Cliffs Natural Resources Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 1, 2011. The filing identifies the registrant as Cliffs Natural Resources Inc. and presents unaudited consolidated results. The company produced iron ore and metallurgical and thermal coal across North America and Australia, with additional investments and development projects.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,142.8 million | $1,346.0 million | $5,131.8 million | $3,257.9 million |
| Sales margin | $863.3 million (40.3%) | $477.2 million (35.5%) | $2,194.9 million (42.8%) | $1,042.6 million (32.0%) |
| Operating income | $820.3 million | $390.4 million | $1,980.7 million | $871.7 million |
| Net income attributable to Cliffs shareholders | $589.5 million | $297.4 million | $1,420.6 million | $635.4 million |
| Diluted EPS, continuing operations | $4.19 | $2.19 | $10.25 | $4.68 |
| Diluted EPS, including discontinued operations | $4.07 | $2.18 | $10.12 | $4.67 |
- Cash flow: Nine-month cash from operations was $1,545.7 million, versus $631.0 million in 2010. Cash used in investing was $4,918.6 million, mainly reflecting the Consolidated Thompson acquisition; cash from financing was $2,366.6 million. Cash fell to $545.1 million from $1,566.7 million at year-end 2010. Cash capital expenditures were $478.9 million.
- Financial position and liquidity: At September 30, current assets were $1,904.8 million and current liabilities $1,299.4 million. Long-term debt was $3,883.5 million, plus a $62.3 million current term-loan portion. The $1.75 billion revolving facility had $250 million drawn and $1,476.5 million available after letters of credit. Management reported more than $2.0 billion in cash and available credit and compliance with debt covenants.
- Shareholder returns: The quarterly dividend was raised to $0.28 per share. The company repurchased about 3.0 million shares during the quarter for approximately $221.9 million and issued 10.35 million shares in June, raising $853.7 million net.
Material changes and drivers
- Revenue and margins rose substantially year over year, reflecting higher iron ore prices, increased Eastern Canadian iron ore sales following the May acquisition of Consolidated Thompson, and the ArcelorMittal price settlement. Nine-month U.S. Iron Ore revenue included $280.9 million related to that settlement.
- Consolidated Thompson contributed $431.0 million of revenue and $160.6 million of operating income from the acquisition date through September 30. The acquisition was funded through debt and equity financing and materially expanded assets, goodwill, and debt. Its purchase-price allocation remained preliminary.
- Higher costs partly offset improved pricing and volume. Factors included increased mining and repair costs, foreign-exchange effects, fuel and royalty costs, and $59.8 million of inventory step-up expense from Consolidated Thompson purchase accounting.
- North American Coal’s sales margin loss widened to $60.4 million for the first nine months, from $5.4 million in 2010, amid mine disruptions, lower realized prices and increased idle costs. Oak Grove sustained tornado damage; Pinnacle operations were affected by elevated carbon monoxide and ventilation issues.
Outlook, risks and unusual items
- 2011 guidance: U.S. Iron Ore sales of about 24 million long tons at $135–$140 revenue per ton; Eastern Canadian Iron Ore sales of about 8 million metric tons at $160–$165 per ton; Asia Pacific Iron Ore sales of about 8.8 million metric tons at $155–$160 per ton; and North American Coal sales of about 4 million short tons at $115–$120 per ton. The company revised down expected volume for U.S. Iron Ore, Eastern Canadian Iron Ore and North American Coal; it raised U.S. Iron Ore revenue-per-ton guidance and lowered guidance for Eastern Canadian and Asia Pacific Iron Ore.
- Management expected approximately $900 million of 2011 capital expenditures and approximately $2.2 billion of cash from operations. It forecast approximately $420 million of depreciation, depletion and amortization. The outlook states an approximately 18% full-year effective tax rate; the tax note separately gives an estimated 22.7% annual rate before discrete items.
- For 2012, management expected sales of about 23 million long tons of U.S. Iron Ore, 12 million metric tons of Eastern Canadian Iron Ore, 11 million metric tons of Asia Pacific Iron Ore, and 7.2 million short tons of North American Coal. These are forward-looking estimates, not guarantees.
- Bloom Lake was ramping toward 8 million metric tons annual capacity, with approved expansion intended to add another 8 million tons. The expansion had approximately $615 million approved, of which $206 million was committed at quarter-end. Other significant projects included Oak Grove repairs and expansions at Koolyanobbing, Empire and Tilden.
- The company planned to cease and dispose of renewaFUEL. Its Q3 discontinued-operations loss was $17.5 million, including a $16.7 million impairment charge, net of tax benefits.
- A prospective accounting adjustment for the Empire partnership increased reported noncontrolling interest by $84.0 million and reduced Cliffs-attributable net income by $67.9 million, or about $0.47 per share for Q3 and $0.49 per share for the nine months. Management judged the prior-period error immaterial and did not restate those periods.
- Unsettled provisional iron ore pricing, spot-price volatility, reliance on steel demand—particularly in China—currency and fuel costs, acquisition integration, mine operating and safety interruptions, and the proposed Australian Minerals Resource Rent Tax were identified risks. The filing said the proposed Australian tax, if enacted as described, could have a significant financial-statement impact.
- Management expected pending litigation, in aggregate, not to materially affect the company, while acknowledging uncertainty. It also disclosed a pending Minnesota environmental enforcement matter concerning particulate readings at Northshore and MSHA citations and orders at several mines. No mining-related fatalities were reported for the period.
Most important facts for investors to verify
- Whether Consolidated Thompson integration, Bloom Lake ramp-up and its expansion meet production, cost and capital expectations; the acquisition valuation was still preliminary.
- Final pricing settlements and contract terms for provisional iron ore shipments, and the sensitivity of earnings to iron ore and steel prices.
- Progress in restoring Oak Grove and sustaining safe, reliable output at Oak Grove and Pinnacle, including insurance recoveries and restart timing.
- Debt reduction, interest expense, cash generation and liquidity after the acquisition, capital program, dividends and share repurchases.
- Final disposition and recoverable value of renewaFUEL assets, and the potential effects of the Australian mining tax and other regulatory or environmental matters.