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Cleveland-Cliffs Inc Reports 1st Quarter Results
05/06/2008 - Cleveland-Cliffs reports 2008 net income of $16.7 million on record consolidated revenues of $494.4 million for the quarter ended March 31, 2008.
Cleveland-Cliffs Inc. reported 2008 net income of $16.7 million on record consolidated revenues of $494.4 million for the first quarter ended March 31, 2008.
Net income of $16.7 million ($0.32 per diluted share) compares to net income of $32.5 million ($0.62 per diluted share) in the year-ago quarter. Cliffs said net income was impacted by a $6.9 million equity loss related to its investment in the Amapá Iron Ore Project, as well as the impact from unsettled iron ore benchmarks. Results were also impacted by a higher tax rate of 34.5% vs. 26.7% in the year-ago quarter, due primarily to the mix of net income generated at geographies outside of the United States.
Consolidated revenues were a record $494.4 million, a 52% increase from $325.5 million in the year-ago quarter. The increase was primarily driven by $94 million in sales generated by Cliffs’ North American Coal segment acquired in July 2007 and a $54 million increase in revenues from the company’s North American Iron Ore segment.
“Cliffs’ strong revenue growth continued in the first quarter, despite the fact that some benchmark prices referenced in our contracts have yet to settle,” commented Joseph A. Carrabba, Cliffs’ Chairman, President and CEO. “All indications are that these 2008 increases will result in record price levels. As such, we expect to recognize an additional $55 million of revenue in a future quarter relating to tons sold in the first quarter.”
Operating income, $42.6 million, was comparable to the year-ago quarter’s $44.9 million. Operating income was impacted by higher selling, general and administrative expenses, including approximately $6 million attributable to the company’s North American Coal segment acquired in July 2007; a charge of approximately $7 million in connection with a legal case; and approximately $10 million in additional management infrastructure and corporate development activities in Latin America and Asia-Pacific. The impact on operating income if all iron ore price settlements had occurred and the related revenue had been recognized would have been approximately an additional $55 million, as costs associated with these sales volumes were accounted for in the first quarter.
First-Quarter Results, North American Iron Ore—North American Iron Ore pellet sales volume was 2.7 million tons, a 10% increase from the 2.5 million tons sold in the first quarter of 2007. The year-over-year increase in sales volume is attributed to increased demand for iron ore pellets and the timing of customer shipments. The company noted that first-quarter sales volume is typically lower than other periods due to shipping constraints on the Great Lakes.
Reported North American Iron Ore revenues per ton were $76.32 during the first quarter, up 15% from the comparable quarter in 2007. The increase in revenue per ton is primarily attributed to higher pricing for steel, which is a factor used in the pricing formulas for several of Cliffs’ North American Iron Ore contracts. Cliffs also noted that as of the end of the first quarter the iron ore pellet benchmarks referenced in its North American Iron Ore sales contracts had yet to settle and, as a result, based on recently announced 87% increases for Eastern Canadian pellets, approximately $5 million of additional revenue related to first-quarter sales will be recognized in the second quarter.
Cost per ton of $52.77 was up 2% from the year-ago quarter.
All of Cliffs’ North American Iron Ore mines are producing at or near capacity. Production at Hibbing increased 800,000 tons year-over-year as last year’s first-quarter output was reduced due to a weather-related plant shutdown. At Northshore, Cliffs restarted its Furnace No. 5 at the end of March, where production there is expected to benefit from an incremental increase of approximately 600,000 tons in 2008 and approximately 800,000 tons annually thereafter. Although production at Empire was originally expected to decline to 3.6 million tons in 2008, market conditions have prompted Cliffs to raise the facility’s rate of production, and the company now estimates Empire will produce 4.0 million tons for the year.
First-Quarter Results, North American Coal—Metallurgical coal sales volume was 998,000 short tons, with average revenues per ton of $81.02. The segment reported a loss of $2.5 million in sales margin on cost of goods sold of $83.57 per ton. On a sequential-quarter basis, cost declined $7.41 per ton from the $90.98 per ton realized in the fourth quarter of 2007.
In mid-March, production slowed at the company’s Pinnacle Mine in West Virginia because of a fault area within the coal panel being mined at the time. Cliffs indicated significant progress has been made since that time, and that it expects to mine through the fault area by mid-May. As a result, the company reduced its total metallurgical coal production forecast for 2008 by approximately 200,000 tons to 4.3 million tons.
First-Quarter Results, Asia Pacific Iron Ore—Asia-Pacific Iron Ore sales volume increased 9% to 2.1 million tonnes, compared with 1.9 million tonnes in the year-ago quarter. The company said the increase was primarily the result of shipments originally scheduled for the fourth quarter of 2007 that were pushed into the first quarter due to vessel availability at the end of 2007.
Revenues per tonne, $56.12, reflect an 8% increase compared to $52.14 in the prior year. Cliffs noted that the Australian benchmark for lump and fines iron ore referenced in all of its Asia-Pacific supply contracts are yet to settle and, as a result, based on an assumed 65% increase, an estimated $50 million of additional revenue related to first-quarter sales will be recognized upon settlement.
Per-tonne cost in Asia-Pacific Iron Ore, which increased 16% to $45.91, continues to be negatively impacted by foreign exchange rates, as the U.S. dollar weakened relative to the Australian dollar. In addition, higher fuel, maintenance and contract labor expenditures due to inflationary pressures also contributed to the cost increase.
Production in Asia-Pacific Iron Ore was 1.9 million tonnes, approximately flat with the first quarter of 2007. In 2008, production at Cockatoo Island is expected to continue into the second quarter, with shipments projected to end with the closing of the mine in the third quarter.
