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Cleveland-Cliffs Reports 3rd-Quarter Results
11/05/2007 - Cleveland-Cliffs reports net income of $56.9 million on consolidated revenues of $619.6 million for the third quarter, and net income of $176.3 million on consolidated revenues of $1492.7 million for the nine months ended Sept. 30, 2007.
Cleveland-Cliffs Inc. reported net income of $56.9 million on consolidated revenues of $619.6 million for the third quarter, and net income of $176.3 million on consolidated revenues of $1492.7 million for the nine months ended Sept. 30, 2007.
The company also confirmed its 2007 iron ore sales guidance of 22 million tons in the North American market, and eight million tonnes in the Asia-Pacific market. Cliffs expects to produce approximately 4.5 million tons of metallurgical coal in 2008.
Third-Quarter Consolidated Results—Net income of $56.9 million ($1.08 per diluted share) compares with net income of $89.1 million ($1.68 per diluted share) last year. In addition to lower operating income, higher interest expense related to debt incurred for the PinnOak acquisition negatively impacted net income in the quarter.
Operating income was $81.9 million, a 31% decrease from $119.5 million in the 2006 third quarter. According to Cliffs, the decline was primarily due to losses at PinnOak and increased Asia-Pacific Iron Ore costs related to the weakening U.S. dollar compared with the Australian dollar.
Consolidated revenues were $619.6 million, an increase of 7% compared with consolidated revenues of $580.1 million in the same quarter last year. According to Cliffs, the increase was driven by $33.9 million in sales generated by PinnOak Resources, LLC—the metallurgical coal producer Cliffs acquired at the end of July—and $18.8 million in increased revenues from Asia-Pacific Iron Ore, partially offset by volume decreases in North America.
“As sometimes occurs in mining, unanticipated geology at our Pinnacle Mine negatively impacted short-term, quarterly results,” said Joseph A. Carrabba, Cliffs’ Chairman, President and CEO. “However, the combined iron ore and metallurgical coal assets in Cliffs’ existing mine portfolio position the company well to take advantage of the expected and much-publicized 2008 increases in iron ore and metallurgical coal pricing.”
Nine-Month Consolidated Results—Net income was $176.3 million ($3.37 per diluted share), which compares with net income of $210.1 million ($3.87 per diluted share) in last year’s first nine months. Operating income of $242.7 million reflects a 14% decrease from operating income of $282.1 million in the first nine months of 2006.
Revenues from product sales and services were a record $1.49 billion, an increase of 9%, compared with $1.37 billion in the same period last year.
North American Iron Ore pellet sales volume was 6.1 million tons, a 6% decrease from the 6.5 million tons sold in the third quarter last year. Cliffs attributes the year-over-year decrease in sales volume to timing as customers performed maintenance on their blast furnaces. These outages have been completed and Cliffs expects increased deliveries, combined with customers’ minimum purchase obligations, to result in iron ore sales of approximately 8 million tons in the fourth quarter.
North American Iron Ore—Revenue per ton was $65.17 during the quarter, up 1% versus last year’s comparable quarter. Costs per ton of $48.35 during the quarter were also up 1% versus the year-ago quarter.
“During the third quarter, we continued to control costs in North American Iron Ore extremely well,” Carrabba added. “We are benefiting from our six sigma efforts as well as proactive maintenance programs performed at many of our mines during downtime in the first half of the year.”
Pellet sales volume totaled 14.0 million tons, down 2% compared with the first nine months of 2006. Revenue per ton increased 1% to $65.78 for the nine-month period with costs per ton of $48.37, up 3% compared with 2006.
Hibbing’s production declined as a result of the late-February shutdown due to severe weather conditions that impacted the mine’s water supply. The production loss totaled approximately 800,000 tons (Company share, 200,000 tons), requiring the reduction of Hibbing production estimates for 2007.
Year-over-year production at Tilden and United Taconite is expected to increase 800,000 tons and 1.0 million tons, respectively, as Tilden benefits from major maintenance work and operating improvements, and United Taconite has recovered from an electrical accident in the prior year.
North American Coal—For the two months of PinnOak Resources operations included in the company’s third-quarter results, metallurgical coal sales volume was 447,000 tons. North American Coal revenue per ton was $70.92 during the period.
In August, production at the company’s Pinnacle Mine in West Virginia slowed as a result of sandstone intrusions encountered within the coal panel being mined at the time. This slowdown prompted the decision in late September to move the mine’s longwall plow system to another panel. In mid-October, the plow system was brought back into production.
The slowdown, and resulting lack of leverage over fixed costs, such as labor, energy and administration, produced a $15.9 million loss of sales margin and unusually high per-ton costs of goods sold at $106.49. Cliffs indicated that, as it builds production volumes at its metallurgical coal mines through 2008 and into 2009, it expects costs per ton to steadily and significantly decrease.
