Cliffs Reports Record 3rd-Quarter, Nine-Month Results
10/30/2008 - Cliffs Natural Resources reports net earnings of $175 million on quarterly record consolidated revenues of $1.2 billion for the third quarter, and net income of $462 million on record revenues of $2.7 billion for the nine-month period ended Sept. 30, 2008.
Cliffs Natural Resources Inc. reported net earnings of $175 million on quarterly record consolidated revenues of $1.2 billion for the third quarter, and net income of $462 million on record revenues of $2.7 billion for the nine-month period ended Sept. 30, 2008.
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Cliffs’ third-quarter developments and achievements include:
· Announcing a definitive merger agreement with Alpha Natural Resources
· Launching an offer for the remaining minority interest in Portman Limited
· Reaching a deal to buy out its minority partner’s interest in United Taconite
· Commencing an expansion project at its North American Iron Ore operations in Michigan
· Recognition of the Northshore Mining-Babbitt Mine in Silver Bay, Minn., for outstanding safety performance in 2007 with the industry's coveted Sentinels of Safety Award
· Successfully reaching a new, four-year labor agreement with the United Steelworkers
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Cliffs achieved record third-quarter revenues of $1.2 billion, an increase of 92% compared with $620 million in the third quarter of 2007. The company said the dramatic year-over-year increase in revenues was the result of strong iron ore sales. Revenues also include sales contributions from Cliffs’ North American Coal segment, acquired July 31, 2007, as well as coal sales at the Sonoma project in Australia, which began shipments earlier this year.
Operating income of $339 million, also a third-quarter record, represents a 314% increase from the $82 million reported in the third quarter of 2007. The company said the strong increase in operating income was largely the result of higher sales margins across the company’s North American Iron Ore and Asia-Pacific Iron Ore segments, as well as the contribution from Sonoma. The improvement was slightly offset by higher costs and negative sales margin of $13.3 million in the company’s North American Coal segment.
Results were negatively impacted by an approximately $94-million pre-tax decrease ($0.52 per share after-tax and minority interest) in fair value of derivative instruments primarily related to currency hedging activity in the company’s international businesses as the U.S. dollar unexpectedly strengthened compared with the Australian dollar.
“In addition to generating record sales and earnings during the quarter, the Cliffs management team continued to aggressively execute on our strategic plan, which includes consolidating minority positions, expansion via strategic acquisition, exploiting organic growth opportunities and striving for operational excellence in each of our business segments,” commented Joseph A. Carrabba, Cliffs’ Chairman, President and CEO. “While ever conscious of the challenges of the current economic environment, we will continue to identify low-risk opportunities to grow and at the same time position Cliffs to weather any difficult times that lie ahead.”
Year-to-Date Results—The $462 million net income through the first nine months compares with net income of $176 million for the same period last year. Diluted earnings per share, $4.34, represent a 157% increase vs. diluted eps of $1.69 in the first nine months of 2007.
Revenues increased sharply through the first nine months, reaching a record $2.7 billion, compared with the $1.5 billion reported in the same period last year. Operating income was $792 million, a 226% increase from the $243 million reported in 2007.
North American Iron Ore Results—Pellet sales volume was 8.0 million tons, up 31% from the 6.1 million tons sold in the prior-year third quarter. Revenues per ton were $92.73, up 42% from the comparable quarter in 2007. The company said this increase in reported per-ton revenues 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 25% in the third quarter to $60.47, compared with $48.34 in 2007’s comparable quarter. The increase was primarily due to higher costs of production, including higher rates for natural gas, diesel fuel and supplies. Expenses also reflect some impact related to the new labor agreement with the United Steelworkers. In addition, higher plant spending was incurred during the quarter related to the expansion project at the Empire and Tilden mines.
All of Cliffs’ North American Iron Ore mines produced at or near capacity in the third quarter. However, Cliffs has initiated production curtailments at two of its six North American Iron Ore mines, where it will temporarily idle two small pellet furnaces at Northshore Mining and one small pellet furnace at United Taconite. On a combined basis, the three furnaces have monthly pellet production capacity of approximately 300,000 tons.
Cliffs indicated that the curtailments were necessary to bring production levels in line with demand
North American Coal Results—Metallurgical coal sales volume reached 894,000 short tons in the third quarter. Average realized revenue per ton was $100.34, an increase of 41% compared with the $70.92 realized in the two months ended Sept. 30, 2007. (Cliffs acquired what is now its North American Coal segment on July 31, 2007.)
Reported cost per ton for the third quarter was $115.22. Costs were impacted by extended long-term mine planning and development activities, as well as the hiring and training of miners, increased supply and service costs and higher royalty expenses.
