LLC, Research Division

I guess just first off, on North America. Obviously, a lot of your customers are moving to backward integrate year, what is your view sort of looking out 3 or 4 years and your strategy in North America and how you can maintain your share?

Joseph A. Carrabba

Well, I think, our view is, if you will, it's a normal reaction to a high-priced commodity and people are looking to vertically integrate within the steel industry right now. I mean, that's pretty much been proven all the way through and that's where things are going right now. It's obviously concerning. With that, we've got some ideas on where we can place our pellets within North America as we go across with this. And I think also just as you watched us on ramp-ups as well, I think you've got to watch the timing on the ramp-ups and the construction as well of the new facilities that are being discussed and being built in the marketplace as well. So certainly, concerning it's a few years out and a lot of things happen between now and then, then we'll be working on strategies to place the pellets in North America and outside of North America between now and then.

Laurie Brlas

And I think there's a limit, really, to how much backward integration we expect will happen in the U.S. Some of our customers who have focused on backward integration are probably more likely to be looking to replace their seaborne tonnage and ship into Europe and other places that they have blast furnaces, as opposed to replace those in the U.S.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Right, okay. Fair enough. And then just remind me, again. On coal, obviously, you need to get the mines back up and running and fueled up and your team can do here but are we still looking at a business that's going to produce 9 million to 10 million tons as you look out 1 to 2 years?

Joseph A. Carrabba

Well, we've said we're going to stabilize to 7.2 million...

Kuni M. Chen - CRT Capital Group LLC, Research Division

For next year?

Joseph A. Carrabba

For next year. And then we'll take a look from there, Kuni. Yes we have set the 9 million to 10 million, but I think given the operating problems that we've had at this point in time and again allowing David Webb to get his feet into this thing will come back out with a new projection sometime next year on the future years of coal production.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Okay, so the 7 million tons is more of maybe a bit of a conservatism as you look to get those mines bent backup, not really an indication of where the market might be? Is that the right way to think about it?

Laurie Brlas

I would say that the 7 million is our projection for 2012 and we're just really not comfortable projecting beyond 2012 in terms of volumes at this point in time. And it's not a market concern, I think that's what you're getting at. It isn't a concern there, it's just making sure that we're confident in our production capabilities.

Operator

Our next question comes from Mitesh Thakkar of FBR company.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

So I saw you lower your CapEx number a little bit and it's mostly related to the adjustments. So maybe you have to have a catch-up next year. Can you just kind of give us a sense on, outside of Canada and Australia, in terms of emerging exploration and coal mine, how are you allocating the CapEx right now? And maybe provide an update on the chromite project and permitting issues and stuff?

Laurie Brlas

Yes, we don't look at that adjustment as a major delay or anything like that, as we said. It's really just cash timing. In terms of next year, we haven't finalized our capital plan. I think we would expect probably in the neighborhood of $300 million in sustaining capital. On top of that, we'll have some capital to finish up our projects, but we'll report that -- our exact expectation next year in the comment on the project.

Joseph A. Carrabba

Yes, ferrochrome continues to move through prefeasibility at a good pace. The guys are pinning down their final options right now, it's going through a lot of reviews that we talk about. And we'll come out with a new capital number and an OpEx as well probably sometime in the late first or early second quarter once we come out of prefeasibility and get these numbers pinned down. There's a lot of moving parts between where we're going to site, the furnaces, any nonelectrical contracts that we're in negotiations with right now and the transportation quarter that's best for this project and which one we select to use. So all of those are going on. The government continues to be very encouraging and we're working very well within partnership. Our environmental permitting process and baseline work continues on at a positive phase and we're working with all of the First Nation's groups that are affected within the area and starting to work on MoUs within the various groups of folks up there. So it's all progressing. It's a typical prefeasibility at this point in time. The deposit continues to look very good. The smelting tests that we've run, the pilot test in South Africa came out very well. So again, all of the signs continue to be very encouraging.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Great, great. And one final question on North American -- on U.S. iron ore, is there a way to provide a sensitivity around the movement in iron ore prices?

Steven Baisden

Yes, Mitesh, we have taken a look at it for 2011 and given where we're at, our order book and what we've already sold, we think for every $10 change in the spot price, you would see an impact to our revenue per ton guidance of about $2.

Operator

Our next question comes from David MacGregor of Longbow Research.

Unknown Analyst -

This is actually Joe Crozak [ph] sitting in for David. Most of our questions have already been answered. Just a couple of quick follow-ups here. Are you satisfied with the Amapa operations in Brazil and now that it looks like it's achieved a steady state, is there a Phase 2 in the pipeline?

Joseph A. Carrabba

Well, I don't know if I'm ever satisfied with any operation, but in Amapa, I think Anglo has, to their credit, they operated, they have settled the mine down quite well. I think it's operating within parameters. It's going to continue to operate in with the production splits between the DRI and the blast furnace grades and the center grades and all of the other grades that have come out of that mine as well. They've really achieved an excellent safety record up there and they have a good environmental record. So I think Anglo has done a nice job really settling this mine down and again the pricing taken it into profitability with that. There is not a Phase 2 to that mine. We think the resource is limited. And also with what we'd have to do with other capital for port and rail for an expansion just doesn't make sense to us, given the parameters of the mine. So it is what it is. It's profitable. It takes very little management time on our end to do it and Anglo's doing a nice job of their management.

