Business context and reporting period
Registrant: Cliffs Natural Resources Inc., the name used in this filing; the request metadata identifies Cleveland-Cliffs Inc. This Form 10-K covers the fiscal year ended December 31, 2016. The company focused on U.S. iron ore and operated U.S. Iron Ore and Asia Pacific Iron Ore segments; coal and Eastern Canadian iron ore were reported as discontinued operations.
U.S. Iron Ore supplied North American steelmakers under mostly long-term contracts and generated 74% of consolidated revenue. Asia Pacific Iron Ore comprised the Koolyanobbing operation in Western Australia. Empire was indefinitely idled in August 2016; Northshore and United Taconite returned to production during 2016 after prior temporary idles.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue, including freight and partner reimbursements | $2,109.0 million | $2,013.3 million |
| Sales margin | $389.3 million; 18.5% | $236.5 million; 11.7% |
| Operating income | $240.8 million | $151.3 million |
| Income from continuing operations | $219.2 million | $143.7 million |
| Net income (loss) attributable to common shareholders | $174.1 million; diluted EPS $0.87 | $(787.7) million; diluted EPS $(5.13) |
| Net cash from operating activities | $303.0 million | $37.9 million |
| Cash capital expenditures | $69.1 million | $80.8 million |
FY 2016 continuing-operations diluted EPS was $0.97. The net result included a $166.3 million gain on debt extinguishment/restructuring; continuing income also benefited from a $12.2 million income tax benefit. Discontinued operations produced a $19.9 million net loss, compared with an $892.1 million loss in 2015.
Fourth quarter: 2016 revenue was $754.0 million and sales margin was $181.5 million; net income attributable to common shareholders was $79.1 million. In Q4 2015, revenue was $476.0 million, sales margin $43.3 million, and the common-shareholder net loss was $60.3 million.
Debt and liquidity at December 31, 2016: Debt principal was $2,258.8 million, down $639.4 million during the year; reported long-term debt on the balance sheet was $2,175.1 million. Cash was $323.4 million. The ABL Facility had no loans drawn, $333.0 million of borrowing-base availability before letters of credit, and $227.0 million available after $106.0 million of letters of credit and commitments. Current assets were $824.6 million and current liabilities $391.1 million. Total shareholders’ deficit was $1,330.5 million.
Debt maturities were concentrated in 2020: $1,651.0 million of principal, followed by $309.4 million in 2021 and $298.4 million in 2022 and thereafter. Interest expense was $200.5 million. Financing cash outflows included redeeming the remaining 2018 notes; an equity offering generated $287.4 million net proceeds. No common dividends were paid in 2016 or 2015.
Material changes versus the prior comparable period
- Revenue increased 4.8%; sales margin rose $152.8 million and margin percentage improved 6.8 percentage points. Management attributed improvement to cost reductions, higher U.S. sales volume, and stronger Asia Pacific pricing.
- U.S. Iron Ore sales increased to 18.2 million long tons from 17.3 million, while Cliffs’ share of production fell to 16.0 million from 19.3 million long tons, reflecting prior idles and Empire’s 2016 idle. U.S. realized revenue per ton fell 4.3% to $75.71, while cash cost per ton fell 7.1% to $55.97.
- Asia Pacific sales were essentially unchanged at 11.6 million metric tons. Segment sales margin improved to $113.6 million from $9.4 million, mainly on higher iron ore prices and lower costs.
- Operating cash flow increased to $303.0 million from $37.9 million, supported by improved results and working-capital gains, including inventory reduction. Cash at year-end increased to $323.4 million from $285.2 million.
- The company issued 44.4 million common shares in an offering, converted its mandatory convertible preferred shares into common shares, and continued debt exchanges and redemptions. Outstanding common shares at year-end rose to 233.1 million from 153.6 million.
Outlook, management commentary, risks and unusual items
2017 guidance: Management projected net income of $510 million and adjusted EBITDA of $850 million, assuming iron ore and steel prices averaged levels consistent with January 2017. It forecast U.S. Iron Ore sales and production of 19.0 million long tons, with cash costs of $55–$60 per ton; Asia Pacific sales and production of 11.5 million metric tons, with cash costs of $34–$39 per ton. Other expectations included SG&A of approximately $100 million, interest expense of $175 million, depreciation, depletion and amortization of $100 million, and capital expenditures of $105 million, including $40 million to complete the Mustang pellet project. Guidance is management’s outlook, not a guarantee.
Management said it expected operating cash generation and existing liquidity to cover anticipated capital spending and debt service for at least the next 12 months, while warning that weaker customer demand or materially lower iron ore or steel prices could pressure liquidity. Its strategy remained focused on the U.S. business, cost discipline, capital restraint, and further debt reduction; Asia Pacific operations were to be managed for cash generation with low sustaining capital.
- Customer and commodity exposure: Two customers each represented more than 10% of consolidated product revenue in 2016; ArcelorMittal alone represented 37%. Pricing depends partly on iron ore and steel indices, and several Asia Pacific contracts were due for renewal in 2017. A 10% change in expected natural gas and diesel prices was estimated to affect annual costs by about $10.6 million.
- Debt and balance-sheet risk: Debt remains substantial, with significant maturities in 2020. The company reported a shareholders’ deficit and warned that adverse markets could require additional financing, asset sales, further cost reductions, or restructuring.
- Canadian proceedings: CCAA proceedings for former Canadian operations continued. The company recorded $48.6 million in loans and receivables from the Canadian entities, but recovery and potential claims against non-debtor affiliates remain uncertain; further losses could be material.
- Environmental, regulatory and power matters: Mine-closure obligations were $204.0 million and environmental liabilities $2.8 million. Potential future costs from selenium limits, mercury rules, water-quality standards and proposed CERCLA financial assurance were not estimable or could be material. A $13.6 million potential Michigan electricity surcharge liability was accrued. EPA taconite-permit enforcement remained unresolved, though management did not then expect a material impact.
- Legal proceedings and unusual items: Exchange-offer litigation was dismissed in December 2016; ERISA litigation had been dismissed, with an appeal pending. 2016 results also included debt-restructuring gains, share issuance and dilution, foreign-exchange remeasurement losses, and the indefinite idling of Empire.
Important facts for investors to verify
- Whether 2017 earnings and adjusted EBITDA guidance assumptions for iron ore, steel prices, sales volumes and costs were achieved.
- The composition and cash economics of debt, particularly 2020 maturities, secured-note terms, ABL availability and future refinancing needs.
- Customer contract renewals, customer creditworthiness, concentration, and the realized-price effects of iron ore and hot-rolled-coil index formulas.
- Cash recovery from the Canadian proceedings and any additional guarantee, creditor or affiliate claims.
- Final costs and timelines for environmental compliance, mine closure, Michigan electricity proceedings and EPA enforcement.
- Whether cost reductions, production restarts and the Mustang project deliver the expected operating benefits without further capital or liquidity pressure.