Cleveland-Cliffs Inc reported third-quarter 2004 net income of $87.5 million on total revenues and other income of $409.7 million.

Third Quarter Results—Net income of $87.5 million ($7.84 income per diluted share), a quarterly record, compares to a net loss of $4.8 million ($.47 per diluted share) in the third quarter of 2003. The sharply improved net income was the result of higher sales margins driven by higher prices, increased volume and the gain on sale of shares of directly held International Steel Group, Inc. common stock. Income includes $4.9 million of after-tax income from a discontinued operation.

Income from continuing operations was $115.4 million, which compares to a loss of $4.8 million for the third quarter of 2003. The earnings increase of $87.4 million reflects higher pre-tax earnings of $112.3 million partially offset by higher income taxes of $24.9 million in the prior-year third quarter.

The pre-tax earnings increase principally reflect a higher sales margin ($50.6 million) and the $56.8 million gain on the sale of 1.9 million shares of directly held ISG common stock.

Sales revenues increased $109.5 million due to higher sales prices ($69.9 million) and increased sales volume ($39.6 million). Increased sales margins were primarily due to higher sales price realizations and increased sales volume partially offset by higher production costs. The increase in sales prices primarily reflected the effect on Cliffs' term sales contract escalators of higher steel prices and an approximately 20% increase in international pellet pricing. Revenue included approximately $16.5 million of revenue related to pricing adjustments on first-half sales reflecting updated annual estimates of term contract escalators, primarily higher steel pricing. Pellet sales of 6.3 million tons represent a new volume records versus third quarter 2003 sales of 5.2 million tons.

Cost of goods sold and operating expenses increased by $58.9 million principally due to higher sales and production volume ($38.1 million), and higher unit production costs ($20.8 million). Contributing to the higher unit production costs were increased energy and supply pricing ($4.9 million). Unit production costs were also impacted by $7.3 million for costs associated with U.S. labor negotiations and the 14-week labor stoppage at Wabush Mines and a $2.0 million exchange rate effect due to the impact of a weaker U.S. dollar on Cliffs' share of Wabush production costs.

Nine Month Results—Net income of $120.3 million ($10.72 per diluted share) compares with a net loss of $23.8 million ($2.33 per diluted share) in the first nine months of last year. Income includes $4.9 million after-tax income from a discontinued operation.

Income from continuing operations was $115.4 million, which compares to a loss of $23.8 million for the comparable 2003 period. The earnings increase of $139.2 million reflects higher pre-tax earnings of $169.8 million partially offset by higher income taxes of $30.6 million in the first nine months of 2003.

The pre-tax earnings increases principally reflect a higher sales margin ($109.8 million) and the $56.8 million gain on the sale of 1.9 million shares of directly held ISG common stock.

Sales revenues increased $236.0 million due to higher sales prices ($133.8 million) and increased sales volume ($102.2 million). Increased sales margins were primarily due to higher sales price realizations and increased sales volume partially offset by higher production costs. Increased sales prices primarily reflect Cliffs' term sales contract escalators of higher steel prices and an approximately 20% increase in international pellet pricing. Sales revenues included approximately $16.5 million of revenue related to pricing adjustments on first-half sales. Pellet sales of 16.5 million tons represent a new volume record versus 2003 sales of 13.6 million tons in the first nine months.

Cost of goods sold and operating expenses increased by $126.2 million principally due to higher sales and production volume ($104.4 million) and higher unit production costs ($21.8 million). Contributing to the higher unit production costs were increased energy and supply pricing ($9.7 million). Unit production costs were also impacted by $7.3 million in the third quarter of 2004 for costs associated with U.S. labor negotiations and the 14-week labor stoppage at Wabush Mines and a $2.0 million exchange rate effect due to the impact of a weaker U.S. dollar on Cliffs' share of Wabush production costs. Year 2003 operating costs included an $11.1 million fixed-cost impact of a five-week production curtailment at the Empire and Tilden mines relating to loss of electric power in the second quarter due to flooding in the Upper Peninsula of Michigan. Considering the factors noted above, total year 2004 unit production costs are now expected to increase by approximately three percent from 2003.

