CLF

Cleveland-Cliffs Inc. 10-Q Summary: Period Ended June 30, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2002, and the first six months of 2002. Cleveland-Cliffs Inc. operates primarily in the iron ore segment, supplying pellets to the North American steel industry, and maintains a Ferrous Metallics segment (Cliffs and Associates Limited) which remained idle during the period. The company increased its ownership in the Tilden Mine to 85% in January 2002 and acquired an additional interest in the Hibbing Mine in July 2002.

Key Financial Metrics

Operating Margins: The company reported a pre-tax loss of $6.2 million for Q2 2002, an improvement of $17.4 million from the prior year. The iron ore segment generated a sales margin of $0.1 million in Q2 2002 compared to a loss of $17.9 million in Q2 2001.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 64% in Q2 2002 and 71% for the first six months compared to 2001, driven primarily by higher pellet sales volumes (3.9 million tons in Q2 2002 vs. 2.3 million tons in Q2 2001).
• Profitability Improvement: The company returned to net income in Q2 2002 ($0.6 million) from a net loss in Q2 2001. This was driven by improved pellet sales margins, lower idle costs at Cliffs and Associates Limited (CAL), and a $4.4 million favorable income tax adjustment.
• Cost Reductions: Fixed costs related to production curtailments dropped to approximately $3 million in Q2 2002 from $20 million in the same period in 2001.
• Accounting Changes: The Q2 2002 results include a one-time non-cash credit of $9.3 million related to the cumulative effect of an accounting change regarding pension assets recognized in 2001.

Outlook, Risks, and Management Commentary

Guidance and Outlook: Management forecasts full-year 2002 pellet sales between 14.0 and 14.5 million tons. Total production is expected to be about 27 million tons, with the company's share at approximately 14.6 million tons. Capital expenditures for the year are expected to approximate $19 million.

Strategic Developments:

• Secured long-term supply agreements with International Steel Group (ISG) and Rouge Industries, Inc.
• Invested $13 million in ISG common stock (approx. 7% equity).
• Participating in the Mesabi Nugget Project pilot plant with a $4.5 million contribution.

Risks and Contingencies:

• Customer Concentration: Over 95% of revenue is derived from the North American integrated steel industry, with four of fourteen potential customers in reorganization.
• Regulatory: The EPA is considering rules to regulate air pollution emissions (MACT standards) for iron ore processing, which could incur significant compliance costs.
• Environmental Liabilities: Total environmental and closure obligations stand at $68.3 million ($8.8 million current).
• Liquidity: The revolving credit facility expires in May 2003; replacement terms are uncertain.

Investor Verification Checklist

• Customer Solvency: Verify the financial stability of major steel customers (ISG, Rouge, Algoma) given the high concentration of revenue and bankruptcy risks in the sector.
• Inventory Levels: Confirm the valuation and marketability of the $118 million pellet inventory (4.1 million tons), which increased significantly during the period.
• Debt Covenants: Review compliance with the net worth and leverage covenants of the revolving credit facility, noting the company exceeded the most restrictive covenant by $13 million as of June 30, 2002.
• Regulatory Impact: Assess the potential financial impact of pending EPA MACT rules on iron ore processing facilities.
• Idle Asset Costs: Monitor the ongoing costs associated with the idle Cliffs and Associates Limited (CAL) facility in Trinidad and the timeline for potential restart.