Cleveland-Cliffs Reports Record Second-Quarter Results
08/01/2008 - Cleveland-Cliffs reports net earnings of $270 million on consolidated revenues of $1 billion for the second quarter, and net income of $287 million on revenues of $1.5 billion for the six months ended June 30, 2008.
Cleveland-Cliffs Inc.—soon to be known as Cliffs Natural Resources—reported net earnings of $270 million on consolidated revenues of $1 billion for the second quarter and net income of $287 million on revenues of $1.5 billion for the six months ended June 30, 2008.
Second-Quarter Results—Net earnings were up 211% to $270 million vs. the year-ago second quarter, while diluted earnings per share, $2.57, reflects a 210% increase over the same period. Operating income was $409 million, a 253% increase from the $116 million reported in 2007.
Cliffs said the marked improvement in operating income was largely the result of higher sales margins across the company’s North American Iron Ore segment (acquired in the second half of 2007) and Asia-Pacific Iron Ore segment, as well as the contribution from the Sonoma coal project in Australia. The improvement was slightly offset by higher costs and negative sales margin of $23 million in the company’s North American Coal segment. The impact from North American Coal stemmed from a decrease in sales volume resulting from previously announced production impediments during the first half of 2008. Operating income during the quarter also benefited from $29.5 million in casualty recoveries and gain on sale of assets.
Cliffs indicated its second-quarter results also reflect retroactive adjustments to first-quarter sales due to timing of international pricing settlements for iron ore. These adjustments positively impacted second-quarter reported revenue by $70 million, operating income by $66 million, net income by $38 million and earnings per diluted share by $0.36.
Consolidated revenues, a second-quarter record of $1 billion, reflect an 84% increase over revenues of $548 million in the same quarter last year. Cliffs said the significant increase in revenues year-over-year was the result of the strong market environment for iron ore and metallurgical coal. In addition, this year’s revenues include sales contributions from Cleveland-Cliffs’ North American Coal segment, as well as initial coal sales at the Sonoma coal project in Australia, which began shipments earlier this year.
“The record sales and earnings generated during the quarter and first half reflect successful execution of Cliffs’ ongoing strategy,” commented Joseph A. Carrabba, Cliffs’ Chairman, President and CEO. “We continue to grow and expand in the areas that we have identified as integral to sustaining our leadership position in the North American mining sector and around the world. Moreover, we have recently made significant strides in reinforcing our platform to serve the faster growing international markets and to meet the robust demand for steelmaking materials in North America and globally.”
In addition to its agreement to merge with Alpha Natural Resources, Cliffs also completed other significant corporate development achievements over the quarter, including the previously announced expansion project at its Empire and Tilden mines and purchasing the minority partner’s interest in United Taconite. Cliffs’ Australian subsidiary, Portman Limited, also completed a share repurchase, which raised Cliffs’ interest to 85%. The company said these projects will position it for 33 million tons of iron ore sales volume in 2009.
First-Half Results—Net income, at $287 million, compares with net income of $119 million in last year’s first half. Diluted earnings per share were $2.73, reflecting a 139% increase versus $1.14 in the first half of 2007. Revenues increased sharply, reaching $1.5 billion, compared with the $873 million reported in the same period last year.
Operating income was $452 million, an increase of 181% from the $161 million reported for the first half in 2007.
Business Segment Results—Cliffs indicated that the six-month per-ton comparisons for its iron ore businesses are more indicative of actual operating results than reported second-quarter figures, because of the retroactive adjustments described above.
Second-quarter 2008 North American Iron Ore pellet sales volume was 5.5 million tons, up slightly from the 5.4 million tons sold in the prior-year second quarter. Revenues per ton were $103.12, up significantly from the comparable quarter in 2007. The company said this increase was primarily due to higher price settlements for blast furnace pellets, higher steel prices, renegotiated and new supply agreements with certain customers, and other price adjustment factors in Cliffs’ supply contracts.
