Cleveland-Cliffs Inc. (Cliffs Natural Resources Inc.) — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. The registrant named in the filing is Cliffs Natural Resources Inc. The company is an iron ore and metallurgical coal producer with operations in the United States, Canada and Australia.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue from product sales and services | $5.691 billion | $5.873 billion |
| Sales margin | $1.149 billion (20.2%) | $1.172 billion (20.0%) |
| Operating income (loss) | $671.0 million | $(308.8) million |
| Net income (loss) attributable to Cliffs shareholders | $413.5 million | $(899.4) million |
| Diluted EPS attributable to common shareholders | $2.37 | $(6.32) |
| Cash from operating activities | $1.146 billion | $514.5 million |
| Cash and cash equivalents at year-end | $335.5 million | $195.2 million |
| Long-term debt, including current portion | $3.044 billion | $4.055 billion |
Capital expenditures were $861.6 million, down from $1.128 billion. At year-end, the company had $1.742 billion of available borrowing capacity under its $1.75 billion revolving facility and reported compliance with applicable financial covenants. Current assets were $1.560 billion versus current liabilities of $1.086 billion. The filing reports total contractual obligations and binding commitments of approximately $14.3 billion, including substantial long-term purchase commitments.
Fourth-quarter 2013 revenue was $1.516 billion, sales margin was $294.5 million, net income attributable to Cliffs shareholders was $43.3 million, and diluted EPS was $0.20.
Material changes versus prior periods
- Revenue fell 3.1% year over year, principally from lower worldwide iron ore sales volumes and a 15.5% decline in realized North American Coal revenue per ton; higher coal sales volumes partly offset those pressures.
- Cash from operations more than doubled, primarily reflecting working-capital and tax-payment timing, plus reduced exploration and SG&A spending.
- U.S. Iron Ore sales margin declined to $901.9 million from $976.2 million. Eastern Canadian Iron Ore remained loss-making, with a $103.3 million sales-margin loss, while North American Coal’s loss widened to $14.5 million. Asia Pacific Iron Ore sales margin improved to $367.1 million from $311.0 million.
- Results returned to profitability from 2012’s large loss, but 2013 included $250.8 million of goodwill and other long-lived asset impairments. The prior year included $1.050 billion of such impairments and a $365.4 million impairment of the Amapá investment.
- Debt declined after the company repaid its $847.1 million term loan using proceeds from common and preferred share offerings; it also issued $164.8 million in equipment loans. Common dividends were reduced to $0.15 quarterly, or $0.60 for the year, from $2.16 in 2012.
Outlook, commentary and significant risks
- Management expected 2014 demand support from U.S. growth and continued Chinese steel production, while cautioning that slower Chinese growth, additional supply, environmental concerns and tighter credit could weaken raw-material pricing.
- 2014 guidance assumed an iron ore benchmark of $128 per ton (the January 31, 2014 year-to-date average). Expected sales and production volumes were 22–23 million long tons for U.S. Iron Ore, 6–7 million metric tons for Eastern Canadian Iron Ore, 10–11 million metric tons for Asia Pacific Iron Ore, and 7–8 million short tons for North American Coal. Guidance included segment cash costs per ton of $65–$70, $85–$90, $60–$65 and $85–$90, respectively.
- Management forecast 2014 capital expenditures of $375–$425 million and SG&A of approximately $185 million. It expected approximately $100 million of costs from idling Wabush, with substantially all of those costs involving future cash outlays. The filing also states that Wabush idling charges could be $90–$100 million before tax and that additional charges may arise.
- Wabush was scheduled to idle by the end of the first quarter of 2014 due to an unsustainable cost structure. Bloom Lake Phase II remained on hold; Cliffs was evaluating strategic alternatives and would consider temporarily idling Phase I if pricing and costs warranted. The company identified Bloom Lake’s approximately $4.9 billion long-lived asset carrying value as exposed to continued cost, capital and pricing pressures.
- The Northern Ontario Chromite Project was indefinitely suspended, with no significant further capital expected, due to infrastructure uncertainty. The suspension contributed to an $80.9 million goodwill impairment.
- Key risks include commodity-price volatility, customer concentration (ArcelorMittal represented 19% of consolidated product revenue), operating and energy costs, mine closures, permitting and environmental regulation, pension and retiree-benefit obligations, and contractual disputes. The filing describes ongoing investigations involving Bloom Lake and Pointe Noire, a Pinnacle environmental lawsuit, pricing and port-service arbitrations, and a Worldlink arbitration with claims and counterclaims exceeding $75 million and $100 million, respectively. Outcomes for several matters could not be determined.
- The company disclosed an immaterial prior-period noncontrolling-interest accounting error, corrected prospectively in 2013; the correction increased 2013 diluted EPS by $0.26 for the year and $0.29 for the fourth quarter. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether iron ore and coal prices, realized revenue rates and contracted volumes meet management’s 2014 assumptions.
- Wabush idling costs, timing, workforce and contract impacts, and whether additional charges arise.
- Bloom Lake’s cash requirements, Phase I viability, expansion status, contractual rail penalties and recoverability of its asset carrying value.
- Available liquidity and covenant compliance as the revolving-credit debt-to-EBITDA test resumed in 2014; also review debt maturities and the company’s large purchase commitments.
- Progress and potential costs for environmental compliance, mine closure, pension and OPEB funding, and the disclosed litigation, investigations and arbitrations.