Cliffs Natural Resources Expects Demand to Remain Stable
07/29/2013 - Cliffs Natural Resources Inc. reported second quarter results, noting that it anticipates modest growth in the U.S. economy for the remainder of the year, which is expected to support stable North American steelmaking utilization rates.
For the period ended 30 June 2013, consolidated revenues of US$1.5 billion decreased US$91 million, or 6%, from the previous year. The lower revenues were driven by an 11% decrease in global seaborne iron ore pricing to an average of US$126 per ton for a 62% Fe fines product (C.F.R. China). Cost of goods sold increased by 7% to US$1.2 billion, primarily driven by higher sales volumes in North American Coal and U.S. Iron Ore, unfavorable inventory adjustments and higher idle costs. This was partially offset by lower sales volumes in Eastern Canadian Iron Ore. Consolidated sales margin decreased 40% in the second quarter to US$268 million, from US$443 million in last year's comparable quarter.
Joseph Carrabba, Cliffs' president and chief executive officer, said, "During the quarter, I'm pleased to report we paid down debt by US$110 million and made meaningful progress in lowering our SG&A and exploration expenses. Our U.S. Iron Ore, Asia Pacific Iron Ore, and North American Coal segments once again delivered strong operational performances. Looking at the remainder of the year, we also have a positive outlook for these segments. In Eastern Canadian Iron Ore, the team remains steadfast in their efforts to improve the stability of the operations."
Operating income for the second quarter of 2013 decreased 28% to US$262 million. The decrease was primarily driven by the lower consolidated sales margin, partially offset by a significant decrease in year-over-year SG&A and exploration expenses. The reduction to SG&A and exploration expenses was driven by an overall focus on cost management as well as lower spending on drilling and professional services for certain projects. The lower operating income also was partially offset by a significant increase in miscellaneous net, which was primarily comprised of aUS$39 million benefit related to foreign currency exchange remeasurements and a US$19 million non-cash gain related to the final transfer of Cliffs' Cockatoo Island operation and the purchaser's assumption of certain asset retirement obligation liabilities.
Second-quarter 2013 results included an income tax expense of US$9 million versus US$42 million reported in the previous year's comparable quarter. The decrease was driven by Cliffs' expected full-year 2013 income tax effective rate of 2%, including discrete items. Also during the quarter, the Company recorded a US$68 million asset impairment charge related to the write down of Cliffs' Amapa investment. Cliffs reported second-quarter 2013 net income attributable to Cliffs' common shareholders of US$133 million, or US$0.82 per diluted share, compared with US$258 million, or US$1.81 per diluted share, in the second quarter of 2012.
Subsequent to quarter end, Cliffs announced that Joseph Carrabba will be retiring as the Company's president and chief executive officer by Dec. 31, 2013. James Kirsch, who serves on Cliffs' Board, was elected non-executive chairman of the Board, replacing Mr. Carrabba as chairman. Mr. Kirsch said, "I am looking forward to working closely with Cliffs' very capable senior management team during this transition. The Board is committed to increasing shareholder value through initiatives that lower the Company's cost profile, increase productivity and sharpen the capital allocation strategy." Cliffs' Board has retained an executive search firm to assist in identifying potential chief executive officer candidates to lead the Company. Additionally, and as part of this announcement, Laurie Brlas retired as Cliffs' executive vice president and president, global operations.
U.S. Iron Ore
U.S. Iron Ore pellet sales volume was 5.7 million tons, compared with 5.4 million tons in the second quarter of 2012. The increase was primarily driven by higher customer demand and increased export sales related to pellet contracts that were previously supplied by Cliffs' Wabush Mine.
Second-quarter 2013 revenues per ton were US$110.32, down 8% from US$119.51 in the year-ago quarter. The decrease was primarily attributable to lower year-over-year market pricing for iron ore and the year-over-year increase in volume exported into the seaborne market, which has lower realized pricing due to the increased freight costs. Lower hot-rolled steel pricing also contributed to the decrease in realized revenues per ton in the second quarter of 2013. As previously disclosed, certain customer contracts contain pricing mechanisms linked to hot-rolled steel pricing.
