Cleveland-Cliffs Inc. reported record fourth-quarter net income of $203.3 million and record net income of $323.6 million for the year 2004. All common shares and per-share amounts have been adjusted retroactively to reflect the December 2004 two-for-one stock split, and all diluted per-share amounts reflect the potential dilutive effect of the Company's convertible preferred stock.

Fourth Quarter Results—Net income of $203.3 million ($7.31 per diluted share) compares with a net loss of $8.9 million ($.43 per share) in the fourth quarter of 2003. Results reflect improved sales margins driven by higher sales prices and volume, and $113.8 million of net income attributable to reversal of deferred tax asset valuation allowance based upon the company's anticipated realization of those benefits. The favorable results also include an after-tax gain of $62.3 million ($95.9 million pre-tax) on the sale of all directly held International Steel Group, Inc. (ISG) common stock.

Pre-tax operating income, excluding the gain on sale of ISG stock and reversal of tax valuation allowance, was $38.0 million, which compares to an operating loss of $13.5 million in the comparable 2003 period. Results reflect an after-tax loss from its discontinued operation of $1.8 million, which compares to a fourth-quarter 2003 after-tax extraordinary gain of $2.2 million related to the December 2003 acquisition of the United Taconite mine.

Income from continuing operations was $205.1 million, which compares to a loss of $11.1 million for the comparable 2003 period. The earnings increase of $216.2 million reflected higher pre-tax earnings of $151.0 million and lower income taxes of $65.2 million. Lower income taxes reflect the fourth-quarter reversal of $113.8 million of deferred asset valuation reserve, net of current-year tax provisions. Pre-tax earnings increase principally reflected a higher sales margin of $47.4 million and gain on the sale of directly held ISG common stock of $95.9 million.

Increases in sales margins were primarily due to higher sales price realizations and increased sales volume partially offset by higher production costs. Sales revenues (excluding freight and minority interest) increased $75.8 million due to higher sales prices ($57.2 million) and increased sales volume ($18.6 million). The increase in sales prices primarily reflected the effect of higher steel prices and a 20% (approximate) increase in international pellet pricing. Pellet sales of 6.1 million tons compare to 5.6 million tons in the fourth quarter of 2003.

Cost of goods sold and operating expenses (excluding freight and minority interest) increased $28.4 million principally due to higher sales and production volume ($18.6 million) and higher unit production costs ($9.8 million). Contributing to the higher unit production costs were increased energy and supply pricing ($10.2 million). Unit production costs were also impacted by costs associated with the 14-week labor stoppage at Wabush Mines and U.S. labor negotiations ($.9 million) and for the currency exchange rate effect ($1.4 million) 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.

Pre-tax earnings changes compared to 2003 also included lower administrative, selling and general expenses ($1.1 million) and higher mine asset impairment charges ($.6 million) reflecting the write-off of current years' fixed asset additions at the Empire mine subsequent to its impairment in 2002. Other changes include a 2003 restructuring charge of $2.5 million; lower miscellaneous expense (net) of $.9 million, primarily reflecting decreased coal retiree, debt restructuring and business development expenses; higher interest income of $.9, reflecting higher cash balances; decreased interest expense of $.8 million, reflecting repayment of senior unsecured notes in January 2004; and higher other income (net), of $1.9 million in the quarter.

Full Year Results—Record net income of $323.6 million ($11.80 per diluted share) compares to a net loss of $32.7 million ($1.60 per share) in 2003. Results reflect improved sales margins driven by higher sales prices and volume, and $113.8 million of net income attributable to reversal of deferred tax asset valuation allowance in the fourth quarter based upon the company's anticipated realization of those benefits. The favorable results also include an after-tax gain of $99.3 million ($152.7 million pre-tax) on the sale in 2004 of all directly held International Steel Group, Inc. (ISG) common stock. The company had approximately 122,000 shares of ISG remaining in its pension trust at the end of 2004.

Pre-tax operating income, excluding the gain on sale of ISG stock and reversal of tax valuation allowance, was $118.0 million, which compares to an operating loss of $48.3 million in 2003. Results reflect $3.1 million of after-tax income from its Cliffs and Associates Limited discontinued operation, while 2003 results included an after-tax extraordinary gain of $2.2 million related to the December 2003 acquisition of the United Taconite mine.

Income from continuing operations was $320.5 million, which compares to a loss of $34.9 million for 2003. The earnings increase of $355.4 million reflected higher pre-tax earnings of $320.8 million and lower income taxes of $34.6 million. Lower income taxes reflect the fourth-quarter 2004 reversal of $113.8 million of deferred asset valuation reserve, net of current-year tax provisions. Pre-tax earnings increases principally reflected a higher sales margin of $159.8 million and the gain on the sale of directly held ISG common stock of $152.7 million.

Increases in sales margins were primarily due to higher sales price realizations and increased sales volume partially offset by higher production costs. Sales revenues (excluding freight and minority interest) increased $311.8 million due to higher sales prices ($190.9 million) and increased sales volume (120.9 million). Increase in sales prices primarily reflected the impact of higher steel prices and a 20% increase (approximate) in international pellet pricing. Pellet sales of 22.6 million tons compare to 2003 sales of 19.2 million tons. Total year 2004 represented an annual sales record for the company.

