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Cliffs Reports Q3 Earnings, Outlook for Remainder of 2014
10/29/2014 - As it reported its third quarter earnings, Cliffs Natural Resources said it expects domestic steel production and the corresponding demand for steelmaking raw materials to be supported directly by construction activity, energy extraction and motor vehicle production in the near term.
Cliffs Natural Resources Inc. reported third-quarter results for the period ended 30 September 2014. Consolidated revenues of US$1.3 billion decreased US$248 million, or 16%, from the prior year's third quarter. The lower revenues were primarily driven by a 32% reduction in market pricing for iron ore and a 17% reduction in market pricing for metallurgical coal. Cost of goods sold decreased by 2% to US$1.2 billion, primarily driven by the idling of the Wabush Scully mine and the positive results of operational efficiencies and cost-cutting efforts achieved across all business units, partially offset by increased sales volumes. For the third quarter of 2014, Cliffs recorded a net loss attributable to Cliffs' common shareholders of US$5.9 billion, or US$38.49 per diluted share, compared with a net income attributable to Cliffs' common shareholders of US$104 million, or US$0.66 per diluted share, in the third quarter of 2013. Excluding impairment charges and other items, Cliffs reported third-quarter adjusted net income2 of US$33 million, or US$0.21 per diluted share, compared to an adjusted net income2 of US$144 million, or US$0.88 per diluted share, in the prior-year quarter.
For the third quarter, adjusted EBITDA1 was US$233 million, a 45% decrease from the prior-year quarter, primarily due to lower revenues that were driven by significantly decreased market pricing for iron ore and metallurgical coal.
The following table provides a summary of adjusted EBITDA1 by operating segment:
Lourenco Goncalves, Cliffs' chairman, president and chief executive officer, said, "The core of our business, United States Iron Ore, demonstrated remarkable strength in the third quarter as it continues to generate more EBITDA than the company on a consolidated basis. Additionally, our USIO and APIO businesses generated a combined US$295 million in Adjusted EBITDA." Mr. Goncalves added, "Despite continued cost cutting progress at Bloom Lake, Phase I is not feasible. By the end of this year, we will have a solution for Bloom Lake."
Cliffs' third-quarter 2014 SG&A expenses were US$63 million and included US$24 million in proxy contest, change in control and severance-related costs during the quarter. Excluding these items and a US$10 million litigation judgment that occurred in the third quarter of 2013, third-quarter 2014 SG&A expenses decreased US$14 million, or 26%, when compared to the year-ago quarter.
During the third quarter of 2014, miscellaneous - net expense increased to US$54 million and included US$64 million in Wabush-related expenses, primarily associated with the cancellation of the Mine's rail contract and the costs incurred to idle the facilities. Miscellaneous - net expense also included a US$15 million penalty incurred from a minimum tonnage rail shipment contract not being met as a result of the suspension of the Phase II expansion of Bloom Lake mine. This was partially offset by a favorable impact of US$26 million related to foreign currency exchange re-measurements.
As previously announced, during the third quarter of 2014, Cliffs recorded after-tax non-cash impairment charges attributable to Cliffs' shareholders of approximately US$5.7 billion during the quarter, which included US$4.5 billion related to Bloom Lake mine long-lived assets, US$28 million related to Wabush long-lived assets, US$390 million related to Asia Pacific Iron Ore goodwill and long-lived assets, and US$539 million related to North American Coal long-lived assets. The remaining US$254 million was attributable to impairments of the Chromite Ring of Fire long-lived assets.
Third-quarter 2014 results included an income tax benefit of US$921 million versus an expense of US$66 million reported in the previous year's comparable quarter. The large tax benefit during the third quarter is attributable to the previously announced impairment charges, partially offset by the recording of valuation allowances of US$144 million for certain deferred tax assets in Canada and Australia. The realization of these deferred tax assets, comprised mainly of current year operating losses, was due to the company's revised outlook for long-term pricing trends and the market conditions for seaborne iron ore and metallurgical coal.
