Business context and reporting period
Cliffs Natural Resources Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Its principal businesses are iron ore and metallurgical and thermal coal. The filing compares results with the corresponding 2012 periods. The supplied company metadata says Cleveland-Cliffs Inc.; the filing itself identifies the registrant as Cliffs Natural Resources Inc.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,546.6 million | $1,544.9 million | $4,175.6 million | $4,336.8 million |
| Sales margin | $348.7 million; 22.5% | $198.3 million; 12.8% | $854.8 million; 20.5% | $933.6 million; 21.5% |
| Operating income | $224.0 million | $76.3 million | $654.3 million | $661.3 million |
| Net income attributable to Cliffs shareholders | $117.2 million | $85.1 million | $370.2 million | $719.0 million |
| Diluted EPS attributable to common shareholders | $0.66 | $0.59 | $2.14 | $5.04 |
| Cash provided by operating activities | Not separately stated for the quarter | $685.9 million | $275.5 million | |
| Capital expenditures paid | Not separately stated for the quarter | $742.2 million | $793.6 million |
For the nine months, operating cash flow less capital expenditures was negative $56.3 million (a simple calculation, not a company-defined measure). At September 30, cash and cash equivalents were $298.8 million, current assets $1,669.6 million and current liabilities $1,060.5 million. Total debt was about $3.33 billion, down from $4.05 billion at December 31, 2012; long-term debt was $3.32 billion. The company had $380 million drawn on its revolving facility and $1.342 billion of available borrowing capacity. The filing reports compliance with applicable financial covenants.
Material changes versus prior periods
- Q3 revenue was nearly unchanged, but sales margin and operating income improved substantially, reflecting lower costs and stronger Asia Pacific Iron Ore results. Year-to-date revenue declined 3.7% and sales margin fell 8.4%.
- Q3 Asia Pacific Iron Ore sales margin improved to $99.0 million from a loss of $15.8 million, helped by higher realized iron ore prices and lower costs. North American Coal remained slightly loss-making in Q3; weaker coal prices reduced its realized revenue per ton 23.2% year over year.
- Eastern Canadian Iron Ore continued to report a sales margin loss: $22.0 million in Q3 and $52.3 million year to date. Wabush’s pellet plant was idled and operations shifted toward concentrate production.
- Nine-month net income was materially lower than in 2012, when results benefited from a large Australian Minerals Resource Rent Tax-related tax benefit. 2013 results included a $67.6 million Amapá investment impairment.
- Financing included February equity offerings that raised net proceeds of $285.3 million from common shares and $709.4 million from mandatory convertible preferred shares; proceeds helped repay the $847.1 million term loan. The quarterly common dividend was cut 76% to $0.15 per share; preferred shares carry a 7% annual dividend rate.
Outlook, commentary and risks
- Management maintained 2013 sales-volume guidance of 21 million long tons for U.S. Iron Ore, 8.5–9 million metric tons for Eastern Canadian Iron Ore, 11 million metric tons for Asia Pacific Iron Ore and 7 million short tons for North American Coal. Segment cash-cost-per-ton guidance was $65–$70, $100–$105, $65–$70 and $85–$90, respectively.
- Management reduced the 2013 capital expenditure budget from approximately $1.0 billion to $950 million, increased expected depreciation, depletion and amortization by $10 million to about $575 million, and expected a full-year effective tax rate of approximately 13%. The filing gives commodity-price sensitivities and revenue-per-ton ranges, but notes that its $135-per-ton iron ore assumption is not management’s internal full-year price expectation.
- Bloom Lake Phase II construction remains delayed for parts of the concentrator and load-out facility; sustaining infrastructure work continues. Approximately $1.3 billion had been committed to the project by September 30, of which about $1.2 billion had been spent. Management cited market conditions, iron ore pricing and project milestones as factors in resuming work. Shipment shortfalls tied to the delay were expected to generate about $16 million in penalties for the remainder of 2013 and each quarter until completion.
- Management expected liquidity to fund operations and investment needs for at least 12 months, subject to market conditions. Key exposures include volatile iron ore and coal prices, foreign exchange, fuel and energy costs, and potential impairment of mining assets. Wabush’s ongoing profitability trends could affect recovery of its carrying value; chromite project activities remained suspended amid permitting, land-rights and economic-agreement issues.
- A Pointe Noire oil spill in September led to $17.8 million in casualty losses and regulatory investigations; the possible outcome and loss exposure were not determinable. Other notable matters include a Severstal pellet-pricing arbitration and an EPSL port-services dispute for which a partial settlement deferred the hearing while negotiations continue. Management said pending litigation was not expected to result in a material liability, while acknowledging uncertainty.
Important facts for investors to verify
- Whether iron ore and coal prices, sales volumes and realized rates support the stated 2013 guidance and cash-cost assumptions.
- Bloom Lake Phase II timing, remaining capital requirements, production-cost benefits and continuing shipment penalties.
- Liquidity and covenant headroom if commodity markets weaken; the amended credit agreement’s debt-ratio covenant is scheduled to resume for the period ending March 31, 2014.
- Potential effects of the Pointe Noire spill investigations, Severstal arbitration and EPSL negotiations, for which final outcomes were not clear in the filing.
- Whether Wabush and the suspended chromite project require further asset impairments, and whether the Amapá sale closes subject to regulatory approval.