Cliffs Natural Resources Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; filed July 24, 2014. The filing identifies the registrant as Cliffs Natural Resources Inc.; the request metadata names Cleveland-Cliffs Inc.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,100.8M | $1,488.5M | $2,040.8M | $2,629.0M |
| Sales margin | $92.0M; 8.4% | $268.2M; 18.0% | $155.2M; 7.6% | $506.1M; 19.3% |
| Operating income (loss) | $(11.7)M | $262.0M | $(62.4)M | $430.3M |
| Net income (loss) attributable to Cliffs shareholders | $10.9M | $146.0M | $(59.4)M | $253.0M |
| Net income (loss) attributable to common shareholders | $(1.9)M; EPS $(0.01) | $133.1M; EPS $0.87 | $(85.0)M; EPS $(0.56) | $230.2M; EPS $1.53 |
| Operating cash flow | — | $(123.9)M | $388.9M | |
| Cash and cash equivalents at period-end | — | $359.9M | $263.3M |
Revenue fell 26.0% in Q2 and 22.4% in the first half. Management attributed the decline chiefly to lower commodity prices and sales volumes. Lower product pricing reduced revenue by $187.1M in Q2 and $341.8M year to date; lower U.S. Iron Ore volumes also weighed on results. The common-share results reflect preferred dividends.
First-half operating cash flow declined by $512.8M year over year, reflecting weaker operating results and an inventory build as weather delayed U.S. shipments. Cash capital expenditures were $164.3M, versus $501.2M a year earlier. Financing provided $290.7M, including increased credit-facility borrowings.
Balance sheet and liquidity
- At June 30, cash was $359.9M; current assets were $1,663.8M and current liabilities $1,037.5M.
- Total debt was approximately $3,454.1M, including $161.1M short-term/current debt and $3,293.0M long-term debt, compared with $3,043.5M at year-end 2013. The company had drawn $275M on its $1.75B revolving facility and reported $1,469.8M of borrowing capacity available.
- Cash plus available revolver capacity provided about $1.8B of liquidity. The credit agreement was amended June 30: it replaced the debt-to-earnings covenant with a maximum debt-to-capitalization ratio below 45% and raised minimum interest coverage to 3.5x. Cliffs reported compliance at quarter-end.
- Inventories rose to $648.8M from $391.4M at year-end. Environmental and mine-closure obligations were $310.3M.
Segments and material changes
- U.S. Iron Ore: Q2 sales margin was $147.2M, down from $216.3M; first-half margin was $242.2M, down from $373.6M. Great Lakes weather delayed shipments and reduced volumes; realized rates also declined.
- Eastern Canadian Iron Ore: Q2 sales margin loss was $38.5M; first-half loss was $88.2M, versus a $30.3M loss in the prior-year half. Wabush idling reduced revenue, while Bloom Lake faced lower iron ore pricing and high costs.
- Asia Pacific Iron Ore: Q2 margin was $36.0M, down from $95.0M; first-half margin was $102.3M, down from $156.3M, principally due to lower realized prices.
- North American Coal: Q2 sales margin loss was $52.7M, compared with $6.6M income; first-half loss was $101.1M, compared with $8.4M income. Lower metallurgical-coal prices and inventory write-downs were significant factors.
Outlook, risks and unusual items
- Management expected 2014 segment sales and production of 22M long tons for U.S. Iron Ore, 7M metric tons for Eastern Canadian Iron Ore, 11M metric tons for Asia Pacific Iron Ore and 7M short tons for North American Coal. Full-year cash-cost-per-ton guidance was $65–$70, $80–$85, $55–$60 and $85–$90, respectively.
- At a $112/ton assumed iron ore benchmark, projected realized revenue per ton was $100–$105 for U.S. Iron Ore, $85–$90 for Eastern Canadian Iron Ore and $85–$90 for Asia Pacific Iron Ore. North American Coal revenue-per-ton guidance was reduced to $75–$80; about 76% of expected sales were committed and priced at approximately $80/ton.
- Full-year 2014 capital spending guidance was $275–$325M; consolidated DD&A was expected to be about $560M. Management said 2014 cash requirements for capital expenditures, dividends and other uses could slightly exceed operating cash flow, but it expected available liquidity to fund requirements for at least 12 months.
- Bloom Lake Phase II was indefinitely suspended; Phase I continued under reduced tailings and water-management capital plans. Management was evaluating strategic alternatives and said operations could be idled if pricing and costs warranted. Its December 2013 impairment analysis showed material write-down sensitivity to a 15–20% fall in long-term benchmark prices, a 25–30% rise in production costs or a 120–125% rise in life-of-mine capital expenditures.
- Wabush Scully was idled in March. Related 2014 costs were estimated at about $100M, of which $63M had been incurred in the first half. A June WARN notice said Pinnacle coal operations could be temporarily idled for more than six months beginning around August 25 if market conditions did not improve.
- Key risks include further iron ore and coal price declines, Chinese demand and seaborne supply, foreign-exchange and energy-cost volatility, operating and weather disruptions, liquidity and refinancing conditions, and potential asset impairment. The filing also describes a proxy contest and litigation. In Worldlink arbitration, Cliffs sought damages exceeding $85M and faced a counterclaim exceeding $100M; a decision was expected later in 2014. Management said the ultimate outcome of legal matters was not expected to materially affect results overall, while acknowledging uncertainty.
- Other notable items included $37.1M of first-half North American Coal inventory charges and $16.0M of Eastern Canadian Iron Ore inventory charges. The filing reported effective disclosure controls and procedures.
Important facts for investors to verify
- Whether commodity prices, realized selling rates and shipment volumes improve enough to restore positive margins and operating cash flow.
- Progress on Wabush costs and Pinnacle’s potential idling, and the continuing economics and impairment risk of Bloom Lake.
- Compliance with amended credit covenants, revolver availability, debt maturities and the company’s ability to fund spending and dividends from cash flow.
- Updates on the Worldlink arbitration, shareholder litigation, proxy contest and environmental or regulatory matters.
- Whether segment guidance and the $275–$325M capital budget remain achievable as market and operating conditions change.