CLF

Cleveland-Cliffs Inc. 10-Q Summary: Quarter Ended March 31, 1999

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1999, for Cleveland-Cliffs Inc., a company primarily engaged in iron ore production and ferrous metallics development. The company operates two reportable segments: Iron Ore (dominant) and Ferrous Metallics (development stage). Results for the first quarter are noted as not representative of annual results due to seasonal variations in Great Lakes iron ore pellet shipments.

Key Financial Metrics

Liquidity: The company holds $66.9 million in cash and cash equivalents. It maintains a $100 million revolving credit agreement with no outstanding borrowings as of March 31, 1999.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 36% to $22.8 million from $35.6 million. This was driven by a 50% drop in iron ore pellet sales volume (0.3 million tons vs. 0.7 million tons in Q1 1998), attributed to seasonal lows and the absence of non-recurring rail shipments seen in 1998.
• Profitability Improvement: Despite lower revenue, Net Income increased 440% to $2.7 million. This was achieved through a significant reduction in Cost of Goods Sold (COGS) and operating expenses, aided by state tax refunds, insurance recoveries for a 1998 kiln outage, and lower mine operating costs.
• Expense Increases: "Other expenses" rose $2.5 million year-over-year due to increased costs for the Ferrous Metallics segment (including $1.1 million in start-up costs for the Trinidad venture) and a $1.1 million pre-tax charge for corporate staff reductions.
• Cash Flow: Operating cash outflows increased to $50.4 million, primarily due to a $56.1 million increase in working capital driven by seasonal inventory buildup ($83.5 million increase in pellet inventory).

Outlook, Risks, and Management Commentary

• Production Outlook: Full-year 1999 iron ore pellet production is scheduled at 41.1 million tons (Company share: 11.7 million tons). Sales volume is expected to be lower than the record 1998 volume due to a 13-14% decline in international iron ore prices affecting contract escalations.
• Ferrous Metallics: The Cliffs and Associates Limited (CAL) plant in Trinidad and Tobago is scheduled to commence HBI production in May 1999. The market remains soft due to low-priced imported pig iron.
• Year 2000 Compliance: A major priority with an estimated total cost of $30.0 million (Company share $20.6 million). The company is in the testing phase, with system integration testing targeted for Q3 1999. Risks include potential power interruptions from non-compliant suppliers.
• Labor: Labor contract negotiations are ongoing for five mines, with contracts expiring in March and August 1999.
• Environmental: An environmental reserve of $21.4 million exists for Superfund and Clean Water Act sites, including the Rio Tinto mine site in Nevada.

Investor Verification Checklist

• Verify the impact of the 13-14% decline in international iron ore prices on multi-year sales contract pricing formulas.
• Monitor the start-up progress and market acceptance of the HBI plant in Trinidad and Tobago, given the soft market for ferrous metallics.
• Track the status of labor contract negotiations at the five Company-managed mines expiring in 1999.
• Assess the progress of Year 2000 compliance, specifically regarding power supply reliability for mining ventures.
• Review the resolution of construction claims totaling approximately $22 million (Company share $10.2 million) related to the Trinidad project.