Asia-Pacific Iron Ore—Third-quarter 2007 Asia-Pacific Iron Ore sales volume increased 10% to 2.1 million tonnes, compared with 1.9 million tonnes in the year-ago quarter. Increased production capacity has allowed Asia-Pacific to supply higher sales volumes at increased price realizations driven by intense demand from the Asian steel industry, particularly in China.
Revenues per tonne increased 8% to $54.14, compared with $50.06 in the prior year. Per-tonne costs in Asia-Pacific Iron Ore, which increased 17% to $44.18, continue to be negatively impacted by foreign exchange rates, as the U.S. dollar weakened relative to the Australian dollar, as well as higher maintenance and contract labor expenditures.
Nine-month sales volume increased 20% to 6.2 million tonnes, compared with 5.2 million tonnes in the first nine months of 2006. Revenue per tonne of $53.19 increased 10% for the nine-month period, with costs per tonne of $41.79 up 14% compared with 2006.
Asia-Pacific Iron Ore Production—Third-quarter production in Asia-Pacific was 2.1 million tonnes, consistent with last year. Nine-month production in Asia-Pacific was 6.3 million tonnes, compared with 5.4 million tonnes in the same period last year. The company said the nine-month increase in production primarily reflects completion of the two-million-tonne-per-annum expansion at Koolyanobbing in 2006. Cliffs reduced its full-year production expectation for Asia-Pacific Iron Ore by 240,000 tonnes to 8.1 million tonnes, primarily due to a train derailment that occurred in August.
Amapá Iron Ore and Sonoma Coal Projects—The Amapá Project, a joint venture between MMX and Cliffs, continues to progress, with pre-production stripping and construction of mineral processing facilities nearly complete. Cliffs owns a 30% interest in the project and has invested approximately $160 million through Sept. 30, 2007. MMX has indicated plans for an initial shipment in late 2007 and a 2008 production estimate of 4.8 million tonnes of fines product.
Cliffs’ Sonoma Coal Project, a joint venture with QCoal Pty Ltd of Australia, is also expected to begin production late in 2007, with the first shipment to occur in January 2008.
Cliffs has a 45% economic interest in the project and has invested approximately $94 million through Sept. 30. Total Sonoma production of marketable hard coking and thermal coal—in approximately equal amounts—is targeted at approximately 2.0 to 2.3 million tonnes for 2008.
Liquidity—At third-quarter-end, Cliffs had $139.6 million of cash and cash equivalents. The Company had $590 million in borrowings under its credit facility. At Dec. 31, 2006, Cliffs had $351.7 million of cash and cash equivalents and no borrowings under its credit facility. Year-to-date uses of cash include $506 million, including repayment of debt related to the purchase of PinnOak, $64.5 million in property, plant and equipment, $129.2 million for increased product inventories, Cliffs’ $160 million investment in Amapá and $94 million investment in Sonoma. Cliffs now expects to generate cash from operations in 2007 of over $250 million. While cash generation from the iron ore business is expected to be greater than anticipated, the impact of PinnOak on net income resulted in an adjustment from a previous expectation of $270 million.
North American Iron Ore Outlook—With North American Iron Ore operations continuing to run at or near capacity, the company expects Cliffs-managed 2007 iron ore pellet production expected to approximate 35 million tons, with the company’s share representing approximately 22 million tons. The company continues to expect North American Iron Ore sales for 2007 to be approximately 22 million tons.
In 2008, Cliffs expects to produce 21 million tons of pellets available for sale in its own account. This takes into consideration the Company’s tentative agreement to sell its interest in Wabush and previously announced 800,000 ton annual capacity expansion at its Northshore facility.
North American Coal Outlook—The company expects North American Coal to produce 700,000 tons of metallurgical coal in the fourth quarter of 2007, for a total of 1.1 million tons for the last five months of 2007. Cliffs expects sales per ton to be approximately $73 in 2007.
In 2008, Cliffs expects to produce 4.5 million tons of metallurgical coal.
Asia-Pacific Iron Ore Outlook—The company expects Asia-Pacific Iron Ore 2007 production volume to be 8.1 million tonnes, which includes 700,000 tonnes from Cockatoo Island. Asia-Pacific Iron Ore full-year 2007 sales volume is expected to be 8.2 million tonnes.
Cliffs expects to produce 7.8 million tonnes of iron ore in 2008.
Headquartered in Cleveland, Ohio, Cleveland-Cliffs Inc. is an international mining company, the largest producer of iron ore pellets in North America, and a 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.