In October, Cliffs amended its revolving credit facility with its syndicate of banking partners. The amended terms remove the current maximum balance sheet leverage ratio of debt to capitalization of less than 45%, which was a covenant introduced in June 2014, and replaces that covenant with a maximum leverage ratio covenant of secured debt to EBITDA that is not to exceed 3.5 times. In addition, the interest coverage ratio requirement will be reduced from 3.5 times to 2.0 times upon satisfaction of certain collateral requirements. The amendment also reduces the size of the existing unsecured facility from US$1.250 billion to US$1.125 billion and includes a security agreement.
U.S. Iron Ore pellet sales volume was 6.8 million tons, compared with 6.3 million tons in the third quarter of 2013. The increase was primarily driven by a customer with an additional contract in 2014 and higher shipments to customers that had been heavily affected by the freeze on the Great Lakes in the first quarter of 2014.
Eastern Canadian Iron Ore sales volume was 2.3 million tons, a decrease of 12% versus the prior year's quarter. The segment's sales volume decrease was primarily driven by reduced shipments from Wabush Mine, which was idled in the first quarter of 2014. The total shipments included 1.6 million tons from Bloom Lake mine, a 15% increase from the prior year quarter, mainly attributable to improved production rates. Wabush shipped 700,000 tons in the third quarter, compared to 1.2 million tons in the prior-year quarter.
Third-quarter 2014 Asia Pacific Iron Ore sales volume increased 11% to 3.1 million tons, from 2.8 million tons in 2013's third quarter. The increase was attributed to rail and vessel timing.
For the third quarter of 2014, North American Coal sales volume was 1.9 million tons, a 15% increase from 1.6 million tons sold in the prior year's comparable quarter. The increase was primarily driven by increased low-volatile export sales and additional spot sales, higher thermal sales related to a new contract and increased high-volatile sales as a result of new export relationships.
Outlook
Cliffs expects economic growth in the U.S. to continue through the remainder of 2014. Despite the unanticipated first-quarter 2014 contraction in GDP, the significant GDP growth experienced in the second quarter marked a return of the U.S. economy to its prior upward trajectory. Domestic steel production and the corresponding demand for steelmaking raw materials are expected to be supported directly by construction activity, energy extraction and motor vehicle production.
Due to the commodity pricing volatility for the products that Cliffs sells and for the purpose of providing a full-year outlook, Cliffs will utilize a price of US$80 per ton 62% Fe seaborne iron ore fines (C.F.R. China), as a base price assumption for the fourth quarter when providing its full-year 2014 revenues-per-ton sensitivities for the company's iron ore business segments. With US$80 per ton as a base price assumption for the fourth quarter of 2014, combined with year-to-date sales, included in the table below are 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 base price assumption in the fourth quarter.
For the third quarter, adjusted EBITDA1 was US$233 million, a 45% decrease from the prior-year quarter, primarily due to lower revenues that were driven by significantly decreased market pricing for iron ore and metallurgical coal.
The following table provides a summary of adjusted EBITDA1 by operating segment:
| Adjusted EBITDA1 by Segment (in millions) | |||||||||||||||||||||||||
|
U.S. Iron Ore |
Bloom Lake Mine | Asia Pacific Iron Ore | North American Coal |
Corporate/ Other |
Total | ||||||||||||||||||||
|
Q3 2014 Adjusted EBITDA1 (in millions) |
US$ | 248.7 | US$ | (33.2) | US$ | 46.1 | US$ | 6.1 | US$ | (34.4) | US$ | 233.3 | |||||||||||||
|
YTD 2014 Adjusted EBITDA1 (in millions) |
US$ | 556.1 | US$ | (49.3) | US$ | 234.5 | US$ | (32.2) | US$ | (126.2) | US$ | 582.9 | |||||||||||||
| NOTE: All activity for Wabush Mine has been excluded in the Adjusted EBITDA1 calculation. | |||||||||||||||||||||||||
Lourenco Goncalves, Cliffs' chairman, president and chief executive officer, said, "The core of our business, United States Iron Ore, demonstrated remarkable strength in the third quarter as it continues to generate more EBITDA than the company on a consolidated basis. Additionally, our USIO and APIO businesses generated a combined US$295 million in Adjusted EBITDA." Mr. Goncalves added, "Despite continued cost cutting progress at Bloom Lake, Phase I is not feasible. By the end of this year, we will have a solution for Bloom Lake."