Cash cost per ton in U.S. Iron Ore was US$67.59, up 8% from US$62.59 in the prior year's second quarter. The increase was primarily attributed to higher costs related to the planned temporary production curtailments at Cliffs' Northshore and Empire mines as well as increased energy costs. This was partially offset by lower employment-related expenses and maintenance and supplies spending.
Eastern Canadian Iron Ore
Eastern Canadian Iron Ore sales volume was 1.9 million tons, a decrease of 18% versus the prior year's quarter. The sales volume mix included 1.5 million tons of iron ore concentrate and approximately 475,000 tons of iron ore pellets. The sales volume decrease over the prior year's comparable quarter was primarily driven by lower iron ore pellet availability from Wabush Mine. At the end of the second quarter, Cliffs idled its Wabush pellet plant at Point Noire, which was previously announced on March 11, 2013. Going forward, the Company expects to produce only a concentrate product from Wabush's Scully Mine.
Revenues per ton in Eastern Canadian Iron Ore were US$110.66, down 14% from US$128.39 in the prior year's second quarter. The lower per-ton revenues were attributable to an 11% year-over-year decrease in seaborne iron ore pricing. The decrease in revenues per ton was also attributed to the quarter's product mix, which was comprised of a higher proportion of iron ore concentrate sales versus iron ore pellet sales. Iron ore concentrate has historically realized a lower price versus iron ore pellets due to the absence of a pellet premium. Partially offsetting the segment's decreased realized revenues per ton was favorable year-over-year freight rates versus the prior year's comparable quarter.
Cash cost per ton in Eastern Canadian Iron Ore was US$114.43, up 7% from US$107.14 in the year-ago quarter. Second-quarter 2013 cash costs at Wabush Mine were US$200 per ton, up 51% from 2012's comparable quarter, primarily driven by unfavorable inventory adjustments. Included in Wabush Mine's cash cost per ton was an unfavorable adjustment ofUS$33 per ton related to the write down of product inventory to its expected recoverable value and a US$22 per ton unfavorable charge related to unsalable inventory. Partially offsetting these inventory adjustments was lower spending on repairs, maintenance and supplies as well as reduced mining costs at Wabush Mine.
The year-over-year increase in Eastern Canadian Iron Ore's cash costs per ton was partially offset by lower cash costs at Bloom Lake Mine of US$87 per ton, down 4% from the prior year's comparable quarter. The decrease is primarily due to improved production volumes and the resulting favorable impact on the mine's cost-per-ton rate, as well as lower maintenance and contractor spending.
Asia Pacific Iron Ore
Second-quarter 2013 Asia Pacific Iron Ore sales volume decreased 3% to 3.0 million tons, from 3.1 million tons in 2012's second quarter. The slight decrease was attributed to the absence of sales volume from Cliffs' Cockatoo Island operation, which ceased production for Cliffs during the third quarter of 2012.
Revenues per ton for the second-quarter of 2013 decreased 7% to US$109.36, from US$117.73 in last year's second quarter. The decrease was primarily driven by lower market pricing partially offset by the absence of low-grade tons that were included in the prior year's second quarter sales volume.
Cash cost per ton in Asia Pacific Iron Ore increased 12% to US$63.65, from US$56.92 in 2012's comparable quarter. The increase was due to the aforementioned absence of low-grade tons sold in the second quarter of 2012, which were produced at a lower cash cost per ton. This was partially offset by the absence of costs from Cockatoo Island, which was a higher cost mine.
North American Coal
For the second quarter of 2013, North American Coal sales volume was 2.1 million tons, a 36% increase from the 1.5 million tons sold in the prior year's comparable quarter. The increase was driven by significantly higher sales volume from Cliffs' Oak Grove and Pinnacle mines. During the prior year's second quarter, sales volume was unfavorably impacted as the Oak Grove preparation plant only came into full operation during the quarter following repairs needed due to the severe weather damage that occurred in 2011. Consequently, time was needed to rebuild the inventory at the export terminals. Also, Pinnacle Mine's sales and production volume improved year-over-year due to increased production and customer demand.
