Business context and reporting period
Cliffs Natural Resources Inc. (the registrant named in this filing; the request metadata refers to Cleveland-Cliffs Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2016. It reports two continuing segments: U.S. Iron Ore and Asia Pacific Iron Ore. Canadian iron ore and North American coal activities are reported as discontinued operations.
Unless noted otherwise, financial figures below are in U.S. dollars; dollar amounts are millions.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $553.3 | $593.2 | $1,355.0 | $1,537.3 |
| Sales margin | $85.4 | $55.1 | $207.8 | $193.2 |
| Operating income | $34.7 | $29.2 | $109.1 | $126.8 |
| Net income (loss) | $(27.8) | $6.0 | $118.5 | $(690.5) |
| Net income (loss) attributable to Cliffs common shareholders | $(25.8) | $(15.0) | $95.0 | $(727.4) |
| Diluted EPS attributable to common shareholders | $(0.12) | $(0.10) | $0.51 | $(4.75) |
| Adjusted EBITDA | $61.9 | $60.1 | $199.7 | $217.0 |
Q3 sales margin was 15.4% of revenue versus 9.3% a year earlier; nine-month margin was 15.3% versus 12.6%. Q3 net loss from continuing operations was $25.1 million. Results included an $18.3 million debt-extinguishment loss in Q3; nine-month 2016 earnings included a $164.1 million debt-extinguishment/restructuring gain.
- Cash flow: Nine-month operating cash flow was $72.1 million, compared with cash used of $59.5 million in 2015. Investing used $39.5 million; financing used $186.0 million. Cash declined $153.0 million to $132.2 million.
- Liquidity: Current assets were $699.6 million and current liabilities $323.5 million at September 30. Cash plus available ABL borrowing capacity was approximately $379.1 million: $132.2 million cash and $246.9 million availability after letters of credit. No ABL loans were drawn.
- Debt and equity: Long-term debt carrying value was $2,195.9 million; total debt carrying value was $2,213.4 million, versus $2,699.4 million at year-end 2015. Principal maturities include $1,659.0 million in 2020. Total liabilities were $3,173.4 million, and total equity remained in deficit by $1,400.5 million.
Material changes versus comparable periods
- Revenue declined 6.7% in Q3 and 11.9% year to date. The nine-month decline was driven mainly by lower U.S. Iron Ore volume and pricing.
- Q3 sales margin improved by $30.3 million despite lower revenue, helped by lower operating costs and fewer idle costs. Nine-month sales margin rose $14.6 million, while U.S. Iron Ore segment margin fell from $177.7 million to $149.7 million and Asia Pacific Iron Ore margin increased from $15.5 million to $58.1 million.
- U.S. Iron Ore sales volume was 11.343 million long tons year to date, down from 12.791 million; Asia Pacific volume was 8.705 million metric tons, roughly flat year over year. U.S. cost reductions were partly offset by lower volumes and higher idle costs.
- Cliffs issued 44.4 million common shares in August, receiving $287.6 million net, and used the proceeds to redeem $283.6 million principal of 2018 notes for $301.0 million. Preferred shares mandatorily converted into common shares in February. These actions materially changed share count and debt composition.
- Empire mine was indefinitely idled on August 3, 2016. United Taconite resumed production in August; Northshore had returned to production earlier in the year. The Empire idle and a Michigan electricity accrual contributed to Q3 miscellaneous expense.
Outlook, commentary, and risks
Management maintained 2016 volume and cost guidance: U.S. Iron Ore sales of 18 million long tons, production of 16.5 million long tons, cash production cost of $50–$55 per long ton and cash cost of goods sold of $55–$60. Asia Pacific guidance was 11.5 million metric tons of sales and production, with cash production cost of $25–$30 and cash cost of goods sold of $30–$35 per metric ton. Full-year capital expenditure guidance remained $75 million; SG&A guidance was $104 million and interest expense approximately $200 million, including $170 million cash and $30 million non-cash.
Management said it expected operating cash flow to cover anticipated capital spending and debt service over the next 12 months, subject to demand and commodity-price volatility. It cited approximately $379 million of cash and ABL availability as liquidity. It warned that sustained deterioration in demand, iron ore or steel prices could pressure liquidity and might require asset sales, further cost reductions, additional secured-note issuance, or a lender waiver; such measures might not be sufficient under severe industry conditions.
- Management described iron ore pricing as volatile but encouraging through the first nine months; the Platts IODEX averaged $54 per metric ton, down 7% year over year. U.S. hot-rolled-coil prices fell by more than $100 per short ton in Q3. The company’s outlook remained sensitive to steel demand, China, supply additions, trade measures, customer nominations and pricing indices.
- The $12.4 million Michigan Electricity Matters accrual reflects potential retroactive surcharges tied to FERC proceedings. The company estimated potential liability to Empire and Tilden at approximately $13.6 million under the cited scenario, while continuing to challenge the charges.
- Canadian CCAA-related claims and guarantees remain uncertain. The company said it could not reasonably estimate losses beyond its accrual and that future changes or ultimate payments could materially affect future results.
- Other key risks include high indebtedness and refinancing needs, customer and joint-venture counterparty exposure, labor relations, mine-closure and environmental obligations, energy and foreign-exchange movements, and execution of new product initiatives.
Most important facts for investors to verify
- Whether operating cash generation and the $246.9 million of reported ABL availability are sufficient through the large 2020 debt maturities, especially if iron ore or steel prices weaken.
- How much of nine-month earnings depended on the $164.1 million debt-restructuring gain, and the cash and accounting consequences of the debt exchanges and 2018-note redemption.
- Whether stated 2016 production, sales, unit-cost and capital-spending guidance was achieved, including the Mustang pellet project spending.
- The final outcome and potential cash exposure from FERC electricity-cost proceedings and Canadian CCAA-related claims or guarantees.
- The effects of the expanded share count, Empire’s indefinite idle, and reliance on customer-linked pricing adjustments on future earnings and per-share results.