CLF

Cleveland-Cliffs Inc. Q1 2002 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2002. Cleveland-Cliffs Inc. operates primarily in the iron ore segment, with a secondary Ferrous Metallics segment (currently idle). Key operational developments during the quarter included the acquisition of an additional 45% interest in the Tilden Mine (increasing ownership to 85%) and the resumption of production at the Empire Mine on April 8, 2002, following a period of idling due to partner bankruptcy issues.

Key Financial Metrics

Note: Q1 2001 results included a one-time non-cash credit of $9.3 million related to a cumulative effect of an accounting change regarding pension assets.

Material Changes vs. Prior Period

• Revenue Increase: Total revenues increased 88% to $60.7 million, driven primarily by a 160% increase in pellet sales volume (1.3 million tons vs. 0.5 million tons) and higher average price realizations.
• Widening Loss: Despite higher revenue, the pre-tax loss increased to $20.2 million from $16.0 million. This was caused by a $1.2 million deterioration in the pellet sales margin (loss of $15.4 million vs. $14.2 million) due to higher fixed costs associated with production curtailments ($14 million in 2002 vs. $4 million in 2001).
• Segment Performance: The Iron Ore segment reported a pre-tax loss of $11.8 million. The Ferrous Metallics segment (CAL) reported a loss of $4.1 million, an improvement from $6.0 million in 2001 due to cost reduction efforts.
• Inventory Build: Product inventory increased by $41.5 million to $126.3 million, reflecting seasonal patterns and production curtailments.

Outlook, Risks, and Management Commentary

• Production Outlook: Full-year 2002 production is expected to be approximately 27 million tons, with the Company's share at 14 million tons. Sales volume is forecasted at 13 million tons.
• Strategic Agreements: The Company signed a 15-year agreement to be the sole pellet supplier for International Steel Group (ISG), with expected 2002 sales of 1.5 to 2 million tons. A similar 15-year agreement was signed with Algoma Steel Inc.
• Liquidity and Debt: Total liquidity (cash plus credit availability) stands at $142.1 million. The Company is currently in compliance with debt covenants, exceeding the net worth requirement by over $8 million. However, management notes that continued adverse operating performance could jeopardize covenant compliance.
• Risks: Key risks include the financial condition of partners/customers (specifically ISG and Algoma), potential rejection of contracts under bankruptcy provisions, weak global steel demand, and the ability of the Trinidad HBI facility to achieve profitable operations.
• Unusual Items: The Q1 2001 net loss was artificially reduced by a $9.3 million accounting change credit. Excluding this, the underlying operational loss trend has worsened.

Investor Verification Checklist

• Covenant Compliance: Verify the Company's ability to maintain the net worth covenant in its revolving credit facility given the widening operational losses.
• Customer Concentration: Assess the financial stability of new major customers (ISG and Algoma) and the risk of contract rejection or non-performance.
• Inventory Valuation: Review the $126.3 million inventory balance to ensure it aligns with the forecasted sales volume of 13 million tons for the year.
• Fixed Cost Structure: Monitor the impact of fixed costs related to production curtailments (Empire and Hibbing mines) on future margins as production ramps up.
• Environmental Liabilities: Confirm the $70.1 million environmental and closure obligation estimate, particularly regarding the Rio Tinto and Kipling sites.