Cliffs' third-quarter 2014 SG&A expenses were US$63 million and included US$24 million in proxy contest, change in control and severance-related costs during the quarter. Excluding these items and a US$10 million litigation judgment that occurred in the third quarter of 2013, third-quarter 2014 SG&A expenses decreased US$14 million, or 26%, when compared to the year-ago quarter.
During the third quarter of 2014, miscellaneous - net expense increased to US$54 million and included US$64 million in Wabush-related expenses, primarily associated with the cancellation of the Mine's rail contract and the costs incurred to idle the facilities. Miscellaneous - net expense also included a US$15 million penalty incurred from a minimum tonnage rail shipment contract not being met as a result of the suspension of the Phase II expansion of Bloom Lake mine. This was partially offset by a favorable impact of US$26 million related to foreign currency exchange re-measurements.
As previously announced, during the third quarter of 2014, Cliffs recorded after-tax non-cash impairment charges attributable to Cliffs' shareholders of approximately US$5.7 billion during the quarter, which included US$4.5 billion related to Bloom Lake mine long-lived assets, US$28 million related to Wabush long-lived assets, US$390 million related to Asia Pacific Iron Ore goodwill and long-lived assets, and US$539 million related to North American Coal long-lived assets. The remaining US$254 million was attributable to impairments of the Chromite Ring of Fire long-lived assets.
Third-quarter 2014 results included an income tax benefit of US$921 million versus an expense of US$66 million reported in the previous year's comparable quarter. The large tax benefit during the third quarter is attributable to the previously announced impairment charges, partially offset by the recording of valuation allowances of US$144 million for certain deferred tax assets in Canada and Australia. The realization of these deferred tax assets, comprised mainly of current year operating losses, was due to the company's revised outlook for long-term pricing trends and the market conditions for seaborne iron ore and metallurgical coal.
In October, Cliffs amended its revolving credit facility with its syndicate of banking partners. The amended terms remove the current maximum balance sheet leverage ratio of debt to capitalization of less than 45%, which was a covenant introduced in June 2014, and replaces that covenant with a maximum leverage ratio covenant of secured debt to EBITDA that is not to exceed 3.5 times. In addition, the interest coverage ratio requirement will be reduced from 3.5 times to 2.0 times upon satisfaction of certain collateral requirements. The amendment also reduces the size of the existing unsecured facility from US$1.250 billion to US$1.125 billion and includes a security agreement.
| U.S. Iron Ore | ||||||||||||||||
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Volumes - In Thousands of Long Tons | ||||||||||||||||
| Total sales volume | 6,848 | 6,285 | 14,022 | 15,095 | ||||||||||||
| Total production volume | 5,814 | 5,176 | 16,256 | 14,777 | ||||||||||||
| Sales Margin - In Millions | ||||||||||||||||
| Revenues from product sales and services | US$ | 767.4 | US$ | 782.4 | US$ | 1,643.3 | US$ | 1,894.2 | ||||||||
| Cost of goods sold and operating expenses | 547.9 | 508.9 | 1,181.6 | 1,247.1 | ||||||||||||
| Sales margin | US$ | 219.5 | US$ | 273.5 | US$ | 461.7 | US$ | 647.1 | ||||||||
| Sales Margin - Per Long Ton | ||||||||||||||||
| Revenues from product sales and services* | US$ | 100.70 | US$ | 112.67 | US$ | 104.27 | US$ | 113.23 | ||||||||
| Cash production cost3 | 58.53 | 62.53 | 66.00 | 65.69 | ||||||||||||
| Non-production cash cost3 | 6.34 | 2.28 | (0.45) | (0.78) | ||||||||||||
| Cash cost3 | 64.87 | 64.81 | 65.55 | 64.91 | ||||||||||||
| Depreciation, depletion and amortization | 3.78 | 4.34 | 5.79 | 5.45 | ||||||||||||
| Cost of goods sold and operating expenses* | 68.65 | 69.15 | 71.34 | 70.36 | ||||||||||||
| Sales margin | US$ | 32.05 | US$ | 43.52 | US$ | 32.93 | US$ | 42.87 | ||||||||
| * Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. Revenues per ton also exclude venture partner cost reimbursements. | ||||||||||||||||
U.S. Iron Ore pellet sales volume was 6.8 million tons, compared with 6.3 million tons in the third quarter of 2013. The increase was primarily driven by a customer with an additional contract in 2014 and higher shipments to customers that had been heavily affected by the freeze on the Great Lakes in the first quarter of 2014.
