Business Context and Reporting Period
Company: Cliffs Natural Resources Inc. (formerly Cleveland-Cliffs Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: An international mining and natural resources company and the largest producer of iron ore pellets in North America. Operations are organized into North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, and Latin American Iron Ore segments.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenues from Product Sales and Services | $727.7 | $464.8 |
| Sales Margin | $150.0 | $42.4 |
| Operating Income | $113.4 | $11.4 |
| Net Income Attributable to Cliffs Shareholders | $93.5 | $(7.4) |
| Earnings Per Share (Diluted) | $0.69 | $(0.07) |
| Cash and Cash Equivalents (End of Period) | $550.4 | $97.3 |
| Long-Term Debt | $725.0 | $525.0 |
| Net Cash Provided by Operating Activities | $66.7 | $(44.8) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 57% to $727.7 million, driven primarily by a 57% increase in North American Iron Ore sales volume and higher pricing. North American Coal sales volume increased 34%.
- Profitability: The company returned to profitability with a net income of $93.5 million, compared to a net loss of $7.4 million in Q1 2009. Sales margin improved to $150.0 million (20.6% margin) from $42.4 million (9.1% margin).
- Acquisitions: Significant non-recurring gains of $60.6 million were recognized from the acquisition of controlling interests in Wabush (100% ownership) and Freewest (100% ownership). This included a $47.0 million gain on Wabush and a $13.6 million gain on Freewest.
- Debt Structure: The company completed a $400 million public offering of senior notes due 2020 and repaid a $200 million term loan, increasing total long-term debt to $725.0 million.
- Provisional Pricing: Due to a shift in the industry from annual benchmark pricing to shorter-term spot-market arrangements, $85.0 million of revenue was recorded on a provisional basis pending final settlement.
Guidance, Outlook, and Risks
2010 Outlook and Guidance
- North American Iron Ore: Sales volume guidance increased to 27.0 million tons (from 25.0 million). Expected revenue per ton is $107-$112, assuming a 90% price increase for blast furnace pellets. Cost per ton expected at $65-$70.
- North American Coal: Sales volume maintained at 3.4 million tons. Expected revenue per ton is $140-$145. Cost per ton expected at $110-$115.
- Asia Pacific Iron Ore: Sales volume expected at 8.5 million tonnes. Revenue per tonne expected at $100-$105. Cost per tonne expected at $55-$60.
- Capital Expenditures: Total 2010 capital budget increased to approximately $250 million (from $200 million), with $120 million designated as sustaining capital.
- Cash Flow: Expected to generate more than $1.5 billion in cash from operations in 2010.
Risks and Contingencies
- Pricing Volatility: The transition from annual benchmark pricing to quarterly index-based pricing introduces volatility and uncertainty regarding final settlement prices.
- Legal Proceedings: Pending arbitration with ArcelorMittal regarding pellet price reopener provisions; potential retroactive pricing adjustments could materially impact results. Maritime asbestos litigation remains ongoing.
- Health Care Reform: The PPACA and Reconciliation Act resulted in a $16.1 million non-cash tax charge in Q1 2010 and are expected to increase future employee health benefit costs.
- Amapá Debt: The Amapá project (30% interest) is currently in violation of loan covenants, though waivers have been obtained through May 27, 2010. Failure to renegotiate could trigger debt repayment obligations.
Investor Verification Checklist
- Provisional Revenue Settlement: Verify the final settlement of the $85.0 million in provisional iron ore revenue recorded in Q1 2010 to confirm actual realized pricing.
- Acquisition Integration: Monitor the integration of Wabush and Freewest to ensure projected production capacity increases and cost synergies are realized.
- Amapá Covenant Compliance: Track the status of Amapá's debt covenant waivers and the project's path to breakeven operations.
- Arbitration Outcome: Review the ruling on the ArcelorMittal arbitration regarding the 2009 price reopener to assess potential retroactive revenue adjustments.
- Health Care Cost Impact: Assess the long-term impact of the PPACA on postretirement benefit costs and the effective tax rate for the remainder of 2010.