Cliffs Natural Resources Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The unaudited filing covers Cliffs Natural Resources Inc. and subsidiaries, an iron ore and metallurgical coal producer.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,488.5 million | $1,579.4 million | $2,629.0 million | $2,791.7 million |
| Sales margin | $268.2 million; 18.0% | $443.4 million; 28.1% | $506.1 million; 19.3% | $735.2 million; 26.3% |
| Operating income | $262.0 million | $361.9 million | $430.3 million | $584.9 million |
| Net income attributable to Cliffs shareholders | $146.0 million | $258.0 million | $253.0 million | $633.8 million |
| Diluted EPS from continuing operations | $0.82 | $1.79 | $1.49 | $4.39 |
For the six months, operating cash flow was $388.9 million, versus cash used of $32.8 million in 2012. Capital expenditures were $501.2 million, and cash and cash equivalents rose to $263.3 million from $195.2 million at year-end 2012. Net cash used in investing activities was $500.3 million.
At June 30, total debt was $3.323 billion, down from $4.055 billion at December 31, 2012; the term loan was repaid in February. The revolving facility had $440 million drawn and $1.282 billion of available borrowing capacity. Cash plus available facility capacity provided reported liquidity of $1.546 billion. Current assets were $1.666 billion and current liabilities $1.155 billion.
Material changes versus prior year
- Revenue fell 5.8% in both the quarter and first half, reflecting lower realized prices and lower worldwide iron ore sales volumes; increased North American coal volumes partly offset the declines.
- Sales margin fell $175.2 million in Q2 and $229.1 million in the first half. Costs rose despite lower iron ore volumes, including U.S. Iron Ore idle costs and Eastern Canadian Iron Ore inventory charges.
- Q2 included a $67.6 million impairment of the Amapá investment after a port shiploader collapsed in Brazil. The Amapá sale process remained in place but had no projected closing date.
- Financing actions included February 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 reduced 76% to $0.15 per share.
- Other comprehensive loss was $187.1 million in Q2, primarily reflecting foreign currency translation and derivative losses; Q2 comprehensive loss attributable to Cliffs shareholders was $42.2 million despite positive net income.
Outlook, commentary and risks
- Management expected continued commodity-price volatility. Its outlook used a $137-per-ton year-to-date Platts 62% Fe iron ore price as a calculation assumption, explicitly not as management’s full-year price expectation.
- 2013 segment guidance: U.S. Iron Ore sales of 21 million long tons, production of 20 million tons, cash cost of $65–$70 per ton; Eastern Canadian Iron Ore sales and production of 8–9 million metric tons, cash cost of $100–$105 per ton; Asia Pacific Iron Ore sales and production of about 11 million metric tons, cash cost of $65–$70 per ton; North American Coal sales and production of about 7 million short tons, cash cost of $90–$95 per ton.
- Eastern Canadian sales guidance was cut from 9–10 million to 8–9 million tons, and its cash-cost outlook increased. North American Coal revenue-per-ton guidance was reduced to $100–$105; Asia Pacific cash-cost guidance was lowered to $65–$70.
- Management increased the 2013 capital-expenditure budget to approximately $1 billion, including about $600 million of Bloom Lake growth/productive spending and about $400 million of sustaining capital. Certain Bloom Lake Phase II components, including the concentrator and load-out facility, remained delayed; common infrastructure work continued. Management cited an expected $33.2 million of additional 2013 penalties for missed minimum shipment requirements.
- Wabush stopped pellet production at its Pointe Noire plant in June and transitioned toward sinter feed. Q2 Wabush-related inventory charges totaled $26.4 million for lower-of-cost-or-market and unsaleable inventory impairments. Continued high Wabush costs could affect asset recoverability.
- The Ontario chromite project’s environmental assessment work was temporarily suspended amid permitting, land-rights and other unresolved issues. Management cited iron ore and coal prices, demand, production, project execution, currencies, energy costs, liquidity, permitting and litigation among material risks.
- The filing gives differing tax-rate estimates: the outlook states an approximately 2% full-year 2013 effective tax rate, while the tax note describes an approximately 5% estimated annual rate before discrete items. These figures have different stated bases and should be reconciled when assessing the outlook.
- Management reported compliance with applicable credit-facility covenants at June 30 and expected compliance for the next 12 months. The amended facility includes a 2.5-to-1 minimum interest-coverage requirement and temporary covenant terms; the debt-to-EBITDA test was to resume for the period ending March 31, 2014.
Key facts for investors to verify
- Whether iron ore and coal price assumptions, sales volumes and per-ton cost guidance were achieved, especially the reduced Eastern Canadian outlook.
- Bloom Lake Phase II schedule, total remaining commitments, capital spending and shipment-penalty exposure.
- Wabush’s operating economics and any further impairment risk, and the status and recoverability of the Amapá investment and proposed sale.
- Liquidity, revolver availability and covenant compliance as debt-to-EBITDA testing approaches; also the cash demands from the higher capital budget.
- The basis for the approximately 2% versus 5% tax-rate estimates and the effect of preferred-share dividends and potential conversion on common-share earnings and dilution.