Unknown Analyst -

And just one more quick follow-up here. Just how much coal is stockpiled at Oak Grove? Could you give us some details in that?

Joseph A. Carrabba

Yes, there's 600,000 clean tons of...

Laurie Brlas

By year end, we expect.

Joseph A. Carrabba

By year end. We're expecting that by year end on the ground at Oak Grove.

Operator

Our next question comes from Jessica Fung of BMO Capital Markets.

Jessica Fung - BMO Capital Markets Canada

Two quick questions, please. I know it doesn't really affect your margins, the consolidation of Empire Mine, but, I mean, if iron ore prices go down, is it possible for you guys to have to sort of deconsolidate it?

Laurie Brlas

No, I would not. That would not be the case. It would reduce, obviously, the profitability of the mine and it would reduce the amount of the minority interest that comes out at the bottom but we would not deconsolidate it.

Jessica Fung - BMO Capital Markets Canada

Okay, great. And little point on the chromate assets, for your prefeas, are you guys including studies on logistics in there, like building a railroad or possibly a...

Joseph A. Carrabba

Yes, we absolutely are. Yes, Jessica, that's going to be a vital part of the project whether it's road or rail and again, which quarter we pick to come out with it, it'll also be a very expensive part of this project, but a vital part that has to be included in the CapEx and the project will have to carry the load on the first phase to get started. It'll be an expensive piece of the CapEx.

Operator

Our next question comes from Mark Parr of KeyBanc.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

I have -- this is kind of an off-the-wall question. But if you're looking in the mining process, where you have, I believe, the ore goes through a grinding phase with the big grinding balls before you go through concentration?

Joseph A. Carrabba

Right.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Can you give me some sort of a rough idea what the cost or what percentage of the capital is associated with the grinding side of a concentrator operation out on a [indiscernible] per ton basis?

Joseph A. Carrabba

It's just on the tip of my tongue, I'm sorry, Mark.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

I'm just shocked you just don't have that answer, Joe.

Joseph A. Carrabba

We'll be glad to follow up with you, though, Mark.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

I have another question, if I could. You had talked, I think, and, Laura, you may have said this earlier, just about your sense of 2012 iron ore pricing kind of staying in the same range as 2011.

Laurie Brlas

Yes.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

I guess, I'm just curious how you're thinking about that in terms of this pretty dramatic pullback. I think we've seen the spot oceanborne number go below $120 this week and the 58% FE, I think, is closer to $100. And those are -- just in the last 3 weeks there's been pretty meaningful pullback and then in conjunction with the reduction in the volume out of Bloom Lake, I think that, that production is predominantly going to China, if I'm not mistaken.

Joseph A. Carrabba

That's correct.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

And, I mean, are we kind of on the front end of some real uncertainty related to Chinese consumption and the Chinese economy? I mean, how do you reconcile that in the context of your commentary about pricing remaining in the same range in '12 as we've had this year? I'd like to get some color.

Joseph A. Carrabba

I would take it this -- I would put it this way and dramatic as the drop is, the rise up to -- well above $175 earlier this year was came just as quick, just as big a surprise and while everybody gets euphoric and happy on the rise -- on the high side, we didn't remodel our business based on $175 as we wouldn't on a $120. I think the discussion on China and the slowdown of China has been going on now for almost 2 years. So I don't think this should be any surprise either to anybody because the predictions and the economist have written volumes about this as well. So if you take the high and the low out of this thing, and the fact that we do think Chinese production will come off at a certain point when these prices go down and also put the tightness of the credit in China right now so that iron ore producers going to stockpiles are going to get squeezed like everybody else. With that, we think there's still a pretty big hole in there for the iron ore businesses at stance today with that and to trade within a range for the mills to be profitable.

Operator

Our next question comes from Tim Hayes of Davenport & Company.

Timothy P. Hayes - Davenport & Company, LLC, Research Division

I missed the numbers on the coal, was there a pricing for '12 coal that was -- tonnage that has been priced?

Steven Baisden

Tim, we said that we have 75% of our '12 production still available for pricing. That we already have prices about at an average of -- and this is just for the metallurgical coal, it's about an average of $150 a short ton at the mine.

Timothy P. Hayes - Davenport & Company, LLC, Research Division

And the miscellaneous income on the P&L, what accounted for that?

Laurie Brlas

That's primarily currency for some of our monetary assets. It's between the Aussie dollar and the U.S. dollar.

Timothy P. Hayes - Davenport & Company, LLC, Research Division

Okay. So the currency was a benefit there and then it's also a benefit on the tax rate?

Laurie Brlas

That's correct.

Steven Baisden

Great. Well, that makes it easy. We appreciate everyone's interest on the call today. I will be available, and Jessica will be available, for the rest of the day. So if you have follow-up questions, please don't hesitate to give us a call. Thanks a lot.

Joseph A. Carrabba

Thank you all.

Laurie Brlas

Thanks.

Operator

This concludes today's conference, and you may all now disconnect.

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