Cliffs Natural Resources Inc. (now Cleveland-Cliffs Inc.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The filing was made by Cliffs Natural Resources Inc.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $1,140.5 million | $1,212.4 million |
| Sales margin | $237.9 million; 20.9% | $291.8 million; 24.1% |
| Operating income | $168.3 million | $222.9 million |
| Net income attributable to Cliffs shareholders | $107.0 million | $375.8 million |
| diluted EPS from continuing operations | $0.66 | $2.59 |
| Cash from operating activities | -$25.4 million | -$129.0 million |
| Capital expenditures paid | $230.4 million | $241.1 million |
Revenue fell 5.9%, primarily because iron ore sales volume declined by 801,000 tons, partly offset by higher North American coal volumes. Sales margin contracted 3.2 percentage points. The prior-year comparison includes a $213.2 million income tax benefit, largely related to Australia’s Minerals Resource Rent Tax, and $5.5 million of income from discontinued Sonoma operations; these significantly elevated Q1 2012 earnings.
Q1 2013 operating cash use improved year over year but remained negative. Inventory increased by $193.6 million from year-end to $630.1 million, contributing to working-capital demands. Cash and equivalents were $287.2 million at March 31, 2013.
Balance sheet, financing and liquidity
- Total debt was $3.433 billion, down from $4.055 billion at December 31, 2012. The $847.1 million term loan was repaid in February; revolving-credit borrowings rose to $550 million.
- Available borrowing capacity under the $1.75 billion revolving facility was approximately $1.172 billion. Cash plus facility availability provided approximately $1.460 billion in liquidity.
- Current assets were $1.824 billion and current liabilities $1.101 billion. Total liabilities were $6.963 billion; total equity was $6.859 billion.
- The company raised approximately $709.4 million net through 7% mandatory convertible preferred depositary shares and $285.6 million net through common shares. The preferred issue carries cumulative dividends and may convert into 20.6–25.2 million common shares.
- The quarterly common dividend was cut 76% to $0.15 per share, with management citing Bloom Lake investment needs and protection of investment-grade ratings. Preferred dividends were declared at approximately $0.34 per depositary share.
Segments and changes
- U.S. Iron Ore: Revenue was $410.1 million and sales margin $157.3 million, down from $166.9 million. Lower shipments, including reduced demand from a customer experiencing financial difficulties, weighed on results. Sales volume was 3.083 million long tons.
- Eastern Canadian Iron Ore: Revenue was $245.3 million; sales margin improved to $19.4 million from a $14.3 million loss. Higher realized pricing and the absence of prior-year Wabush repair downtime helped, partly offset by slightly lower volume and operating challenges.
- Asia Pacific Iron Ore: Revenue fell to $270.8 million and sales margin to $61.3 million from $125.0 million. Lower sales volume, shipment timing, ore-grade penalties and lagged pricing contributed to the decline.
- North American Coal: Revenue rose to $214.3 million, but sales margin fell to $1.8 million from $14.5 million. Higher volume was more than offset by weaker realized pricing and increased costs.
Outlook, commentary and key risks
- Management expected 2013 iron ore and coal prices to remain volatile and used a $148/tonne Platts 62% Fe spot price as a sensitivity baseline, explicitly stating this was not its internal full-year price forecast.
- 2013 guidance: U.S. Iron Ore sales of 21 million long tons and production of 20 million; Eastern Canadian Iron Ore sales and production of 9–10 million metric tons; Asia Pacific Iron Ore sales and production of about 11 million metric tons; North American Coal sales and production of about 7 million short tons.
- Guided cash costs per ton: U.S. Iron Ore $65–$70; Eastern Canadian Iron Ore $95–$100; Asia Pacific Iron Ore $70–$75; North American Coal $95–$100. The company maintained an $800–$850 million capital expenditure budget and expected 2013 DD&A of approximately $565 million.
- Bloom Lake Phase II construction was delayed in part, with completion expected in 2014 depending on iron ore pricing, demand and other conditions. Approximately $745 million of capital remained to complete the project, and management expected $300 million of Bloom Lake Phase II expenditure in 2013.
- A March 28 collapse of the Santana port shiploader halted Amapá mine shipments. The cause and business-continuity plan were under investigation; the announced sale of Cliffs’ 30% interest had no projected closing date while port conditions remained uncertain.
- Management cited commodity-price and demand volatility, customer and joint-venture counterparty exposure, operating and geological disruptions, energy costs, foreign exchange and interest rates, environmental and mine-closure obligations, project execution, and access to capital as risks. A 10% change in fuel and energy prices was estimated to affect 2013 costs by about $22.6 million.
- Bloom Lake expansion commitments totaled approximately $1.2 billion, with about $889 million spent by March 31 and roughly $311 million of committed spending expected during the rest of 2013. Management said expected operating cash flows and investing inflows would be below budgeted capital spending, debt payments, dividends and other cash requirements.
- The company reported compliance with applicable credit covenants. The amended credit agreement imposed temporary 2013 covenant terms, including minimum tangible net worth of approximately $4.6 billion, a 52.5% maximum funded debt-to-capitalization ratio and a 2.5-to-1 minimum interest coverage ratio.
Investor verification checklist
- Track Bloom Lake Phase II spending, completion timing, remaining funding needs and the effect on liquidity and debt.
- Monitor Amapá port restoration, mine operations and the status and terms of the proposed sale.
- Compare realized iron ore and coal pricing, shipment volumes and unit costs with management’s 2013 guidance.
- Assess the impact of the common-dividend reduction and preferred-stock conversion and dividend terms on cash flow and per-share dilution.
- Review working-capital trends, operating cash generation, revolver availability and covenant headroom.
- Distinguish recurring operating performance from the exceptional 2012 tax benefit and discontinued-operation income when comparing earnings.