Business context and reporting period
Cliffs Natural Resources Inc. (the registrant named in this filing; now associated with Cleveland-Cliffs) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Following exits and restructuring proceedings involving Canadian operations, the company reported continuing operations in U.S. Iron Ore and Asia Pacific Iron Ore. North American Coal was classified as held for sale and reported in discontinued operations.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $498.1 million | $747.7 million | $944.1 million | $1,363.2 million |
| Sales margin | $57.3 million (11.5%) | $183.5 million (24.5%) | $138.1 million (14.6%) | $373.5 million (27.4%) |
| Operating income | $25.7 million | $139.3 million | $97.6 million | $278.5 million |
| Continuing operations income (loss) | $(38.2) million | $90.9 million | $128.6 million | $160.6 million |
| Net income (loss) | $65.2 million | $14.5 million | $(696.5) million | $(56.2) million |
| Common EPS, diluted | $0.39 | $(0.02) | $(3.92) | $(0.55) |
- Q2 common-shareholder earnings included $103.4 million of after-tax income from discontinued operations; continuing operations posted a loss. First-half discontinued operations recorded an $825.1 million after-tax loss.
- Operating cash flow was $(248.2) million in the first half, versus $(123.9) million a year earlier. Investing cash flow was $(34.0) million, including $34.4 million of cash capital expenditures; financing cash flow was $268.4 million. Cash ended the period at $276.2 million.
- At June 30, cash was $276.2 million and long-term debt was $2,887.4 million (reported carrying value). Debt face amount was $3,621.5 million, reflecting substantial discounts on notes. The company had no ABL borrowings and $332.6 million of borrowing capacity after letters of credit and other commitments; stated cash plus borrowing availability was approximately $608.8 million.
- Total liabilities were $4,349.6 million against assets of $2,609.4 million; total deficit was $1,740.2 million. The company recorded $173.3 million of continuing-operations income tax expense in the first half, primarily from a valuation allowance against U.S. deferred tax assets.
Material changes versus prior comparable periods
- Revenue fell 33.4% in Q2 and 30.7% in the first half. Management attributed the decline mainly to lower iron ore pricing, including reduced hot-band steel price assumptions, and lower Q2 sales volume. Consolidated sales margin fell $126.2 million in Q2 and $235.4 million in the first half.
- Platts 62% Fe fines spot price averaged $58 per ton in Q2, down 43.1% year over year, and $60 per ton in the first half, down 45.8%. Realized U.S. Iron Ore revenue per ton fell 26.7% in Q2 and 21.8% in the first half; Asia Pacific realized revenue per ton fell 44.9% and 50.5%, respectively.
- Cost reductions and favorable foreign exchange partly offset price pressure. Q2 U.S. Iron Ore sales margin was $49.0 million versus $147.2 million; Asia Pacific Iron Ore margin was $8.3 million versus $36.0 million. First-half margins were $129.0 million and $9.1 million, respectively, versus $242.2 million and $102.3 million.
- First-half continuing results included a $313.7 million gain on extinguishment of debt from debt transactions. The company issued $540 million of 8.25% first-lien notes, exchanged existing notes for $544.2 million of 7.75% second-lien notes, and replaced its former revolving credit facility with a $550 million ABL facility. Interest expense increased year over year.
- Canadian restructuring and deconsolidation, plus the North American Coal held-for-sale classification, materially changed reported results and balance-sheet presentation. The common dividend was eliminated beginning in 2015; preferred dividends continued.
Guidance, outlook, risks and unusual items
- Management described 2015 as a challenging year amid weak steel demand, oversupply of seaborne iron ore, Chinese steel-production weakness, and steel imports into the U.S. It expected downward pressure on seaborne iron ore prices absent substantial supply or demand changes.
- 2015 guidance: U.S. Iron Ore sales and production of 19 million long tons, cash production cost of $55–$60 per ton, and cash cost of goods sold of $60–$65 per ton. Asia Pacific Iron Ore sales and production of about 11 million metric tons, cash production cost of $30–$35 per ton, and cash cost of goods sold of $35–$40 per ton.
- Other guidance included SG&A of $120 million, interest expense of approximately $235 million (about $205 million cash), consolidated depreciation, depletion and amortization of approximately $145 million, and capital expenditures of $100–$125 million, including North American Coal. Management expected a cash tax refund of approximately $160 million in Q3.
- Management said 2015 capital expenditures, preferred dividends and other cash requirements were expected to exceed operating cash flow, but expected available cash and the ABL facility to fund requirements for at least 12 months, based on then-current conditions. The ABL fixed-charge coverage covenant was not applicable at quarter-end because liquidity requirements were met.
- Bloom Lake and Wabush entered Canadian CCAA restructuring proceedings and were deconsolidated. The company recorded a first-half Canadian deconsolidation loss of $684.0 million, partly offset in Q2 by a $134.7 million gain. It reported $94.5 million of receivables from the Canadian entities and $160.5 million of contingent liabilities measured at fair value. Potential claims under guarantees and other Canadian exit obligations could change materially; the company could not reasonably estimate losses beyond its accrual.
- North American Coal assets were intended for sale in 2015; the first quarter included a $73.4 million impairment. Empire reduced operations beginning June 26, 2015, and a July 29 notice announced a temporary United Taconite production idling. These actions reflect lower customer nominations and could be extended if demand does not improve.
- Other key risks include volatile commodity and currency prices, liquidity and refinancing conditions, customer and joint-venture counterparty performance, mine closure and environmental obligations, energy supply and costs, and pending litigation. Management stated disclosure controls were effective.
Most important facts for investors to verify
- Whether the stated $608.8 million of cash and borrowing availability remains adequate as operating cash flow is negative and debt service, preferred dividends, and capital spending continue.
- Progress and ultimate cash impact of the Bloom Lake and Wabush CCAA processes, including claims against Cliffs under guarantees and the recoverability of the $94.5 million receivable.
- Actual iron ore prices, customer nominations, sales volumes, and realized revenue rates versus guidance, particularly in U.S. Iron Ore and Asia Pacific Iron Ore.
- Execution and proceeds of planned North American Coal and other asset sales, and any further impairments or operating idlings.
- Whether the $160 million expected tax refund is received and whether the valuation allowance or other tax items produce further earnings impacts.