Cleveland-Cliffs Inc. reported net income of $85.6 million for 2005's third quarter and a record net income of $210.5 million for the first nine months.

Third Quarter Results—The $85.6 million net income ($3.07 per share) was $1.9 million lower than the comparable period in 2004. The slight decrease reflected the $56.8 million pre-tax impact of the sale of directly held International Steel Group, Inc. (ISG) shares in the third quarter of 2004 and the $4.8 million after-tax decrease in income from the discontinued operation largely offset by higher North American sales margins and the inclusion of Portman sales margins.

Nine Month Results—The $210.5 million record net income ($7.59 per share) is 75% higher than the previous record of $120.3 million for the first nine months of last year. The increase primarily reflected higher North American sales margins and the inclusion of earnings from Australian mining company Portman Limited since March 31, 2005, when Cliffs acquired a controlling interest. Results also included a pre-tax business interruption insurance recovery of $12.0 million, $4.2 million of after-tax income from a 2005 accounting change, and a $4.1 million decrease in after-tax income related to a discontinued operation in Trinidad and Tobago, which was sold in the third quarter of 2004. Last year's third quarter benefited from a $56.8 million pre-tax gain on the sale of 1.9 million shares of ISG common stock.

The increases in third-quarter and nine-month income from continuing operations of $2.9 million and $90.1 million, respectively, reflected higher income before income taxes and minority interest ($15.7 million in the quarter and $144.4 million in the first nine months), partially offset by higher income taxes ($9.0 million and $46.6 million for the respective periods) and $3.8 million and $7.7 million in the third quarter and first nine
months of income attributable to the minority interest owners of Portman.

The pre-tax earnings increases from 2004 principally reflected the higher North American sales margins ($61.5 million for the third quarter and $177.3 million for the first nine months); the inclusion of Portman's sales margin ($10.9 million in the third quarter and $31.8 million since the March 31, 2005 acquisition); and a business interruption insurance recovery ($1.4 million in the third quarter and $12.0 million in the first nine months of 2005). All of these factors were partially offset by last year's $56.8 million third-quarter gain on the sale of ISG common stock.

North American Iron Ore—The significant increases in North American sales margins in 2005 were primarily due to higher sales price realizations partially offset by higher production costs. Sales volumes decreased modestly in the third quarter and the first nine months.

Sales revenues (excluding freight and venture partners' cost reimbursements) increased $76.3 million in the third quarter and $231.2 million in the first nine months, setting new records for both periods. The increase was due to higher sales prices partially offset by sales volume decreases. The increases in sales prices (29% in the third quarter and 35% for the nine months) primarily reflected the effect of Cliffs' term sales contract price adjustment factors.

Cost of goods sold and operating expenses (excluding freight and venture partners' costs) increased $14.8 million in the third quarter and $53.9 million in the first nine months. The increases primarily reflected higher unit production costs. Lower sales volume reduced costs $6.5 million in the third quarter and $12.2 million in the first nine months. The increases in unit production costs included higher energy and supply pricing; increased maintenance costs; and higher royalty rates due to increased pellet sales pricing. Production costs were negatively impacted by $7.3 million of costs associated with U.S. labor negotiations and a 14-week work stoppage at Wabush Mines. Total-year 2005 North American unit production costs are currently estimated to increase approximately 12% from the 2004 cost of goods sold and operating expenses (excluding freight and venture partners' costs) of $37.56 per ton.

Australian Iron Ore—Sales margins were $10.9 million on 1.7 million tonnes of Portman's sales in the third quarter, and $31.8 million on 3.3 million tonnes of sales since the March 31, 2005 acquisition. Sales revenues of $77.6 million in the third quarter and $145.4 million for the six-month period both represented records for Portman. Cost of goods sold and operating expenses reflected the Company's basis adjustments due to the allocation of the $434.0 million purchase price. In the third quarter, Cliffs refined its Portman purchase accounting to reflect a preliminary purchase price allocation by its outside consultant. The adjustment increased Portman's iron ore inventory values by $51.5 million to reflect a market-based valuation with a corresponding reduction to the value assigned to iron ore reserves. As a result, the company's third-quarter cost of goods sold and operating expenses were adjusted upward by $10.5 million, with $8.4 million attributable to second-quarter sales.

Significant other changes in pre-tax income from continuing operations for the third quarter and first nine months of 2005 versus the comparable 2004 periods included:

• Flat administrative, selling and general expense compared with last year's third quarter and $8.7 million higher for the nine-month period, reflecting increased stock-based compensation and the inclusion of $3.7 million of Portman's 2005 expense since the March 31, 2005 acquisition.
• Higher other-net expense of $11.4 million in the first nine months, principally reflecting $9.8 million of currency hedging costs associated with the Portman acquisition.

Production and Inventory—At September 30, 2005, Cliffs had 4.0 million tons of pellets in its North American product inventory, compared with 3.3 million tons at December 31, 2004 and 3.5 million tons at September 30, 2004. Total North American production for Cliffs' account was 5.9 million tons in the third quarter and 16.6 million tons in the first nine months versus 5.6 million tons and 15.7 million tons in the respective 2004 periods. Although production schedules are subject to change, all operations are anticipated to operate at or near capacity for the balance of the year and total North American pellet production is expected to be approximately 36.5 million tons, with Cliffs' share at about 22.6 million tons.

Production of lump and fines ore at Portman totaled 1.6 million tonnes in the third quarter and 3.2 million tonnes since the acquisition. The current estimate of total year 2005 Portman production is 6.4 million tonnes, of which 1.5 million tonnes were produced in the first quarter prior to the acquisition. At September 30, 2005, Portman's finished goods inventory totaled .7 million tonnes.

Liquidity—At September 30, 2005, Cliffs had $102.9 million of cash and highly liquid marketable securities. There were no borrowings outstanding at the end of the quarter under the company’s revolving credit facility. At December 31, 2004, Cliffs had $399.6 million of cash and highly liquid marketable securities. The $296.7 million decrease in liquidity primarily reflected the Portman acquisition, $409.9 million (net of Portman cash of $24.1 million), and $76.6 million of capital expenditures, partially offset by $206.3 million of cash flow from operations.

Cash flow from operations was net of $48.4 million of pension and VEBA contributions and $43.6 million of excess electric power payments pending the outcome of an arbitration of Cliffs' dispute of WEPCO's unilateral increase in the electric power energy rates it charges to the Empire and Tilden mines under the terms of existing electric power agreements between the parties. Approximately $36.3 million of the excess power payments are recoverable in early-2006 under uncontested provisions of the agreements.

Outlook—Chairman and CEO John Brinzo stated, "We are gratified with our continuing record performance; however, as we begin to look forward to 2006, we are concerned about the rising costs of much of our purchased energy and materials. While PPI escalation factors in our North American sales contracts will recover some of the expected inflation, we will need to have continued levels of solid steel pricing and an improved international iron ore price in order to maintain our sales margins."

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 is majority owner of Portman Limited, the third-largest iron ore mining company in Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore.