CLF

Business Context and Reporting Period

Company: Cliffs Natural Resources Inc. (formerly Cleveland-Cliffs Inc.)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: An international mining and natural resources company and the largest producer of iron ore pellets in North America. Operations are organized into North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, and Latin American Iron Ore segments. The company serves the global steel industry, with significant exposure to markets in North America, China, and Japan.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 35% to $2.34 billion, driven by a 28% drop in North American Iron Ore sales volume and a 42% drop in North American Coal volume due to the global economic crisis and reduced steel demand. Asia Pacific Iron Ore revenue declined 30% due to lower benchmark prices.
• Profitability Compression: Sales margin percentage dropped from 32.1% in 2008 to 13.2% in 2009. Net income attributable to shareholders fell 60% to $205.1 million.
• Cost Management: Cost of goods sold decreased 17% to $2.03 billion, aided by lower volumes and cost reduction efforts, though partially offset by $159.6 million in idle expenses from production curtailments.
• Foreign Exchange Impact: The company recorded an $85.7 million unrealized gain on foreign currency contracts due to the appreciation of the Australian dollar (from A$0.69 to A$0.90), which significantly improved "Other income (expense)" compared to a $188.2 million loss in 2008.
• Liquidity Position: Cash and cash equivalents increased to $502.7 million, bolstered by a $348 million public equity offering in May 2009 and a reduction in dividends during the second and third quarters.

Guidance, Outlook, and Risks

2010 Outlook

• North American Iron Ore: Sales volume guidance increased to 25.0 million tons (from 23.0 million). Revenue per ton expected at $90-$95; Cost per ton at $65-$70.
• North American Coal: Sales volume guidance increased to 3.4 million tons (from 3.0 million). Revenue per ton expected at $115-$120; Cost per ton at $105-$110.
• Asia Pacific Iron Ore: Sales volume expected at 8.5 million tonnes. Revenue per ton expected at $80-$85; Cost per ton at $50-$55.
• Capital Expenditures: Expected to be approximately $200 million, including sustaining capital and expansion projects (e.g., new longwall system at Pinnacle Mine).

Management Commentary

Management noted signs of stabilization in the global steel industry and improved capacity utilization in North America during the second half of 2009. The company has increased production at most facilities to meet rising demand. Strategic growth continued with the acquisition of Freewest Resources (chromite) and the remaining interest in Wabush Mines (completed Feb 2010).

Risks and Contingencies

• Customer Credit Risk: A significant customer failed to remit $147.5 million in payments due by Dec 31, 2009, though payment was received on Jan 4, 2010. The company notes risks regarding the ability of highly leveraged customers to meet obligations.
• Legal Proceedings: Ongoing arbitrations with ArcelorMittal regarding pellet pricing and nominations. Maritime asbestos litigation remains a long-term exposure.
• Joint Venture Risks: Amapá (Brazil) is in violation of loan covenants, though waivers were obtained through May 2010. Failure to renegotiate could trigger debt calls.
• Regulatory Environment: Potential impacts from climate change legislation, carbon taxes, and environmental regulations (e.g., Clean Air Interstate Rule, Regional Haze) could increase operating costs.

Investor Verification Checklist

• Customer Payment Status: Verify the collection status of the $147.5 million receivable from the North American Iron Ore customer that was paid in early January 2010.
• 2010 Price Settlements: Monitor the finalization of 2010 iron ore benchmark price settlements with Chinese and Japanese customers, as current guidance relies on analyst estimates (40% increase for pellets, 35%/30% for lump/fines).
• Amapá Debt Covenants: Track the status of Amapá's loan covenant waivers and the potential for debt restructuring or acceleration.
• Wabush Acquisition Integration: Review the financial impact and integration progress of the Wabush Mines acquisition (100% ownership) completed in February 2010.
• Energy Costs: Monitor the outcome of the WEPCO rate case, which proposes a 33% rate increase that could impact Tilden and Empire mine costs by approximately $29 million annually.