| Eastern Canadian Iron Ore | ||||||||||||||||
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Volumes - In Thousands of Metric Tons | ||||||||||||||||
| Total sales volume | 2,276 | 2,595 | 5,872 | 6,387 | ||||||||||||
| Total production volume | 1,536 | 2,198 | 4,848 | 6,329 | ||||||||||||
| Sales Margin - In Millions | ||||||||||||||||
| Revenues from product sales and services | US$ | 148.0 | US$ | 284.2 | US$ | 480.3 | US$ | 743.4 | ||||||||
| Cost of goods sold and operating expenses | 224.8 | 306.2 | 645.3 | 795.7 | ||||||||||||
| Sales margin | US$ | (76.8) | US$ | (22.0) | US$ | (165.0) | US$ | (52.3) | ||||||||
| Sales Margin - Per Metric Ton - Bloom Lake only* | ||||||||||||||||
| Revenues from product sales and services | US$ | 70.91 | US$ | 106.58 | US$ | 86.27 | US$ | 112.78 | ||||||||
| Cash production cost3 | 74.46 | 89.71 | 80.95 | 86.52 | ||||||||||||
| Non-production cash cost3 | 7.25 | 3.57 | 4.93 | 3.29 | ||||||||||||
| Cash cost3 | 81.71 | 93.28 | 85.88 | 89.81 | ||||||||||||
| Depreciation, depletion and amortization | 24.59 | 28.02 | 23.77 | 24.84 | ||||||||||||
| Cost of goods sold and operating expenses | 106.30 | 121.30 | 109.65 | 114.65 | ||||||||||||
| Sales margin | US$ | (35.39) | US$ | (14.72) | US$ | (23.38) | US$ | (1.87) | ||||||||
| * As a result of the Wabush mine idle, all revenue and cost activity related to the Wabush mine has been excluded from the Per Ton Information above. Per Ton Information relates to Bloom Lake mine only. | ||||||||||||||||
Eastern Canadian Iron Ore sales volume was 2.3 million tons, a decrease of 12% versus the prior year's quarter. The segment's sales volume decrease was primarily driven by reduced shipments from Wabush Mine, which was idled in the first quarter of 2014. The total shipments included 1.6 million tons from Bloom Lake mine, a 15% increase from the prior year quarter, mainly attributable to improved production rates. Wabush shipped 700,000 tons in the third quarter, compared to 1.2 million tons in the prior-year quarter.
