CLF

Business Context and Reporting Period

Company: Cliffs Natural Resources Inc. (formerly Cleveland-Cliffs Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: An international mining and natural resources company and the largest producer of iron ore pellets in North America. Operations are organized into North American Iron Ore, North American Coal, and Asia Pacific Iron Ore segments, with additional interests in Latin American Iron Ore (Amapá) and Asia Pacific Coal (Sonoma).
Strategic Shift: The company completed a transformation from a North American mine manager to an international mining company, highlighted by the full acquisition of Portman (Australia) and United Taconite (Minnesota) during 2008.

Key Financial Metrics

Liquidity: As of December 31, 2008, the company reported $179.0 million in cash and cash equivalents with $587.3 million in available borrowing capacity under its credit facilities, totaling over $750 million in liquidity.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 59% to $3.6 billion, driven by higher sales prices (particularly in Asia Pacific where benchmark prices rose 80-97%) and increased sales volumes.
• Acquisitions:
  • Portman: Completed a compulsory acquisition to reach 100% ownership of the Australian iron ore producer.
  • United Taconite: Acquired the remaining 30% interest for approximately $450.7 million (cash, stock, and iron ore pellets).
• Termination of Alpha Merger: Terminated the merger agreement with Alpha Natural Resources, incurring a $90.1 million charge for termination fees and acquisition costs.
• Derivative Losses: Recorded an unrealized loss of $188.2 million due to the de-designation of cash flow hedges and the depreciation of the Australian dollar against the U.S. dollar.
• Impairment Charges: Recorded $25.1 million in impairment charges related to available-for-sale securities (PolyMet and Golden West) due to the global economic crisis.

Guidance, Outlook, and Risks

2009 Outlook:

• North American Iron Ore: Contractual obligations for ~18 million tons. Cost per ton expected between $70-$80 due to reduced leverage from lower production. Revenue per ton guidance unavailable pending price settlements.
• North American Coal: ~1.6 million tons under contract. Cost per ton expected between $110-$120.
• Asia Pacific Iron Ore: Sales volume expected at 8.4 million tonnes. Cost per tonne expected between $50-$60.
• Capital Expenditures: Anticipated to be approximately $200 million in 2009.

Management Commentary: Management prioritizes generating and preserving cash to maintain financial flexibility. Production levels have been aligned with lower demand, including temporary curtailments at North American mines.

Key Risks:

• Economic Crisis: Severe downward pressure on steel demand and commodity prices, particularly in China.
• Customer Concentration: Five customers accounted for 84% of North American Iron Ore revenue in 2008.
• Environmental Regulation: Potential costs from climate change legislation (carbon taxes), Regional Haze rules, and mercury reduction strategies.
• Pension Obligations: Decline in plan asset values increased estimated 2009 pension and OPEB costs to $71.5 million (up from $28.9 million in 2008).

Investor Verification Checklist

• Derivative Accounting: Verify the impact of the $188.2 million unrealized loss on derivatives and the de-designation of hedges on future earnings volatility.
• 2009 Pricing Settlements: Monitor the outcome of 2009 international benchmark price negotiations for iron ore and coal, which are critical for revenue guidance.
• Production Curtailments: Assess the duration and financial impact of temporary shutdowns at Hibbing, Northshore, and Pinnacle mines announced in early 2009.
• Pension Funding: Review the $67.4 million estimated cash contribution for 2009 and the sensitivity of pension obligations to discount rate changes.
• Customer Credit Risk: Evaluate the financial health of major steel customers (ArcelorMittal, Severstal, Algoma) given the global recession and potential for payment delays.