North American Coal's 2013 second-quarter revenues per ton were down 13% to US$104.89, versus US$120.32 in the second quarter of 2012. The decrease was primarily driven by lower year-over-year market pricing for metallurgical coal products. This was partially offset by favorably priced annual and carryover contracts, as well a product mix that was comprised of certain higher quality metallurgical coal products.
Cash cost per ton decreased 20% to US$88.12, from US$110.72 in the year-ago quarter. Second-quarter 2013 cash cost per ton benefited from improved fixed-cost leverage from the increased sales volumes, lower maintenance spending and employment-related expenses, and an overall focus on improving the operation's cost structure.
Capital Structure, Cash Flow and Liquidity
At quarter end, Cliffs had US$263 million of cash and cash equivalents and US$3.3 billion in total debt, including US$440 million drawn on its US$1.75 billion revolving credit facility. For the second quarter, Cliffs generated US$414 million in cash from operations, versus generating US$96 million in the 2012 comparable quarter. The improvement was primarily driven by favorable working capital changes related to inventory and payables.
At quarter end, Cliffs had US$263 million of cash and cash equivalents and US$3.3 billion in total debt, including US$440 million drawn on its US$1.75 billion revolving credit facility. For the second quarter, Cliffs generated US$414 million in cash from operations, versus generating US$96 million in the 2012 comparable quarter. The improvement was primarily driven by favorable working capital changes related to inventory and payables.
Cliffs reported depreciation, depletion and amortization of US$144 million during the second quarter of 2013.
Outlook
Looking ahead, the demand from Cliffs' two largest end markets is expected to remain stable. For the remainder of the year, the Company anticipates modest growth in the U.S. economy, which is expected to support stable North American steelmaking utilization rates. In China, year-to-date average crude steel production is trending higher over the previous year, contributing to increased seaborne iron ore imports.
Looking ahead, the demand from Cliffs' two largest end markets is expected to remain stable. For the remainder of the year, the Company anticipates modest growth in the U.S. economy, which is expected to support stable North American steelmaking utilization rates. In China, year-to-date average crude steel production is trending higher over the previous year, contributing to increased seaborne iron ore imports.
The Company expects pricing for the commodities it sells to remain volatile, with the potential to significantly decrease or increase at any point in time. Due to this expected volatility and for the purpose of providing a full-year outlook, Cliffs will utilize the year-to-date average Platts 62% Fe seaborne iron ore spot price as of 30 June 2013 of US$137 per ton (C.F.R. China) as a base price assumption for providing its revenues-per-ton sensitivities for the Company's iron ore business segments. Cliffs indicated this assumption does not reflect the Company's internal expectation of full-year seaborne iron ore pricing. As such, with US$137 per ton as the iron ore price assumption for the remainder of the year, included in the table below is the expected full-year revenues-per-ton range for the Company's iron ore business segments and the per-ton sensitivity for each US$10-per-ton variance from the price assumption. The sensitivities per ton for each respective iron ore business segment below reflects the sales volume and realized price achieved for the first six months of 2013 results and Cliffs' realized expectation for the remaining periods in 2013.
U.S. Iron Ore Outlook (Long Tons)
For 2013, the Company is maintaining its sales and production volume expectation of 21 million tons and 20 million tons, respectively.
For 2013, the Company is maintaining its sales and production volume expectation of 21 million tons and 20 million tons, respectively.
The U.S. Iron Ore revenues-per-ton sensitivity included within the 2013 revenue sensitivity summary table above also includes the following assumptions:
- 2013 U.S. and Canada blast furnace steel production of 40 - 45 million tons
- 2013 average hot-rolled steel pricing of US$615 per ton
- Approximately 50% of the expected 2013 sales volume is linked to seaborne iron ore pricing
Cliffs is maintaining its 2013 full-year U.S. Iron Ore cash-cost-per-ton expectation of US$65 - US$70, and depreciation, depletion and amortization is expected to be approximately US$6 per ton.
