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Cleveland-Cliffs Provides 1st Quarter Operations Update

Cleveland-Cliffs Inc. announced selected operating information for the three months ended March 31, 2007.
 
The company notes that information is limited due to the ongoing review of its application of SFAS 133. The company anticipates that any related revision will be the result of embedded derivatives related to fluctuations in the market value of certain price-adjustment factors contained within its long-term pellet supply agreements. The company is near completion of its analysis of the potential impact of embedded derivatives on its consolidated financial statements and the periods that may be affected. The company expects that any changes stemming from its application of SFAS 133 will be non-cash and will not have any economic impact over the life of any contract.
 
North American Iron Ore—During the first quarter of 2007, Cleveland-Cliffs shipped 2.6 million tons of iron ore pellets from its North American mines, which compares to shipments of 2.9 million tons in last year's first quarter. First-quarter shipments are not indicative of full-year sales volume due to winter shipping constraints on the Great Lakes. Current shipments included approximately 0.3 million tons of the previously disclosed 1.2 million tons of pellets purchased from upper Great Lakes stockpiles and paid for by customers in December 2006.
 
Per-ton billing rates (excluding freight and venture partners' costs) for pellet deliveries increased approximately 7% to $66.91 during the quarter, versus $62.50 in the first three months of last year. Billing rates reflect customer mix and the net impact from several contractual price-adjustment factors. The billing rate realization includes 1.5 million tons of shipments at 2006 billing rates.
 
Full-year 2007 pellet-price realization could fluctuate, versus 2006, due to various price-adjustment factors in Cliffs' pellet contracts. Settlement of the World Pellet Price in 2007 is expected to increase Cliffs' average pellet sales realization by $0.63 per ton, compared with 2006. Each 1% change in the PPI-Industrial Commodities Less Fuel and PPI-Fuel and Related Products indices is currently anticipated to result in $0.12 per ton and $0.07 per ton changes, respectively, versus Cliffs' 2006 average realization. Additionally, each $10 increase from $560 per ton in the average hot rolled steel price at certain steelmaking facilities will result in a $0.26 per ton increase in Cliffs' 2007 average realization.
 
Per-ton cost of goods sold and operating expenses (excluding freight and venture partners' costs) increased approximately 10% over the quarter to $51.71, compared with last year's $47.03. The $4.68 per ton increase primarily reflected higher energy and supply usage, lower production volume and higher maintenance spending.
 
"Business conditions in North America continue to exhibit strength, with demand from steel companies remaining firm,” said Cleveland-Cliffs President and CEO Joseph A. Carrabba. “This environment bodes well for Cliffs' domestic iron ore business and appears to signal another very good year for our company."
 
Australian Iron Ore—Sales revenue at Portman of $100.3 million on 1.9 million tonnes, versus $60.2 million on 1.5 million tonnes for the same period in 2006, reflected higher volume and prices. Average per-tonne revenue was $52.13, versus $41.12 last year — a 27% increase. Per-tonne cost of goods sold and operating expenses increased 14% to $39.40, compared with last year's $34.43. The 27% increase in first-quarter revenue rates reflected the impact of the 9.5% increase in 2007 iron ore prices versus the 2006 price settlement of 19%, which did not occur until the second quarter with retroactive application to the beginning of the year.
 
Production and InventoryAt March 31, 2007, Cliffs had six million tons of pellets in its North American inventory, compared with 3.8 million tons at December 31, 2006 and 5.4 million tons at March 31, 2006. The inventory buildup occurred due to winter shipping constraints on the Great Lakes. Total North American production for Cliffs' account was 4.8 million tons in the first quarter versus 5.1 million tons in the corresponding 2006 period. At March 31, 2007, Portman had 0.9 million tonnes of finished product inventory, which is unchanged from December 31, 2006 and 0.4 million tonnes higher than at March 31, 2006.
 
Production at Tilden was lower as a result of scheduled equipment repairs. Hibbing production was lower due to an unscheduled plant shutdown from mid-February to mid-March, the result of a weather-induced free-flowing water shortage. Production at Wabush was 0.3 million tons higher than the same period in 2006 as a result of design improvements to mitigate pit dewatering issues.
 