Cost per ton increased 14% in the second quarter to $53.37, versus $46.96 in 2007’s comparable quarter. Cost per ton increased due to higher fuel and energy costs versus 2007, increased royalty costs as a result of price increases and the impact of furnace repairs at the company’s Empire and United Taconite mines.
North American Iron Ore Production—Second-quarter 2008 North American Iron Ore pellet sales volume was 5.5 million tons, up slightly from the 5.4 million tons sold in the prior-year second quarter.
Revenues per ton were $103.12, up significantly from the comparable quarter in 2007. The company said the increase was primarily due to higher price settlements for blast furnace pellets, higher steel prices, renegotiated and new supply agreements with certain customers, and other price adjustment factors in Cliffs’ supply contracts.
Cost per ton increased 14% to $53.37, versus $46.96 in 2007’s comparable quarter. Cost per ton increased due to higher fuel and energy costs versus 2007, increased royalty costs as a result of price increases and the impact of furnace repairs at the company’s Empire and United Taconite mines.
North American Iron Ore Production—Cliffs said that all of its North American Iron Ore mines are producing at or near capacity. Due to market conditions, Cliffs has increased its rate of production at Empire and expects to produce approximately 4.2 million tons in 2008, up from its previous expectation of 4.0 million tons. As part of the previously announced capacity expansion at the Empire and Tilden mines, Cliffs is shifting additional Tilden iron ore processing to the Empire facility, thereby enabling Tilden to increase its total production in 2008 to 8.4 million tons from previous guidance of 7.9 million tons.
The first-half production increase at Hibbing was related to last year’s first-quarter output being reduced due to a weather-related plant shutdown. The increase at Northshore reflected the previously announced restart of Furnace No. 5, which commenced production at the end of March.
North American Coal—Metallurgical coal sales volume in the second quarter was 576,000 short tons. Average realized revenue per ton was $91.67.
Cost per ton for the second quarter was $131.60. The company said the unusually high cost per ton was the result of the extended development of a longwall panel, as well as slowed production due to a fault area within a coal panel being mined at the Pinnacle Mine. Longwall development timing at Oak Grove Mine has been extended due to the difficulty in obtaining additional equipment and personnel. The company expects the cost per ton to decline significantly in the year’s second half as volumes increase.
North American Coal Production—Asia-Pacific Iron Ore sales volume decreased 16% to 1.8 million tonnes during the 2008 second quarter. The lower volume was primarily due to timing of shipments near quarter end.
Revenues per tonne for the quarter were reported at $148.18, up 179% from the $53.20 reported in the second quarter of 2007. The company said the increase was primarily the result of higher Australian price settlements for lump and fines iron ore. The retroactive adjustments positively impacted per-tonne revenues by $35.91.
Per-tonne cost in Asia-Pacific Iron Ore increased 43% to $59.28, versus the comparable period in 2007. Foreign exchange rates (as the U.S. dollar weakened further relative to the Australian dollar), and higher energy and contract labor expenditures due to inflationary pressures contributed to the cost increases.
Asia-Pacific Iron Ore Production—Second-quarter production in Asia-Pacific Iron Ore of 2.1 million tonnes was relatively consistent with the second quarter of 2007. Production at Cockatoo Island is expected to end in the third quarter and final shipments from the facility also will be made in the third quarter in conjunction with the closing of the mine. Production was lower at Koolyanobbing due to reduced rail availability to the shipping port.
North American Iron Ore Outlook—The company updated its guidance for expected full-year 2008 per-ton pricing and costs and currently expects to realize average per-ton prices of $90, up from its previous estimate of $85 and an increase of 36% from the average price per ton of $66 realized in 2007. This expectation is based on an annual average hot band steel price of $775 per ton at certain steelmaking facilities.
Cost per ton is estimated to average $57 for the full year—up from the previous estimate of $56, and an increase of 19% compared with the $48 per-ton average reported for 2007.
