Cleveland Cliffs Reports 2nd Quarter Results
07/30/2007 - Cleveland-Cliffs reports net income of $86.9 million on record revenues from iron ore product sales and services of $547.6 million for the second quarter, and net income of $119.4 million on record revenues of $873.1 million for the six months ended June 30, 2007.
Cleveland-Cliffs Inc reported net income of $86.9 million on record revenues from iron ore product sales and services of $547.6 million for the second quarter, and net income of $119.4 million on record revenues from iron ore product sales and services of $873.1 million for the six months ended June 30, 2007.
Second-Quarter Results—The $86.9-million net income ($1.66 per diluted share) compares with net income of $83.1 million ($1.53 per diluted share) last year. Cliffs says the increase primarily reflects lower income taxes due to a larger income contribution from North American operations, which benefit from lower tax rates when compared to Asia-Pacific operations.
Revenues from iron ore product sales and services, a record $547.6 million, reflect a 13% increase compared with revenues of $486.2 million in the same quarter last year. Cliffs says the increase was driven by higher sales volumes in both North America and Asia-Pacific, combined with higher sales price realizations in Asia-Pacific.
Operating income decreased to $115.9 million from $116.4 million in the 2006 second quarter. According to Cliffs, operating income was lower compared with last year primarily as a result of additional expenses to support current and future growth, partially offset by a casualty recovery.
Management Comments—“In addition to delivering solid results in the quarter, we continued to increase our presence as a global mining company with a definitive agreement to acquire PinnOak Resources, LLC, including its three metallurgical coal mines, as well as an agreement with QCoal for a 45% economic interest in the Sonoma Coal Project in Australia,” said Joseph A. Carrabba, Cliffs’ Chairman, President and CEO. “We also further strengthened our management team in the quarter with key additions that will support the company’s growth. Our North American franchise remains a strong core for the business as we continue to execute our strategy to diversify products and Cliffs’ geographic reach.”
First-Half Consolidated Results—Net income of $119.4 million ($2.29 per diluted share) compares with net income of $121.0 million ($2.20 per diluted share) for the same period last year. Revenues from iron ore product sales and services, a record $873.1 million, reflect a 10% increase compared with revenues of $792.6 million in the same period last year. Operating income decreased 1% to $160.8 million, from $162.6 million in the first six months of 2006.
North America Results—Second-quarter North American iron ore pellet sales volume was 5.4 million tons, an 11% increase from the 4.9 million tons sold in the second quarter last year. Revenues (excluding freight and venture partners’ cost reimbursements) increased 10% to $359.8 million for the quarter, compared with $327.9 million last year. Sales margin of $104.4 million reflects a $2.7 million (3%) increase compared to a margin of $101.7 million in 2006. Cliffs attributes the margin increase for the quarter to higher sales volume, which partially offset decreased pricing and 2% higher costs per ton.
Costs per ton (excluding freight and venture partners’ costs) of $46.96 during the quarter benefited from a $9.0-million credit (approximately $1.65 per ton) for a dispute settlement with WEPCO, one of the company’s energy suppliers. Excluding this benefit, costs per ton would have been approximately $48.61 (5%) higher year-over-year. Cliffs says the increased costs resulted from higher energy and maintenance expenses.
For the six months, pellet sales volume totaled 7.9 million tons, a 1% increase compared with the same period in 2006. Pellet sales margin of $141.7 million declined 4% from the $147.3 million generated in 2006, primarily reflecting 4% higher per-ton costs, partially offset by a 1% increase in per-ton revenue.
Asia-Pacific Results—Second-quarter iron ore sales volume of 2.2 million tonnes reflect a 22% increase compared with iron ore sales of 1.8 million tonnes in the 2006 second quarter. Revenues of $114.8 million reflect a 24% increase compared with revenues of $92.3 million last year. Cliffs says the higher sales volume and price realization were driven by continuing strong demand from the Chinese and Japanese steel industries.
Sales margin of $25.2 million was $1.8 million lower than last year’s second-quarter sales margin of $27.0 million. According to Cliffs, second-quarter 2006 sales revenue and margin benefited from a retroactive 19% price settlement that did not occur until the second quarter of 2006. The impact on a portion of first-quarter 2006 sales was $7.3 million. Excluding this impact, sales margin for the second quarter of 2007 would have increased 28% over last year.
First-half sales volume of 4.1 million tonnes reflects a 27% increase compared with sales of 3.2 million tonnes in the 2006 first half. Costs per tonne increased 13% for the six months, compared with 2006. Sales margin for the 2007 period, $49.7 million, reflects a 35% increase compared to a sales margin of $36.8 million in the comparable 2006 six months. According to Cliffs, the improvement was principally due to higher volume and sales prices, partially offset by higher production costs and foreign exchange rates.
Strategic Transactions Update—During the first half of 2007, Cliffs announced a number of transactions to support its continued strategic expansion within the global mining industry, including an alliance with Kobe Steel to license its patented ITmk3® ironmaking process. Announced on June 19, 2007, the alliance has a 10-year term and covers use of a proprietary process for the production of high-purity iron nuggets containing more than 96% iron that can be used as high-quality raw material feedstock for electric arc furnace steelmaking. Cliffs does not currently sell into this market and is evaluating potential sites to construct a commercial-scale facility near one of its current operations.
