Cleveland-Cliffs Reports Year-End 2007 Results
02/26/2008 - Cleveland-Cliffs reports net income of $93.7 million on consolidated revenues of $782.5 million for the fourth quarter, and net income of $270.0 million on record revenues of $2.28 billion for the full year ended December 31, 2007.
Cleveland-Cliffs Inc reported net income of $93.7 million on consolidated revenues of $782.5 million for the fourth quarter, and net income of 270.0 million on record revenues of $2.28 billionfor the full year ended December 31, 2007.
Fourth Quarter Results—Net income of $93.7 million ($1.77 per diluted share) reflects a 34% increase compared to net income of $70.0 million ($1.33 per diluted share) in the fourth quarter of 2006. Consolidated revenues of $782.5 million reflect a 43% increase compared with net revenues of $549.0 million in the same quarter last year. The company said the increase was primarily driven by a $180 million increase in revenues from the company’s North American Iron Ore segment and $51 million in sales generated by its North American Coal segment acquired during 2007.
Operating income of $138.9 million reflects a 52% increase compared to operating income of $91.2 million in the 2006 fourth quarter. The company said the increase was primarily the result of increased sales margin at the company’s North American Iron Ore segment, partially offset by higher selling, general and administrative expenses and a negative sales margin in its North American Coal segment.
“In the fourth quarter, our North American Iron Ore team delivered a record performance,” said Joseph A. Carrabba, Cliffs’ Chairman, President and CEO. “In addition, at our North American Coal mines, integration efforts to implement Cliffs’ proven production methodologies and processes are on track. This includes our recovery from the unanticipated geology at our Pinnacle Mine, which negatively impacted third-quarter results and carried over to the beginning of the fourth quarter.”
Full Year Results—Net income of $270.0 million ($5.14 per diluted share) compares to net income of $280.1 million ($5.20 per diluted share) in 2006. Record full-year revenues of $2.28 billion reflect a $353.5 million (18%) increase from the previous record set in 2006. The company said the increase was driven by a $184.7 million (12%) increase in North American Iron Ore sales; an $83.6 million (23%) increase in Asia-Pacific Iron Ore sales; and $85.2 million in revenues from the acquisition of three metallurgical coal mines in July 2007.
“Cliffs’ strong performance is the result of focused execution by our operating teams in North America and Asia-Pacific, as well as unprecedented demand for the company’s products,” commented Carrabba. “Our portfolio of both established and newly producing iron ore and metallurgical coal assets now spans three continents and has us uniquely positioned to capitalize on global industry dynamics in 2008 and beyond.”
Consolidated Results—Fourth-quarter North American Iron Ore pellet sales volume was 8.3 million tons, a 37% increase from the 6.0 million tons sold in the fourth quarter of 2006. The year-over-year increase in sales volume is attributed to additional fourth-quarter shipments of iron ore that had been postponed in the third quarter due to relining performed on two customers’ blast furnaces. This, combined with customers’ minimum purchase obligations, resulted in the higher sales tonnage.
North American Iron Ore revenues per ton were $66.42 during the fourth quarter, up 6% from the comparable quarter in 2006. Cost per ton of $47.74 was down 6% from the year-ago quarter. The decrease is primarily attributed to stringent cost control and benefits received from the company’s six sigma and business improvement efforts, which included proactive maintenance programs.
Revenues from product sales and services in 2007 were a record $2.28 billion, an increase of 18%, compared with $1.92 billion last year. Operating income for the year increased 2% to $383.3 million, versus $375.9 million in 2006. Net income for 2007 was $270.0 million ($5.14 per diluted share) compared with $280.1 million ($5.20 per diluted share) in 2006.
For the full year, pellet sales volume totaled 22.3 million tons, up 9% compared with 2006. Revenues per ton increased 3% to $66.02 for the year with cost per ton of $48.14, virtually flat with 2006.
North American Iron Ore Production—All of Cliffs’ North American Iron Ore mines produced at or near capacity during the fourth quarter.
Looking ahead, Cliffs expects 2008 production at Northshore to benefit from an incremental increase of 600,000 tons due to the planned restart of an idled pellet furnace at the end of the first quarter. The production increase from the furnace restart is expected to total approximately 800,000 tons annually.
Production at Empire is expected to slow to 3.6 million tons in order to extend the life of the mine. Cliffs is currently in negotiations to sell Wabush and expects the sale to be completed during the first half of 2008. As a result, only one quarter of production is included in the 2008 production estimate.
North American Coal—Metallurgical coal sales volume was 724,000 short tons in the fourth quarter, with revenues per ton of $67.72 during the period.
Production at the company’s Pinnacle Mine in West Virginia slowed in August as a result of sandstone intrusions in the coal panel being mined at the time, prompting a late September decision to move the mine’s longwall plow system to another panel. In mid-October, the plow system was brought back into production. In addition, at the company’s Oak Grove Mine in Alabama, Cliffs has invested in business improvement initiatives and safety activities designed to enhance future production. These investments have reduced the company’s current year production.
The net effect of the above factors was a fourth-quarter loss of $15.8 million at the sales margin level and unusually high per-ton cost of goods sold of $90.98. On a sequential-quarter basis, cost declined $15.51 per ton from the $106.49 per ton realized in the third quarter. As production volumes build at its North American metallurgical coal mines through 2008, cost per ton is anticipated to steadily and significantly decrease each quarter, reaching approximately $77 per ton for the year.
