Cliffs Natural Resources Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing identifies the registrant as Cliffs Natural Resources Inc. (Ohio); it reports full-year results, with significant fourth-quarter charges.
Business context
Cliffs was an international producer of iron ore and metallurgical coal, with operations in the U.S., Eastern Canada and Australia. Its results were highly exposed to steelmaking demand and iron ore and coal prices. The company’s strategy shifted toward organic growth, particularly the Bloom Lake Phase II iron ore expansion, alongside debt reduction and preserving investment-grade credit ratings.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue from product sales and services | $5.873 billion | $6.564 billion |
| Sales margin | $1.172 billion; 20.0% of revenue | $2.611 billion; 39.8% of revenue |
| Operating income (loss) | $(308.8) million | $2.297 billion |
| Income (loss) from continuing operations | $(1.163) billion | $1.793 billion |
| Net income (loss) attributable to Cliffs shareholders | $(899.4) million | $1.619 billion |
| Diluted EPS from continuing operations | $(6.57) | $11.34 |
| Cash from operating activities | $514.5 million | $2.289 billion |
| Capital expenditures, cash paid | $1.128 billion | $880.7 million |
| Cash and cash equivalents at year-end | $195.2 million | $519.3 million |
| Long-term debt, carrying value | $3.961 billion | $3.609 billion |
At December 31, 2012, total debt face amount was $5.497 billion, including $325 million drawn on the revolving credit facility and $847.1 million outstanding under the term loan. Reported revolver borrowing capacity, after covenant restrictions and other commitments, was $504.9 million. Working capital was $268.5 million, based on current assets of $1.650 billion and current liabilities of $1.382 billion.
Material changes versus 2011
- Revenue declined 10.5%, chiefly reflecting weaker pricing. The Platts 62% Fe iron ore spot benchmark averaged $130 per ton, down 23.1%; low-volatile hard coking coal averaged $191 per ton versus $292 in 2011.
- Sales margin fell by $1.439 billion. Iron ore price declines outweighed higher sales volumes in Eastern Canada and Asia Pacific and higher North American coal sales.
- Operating cash flow fell by $1.774 billion, also reflecting the absence of 2011 customer settlement receipts and differences in tax-payment timing.
- Fourth-quarter impairment charges totaled $1.050 billion for goodwill and other long-lived assets: $997.3 million at CQIM/Bloom Lake, $2.7 million at Wabush goodwill and $49.9 million for Wabush pelletizing assets. A separate $365.4 million impairment reduced the Amapá investment to estimated fair value. Together, these charges were approximately $1.415 billion.
- Income tax expense was $255.9 million despite a pretax loss from continuing operations. The company recorded a $634.5 million increase in valuation allowances during 2012; the year-end allowance was $858.4 million.
- Sales margin by segment: U.S. Iron Ore $976.2 million (down from $1.679 billion); Eastern Canadian Iron Ore loss of $121.4 million (versus $290.9 million income); Asia Pacific Iron Ore $311.0 million (down from $699.5 million); North American Coal loss of $1.8 million (versus $58.4 million loss).
Outlook, management commentary and risks
- Management expected 2013 global iron ore sales of approximately 40 million tons, relatively flat year over year. Its planning assumption was a $150-per-ton seaborne benchmark, based on the average through January 31, 2013; iron ore pricing was expected to remain volatile.
- 2013 segment guidance: U.S. Iron Ore sales and production of 20 million long tons, cash cost $65–$70 per ton; Eastern Canadian Iron Ore 9–10 million metric tons, cash cost $100–$105 per ton; Asia Pacific Iron Ore approximately 11 million metric tons, cash cost $70–$75 per ton; North American Coal approximately 7 million short tons, cash cost $95–$100 per ton.
- Management forecast 2013 capital expenditures of $800–$850 million, including continued Bloom Lake investment, and full-year depreciation, depletion and amortization of approximately $610 million. It stated that expected 2013 operating cash flows could be below budgeted investments, debt payments, dividends and other cash requirements.
- Bloom Lake Phase II construction was delayed amid price volatility and increased project costs; completion was expected in 2014, subject to market conditions. The company reported approximately $1.1 billion committed and $734 million spent on the expansion by year-end 2012.
- On February 8, 2013, lenders agreed to suspend the funded-debt-to-EBITDA covenant for 2013. Temporary covenants included minimum tangible net worth of approximately $4.6 billion and maximum funded debt to capitalization of 52.5%; the interest coverage covenant remained. Borrowing costs could rise, and the amendments restricted dividends, acquisitions and certain subsidiary debt.
- The board reduced the quarterly dividend by 76% to $0.15 per share in February 2013 to conserve cash and support Bloom Lake investment. In 2012, dividends declared were $2.16 per share.
- Other notable risks include commodity-price and China-demand volatility, Bloom Lake execution and cost risks, customer concentration, energy and transport costs, labor relations, extensive permitting and environmental rules, pension and postretirement obligations, and foreign-exchange exposure.
- Contingencies include investigations concerning alleged environmental incidents at Bloom Lake; arbitration with Esperance Port over port capacity obligations; and ongoing maritime asbestos claims. The filing says outcomes or loss exposure for some matters cannot be determined clearly; management did not expect pending litigation, based on information then available, to be material overall.
- Asset disposals: Sonoma was sold for approximately AUD$141 million net cash proceeds; sale of Cliffs’ 30% Amapá interest was approved and expected to close in the first half of 2013. The Cockatoo Island sale transferred rehabilitation obligations subject to registration; the company estimated its remaining share of rehabilitation costs at approximately $24 million until transfer.
Most important facts for investors to verify
- Whether Bloom Lake Phase II meets revised cost, schedule, production and cash-flow expectations, and whether the stated $800–$850 million 2013 capital budget is sufficient.
- Liquidity and covenant headroom under the February 2013 amendments, including compliance with tangible-net-worth and capitalization tests and access to the revolving facility.
- Realized commodity prices, customer nominations and volumes versus guidance, particularly in U.S. Iron Ore and Eastern Canadian Iron Ore.
- Whether further impairments or tax valuation allowances are required, given the sensitivity of asset values and deferred tax assets to price and operating assumptions.
- Completion and proceeds of the Amapá sale, transfer of Cockatoo rehabilitation obligations, and potential financial exposure from environmental, arbitration and asbestos matters.