Filing summary
Registrant and period: The filing is for Cliffs Natural Resources Inc. (the name shown in the 2015 filing), for the unaudited quarter and nine months ended September 30, 2015. The company said it was refocusing on U.S. Iron Ore and reported continuing operations in U.S. Iron Ore and Asia Pacific Iron Ore; North American Coal and Canadian operations were classified as discontinued operations.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $593.2 million | $979.7 million | $1,537.3 million | $2,342.9 million |
| Sales margin | $55.1 million | $256.2 million | $193.2 million | $629.7 million |
| Operating income (expense) | $29.2 million | $(142.8) million | $126.8 million | $135.7 million |
| Income (loss) from continuing operations | $49.9 million | $(274.2) million | $178.5 million | $(113.6) million |
| Net income (loss) | $6.0 million | $(6,887.2) million | $(690.5) million | $(6,943.4) million |
| Net loss attributable to common shareholders | $(15.0) million | $(5,892.4) million | $(727.4) million | $(5,977.4) million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(59.5) million | $104.0 million |
Revenue fell 39.5% in Q3 and 34.4% year to date. Sales margin declined as lower commodity prices and reduced iron ore sales volumes outweighed cost reductions. Q3 results included a $79.2 million debt-extinguishment gain; the nine-month period included a $392.9 million gain. Q3 diluted EPS from continuing operations was $0.19, while diluted EPS attributable to common shareholders was a loss of $0.10; corresponding nine-month figures were $0.87 and a loss of $4.75.
Balance sheet and liquidity at September 30, 2015
- Cash and cash equivalents: $270.2 million; total assets: $2,271.5 million.
- Long-term debt: $2,721.6 million carrying value, versus $2,843.3 million at December 31, 2014. Net interest expense was $61.7 million in Q3 and $168.2 million year to date.
- Total liabilities were $4,031.0 million and total deficit was $1,759.5 million. The company had no ABL borrowings; reported ABL borrowing capacity was $442.9 million before $187.3 million of letters of credit, leaving $255.6 million available. Cash plus reported availability was approximately $525.8 million.
- For the first nine months, investing cash use was $57.2 million and financing cash provided was $98.2 million. Cash decreased by $20.7 million on the cash-flow statement.
Material changes and business developments
- U.S. Iron Ore revenue was $471.0 million in Q3, down from $767.4 million; segment sales margin fell to $48.7 million from $219.5 million. Realized revenue per ton declined 24.0%, and sales tons decreased. United Taconite was idled by the end of August; Empire and a Northshore production line were also idled during the period.
- Asia Pacific Iron Ore revenue was $122.2 million, down from $212.3 million, and sales margin was $6.4 million versus $9.1 million. Its realized revenue per ton fell 43.5%, primarily reflecting lower seaborne iron ore prices.
- Bloom Lake and other Canadian entities entered restructuring proceedings under Canada’s CCAA and were deconsolidated. The company recorded a $697.4 million pretax loss from Canadian deconsolidations in the first nine months. North American Coal was classified as held for sale; a $73.4 million impairment was recorded in Q1, with no further impairment in Q2 or Q3.
- The common dividend was eliminated in January 2015; the 7% preferred dividend continued. The preferred shares were scheduled to convert automatically to common shares on February 1, 2016.
Outlook, commentary and risks
- Management described steel and iron ore markets as challenging, citing weakening steel production, overcapacity, Chinese demand uncertainty, import pressure and expanding low-cost seaborne iron ore supply. The Platts 62% Fe fines spot price averaged $55 per ton in Q3, down 39.1% year over year.
- For 2015, guidance included U.S. Iron Ore sales volume of 17.5 million long tons and cash production cost of $55–$60 per ton; Asia Pacific Iron Ore sales and production volume of about 11.5 million metric tons and cash production cost of $30–$35 per ton. U.S. full-year realized revenue guidance was $80–$85 per ton assuming fourth-quarter Platts prices of $55–$60 per ton.
- Management projected 2015 capital expenditures of $85–$95 million, SG&A of about $110 million, interest expense of about $235 million (approximately $205 million cash interest), and consolidated depreciation, depletion and amortization of about $135 million. It said operating cash flow was expected to fall short of capital expenditures, dividends and required financing obligations over the next 12 months, but believed cash and ABL availability would fund operations for at least that period under then-current assumptions.
- On October 5, 2015, the company terminated its pellet sale agreement with Essar Algoma, citing material breaches, and reduced its 2015 U.S. Iron Ore sales-volume outlook accordingly. Contract litigation included claims exceeding $90 million by Cliffs and counterclaims exceeding $160 million by Essar; a court had granted partial summary judgment on certain claims.
- Canadian guarantee and lease claims remain uncertain. The company accrued estimated probable losses but said it could not reasonably estimate additional possible losses; further changes could materially affect future results. Separately, the filing noted an approximately $330 million estimate of the coal mines’ combined share of an underfunded UMWA pension plan, excluded from the reported discontinued-operations liabilities. Other risks include commodity and currency volatility, customer demand and contract renewals, labor negotiations, mine idling, permitting, environmental and closure obligations, and liquidity.
Important facts for investors to verify
- Whether iron ore prices, steel demand, customer nominations and the terminated Essar agreement changed realized prices or sales volumes from the company’s guidance.
- Available borrowing capacity, letter-of-credit requirements, cash burn and compliance with ABL liquidity provisions as market conditions evolve.
- Final recoveries and any additional guarantee, lease or other claims arising from the Canadian CCAA proceedings, and the reported UMWA pension exposure.
- Progress and proceeds from planned North American Coal and potential Asia Pacific Iron Ore divestitures, and the operational and financial impact of mine idling.
- Outcomes of the Essar dispute, labor negotiations, FERC-related electricity-cost proceedings and other material litigation or contingencies.