North American Coal Production—Iron Ore sales volume decreased 15% in the fourth quarter to 1.9 million tonnes, compared with 2.3 million tonnes in the 2006 fourth quarter. The decrease was primarily the result of the timing of shipments.
Revenues per tonne increased 20% in the fourth quarter to $59.12, compared with $49.23 in the prior year. Per-tonne cost in Asia-Pacific Iron Ore, which increased 22% to $46.30, continues to be negatively impacted by foreign exchange rates, as the U.S. dollar weakened relative to the Australian dollar. Costs are also negatively impacted by higher maintenance and contract labor expenditures, including additional expenses related to change-over costs for engaging a new mining contractor. Cliffs expects the contractor change to result in greater cost control in future quarters.
Full-year sales volume increased 10% to 8.1 million tonnes, compared with 7.4 million tonnes in 2006. Revenues per tonne of $54.59 increased 12%, with cost per tonne of $42.83 up 16%, compared with 2006.
Asia-Pacific Iron Ore Production—Fourth-quarter production in Asia-Pacific Iron Ore was 2.1 million tonnes, down slightly from the fourth quarter in 2006. Full-year production was 8.4 million tonnes, compared with 7.7 million tonnes in 2006. The company said the production increase reflects the completion of the two-million-tonne-per-annum expansion at Koolyanobbing, which was completed in the second half of 2006. In 2008, production at Cockatoo Island is expected to continue into the second quarter, with shipments to end with the closing of the mine in the third quarter.
Cliffs’ major uses of cash for the year included $503 million, including repayment of debt, related to Cliffs’ acquisition of PinnOak Resources, LLC; $206 million in property, plant and equipment, which includes Cliffs’ share of capital expenditures related to the Sonoma Coal Project; $181 million in investments in ventures, including $160 million for the company’s investments in Amapá.
For the year, Cliffs generated $296 million in cash from operations. In 2008, the company expects to generate approximately $650 million in cash from operations.
Pricing Outlook—Cliffs noted that there has been a reported settlement of a 65% increase in pricing for iron ore fines for 2008, and is incorporating this information into its estimates for pricing projections for lump and pellets. Negotiations are still underway, however, and the company said there could be changes to the pricing for fines. In addition, pellets and lump may settle at different pricing levels.
North American Iron Ore Outlook—Cliffs’ North American Iron Ore operations continue to produce at or near capacity. In 2008, Cliffs-managed iron ore pellet production is expected to approximate 31.5 million tons, with the company’s equity share expected to be approximately 21 million tons. As the company sells through current inventory, 2008 sales volume is estimated at 23 million tons. In estimating Cliffs’ revenue per ton, the company made certain assumptions for the various factors included in its iron ore supply contracts. These include:
- A 65% increase in World Pellet Price
- Modest increases among producer price indices
- Approximately 16% increase in factors related to steel pricing
- A combination of contractual base price increases, lag year adjustments and capped pricing
Under consideration of this combination of factors, Cliffs is projecting an estimated revenue per ton of $76 for 2008.
North American Coal Outlook—North American Coal is expected to produce and sell 4.5 million tons of metallurgical coal in 2008. For 2008, Cliffs expects sales per ton to be approximately $91, and cost per ton to be approximately $77. This full-year cost expectation assumes sequential quarterly improvement throughout the year as the company ramps up production and executes business improvement initiatives at its North American coal mines.
Asia-Pacific Iron Ore Outlook—Asia-Pacific Iron Ore 2008 production volume is expected to be 7.9 million tonnes with expected sales volume of 8.0 million tonnes. Cliffs expects Asia-Pacific revenues per tonne of approximately $88. This estimate assumes a 65% increase in the 2008 international settlement price for lump and fines, which, as stated earlier, is still subject to change. This also considers that, in 2007, Cliffs’ Asia-Pacific Iron Ore segment had a $30 million, or $3 per tonne, revenue benefit from currency hedging that the Company assumes is not going to recur in 2008.
Cliffs expects Asia-Pacific Iron Ore costs per tonne of approximately $53. This estimate includes an expanded $23 million, or $3 per tonne, exploration and evaluation program at the company’s Koolyanobbing operations targeted at expanding Portman Limited’s iron ore reserves in Australia.
Sonoma Coal Project Joint Venture Outlook—Cliffs’ Sonoma Coal Project, a joint venture with QCoal Pty Ltd of Australia, is scheduled to commence shipments in the first quarter of 2008. Due to severe flooding at the mine in Mid-February, there has been a delay in shipments that were previously scheduled. Cliffs has a 45% economic interest in the project and with the recent flooding now expects total production of approximately 2.0 million tonnes for 2008. Revenues per tonne at Sonoma are expected to average $82 in 2008, with projected cost of approximately $78 per tonne.
Amapá Iron Ore Project Joint Venture—The Amapá Project, a joint venture between MMX and Cliffs, began production in late-December 2007. Cliffs owns a 30% interest in the project and invested approximately $160 million through December 31, 2007.
MMX has management control over the venture and has indicated plans to complete construction of the concentrator and ramp up operations during 2008. Production and sales are expected to total three to four million tonnes in 2008. Based on start-up delays and production levels, Cliffs expects to incur significant equity losses in 2008. MMX expects Amapá to produce at the 6.5-million-ton design level in 2009.
Headquartered in Cleveland, Ohio, Cleveland-Cliffs Inc. 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 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.
