CLF

Cleveland-Cliffs Inc. Q1 2008 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008. Cleveland-Cliffs Inc. is an international mining company and the largest producer of iron ore pellets in North America. The company operates iron ore mines in North America and Australia, and coal mines in North America. It also holds minority interests in iron ore projects in Brazil (Amapá) and coal projects in Australia (Sonoma).

Key Financial Metrics

Note: Operating cash flow was negative primarily due to a $130.9 million increase in product inventories caused by winter shipping constraints on the Great Lakes.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 52% to $494.4 million, driven by a 15% increase in North American Iron Ore sales prices and the inclusion of the North American Coal segment (acquired in July 2007).
• Profitability Decline: Net income decreased 49% to $16.7 million. This was primarily due to a $6.9 million equity loss from the Amapá venture (pre-production/start-up losses) and a $25.9 million increase in Selling, General, and Administrative (SG&A) expenses.
• Segment Performance:
  • North American Iron Ore: Sales margin improved to $64.6 million from $37.3 million due to higher prices and volume.
  • North American Coal: Reported a sales margin loss of $2.5 million.
  • Asia-Pacific Iron Ore: Sales margin decreased to $21.4 million from $24.5 million, impacted by a weaker U.S. dollar against the Australian dollar.
• Debt Levels: Revolving credit facility draw increased from $240.0 million to $400.0 million to fund operations and inventory buildup.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Pricing: Management expects to recognize significant revenue increases in Q2 2008 as iron ore benchmarks settle (87% increase for pellets, 65% for fines).
• Production: 2008 North American Iron Ore production is estimated at 35.6 million tons. North American Coal production forecast was reduced to 4.3 million tons due to geological issues at the Pinnacle mine.
• Costs: North American Iron Ore costs per ton are expected to rise ~10% to $53. North American Coal costs per ton are expected to rise to $86.
• Capital Expenditures: Expected to be approximately $200 million for 2008.

Risks and Contingencies:

• Legal Proceedings:
  • Dofasco Litigation: Dofasco sued Cliffs and U.S. Steel seeking specific performance of a sale of Wabush interests or damages up to C$1.8 billion. Cliffs intends to defend vigorously.
  • Silta Litigation: A jury awarded Silta $6.8 million for breach of contract; Cliffs has filed motions for a new trial and intends to appeal.
  • ArcelorMittal Arbitration: Two arbitrations filed regarding nomination volumes and transfer rights under an Umbrella Agreement.
• Environmental: United Taconite received a Draft Stipulation Agreement from the MPCA regarding air emissions violations; penalties are to be determined.
• Market Risk: Exposure to foreign currency fluctuations (AUD/USD) and rising energy costs (natural gas and diesel).

Investor Verification Checklist

• Inventory Buildup: Verify the impact of the $130.9 million inventory increase on future cash flows once Great Lakes shipping resumes.
• Price Settlements: Monitor the final settlement of 2008 iron ore benchmarks (87% pellets, 65% fines) to confirm projected Q2 revenue recognition.
• Legal Exposure: Track the status of the Dofasco lawsuit (potential C$1.8 billion claim) and the Silta appeal ($6.8 million liability).
• Amapá Venture: Review updates on the Amapá project's start-up delays and covenant violations with lenders, which contributed to the $6.9 million equity loss.
• Coal Production: Confirm the resolution of the fault area at the Pinnacle mine and the ability to meet the revised 4.3 million ton production forecast.