CLEVELAND-CLIFFS INC. annual report, FY2015

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Cliffs Natural Resources Inc. — FY2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. The registrant named in this filing is Cliffs Natural Resources Inc. (Ohio), not Cleveland-Cliffs Inc.

Business context

Cliffs was transitioning toward a U.S. Iron Ore-focused business. Continuing operations comprised U.S. Iron Ore and Asia Pacific Iron Ore; North American Coal and Eastern Canadian operations were reported as discontinued operations. Cliffs sold its remaining U.S. coal mines in December 2015 and deconsolidated its Bloom Lake and Wabush Canadian entities following creditor-protection proceedings.

Financial and operating results

  • Revenue: $2.013 billion, down 40.3% from $3.373 billion in 2014. Lower realized prices and reduced U.S. Iron Ore sales volumes were the primary factors.
  • Profitability: Sales margin was $236.5 million (11.7% of revenue), versus $885.7 million (26.3%) in 2014. Operating income was $151.3 million. Continuing-operations income was $143.7 million, including a $392.9 million gain on extinguishment of debt and a $169.3 million income-tax expense. Discontinued operations generated an $892.1 million after-tax loss; net loss was $748.4 million, or $787.7 million attributable to common shareholders. Basic loss per common share was $5.14.
  • Cash flow: Operating cash flow was $37.9 million, down from $358.9 million in 2014. Investing cash outflow was $103.2 million; cash capital expenditures were $80.8 million. Financing provided $61.0 million. Year-end cash was $285.2 million.
  • Segments: U.S. Iron Ore revenue was $1.525 billion and sales margin $227.1 million, down from $710.4 million margin in 2014. Sales volume fell to 17.3 million long tons from 21.8 million; realized revenue per ton declined 22.7% to $79.12. Asia Pacific Iron Ore revenue was $487.9 million and sales margin $9.4 million, down from $121.7 million; realized revenue per metric ton fell 46.4% to $39.93.
  • Production: U.S. Iron Ore production was 26.1 million long tons (Cliffs’ share: 19.3 million), compared with 29.7 million (share: 22.4 million) in 2014. Asia Pacific production was 11.7 million metric tons, up from 11.4 million.
  • Debt and liquidity: Year-end total debt principal was $2.898 billion; cash was $285.2 million. No ABL loans were drawn. After borrowing-base limits and letters of credit/other commitments, available borrowing capacity was $179.2 million, for reported cash plus availability of approximately $464.4 million. Long-term debt on the balance sheet was $2.699 billion.
  • Balance sheet: Total assets were $2.136 billion and total liabilities $3.947 billion, leaving a total deficit of $1.812 billion. Current assets were $982.7 million versus current liabilities of $581.7 million.
  • Other: Common dividends were eliminated beginning in 2015; preferred-stock dividends totaled $38.4 million. Adjusted EBITDA, a non-GAAP measure, was $292.9 million, down from $1.048 billion in 2014.

Material changes and unusual items

  • Revenue fell sharply amid a 42.6% decline in the annual average Platts 62% Fe fines spot price to $56 per ton, reduced U.S. steel production, and elevated imported-steel competition. U.S. Iron Ore sales margin declined by $483.3 million year over year; cost reductions partly offset lower revenue.
  • Cliffs recorded a $710.9 million pretax loss from Canadian deconsolidations and related charges in discontinued operations. The Canadian entities’ estimated equity value was approximately zero; Cliffs retained $72.9 million of loans and receivables and recorded $132.4 million of guarantees and contingent liabilities at fair value. Additional exposure could not be reasonably estimated.
  • The North American Coal segment reported a $152.4 million after-tax discontinued-operations loss for 2015, including a $73.4 million impairment and a $9.3 million pretax gain on the December sale. Seneca may pay an earn-out of up to $50 million through 2020; no gain contingency was recorded.
  • Cliffs terminated its long-term Essar pellet agreement in October 2015, citing material breaches. Essar entered Canadian CCAA and U.S. Chapter 15 proceedings. A Canadian court determined it had jurisdiction over the contract dispute; whether Cliffs must resume supply remained unresolved in the filing.
  • Two Minnesota mines, United Taconite and Northshore, were temporarily idled amid reduced customer nominations; Empire also had a temporary 2015 shutdown. Windarling in Australia was idled for cost reduction.

Outlook, risks, and contingencies

  • 2016 guidance: U.S. Iron Ore sales of about 17.5 million long tons and production of 16 million tons; cash production cost of $50–$55 per ton and cash cost of goods sold of $55–$60. Asia Pacific sales and production were each expected at about 11.5 million metric tons; cash production cost of $25–$30 and cash cost of goods sold of $30–$35 per ton.
  • Management expected 2016 capital expenditures of about $50 million, SG&A of about $95 million, interest expense of about $240 million (approximately $205 million cash interest), and consolidated DD&A of about $145 million. Management anticipated no meaningful iron-ore price improvement absent a material change in global supply and demand, but expected U.S. steel conditions to improve as trade duties curbed imports.
  • Management said 2016 capital expenditures and debt-service cash needs were expected to exceed estimated operating cash flow, but that cash and ABL availability should fund normal operations and obligations for the next 12 months. Further deterioration in demand or prices could pressure liquidity and require asset sales, further cost reductions, or refinancing; management warned such measures might not be sufficient in a severe downturn.
  • Principal risks include volatile iron-ore and steel prices, customer concentration and contract renewals, substantial leverage and refinancing needs, idled operations, labor negotiations, energy costs, permitting and environmental requirements, mine-closure obligations, and Canadian restructuring-related claims. U.S. labor agreements had been extended during negotiations, with potential for disruption if negotiations failed.
  • Environmental exposures include estimated mine-closure and environmental obligations of $234.0 million. Potential costs relating to selenium controls, mercury reductions, water-quality rules, and other regulatory developments were not fully estimable. A possible retroactive electricity-system cost allocation could create an estimated $17.1 million liability; Cliffs continued to contest it.
  • The filing reports proposed settlements of certain shareholder lawsuits funded by insurers, subject to documentation and court approval; the Essar dispute and Canadian creditor proceedings remained significant uncertainties.

Most important facts for investors to verify

  • Whether 2016 sales volumes, realized prices, cost targets, and the expected U.S. steel-market improvement were achieved.
  • Available liquidity after borrowing-base changes, letters of credit, cash needs, and the outcome of the 2016 debt exchange offers.
  • Debt maturities, interest expense, covenant compliance, and capacity to service debt under lower-price scenarios.
  • Resolution of Essar’s supply and contract claims and any additional liabilities or recoveries arising from the Canadian CCAA proceedings and guarantees.
  • Whether idled U.S. mines restarted, and the effect of customer nominations and contract renewals—particularly major U.S. customer agreements approaching expiration.
  • Final costs and timing for environmental compliance, mine closure, pension obligations, and pending legal matters.