Pre-tax earnings changes for 2004 versus 2003 included:

• A $6.2 million restructuring charge in the third quarter of 2003 related to a salaried staff reduction.
• Lower provisions for customer bankruptcy exposures of $4.9 million in the third quarter and $5.9 million in the first nine months.
• Decreased interest expense of $1.0 million and $3.0 million in the quarter and nine-month periods, respectively, primarily reflecting repayment of senior unsecured notes in January 2004.
• Administrative, selling and general expenses increased $5.5 million in the quarter and $9.1 million in the first nine months principally due to the impact of changes in Cliffs' stock price on stock-based compensation, and higher outside professional service expenses.
• Lower other income of $0.9 million in the quarter and $5.1 million for the first nine months primarily relating to non-strategic asset sales in 2003.

Discontinued Operation—On July 23, 2004, Cliffs and Associates Limited (CAL), an affiliate of the company jointly owned by a subsidiary of the company (82.3945%), and Outokumpu Technology GmbH (17.6055%), a German company (formerly known as Lurgi Metallurgie GmbH), completed the sale of CAL's Hot Briquette Iron (HBI) facility located in Trinidad and Tobago to ISG. Terms of the sale include a purchase price of $8.0 million plus assumption of liabilities. The company recorded an after-tax gain of approximately $4.9 million related to this transaction in third-quarter 2004. CAL may receive up to $10 million in future payments contingent on HBI production and shipments.

Production and Inventory—At September 30, 2004, Cliffs had 3.5 million tons of pellets in inventory, a decrease of 0.6 million tons since December 31, 2003, and 0.9 million tons less than September 30, 2003. Cliffs' 2004 production of 5.6 million tons in the third quarter and 15.7 million tons for the first nine months represented increases of 0.6 million tons and 2.3 million tons from the comparable 2003 periods.

Third-quarter production at Wabush was impacted by a fourteen-week work stoppage, which ended on October 11, 2004 after a five-year agreement was reached with the United Steelworkers Union. Cliffs and the United Steelworkers of America had previously settled on new four-year agreements covering approximately 2,000 workers at four of its U.S.-managed iron ore mines in Michigan and Minnesota.

Liquidity—At September 30, 2004, Cliffs had $265.6 million of cash and cash equivalents and no outstanding debt. Net proceeds from Cliffs' January 2004 offering of $172.5 million of redeemable cumulative convertible perpetual preferred stock were utilized to retire the remaining $25.0 million of senior unsecured notes and to fund $45.9 million into underfunded pension plans and $11.5 million into VEBAs covering bargaining unit employees at four U.S. managed mines. Cliffs expects to utilize remaining proceeds for working capital and other general corporate purposes, including capital expenditures, increased investments in existing mines and has also committed to make additional contributions to its pension and VEBA plans.

During the third quarter 2004, Cliffs sold approximately 1.9 million shares of its directly held ISG common stock in market transactions realizing total net proceeds of $62.1 million. The sales resulted in a gain of $56.8 million pre-tax ($44.8 million after-tax), recorded in the third quarter. Since September 30, Cliffs has sold an additional 2.7 million shares of ISG and, as of close of business on Tuesday, October 26, owns 1.2 million shares (0.4 million owned directly and 0.8 million through pension fund investments). Cliffs intends to continue to sell ISG shares as market conditions warrant.

Additionally, Cliffs repurchased 50,000 shares of its common stock at a cost of $3.8 million in the third quarter of 2004 under its previously announced 1.0 million share repurchase program.

Outlook—The North American steel business continues to be very strong, with steel producers operating at or near capacity and steel pricing near record levels. Cliffs' iron ore pellet sales for 2004 are projected to exceed 22 million tons. Current indications are that 2005 sales requirements will meet or exceed Cliffs' expanded capacity.

John Brinzo, Cliffs' Chairman and CEO, said, "The year 2004 is expected to be a record year for our company in many respects. Record sales and production volumes at very favorable sales margins coupled with the gain realized from Cliffs' investment in ISG will result in the most profitable year in the company's 157-year history. Additionally, based on performance to date, the year 2004 has been the safest year for our employees in the recorded history of the company. Clearly 2004 has been a turnaround year for Cleveland-Cliffs; the transformation continues and we expect to build on our recent successes."

Headquartered in Cleveland, Ohio, Cleveland-Cliffs Inc. is the largest producer of iron ore pellets in North America and sells the majority of its pellets to integrated steel companies in the United States and Canada. The company operates six iron ore mines located in Michigan, Minnesota and Eastern Canada.