| Asia Pacific Iron Ore | ||||||||||||||||
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Volumes - In Thousands of Metric Tons | ||||||||||||||||
| Total sales volume | 3,075 | 2,771 | 8,616 | 8,065 | ||||||||||||
| Total production volume | 2,789 | 2,798 | 8,310 | 8,386 | ||||||||||||
| Sales Margin - In Millions | ||||||||||||||||
| Revenues from product sales and services | US$ | 212.3 | US$ | 301.7 | US$ | 699.6 | US$ | 899.5 | ||||||||
| Cost of goods sold and operating expenses | 203.2 | 202.7 | 588.2 | 644.2 | ||||||||||||
| Sales margin | US$ | 9.1 | US$ | 99.0 | US$ | 111.4 | US$ | 255.3 | ||||||||
| Sales Margin - Per Metric Ton | ||||||||||||||||
| Revenues from product sales and services | US$ | 69.04 | US$ | 108.88 | US$ | 81.20 | US$ | 111.53 | ||||||||
| Cash production cost3 | 52.01 | 52.32 | 51.07 | 57.41 | ||||||||||||
| Non-production cash cost3 | 0.35 | 7.12 | 2.85 | 8.07 | ||||||||||||
| Cash cost3 | 52.36 | 59.44 | 53.92 | 65.48 | ||||||||||||
| Depreciation, depletion and amortization | 13.72 | 13.71 | 14.35 | 14.40 | ||||||||||||
| Cost of goods sold and operating expenses | 66.08 | 73.15 | 68.27 | 79.88 | ||||||||||||
| Sales margin | US$ | 2.96 | US$ | 35.73 | US$ | 12.93 | US$ | 31.65 | ||||||||
Third-quarter 2014 Asia Pacific Iron Ore sales volume increased 11% to 3.1 million tons, from 2.8 million tons in 2013's third quarter. The increase was attributed to rail and vessel timing.
| North American Coal | ||||||||||||||||
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Volumes - In Thousands of Short Tons | ||||||||||||||||
| Total sales volume | 1,861 | 1,623 | 5,469 | 5,497 | ||||||||||||
| Total production volume | 1,910 | 2,077 | 5,496 | 5,536 | ||||||||||||
| Sales Margin - In Millions | ||||||||||||||||
| Revenues from product sales and services | US$ | 170.5 | US$ | 178.3 | US$ | 515.8 | US$ | 638.5 | ||||||||
| Cost of goods sold and operating expenses | 194.8 | 180.1 | 641.2 | 631.9 | ||||||||||||
| Sales margin | US$ | (24.3) | US$ | (1.8) | US$ | (125.4) | US$ | 6.6 | ||||||||
| Sales Margin - Per Short Ton | ||||||||||||||||
| Revenues from product sales and services* | US$ | 75.71 | US$ | 98.95 | US$ | 78.31 | US$ | 104.91 | ||||||||
| Cash production cost3 | 67.76 | 63.41 | 72.85 | 73.29 | ||||||||||||
| Non-production cash cost3 | 4.73 | 12.75 | 11.53 | 12.28 | ||||||||||||
| Cash cost3 | 72.49 | 76.16 | 84.38 | 85.57 | ||||||||||||
| Depreciation, depletion and amortization | 16.28 | 23.91 | 16.86 | 18.14 | ||||||||||||
| Cost of goods sold and operating expenses* | 88.77 | 100.07 | 101.24 | 103.71 | ||||||||||||
| Sales margin | US$ | (13.06) | US$ | (1.12) | US$ | (22.93) | US$ | 1.20 | ||||||||
| * Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. | ||||||||||||||||
For the third quarter of 2014, North American Coal sales volume was 1.9 million tons, a 15% increase from 1.6 million tons sold in the prior year's comparable quarter. The increase was primarily driven by increased low-volatile export sales and additional spot sales, higher thermal sales related to a new contract and increased high-volatile sales as a result of new export relationships.
Outlook
Cliffs expects economic growth in the U.S. to continue through the remainder of 2014. Despite the unanticipated first-quarter 2014 contraction in GDP, the significant GDP growth experienced in the second quarter marked a return of the U.S. economy to its prior upward trajectory. Domestic steel production and the corresponding demand for steelmaking raw materials are expected to be supported directly by construction activity, energy extraction and motor vehicle production.
Due to the commodity pricing volatility for the products that Cliffs sells and for the purpose of providing a full-year outlook, Cliffs will utilize a price of US$80 per ton 62% Fe seaborne iron ore fines (C.F.R. China), as a base price assumption for the fourth quarter when providing its full-year 2014 revenues-per-ton sensitivities for the company's iron ore business segments. With US$80 per ton as a base price assumption for the fourth quarter of 2014, combined with year-to-date sales, included in the table below are 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 base price assumption in the fourth quarter.
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