Cleveland-Cliffs Inc. (Cliffs Natural Resources Inc.) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Financial statements are unaudited. The company reported operations across North American iron ore and coal, Asia Pacific iron ore, and other mining and exploration interests.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $1,183.2 million | $727.7 million |
| Sales margin | $598.7 million (50.6%) | $150.0 million (20.6%) |
| Operating income | $541.2 million | $113.4 million |
| Net income attributable to Cliffs shareholders | $423.4 million | $77.4 million |
| Diluted EPS | $3.11 | $0.57 |
| Cash from operating activities | $106.9 million | $74.0 million |
- Revenue rose 63%, principally from higher iron ore prices and higher North American Coal sales following the 2010 CLCC acquisition. North American Iron Ore sales volume fell 20%; Asia Pacific Iron Ore volume rose 5%.
- Net income included a substantial one-time benefit from the ArcelorMittal settlement and Algoma pricing adjustment: $159.8 million of additional product revenue and $54.1 million of lower costs, increasing operating income by $213.9 million and diluted EPS by $1.02. The $275 million ArcelorMittal cash settlement was received April 26, 2011.
- Other income included a net $56.3 million gain from changes in fair value of foreign currency contracts, including contracts hedging the proposed Consolidated Thompson acquisition. Interest expense increased to $38.2 million from $10.2 million, reflecting debt issuances in 2010.
- Operating cash flow increased year over year, but was affected by working-capital investment, including a $229.5 million increase in product inventories and a $166.7 million use from receivables and other assets.
- At March 31, cash and cash equivalents were $2,267.7 million, versus $1,566.7 million at year-end. Current assets were $3,713.9 million and current liabilities $1,107.2 million. Long-term debt was $2,412.5 million, up from $1,713.1 million; reported total liabilities were $4,678.4 million.
- Net cash from financing was $627.4 million, primarily reflecting $699.3 million in net proceeds from the first tranche of a senior-note offering. Capital expenditures paid were $65.7 million; segment capital additions were $91.0 million.
Changes, outlook, and key risks
- Iron ore prices and sales margins improved sharply as the industry shifted from annual benchmark pricing toward shorter-term, spot-linked arrangements. North American Iron Ore sales margin increased to $395.8 million from $109.5 million; Asia Pacific Iron Ore margin rose to $195.8 million from $43.7 million. North American Coal remained loss-making at a $2.9 million margin, an improvement from a $10.6 million loss.
- Management expected strong demand and forecast 2011 operating cash generation of approximately $2.6 billion and capital expenditures of approximately $700 million. It projected SG&A of approximately $200 million, full-year tax rate of approximately 27%, and depreciation, depletion and amortization of approximately $360 million.
- 2011 segment outlook: North American Iron Ore sales of approximately 29 million long tons, revenue per ton of $140–$145, and cost per ton of $65–$70; Asia Pacific Iron Ore sales and production of 9 million metric tons, revenue per ton of $165–$170, and cost per ton of $70–$75. North American Coal guidance was suspended after the Oak Grove incident.
- On April 27, a tornado and severe weather damaged Oak Grove’s preparation plant, conveyor, and surrounding infrastructure. Employees were reported safe, but future deliveries were expected to be affected; the company had not yet quantified the operational or financial impact.
- The proposed Consolidated Thompson acquisition was valued at approximately C$4.9 billion, including net debt, and remained subject to customary closing conditions, including regulatory approval. Financing included a $1.25 billion term loan commitment, up to a $960 million bridge facility, and senior notes; debt-funded acquisition and integration risks remain significant.
- Other risks include volatile iron ore pricing and provisional customer settlements, foreign exchange exposure, weather and operating disruptions, energy costs, mine closure and environmental obligations, and litigation. Management reported compliance with debt covenants and effective disclosure controls. It stated pending litigation was not expected to have a material adverse effect, while acknowledging unfavorable outcomes could be material.
- Results benefited from unusual and timing-sensitive items. The 2010 comparison was retrospectively adjusted for Wabush purchase-accounting refinements, reducing prior-period net income attributable to shareholders by $16.1 million and EPS by $0.12.
Important facts for investors to verify
- How much of Q1’s earnings and margin improvement is recurring after excluding the $213.9 million operating-income benefit from customer pricing settlements?
- Whether and when the Consolidated Thompson acquisition closed, its final funding mix and added debt, and the costs and benefits of integration.
- The extent and duration of Oak Grove damage, revised coal production and sales guidance, and any insurance recovery.
- Whether spot-linked pricing, provisional settlements, and customer contract changes support the iron ore revenue-per-ton outlook.
- Whether working-capital needs, planned $700 million capital spending, and acquisition funding preserve liquidity and keep debt covenants satisfied.