CLF

Cleveland-Cliffs Inc. 10-Q Summary: Quarter Ended March 31, 1998

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1998, for Cleveland-Cliffs Inc., a company primarily engaged in the production and sale of iron ore pellets. The filing includes unaudited financial statements prepared in accordance with GAAP. As of April 24, 1998, there were 11,353,655 common shares outstanding.

Key Financial Metrics

Profitability: Net income decreased by $2.5 million year-over-year. The decline is attributed to the absence of $2.5 million in earnings from the sale of remaining inventory at the Savage River Mine in Australia, which ceased operations in late 1996. Excluding this non-recurring item, earnings were effectively unchanged.

Liquidity: Cash balances decreased by $57.3 million, driven primarily by a $46.4 million increase in working capital (largely due to seasonal inventory buildup) and $9.5 million in project investments and capital expenditures.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased to $35.6 million from $28.8 million, driven by higher North American iron ore pellet sales volume (0.7 million tons vs. 0.3 million tons in 1997).
• Expense Increases: Administrative expenses rose by $1.0 million, primarily due to a 17% increase in the company's stock price affecting the cost of Performance Share grants. Operating costs also increased due to a kiln outage at the Tilden Mine.
• Inventory Buildup: Inventories increased by $57.3 million compared to the prior year-end, a normal seasonal occurrence for the first quarter.
• Investment Income: Investment income decreased to $1.4 million from $2.2 million due to lower cash balances, partially offset by reduced interest expense.

Outlook, Risks, and Management Commentary

Guidance and Outlook: Management expects record North American pellet sales of at least 11.5 million tons in 1998, an 11% increase over 1997. Production at the six managed North American mines is projected to reach a record 40.5 million tons. International pellet prices have risen approximately 3%, favorably impacting multi-year contracts.

Capital Projects:

• Cliffs and Associates Limited: Construction is progressing on a reduced iron briquette project in Trinidad and Tobago, with startup scheduled for Q4 1998. The company's share of the $160 million total cost is $74.4 million.
• Northshore Mine: An engineering study is underway for a new pig iron plant using the "Redsmelt" process. A decision to proceed is expected in mid-1998.

Risks and Contingencies:

• Environmental Reserves: The company maintains an environmental reserve of $22.4 million, covering Superfund sites, active operations, and former sites. Actual costs may vary from estimates.
• Year 2000 Compliance: Estimated total cost is $25 million ($17 million capital, $8 million operating). The company does not expect a material adverse impact on operations.
• Market Risks: Risks include steel imports due to the Asian crisis, energy costs, and the financial condition of integrated steel partners.

Investor Verification Checklist

• Verify the sustainability of the 11% projected sales increase given the cyclical nature of the steel industry and potential import competition.
• Monitor the progress and cost overruns of the Cliffs and Associates Limited project in Trinidad and Tobago, which represents a significant capital commitment.
• Assess the impact of the Tilden Mine kiln outage on full-year production targets and operating margins.
• Review the adequacy of the $22.4 million environmental reserve against potential future remediation costs at Superfund sites.
• Confirm the timeline and budget for Year 2000 technology compliance, specifically the $25 million estimated expenditure.