Cleveland-Cliffs' Recent Correspondence

The following is an exchange of comments on Cleveland-Cliffs (CLF) clarifying upcoming price increases.

Usaironmaker said:

Cliffs does not see all of any price increases. They sell their pellets under long term contracts with small escalators built in that are a fraction of the yearly price increases.

CrossProfit said:

"Small escalator" quarterly increases do not include Australian Portman acquisition and new (USA) met coal production capacity. Long term contracts up for pricing renewal in 2008 will boost earnings significantly on current production.

This should become evident to all towards the end of Q2 2008.

Usaironmaker said:

Couple of questions.

What Australian acquisition are you talking about? It can't be Portman, they've had them for a while now and my understanding is they are desperately looking for more reserves to break even on the takeover. The coal mine in Australia also won't be ready by Q2 so I'm not sure what hope you're pinning on Australia.

Is the new production capacity in North America where they recently unloaded the Wabush mine and will probably be seeing less production from the Empire mine? 800,000 tons more out of Northshore won't make up for that.

Exactly which steel companies have their long term pellet contracts up in 2008? Mittal runs past 2010 as do the others I looked at.

CrossProfit said:

Rule of Thumb Price Increase Calculation:

"Each one percent increase in the PPI—All Commodities Less Fuel index is currently expected to add $0.12 per ton to Cliffs’ 2005 average pellet sales pricing; each one percent increase in the PPI—Fuel and Related Products index will result in an approximate $0.06 per ton increase to Cliffs’ 2005 average pellet sales pricing; and, each $10 per ton increase from $520 per ton average hot rolled price in a number of Cliffs’ contracts is expected to result in a $0.30 per ton increase to Cliffs’ 2005 average pellet sales pricing." - 8K 06/26/2006

In general, prices reset in January every year for iron pellets on all long term contracts. Different formulas are used for the various contracts with a partial resetting done on a quarterly basis. If this is what you are referring to then this is correct. In April, prices reset for met coal exports. Long term contracts pricing are linked to industry variables that protect from wild swings in both directions. The pricing formula lags the current market price, however, catches up once a year. This gives investors ample time to see the direction.

CLF declared a quarterly dividend of $0.125 per share, starting 12/2007. Preferred stock dividend of $8+ is being paid in 01/2008. We expect common stock dividends to increase over 100% over the next few years as the cash flow increases.

Australia Portman acquisition benefits from hedged exchange rate and there should be a large price increase coming through in January (in U.S. dollar terms). End of Q2 in previous comment refers to met coal exports from U.S., as the export contracts are renewed on a yearly basis mirroring spot prices. Aussie coal exports should start flowing in commercial quantities as well in Q2 2008 (we are not familiar with your source of information stating otherwise). We also like the 'short haul' to the export port from the production site.

As for 'desperately looking for more reserves to break even on the takeover'; more reserves is always a good thing, but CLF will make money 'as is' as inflation erodes their cost base.