On June 14, 2007, Cliffs announced its intention to acquire PinnOak Resources, LLC, and its subsidiary operating companies, for $450 million in cash, a portion of which is deferred, and the assumption of approximately $150 million in debt, which will be repaid at close. The acquisition agreement also includes an earnout provision contingent on progressively improving performance. PinnOak is a privately owned domestic producer of high-quality, low-volatile metallurgical coal, which is primarily consumed by the international steel industry. This acquisition would provide Cliffs the potential annual capacity to produce more than seven million tons of premium-quality coal. In 2007, Cliffs expects PinnOak to produce approximately 3.5 million tons of coal. A team comprised of Cliffs and PinnOak senior managers has been assembled and integration plans are currently underway. The companies expect the transaction to close at the end of July.
On June 6, 2007, Cliffs announced an agreement to sell its 26.8% interest in the Wabush Mines joint venture to Consolidated Thompson Iron Mines. Under terms of the transaction agreement, Cliffs would receive $24.1 million in cash, as well as warrants entitling Cliffs to purchase approximately 1.1 million CLM common shares at C$5.10 per share for a two-year period. Announcement of the transaction triggered a 90-day purchase option that may be exercised by Dofasco Inc., a subsidiary of ArcelorMittal, which holds a 28.6% ownership position in the Wabush Mines joint venture. To date, Dofasco has not indicated its intent with regard to exercising this option, which expires in early September.
On April 3, 2007, Cliffs announced a definitive agreement to acquire a 45% economic interest in Sonoma, a Queensland, Australia, joint venture for the development of a coal mine and washplant, the construction of which has commenced. The transaction closed on April 18, and Cliffs has invested $57 million in the project through June 30. Cliffs’ total 2007 capital investment in the project is anticipated to be $96 million. Production at Sonoma is expected to commence start-up prior to year-end with nominal production of marketable hard coking and thermal coal, in approximately equal amounts in 2007, increasing to an estimated 2.5 million tonnes in 2008, with an ultimate annual target of three to four million tonnes.
In addition to the strategic actions taken in the second quarter, in the first quarter of 2007, Cliffs acquired a 30% interest in the Amapá Project, a Brazilian iron ore operation, with an initial investment of $133 million and $27 million in additional capital contributions to date. Construction is currently underway and the project is expected to be commissioned near the end of 2007. Plans call for Amapá to produce 6.5 million tonnes of iron ore concentrate annually.
Outlook—Cliffs’ operations continue to run at or near capacity. The company expects Cliffs-managed 2007 North American pellet production to approximate 35 million tons, with the company’s share representing approximately 22 million tons. This expectation includes production at Wabush under the terms of Cliffs’ off-take agreement with Consolidated Thompson. The company also expects North American sales for 2007 to be approximately 22 million tons. North American revenue per ton (excluding freight and venture partners’ cost reimbursements) for pellets is expected to increase approximately 3% for the full year 2007 compared to 2006 levels.
Cliffs reduced its expected increase for 2007 North American unit production costs to approximately 1% from a previous expectation of 2%. In 2006, per-ton cost of goods sold and operating expenses (excluding freight and venture partners’ costs) was $48.17. The company reduced the expected increase based on results from its business improvement initiatives.
Portman’s 2007 production volume is expected to be 8.4 million tonnes, which includes 700,000 tonnes from Cockatoo Island. Portman full-year 2007 sales are expected to be 8.2 million tonnes. Revenue per tonne for 2007 is anticipated to increase approximately 7%, principally reflecting benchmark price settlements adjusted for foreign exchange rates and expected lump and fines sales mix.
Portman’s unit production costs are expected to increase approximately 11% from the 2006 cost of goods sold and operating expenses of $36.93 per tonne, primarily due to higher contract labor and foreign exchange rates.
For the year, Cliffs expects to generate cash from operations of approximately $270 million. The company anticipates using its operating cash flow, revolving credit facility and a new one-year, $150-million term loan to finance the PinnOak acquisition, its Sonoma and Amapá investments and other capital expenditures.
“Through the first half of the year, demand has remained strong in each of our current markets and Cliffs continued to position itself with strategic investments to capitalize on worldwide demand,” added Carrabba. “In North America, consolidation in the steel sector continues and our customers are capitalizing on their improved economies of scale, resulting in a healthier industry overall. We expect this will continue to be favorable for Cliffs as they look to our Company for raw materials. Internationally, Asian steel producers continue record rates of production and growth and we believe this will be sustained through year-end and beyond.”
Headquartered in Cleveland, Ohio, Cleveland-Cliffs Inc. is an international mining company and the largest producer of iron ore pellets in North America. Cliffs sells the majority of its pellets to integrated steel companies in the United States and Canada. The Company operates six iron ore mines in Michigan, Minnesota and Eastern Canada. Cliffs also owns 80 percent 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 percent interest in the Amapá Project, a Brazilian iron ore project, and a 45 percent economic interest in the Sonoma Project, an Australian coking and thermal coal project.
