Business Context and Reporting Period
Company: Cliffs Natural Resources Inc. (formerly Cleveland-Cliffs Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: An international mining and natural resources company and the largest producer of iron ore pellets in North America. Operations include North American Iron Ore, North American Coal, Asia Pacific Iron Ore, and interests in Latin American Iron Ore (Amapá) and Asia Pacific Coal (Sonoma). The company is navigating a global economic downturn characterized by reduced steel demand and lower commodity prices.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Revenues from Product Sales | $666.4 | $1,521.5 |
| Sales Margin | $103.2 | $133.9 |
| Operating Income | $80.5 | $74.6 |
| Net Income Attributable to Cliffs Shareholders | $58.8 | $96.9 |
| Diluted Earnings Per Share | $0.45 | $0.78 |
| Cash and Cash Equivalents | $359.9 | $359.9 (Balance Sheet) |
| Long-Term Debt | $525.0 | $525.0 |
| Available Borrowing Capacity | $580.0 | $580.0 |
Note: Net cash used by operating activities for the nine months ended September 30, 2009, was $5.4 million, compared to $582.2 million provided in the prior year period.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 44% for the quarter and 43% year-to-date compared to 2008. This was driven by a 30% volume decline in North American Iron Ore and a 62% volume decline in North American Coal due to the global economic slowdown and steel industry curtailments.
- Pricing Pressure: Significant price reductions were negotiated in Asia Pacific Iron Ore (estimated 44% decline for lump and 33% for fines) and North American Iron Ore due to lower World Pellet Pricing and steel indices.
- Cost Reductions: Cost of goods sold decreased 32% (quarter) and 24% (YTD) primarily due to lower volumes and cost conservation efforts. However, these were partially offset by idle expenses of $50.5 million (quarter) and $146.4 million (YTD) related to production curtailments.
- Foreign Exchange Impact: The strengthening of the Australian dollar (from A$0.69 to A$0.88) resulted in an $84.8 million unrealized gain on foreign currency contracts for the nine-month period, significantly improving other income.
- Equity Losses: Equity loss from ventures increased to $55.6 million (YTD) primarily due to operating losses at the Amapá project in Brazil.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management has raised 2009 sales volume expectations for North American Iron Ore to 17.4 million tons and North American Coal to 1.8 million tons, citing signs of stabilization in the steel industry. The company expects to generate $250 million to $300 million in cash from operations for the full year 2009.
- North American Iron Ore: Expected 2009 revenue per ton of $75-$80; cost per ton of $65-$70.
- North American Coal: Expected 2009 revenue per ton of $95-$100; cost per ton of $135-$140.
- Asia Pacific Iron Ore: Expected 2009 revenue per tonne of $60-$65; cost per tonne of $50-$55.
Risks and Contingencies
- Amapá Litigation: A Brazilian court ordered a temporary cessation of activities at the Amapá mine pending an environmental audit. While a suspension of the injunction was granted through November 2009, fines of approximately $26,000 per day remain in effect for violations.
- Customer Arbitration: ArcelorMittal filed an arbitration demand regarding a pellet price reopener provision. If Cliffs is unsuccessful, retroactive pricing adjustments could materially impact 2009 results.
- Debt Covenants: Amapá is currently in violation of certain loan covenants, though lenders have agreed to suspend them through November 8, 2009. Failure to renegotiate could trigger a call on the debt.
- Market Volatility: Continued downward pressure on commodity prices and uncertainty in global steel demand remain significant risks.
Investor Verification Checklist
- Production Volumes: Verify if the company meets its revised 2009 sales volume guidance of 17.4 million tons for North American Iron Ore and 1.8 million tons for Coal.
- Amapá Status: Monitor the outcome of the environmental audit and the status of the suspended injunction in Brazil, as well as the resolution of debt covenant waivers.
- Arbitration Outcomes: Track the resolution of the ArcelorMittal price reopener arbitration, which could result in significant retroactive revenue adjustments.
- Liquidity Position: Confirm the utilization of the $580 million available credit facility and the sustainability of operating cash flows given the shift from positive to negative operating cash flow in the first nine months.
- Wabush Acquisition: Verify the completion of the 100% ownership acquisition of Wabush Mines, announced as a subsequent event, and its impact on future capacity.