Asia-Pacific Iron Ore Results—Asia-Pacific Iron Ore sales volume was 2.1 million tonnes during the third quarter, virtually flat as compared with the third quarter in 2007. Revenues per tonne were reported at $111.55, up 106% from the $54.14 reported in the third quarter of 2007. The company said the increase was primarily the result of higher Australian price settlements for lump and fines iron ore, offset by a sales mix favored toward lower-priced iron ore fines product.
Per-tonne cost in Asia-Pacific Iron Ore increased 44% in the third quarter to $63.76, as compared to the comparable period in 2007. In addition to higher energy and contract labor expenditures, average cost was impacted by approximately $4 per tonne, primarily related to acquisition step-up in the value of inventory, iron ore reserves, and plant and equipment resulting from Portman Limited’s share tender program.
Third-quarter production in Asia-Pacific Iron Ore, 1.6 million tonnes, reflects a 24% decrease from the previous year as a result of a planned maintenance shutdown of Koolyanobbing’s processing plant in September. Production at Cockatoo Island was scheduled to end in the third quarter; however, processing of waste ore continued and resulted in incremental sales.
Liquidity—Cliffs had $388.3 million of cash and cash equivalents at Sept. 30, 2008, up $231.2 million from Dec. 31, 2007. The company said the increase in cash on hand is primarily the result of generating $582.2 million from operating activities year to date, or a more-than 600% increase when compared with the $81 million generated in the first nine months of 2007. The company expects to generate approximately $700 million to $750 million in cash from operations for the full year.
At quarter-end, Cliffs had $525 million in borrowings outstanding, composed of $325 million in Senior Notes and $200 million under its credit facility. This compares with $440 million of borrowings outstanding at Dec. 31, 2007.
Current Outlook—Cliffs said that although its outlook is based on current expectations, economic uncertainty, tightening of credit facilities and reductions in steel production are collectively reducing the degree of certainty with which it can forecast near-term sales and production volumes.
In 2008, Cliffs expects revenue per ton in its North American Iron Ore segment to average $91 and cost per ton to average $57. Based on supply-agreement commitments, the company expects North American Iron Ore sales volume of approximately 25 million long tons in 2008.
Cliffs said, assuming no changes in sales volumes, World Pellet Prices, producer price indices or steel pricing (all adjustment factors that determine Cliffs’ pricing in North American Iron Ore), average realized price per ton in its North American Iron Ore segment in 2009 will increase approximately 18% to $107. This increase is based on contractual base-price adjustments, lag-year adjustments and price caps contained in most of Cliffs’ current supply agreements. Cliffs said increases or decreases in sales volume, World Pellet Prices, production inputs and/or steel prices will impact 2009 average revenue per long ton.
Cliffs indicated that revenue per ton in its North American Coal segment is expected to average $93 for 2008 and cost per ton is anticipated to reach approximately $97. Production in 2008 is currently planned to reach approximately 3.6 million short tons.
Cliffs continues to refine and enhance the long-term mine plan and development activities at each of its North American Coal properties. These actions are designed to optimize production and, in 2009, result in expected production of approximately 4.6 million short tons.
Cliffs its Asia-Pacific Iron Ore segment to have average per-tonne revenue of approximately $98 and cost per tonne of $58 for 2008. These estimates represent respective per-tonne revenue and cost increases of 80% and 35% versus 2007 levels. The company currently expects both full-year Asia-Pacific Iron Ore production and sales volume of approximately 8 million tonnes.
Regarding the Sonoma Coal Project, in which Cliffs has a 45% economic interest, Cliffs expects total production of approximately 2.5 million tonnes for 2008. Sonoma is expected to have sales volume of 2.1 million tonnes and generate average revenue of $131 per tonne in 2008. Per-tonne costs at Sonoma are expected to be $73.
In the third quarter, Cliffs’ new partner in the Amapá project, Anglo-American, closed its acquisition of MMX’s 70% share of the project and assumed management control over the venture. Anglo-American has indicated to Cliffs that it plans to complete construction of the concentrator and continue to ramp up operations. Production and sales in 2008 are expected to total approximately 1 million tonnes. Based on production delays and lower volumes, Cliffs expects to incur significant equity losses in 2008.
Other Expectations—The company expects total operating expenses (excluding mark-to-market adjustments in currency hedges in its Asia-Pacific Iron Ore segment) to be approximately $140 million in 2008. Cliffs anticipates an effective tax rate of approximately 26% for the year, and also expects 2008 capital expenditures of approximately $240 million and depreciation and amortization of approximately $180 million.
“The current economic environment and the swiftness with which markets have changed are leading to unprecedented uncertainty among steel and raw material producers,” noted Carrabba. “As such, it is extremely difficult to forecast sales and production volumes. As the Company proceeds through both the nomination season with its North American Iron Ore customers, and 2009 contract negotiations with coal customers, we will provide as much information as possible as we gain additional insight.”
Headquartered in Cleveland, Cliffs Natural Resources 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 is also majority owner 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.
