CLF

Cleveland-Cliffs Inc. 10-Q Summary: Quarter Ended March 31, 2004

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2004. Cleveland-Cliffs Inc. operates in a single reportable segment, supplying iron ore pellets and services to the steel industry. The Company owns or holds interests in mining operations in Michigan, Minnesota, and Canada (Wabush). As of April 22, 2004, there were 10,695,136 common shares outstanding.

Key Financial Metrics

Debt and Liquidity: The Company repaid its remaining $25.0 million in senior unsecured notes in January 2004. Total current liabilities decreased to $191.1 million. Cash balances increased significantly to $179.7 million, driven primarily by financing activities.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 49% to $240.8 million, driven by a 33% increase in iron ore product sales ($163.9M vs $122.9M) and a significant rise in freight and minority interest revenue ($69.8M vs $28.2M).
• Profitability Decline: Despite higher revenues, the Company reported a net loss of $0.6 million compared to net income of $2.2 million in Q1 2003. This was primarily due to a $1.1 million preferred stock dividend, a $1.6 million provision for customer bankruptcy exposures, and higher administrative expenses ($4.1M increase) driven by stock-based compensation.
• Margin Expansion: Sales margin (excluding freight/minority) improved to $4.2 million from $0.1 million, reflecting higher sales price realization ($11.4M increase) partially offset by higher unit production costs ($7.4M increase).
• Volume Records: Iron ore pellet sales volume reached a record 4.3 million tons in Q1 2004, up from 3.5 million tons in Q1 2003.

Guidance, Outlook, and Risks

Capital Structure: In January 2004, the Company issued $172.5 million of 3.25% redeemable cumulative convertible perpetual preferred stock. Net proceeds of approximately $166 million were used to retire debt and fund pension plans. The Company intends to use at least an additional $19.6 million for pension funding in 2004.

Production and Sales Outlook:

• Sales Forecast: Full-year 2004 sales volume is forecasted at approximately 22 million tons (vs. 19.2 million in 2003).
• Production Forecast: The Company's share of 2004 production is expected to be 22.2 million tons (vs. 18.1 million in 2003).
• Cost Outlook: Full-year 2004 cost of goods sold is expected to be approximately 3% below 2003 on a cost-per-ton basis.

Material Risks and Contingencies:

• Customer Bankruptcies: Significant exposure to customers in bankruptcy, including Weirton Steel (pending sale to ISG), WCI Steel, Rouge Industries (sold to Severstal), and Stelco. A $1.6 million charge was recorded in Q1 2004 related to Weirton/FW Holdings bankruptcy exposures.
• Operational Issues: Production costs were adversely affected by low ore throughput at Empire, furnace refractory problems at Tilden, and slower ramp-up at Wabush and United Taconite.
• Labor Relations: Collective bargaining agreements for U.S. mines expire August 1, 2004; negotiations are expected to begin soon.
• Environmental Obligations: Total environmental and mine closure obligations stand at $97.0 million.

Investor Verification Checklist

• Preferred Stock Terms: Verify the conversion price ($62.00) and redemption conditions of the new $172.5 million preferred stock issuance.
• Bankruptcy Resolutions: Monitor the finalization of the Weirton Steel asset sale to ISG and the impact on the $1.6 million provision and future receivables.
• Pension Funding: Confirm the execution of the planned $19.6 million additional pension funding in 2004 and the impact on cash flow.
• Operational Recovery: Track production ramp-up at Wabush and United Taconite and the resolution of refractory issues at Tilden to validate cost-per-ton forecasts.
• Labor Negotiations: Watch for updates on collective bargaining agreements expiring in August 2004, which could impact operating costs.