Cost per ton is estimated to average $57 for the full year—up from the previous estimate of $56, and an increase of 19% compared with the $48 per-ton average reported for 2007.
In 2008, Cliffs expects to have equity production of approximately 24 million tons and sales volume of an estimated 25 million tons as it sells through some inventory.
North American Coal Outlook—North American Coal is expected to produce and sell approximately 4.0 million tons of metallurgical coal in 2008, a 300,000 ton reduction from previous guidance that is attributed to extended longwall development.
Asia-Pacific Iron Ore Outlook—Cliffs’ Asia-Pacific Iron Ore segment is expected to achieve average revenue per tonne of approximately $102 in 2008. This is an 85% increase from the previous year’s per-tonne average of $55, and is primarily due to recent iron ore settlements in Australia of an 80% increase for fines and a 97% increase for lump ore.
The company expects cost per tonne in Asia-Pacific Iron Ore to average $58 in 2008, up 35% from the $43 per-tonne average in 2007. The cost increase is primarily the result of higher expected royalty payments related to higher-than-expected year-over-year price increases, rising fuel costs and the impact of foreign exchange. Production and sales volumes are both expected to be 8 million tonnes.
Sonoma Coal Project Outlook—Cliffs has a 45% economic interest in the project and expects total production of approximately 2.0 million tonnes for 2008. With recent reports of significant year-over-year increases in pricing for metallurgical coal, Sonoma is expected to benefit and generate average revenue of $142 per tonne in 2008, an increase from the company's previous guidance of $129 per tonne. Cliffs indicated its outlook for Sonoma includes a mix of metallurgical and thermal coal.
Costs at Sonoma are projected at approximately $92 per tonne for 2008, up from the previous estimate of $83 per tonne. The higher cost is the result of expenses attributed to changes in mine operations related to increasing the production ratio of metallurgical versus thermal coal.
Amapá Iron Ore Project—The Amapá Project, a project between MMX and Cliffs, began production in late December 2007. Cliffs owns a 30% interest in the project. MMX, which has agreed to sell its stake in Amapá to Anglo American, has management control over the venture. MMX has indicated plans to complete construction of the concentrator and ramp up operations during 2008, with production and sales expected to total approximately 3 million tonnes for the full year. Based on start-up delays and production levels, Cliffs expects to incur equity losses in 2008. MMX expects Amapá to produce at the 6.5 million tonne design level in 2009.
Capital Expenditures—Cliffs expects 2008 capital expenditures of approximately $250 million. The increase from the previous estimate of $200 million for expected capital expenditures is related to the recently announced Empire and Tilden mine-expansion project, upgrades on the rail line at Portman between the operations and the port, and longwall system down payments at the Pinnacle Mine.
Alpha Natural Resources Merger—Cleveland-Cliffs and Alpha Natural Resources signed a definitive merger agreement under which Cleveland-Cliffs agreed to acquire all outstanding common stock of Alpha in a stock and cash transaction. Under the terms of the agreement, for each share of Alpha common stock, Alpha stockholders would receive 0.95 Cleveland-Cliffs common shares and $22.23 in cash.
The transaction is subject to approval by Cleveland-Cliffs and Alpha shareholders, as well as the satisfaction of customary closing conditions and regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Cliffs stated that it continues to meet with investors and is receiving positive feedback from the majority of its largest shareholders regarding its proposed merger with Alpha. Cliffs also indicated that, based on its and Alpha’s recently announced financial results, current financial conditions and future prospects, it believes that the acquisition of Alpha Natural Resources is compelling and provides both companies with enhanced opportunity for continued growth. In 2009, the combined company, Cliffs Natural Resources, is expected to achieve revenues of $10 billion and EBITDA of approximately $4.7 billion, with Cleveland-Cliffs' operations contributing an expected $2.5 billion to $2.9 billion in EBITDA.
Headquartered in Cleveland, Ohio, Cleveland-Cliffs is an international mining company, the largest producer of iron ore pellets in North America and a major 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 85% 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.