Cost of goods sold and operating expenses (excluding freight and minority interest) increased $152.0 million principally due to higher sales and production volume ($122.8 million) and higher unit production costs ($29.2 million). Contributing to the higher unit production costs were increased energy and supply pricing ($19.9 million). Unit production costs were also impacted by costs associated with the 14-week labor stoppage at Wabush Mines and U.S. labor negotiations ($8.2 million for the year) and for the currency exchange rate effect ($3.4 million for the year) 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.

Pre-tax earnings changes compared to 2003 also included higher royalty and management fee income of $.7 million, principally reflecting management fees from United Taconite; higher administrative, selling and general expenses (+$8.0 million), principally due to higher stock-based and incentive compensation ($8.5 million); and higher mine asset impairment charges of $3.2 million reflecting the write-off of current years' fixed asset additions at the Empire mine subsequent to its impairment in 2002. Additional changes include lower provisions for customer bankruptcy exposures of $5.9 million in 2004 versus 2003; a 2003 restructuring charge of $8.7 million; lower miscellaneous expense (net) of $2.2 million, primarily reflecting decreased coal retiree, debt restructuring and business development expenses; higher interest income of $.9 million, reflecting higher cash balances; decreased interest expense of $3.8 million, reflecting repayment of senior unsecured notes in January 2004; and lower other income (net), which decreased $2.9 million primarily relating to non-strategic asset sales in 2003.

Management Comments—Commenting on the results, Cliffs' Chairman and CEO John Brinzo stated, "In virtually all respects, 2004 was a milestone year in our company's history. In addition to the record revenues and earnings generated during the year, we set a new record for Cliffs' pellet production volume and reported our safest year ever.

"Cliffs ended 2004 with exceptional momentum and we intend to build on that in the current year. Given the capacity increase that came online this past December at the United Taconite facility, and the previously announced capacity expansion underway at our Northshore mine scheduled for completion in this year's third quarter, 2005 pellet production is expected to exceed the 2004 record level."

Income Taxes—The 2004 income tax credit of $66.0 million and $34.9 million for the fourth quarter and full year, respectively, reflected the $113.8 million fourth-quarter reversal of deferred tax asset valuation allowance. The effective tax rate on fourth-quarter and full-year earnings, was 32.8% and 19.2%, respectively, excluding the tax related to the gain on sale of ISG stock (taxed at statutory and marginal 35% rate). The increase in the fourth quarter effective rate was principally due to the year-to-date recognition of all deferred tax assets used in 2004.

Production and Inventory—At December 31, 2004, Cliffs had 3.3 million tons of pellets in inventory, .7 million tons less than at the end of last year. Cliffs' share of fourth-quarter production was 6.0 million tons. Total production for Cliffs' account in 2004 was 21.7 million tons, exceeding the prior record set in 2003 of 18.1 million tons by 3.6 million tons (19.9%)

Liquidity—At December 31, 2004, Cliffs had no debt outstanding and $399.6 million of cash and cash equivalents, compared with $25.0 million in debt and $67.8 million of cash and cash equivalents at the end of last year. The increase was attributable to net proceeds of $165.9 million from the company's preferred stock issued in January 2004, proceeds from the sale of directly held ISG common stock of $170.1 million, and net cash from operating activities of $41.6 million, partially offset by capital expenditures of $60.7 million to maintain and increase production capacity. Included in net cash from operating activities was $76.1 million of pension and other post-retirement plan contributions, income tax payments of $57.1 million and increased trade receivables of $44.6 million.

Subsequent to year-end, the company commenced an all-cash tender offer for all of the outstanding shares of Portman Limited, a Western Australia-based independent iron ore mining and exploration company. If successful, the approximately US$500 million acquisition will be financed with existing cash on-hand, supplemented by a new credit facility.

Outlook—Although production schedules are subject to change, all operations are expected to operate at or near capacity in 2005 and total pellet production is expected to be approximately 37 million tons with the company's share representing approximately 23 million tons.

Cliffs' 2005 sales volume is projected to be a record 24 million tons, a 7% increase from 2004. Revenue per ton from iron ore sales and services is dependent upon several price adjustment factors included in Cliffs' term sales contracts, primarily the percentage change from 2004 to 2005 in the international pellet price for blast furnace pellets and producer price indices (PPI), and one customer's hot rolled coil price realizations from a number of its operations. Production costs per ton are expected to increase between 4 and 5% from the 2004 cost of goods sold and operating expenses (excluding freight and minority interest) of $37.56 per ton.

Commenting on the outlook for 2005, Brinzo said, "Currently, all signals that we are seeing point to another strong year for the iron ore industry and for Cliffs. Sentiment surrounding the international benchmark pricing negotiations seems to indicate the market is expecting a material increase in international iron ore prices, which comes on the heels of 2004's increase-the largest in 10 years. Steel pricing remains strong, and our customers are experiencing better financial health than they have in a number of years. These factors bode well for Cliffs' 2005 pellet pricing as we use both international benchmark pricing and steel prices when determining the actual prices we receive from our customers.

"We are excited about the potential opportunities afforded by increasing Cliffs' access to the Asian and Australian iron ore industries. We look forward to reporting our progress to you as we move through the year."

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. The company operates six iron ore mines located in Michigan, Minnesota and Eastern Canada.