Liquidity—At quarter-end, Cliffs had $186.5 million of cash and cash equivalents (an increase of $29 million from year-end 2007) and $600 million in borrowings outstanding under its $800 million credit facility. At December 31, 2007, Cliffs had $157.1 million of cash and cash equivalents and $440 million outstanding under its credit facility. Major uses of cash in the first quarter included $130.9 million in product inventories and approximately $34 million in property, plant and equipment. Cliffs reported a use of cash from operations of approximately $120 million. However, as the company sells through inventories in the remaining three quarters of the year, it expects to generate approximately $700 million in cash from operations in 2008.
Pricing Outlook—Cliffs has incorporated reported 2008 iron ore settlement increases of 65% for fines and 87% for pellets into its estimates for pricing projections. However, negotiations are ongoing and various benchmarks may settle at different pricing levels.
North American Iron Ore Outlook—Cliffs said that its North American Iron Ore operations continue to produce at or near capacity. In 2008, Cliffs-managed iron ore pellet production is expected to approximate 35.6 million tons, with the company’s equity share expected to be 22.4 million tons. As the company sells through current inventory, 2008 sales volume is estimated at 24 million tons.
In estimating Cliffs’ revenue-per-ton guidance, the company updated its assumptions for various factors included in its North American Iron Ore supply contracts. These include:
- An 87% increase in World Pellet Prices, up from a previous assumption of a 65% increase.
- Approximately 3 to 4% increases among producer price indices, up from a previous assumption for modest increases.
- An approximate 25% increase in factors related to steel pricing, including hot band steel at $700 per ton, up from previous assumptions of 16% and $650, respectively.
- Recent negotiation of an amended supply agreement with Severstal that increases the quantity, changes the price structure, and extends the agreement through 2022.
- A combination of other supply agreement contractual base-price increases, lag-year adjustments and capped pricing.
The combination of these factors results in estimated revenue per ton of $81 for 2008, compared with previous guidance of $76 per ton.
Cliffs also updated the sensitivity for the estimated impact of changes in customer pricing for hot rolled steel on North American Iron Ore revenue per ton. With the update, each $10 change from $700 per ton in the average hot rolled steel price at certain steelmaking facilities will result in a change in average realization of $.24 per ton
Cliffs also updated its expectation for 2008 North American Iron Ore costs per ton to an increase of approximately 10% year over year to $53 per ton, from its previous expectation of 4% or $50 per ton. Cliffs indicated mining expenses are being impacted by rising energy costs.
North American Coal Outlook—North American Coal is expected to produce and sell approximately 4.3 million tons of metallurgical coal in 2008. Cliffs increased its expected average sales realization per ton to approximately $94 from a previous expectation of $91. The increase is based on an improved metallurgical coal market.
As a result of encountering the fault area at the Pinnacle Mine, cost per ton for the year is expected to increase to $86 from Cliffs’ previous estimate of $77.
Asia-Pacific Iron Ore Outlook—Cliffs expects Asia-Pacific Iron Ore 2008 production volume to be 7.8 million tonnes, with expected sales volume of 8.0 million tonnes. Revenue per tonne for the region is expected to average approximately $89. This estimate assumes a 65% increase in the 2008 international settlement price for lump and fines, which is subject to change. This also considers that, in 2007, Cliffs’ Asia-Pacific Iron Ore segment had a $30 million ($3 per tonne) revenue benefit from currency hedging that the company assumes is not going to recur in 2008.
Cliffs expects Asia-Pacific Iron Ore costs per tonne of approximately $53. This estimate includes an expanded $23 million ($3 per tonne) exploration and evaluation program at the company’s Koolyanobbing operations targeted at expanding iron ore reserves in Australia.
Sonoma Coal Project Outlook—Cliffs’ Sonoma Coal Project, a project Cliffs has with QCoal Pty Ltd of Australia, was recently commissioned and Cliffs’ share of sales volume in the first quarter of 2008 was approximately 28,000 tonnes of coal.
Cliffs has a 45% economic interest in the project and expects total production of approximately 2.0 million tonnes for 2008. With recent reports of significant year-over-year increases in pricing for metallurgical coal, Sonoma is expected to benefit and generate average revenue of $129 per tonne in 2008, an increase from the company’s previous guidance of $89 per tonne. Cliffs indicated its outlook for Sonoma includes a mix of metallurgical and thermal coal.
Costs at Sonoma are projected at approximately $83 per tonne for 2008, up from its previous estimate of $78 per tonne. The increase in cost is the result of increased expenses attributed to flooding in eastern Australia earlier in the year.
Amapá Iron Ore Project Outlook—The Amapá Project, a project between MMX and Cliffs, began production in late December 2007. Cliffs owns a 30% interest in the project and MMX, who has agreed to sell its stake in Amapá to Anglo American, has management control over the venture. MMX has indicated plans to complete construction of the concentrator and ramp up operations during 2008, with production and sales expected to total three to four million tonnes for the full year. Based on start-up delays and production levels, Cliffs expects to incur equity losses in 2008. MMX expects Amapá to produce at the 6.5-million-ton design level in 2009.
Headquartered in Cleveland, Ohio, Cleveland-Cliffs Inc. is an international mining company, the largest producer of iron ore pellets in North America and a major supplier of metallurgical coal to the global steelmaking industry. The company operates six iron ore mines in Michigan, Minnesota and Eastern Canada, and three coking coal mines in West Virginia and Alabama. Cliffs also owns 80% of Portman Limited, a large iron ore mining company in Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore. In addition, the company has a 30% interest in the Amapá Project, a Brazilian iron ore project, and a 45% economic interest in the Sonoma Project, an Australian coking and thermal coal project.