Eastern Canadian Iron Ore Outlook (Metric Tons, F.O.B. Eastern Canada)
For 2013, Cliffs is reducing its full-year sales volume expectation to 8 - 9 million tons from its previous expectation of 9 - 10 million tons. Full-year production volume is also expected to be 8 - 9 million tons. The decrease is primarily driven by lower volumes from Bloom Lake Mine related to lower than anticipated throughput and ore recovery rates. For the Eastern Canadian Iron Ore segment, Cliffs expects to sell approximately 1.5 million tons of iron ore pellets, with iron ore concentrate sales making up the remainder of the expected sales volume range.
For 2013, Cliffs is reducing its full-year sales volume expectation to 8 - 9 million tons from its previous expectation of 9 - 10 million tons. Full-year production volume is also expected to be 8 - 9 million tons. The decrease is primarily driven by lower volumes from Bloom Lake Mine related to lower than anticipated throughput and ore recovery rates. For the Eastern Canadian Iron Ore segment, Cliffs expects to sell approximately 1.5 million tons of iron ore pellets, with iron ore concentrate sales making up the remainder of the expected sales volume range.
For Bloom Lake Mine, the Company is increasing its full-year cash-cost-per-ton expectation to US$90 - US$95 from its previous expectation of US$85 - US$90. The increase is primarily driven by additional mining expense expected to be incurred during the remainder of the year related to the mine development of Bloom Lake's ore body. At Wabush Mine, the Company is maintaining its full-year cash-cost-per-ton expectation of US$115 - US$120. Based on the above, Cliffs is increasing its full-year 2013 cash cost per ton in Eastern Canadian Iron Ore to US$100 - US$105 from its previous expectation of US$95 - US$100. Depreciation, depletion and amortization is expected to be approximately US$18 per ton for full-year 2013.
Asia Pacific Iron Ore Outlook (Metric Tons, F.O.B. the port)
Cliffs is maintaining its full-year 2013 Asia Pacific Iron Ore expected sales and production volumes of approximately 11 million tons. The product mix is expected to be approximately half lump and half fines iron ore.
Cliffs is maintaining its full-year 2013 Asia Pacific Iron Ore expected sales and production volumes of approximately 11 million tons. The product mix is expected to be approximately half lump and half fines iron ore.
The Asia Pacific Iron Ore revenues-per-ton sensitivity is included within the 2013 revenues-per-ton sensitivity table above. Cliffs is lowering its 2013 full-year Asia Pacific Iron Ore cash-cost-per-ton expectation to US$65 - US$70 from its previous expectation of US$70 - US$75 primarily driven by favorable foreign currency exchange rates. Depreciation, depletion and amortization is anticipated to be approximately US$15 per ton for the year.
North American Coal Outlook (Short Tons, F.O.B. the mine)
The Company is maintaining its full-year 2013 North American Coal expected sales and production volumes of approximately 7 million tons. Sales volume mix is anticipated to be approximately 69% low-volatile metallurgical coal and 22% high-volatile metallurgical coal, with thermal coal making up the remainder.
The Company is maintaining its full-year 2013 North American Coal expected sales and production volumes of approximately 7 million tons. Sales volume mix is anticipated to be approximately 69% low-volatile metallurgical coal and 22% high-volatile metallurgical coal, with thermal coal making up the remainder.
Cliffs is lowering its full-year 2013 North American Coal revenues-per-ton outlook to US$100 - US$105 from its previous outlook of US$110 - US$115. The decrease is primarily driven by lower market pricing for metallurgical coal products.
Cliffs is decreasing its cash-cost-per-ton expectation to US$90 - US$95 from its previous expectation of US$95 - US$100. The decrease is driven by an overall focus to improve the operation's cost structure. Full-year 2013 depreciation, depletion and amortization is expected to be approximately US$16 per ton.