The increase in Portman's first-quarter production primarily reflected completion of the two-million-tonne per annum expansion project at Koolyanobbing in late 2006.
 
Acquisition Updates—On March 5, 2007, Cliffs acquired a 30% interest in the Amapa Project, a Brazilian iron ore operation, with an initial investment of $133 million. Amapa is expected to be commissioned near the end of 2007 and produce 6.5 million tonnes of iron ore concentrate annually. The full-year 2007 investment in Amapa is expected to total approximately $240 million, comprised of the $133-million initial investment, $23 million for Cliffs' share of Amapa's 2007 capital expenditures, and $84 million of construction expenditures financed by project-level debt.
 
Subsequent to first-quarter-end, Cliffs entered into a definitive purchase agreement to invest in the Sonoma Coal Project, a coking and thermal coal operation in Queensland, Australia. Sonoma is expected to produce at an annualized rate of two million tonnes of coking and thermal coal, in approximately equal amounts, beginning in late 2007. Production is slated to ramp up to a three- to four-million-tonne rate during 2008. Cliffs has a 45% economic interest in the project, including its 100% ownership of the coal washplant. Cliffs' 2007 investment related to the Sonoma Project is expected to total approximately $96 million.
 
Due to the timing of commissioning and production ramp-up, costs are expected to exceed revenues in 2007 for both projects.
 
Liquidity—At March 31, 2007, Cliffs had $118.8 million of cash and cash equivalents, primarily $107.1 million at Portman. Additionally, $50 million was outstanding at the end of the quarter under the company's $500 million revolving credit facility. At December 31, 2006, Cliffs had $351.7 million of cash and cash equivalents. The cash and borrowings were used during the quarter for the investment in Amapa of $133 million, a $126 million increase in inventories due to normal seasonal buildups, and $31 million of other capital expenditures.
 
Outlook—The company's total North American pellet production estimate is more than 35 million tons, with Cliffs' share representing approximately 22 million tons. Portman's 2007 production volume is expected to be 8.4 million tonnes, which includes 0.6 million tonnes from Cockatoo Island.
 
Cliffs projects its 2007 North American sales will be approximately 22 million tons. Portman's full-year sales are estimated to be 8.3 million tonnes.
 
For the full year 2007, the company expects pellet sales realization rates to increase approximately 2%. The company also expects North American production costs per ton for the full year 2007 to increase approximately 2% from the 2006 cost of goods sold. Operating expenses (excluding freight and venture partners' costs) are projected at $48.17 per ton.
 
In Australia, Cliffs expects the 2007 average selling price of lump and fines ore to increase approximately 8%, compared with the 2006 average reported selling price of $48.59. Per-tonne unit production costs are anticipated to be approximately 11% higher in 2007, compared with the $36.93 reported for 2006.
 
In addition to the investments in Amapa and Sonoma, capital expenditures to support the company's existing North American and Portman operations are projected to be $123 million in 2007. With the exception of the $84 million of Amapa project-level financing, Cliffs expects to fund its capital requirements from operating cash flow and its revolving credit facility.
 
Regarding the company's application of SFAS 133, Carrabba added, "Due to the complex nature of identifying and accounting for derivative instruments embedded in our pellet supply agreements, the time required to complete this examination and file our 2006 10-K is still uncertain. However, it is important to note that any potential adjustments to results will be non-cash and will not impact Cliffs' profitability over the life of any contract. While it is regrettable that our audited results are being delayed as a result of this review, we remain steadfast in our commitment to financial transparency according to our corporate governance standards."
 
Headquartered in Cleveland, Ohio, Cleveland-Cliffs Inc. is the largest producer of iron ore pellets in North America, selling the majority of its pellets to integrated steel companies in the United States and Canada. Cleveland-Cliffs Inc operates a total of six iron ore mines located in Michigan, Minnesota and Eastern Canada. The company 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. It also has a 30% interest in the Amapa Project, a Brazilian iron ore project, and a 45% economic interest in the Sonoma Project, an Australian coking and thermal coal project.