Business context and reporting period
Cliffs Natural Resources Inc. (the registrant identified in this filing; the request metadata refers to Cleveland-Cliffs Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Its mining operations include iron ore and coal businesses in North America and Australia. The company’s 2011 acquisition of Consolidated Thompson expanded its Eastern Canadian iron ore operations, including Bloom Lake.
Financial performance
Amounts are in millions of U.S. dollars, except per-share data and where noted.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue from product sales and services | $1,626.0 | $1,805.8 | $2,890.7 | $2,989.0 |
| Sales margin | $449.3 | $731.6 | $752.8 | $1,331.1 |
| Sales margin as % of revenue | 27.6% | 40.5% | 26.0% | 44.5% |
| Operating income | $365.3 | $617.8 | $596.4 | $1,159.9 |
| Net income attributable to Cliffs shareholders | $258.0 | $409.1 | $633.8 | $832.5 |
| Diluted EPS from continuing operations | $1.81 | $2.93 | $4.44 | $6.04 |
| Cash from (used in) operating activities | Not stated for the quarter | $(32.8) | $725.0 |
- Q2 revenue declined 10.0% year over year and first-half revenue declined 3.3%. Lower market prices and the absence of prior-year customer settlements more than offset increased sales volumes.
- Sales margin fell 38.6% in Q2 and 43.4% in the first half. Cost of goods sold and operating expenses rose 9.5% for Q2 and 29.0% for the first half, reflecting higher volumes, acquisition-related operations and increased costs.
- First-half net income included significant tax effects: a $314.7 million benefit from Australia’s newly enacted Minerals Resource Rent Tax (MRRT), partly offset by a $60.5 million expense from currency elections and deferred-tax remeasurement. A separate $26.9 million benefit followed resolution of an uncertain tax position.
Financial position, liquidity and debt
- At June 30, 2012, cash and cash equivalents were $159.2 million, down from $521.6 million at year-end 2011. Current assets were $1,742.6 million and current liabilities $1,534.3 million.
- Debt carrying value was $3,983.8 million, including $369.7 million current and $3,614.1 million long-term debt. The company had $325.0 million drawn on its revolving facility and reported $1,401.9 million of remaining borrowing capacity. Cash plus available capacity was approximately $1.6 billion.
- Six-month investing cash use was $520.9 million, including $517.0 million of cash capital expenditures. Financing activities provided $191.6 million, including net revolving-credit borrowings; dividends paid were $128.8 million. The company reported compliance with its financial covenants.
Material changes, outlook and risks
- Management cited softer iron ore demand and prices versus the unusually strong 2011 market. The first half also lacked $275 million of ArcelorMittal and $129 million of Algoma pricing-settlement receipts that benefited 2011 operating cash flow.
- Segment performance was mixed: first-half U.S. Iron Ore sales margin declined to $452.9 million from $802.4 million; Eastern Canadian Iron Ore moved to a $2.6 million margin loss from $102.5 million profit; Asia Pacific Iron Ore margin fell to $271.9 million from $400.8 million. North American Coal improved to a $5.0 million margin from a $17.7 million loss.
- Management reduced its 2012 operating cash flow expectation to approximately $1.3 billion from $1.7 billion and maintained capital expenditures guidance of approximately $1.0 billion. Full-year SG&A guidance was reduced to approximately $300 million. The company expected a full-year effective tax rate of approximately 2%, or approximately 22% excluding the MRRT and other discrete items.
- 2012 segment guidance was revised for weaker pricing and/or operating changes. Eastern Canadian Iron Ore sales volume was reduced to 9.6 million metric tons from 12 million, with revenue per ton of $130–$135 and cash cost per ton of $100–$105. Asia Pacific Iron Ore sales volume rose to 11.6 million metric tons, but revenue per ton fell to $120–$125. U.S. Iron Ore sales volume remained approximately 23 million long tons; North American Coal sales volume was reduced to 6.9 million short tons.
- Bloom Lake Phase I annual production expectations were lowered to approximately 7.2 million tons from 8 million as the company shifted to a higher-grade concentrate; the change also reduced expected full-year Eastern Canadian output. Phase II expansion investment was estimated at approximately $1.3 billion. Management identified iron ore prices, costs and project timing as sensitivities for $997.3 million of Eastern Canadian goodwill.
- Risks include volatile commodity prices and demand, contract pricing disputes and provisional pricing estimates, currency and fuel costs, mine operating or weather disruptions, environmental regulation, and liquidity and project-execution risks. A WISCO arbitration involving Bloom Lake distributions and Phase II funding was scheduled for late October 2012. Management said pending litigation was not expected to create a material liability, while noting unfavorable outcomes could be material.
- After quarter-end, Cliffs agreed to sell its 45% economic interest in the Sonoma joint venture for approximately AUD $141 million; completion was expected in Q4 2012. The filing said it did not expect a material financial-statement impact.
Important facts for investors to verify
- Assess whether lower iron ore prices, segment-specific cost increases and revised sales volumes are reflected in subsequent results and guidance.
- Track operating cash flow and working-capital needs against the reduced $1.3 billion full-year forecast, planned $1.0 billion capital program and dividend commitments.
- Verify the realization and cash-tax effects of the MRRT benefit, the stated full-year tax outlook, and any review of the MRRT starting-base valuation by the Australian Taxation Office.
- Monitor Bloom Lake’s higher-grade production ramp-up, Phase II spending, WISCO arbitration and the valuation assumptions supporting Eastern Canadian goodwill.
- When comparing 2012 with reported 2011 earnings, account for the filing’s disclosure that an immaterial Empire noncontrolling-interest accounting error would have reduced 2011 Cliffs-attributable net income by $30.4 million for Q2 and $67.9 million for the first half, or $0.22 and $0.49 per share, respectively; reported comparatives were not restated.