Cleveland-Cliffs Inc. (Cliffs Natural Resources Inc.) — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports quarterly results; fourth-quarter revenue was $1.424 billion and net income attributable to Cliffs shareholders was $384.4 million. The company was a diversified mining and natural-resources producer, led by North American iron ore, with coal and Australian iron ore operations.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue from product sales and services | $4.682 billion | $2.342 billion |
| Sales margin | $1.524 billion; 32.5% | $308.9 million; 13.2% |
| Operating income | $1.265 billion | $230.2 million |
| Net income attributable to Cliffs shareholders | $1.020 billion | $205.1 million |
| Diluted EPS | $7.49 | $1.63 |
| Cash from operating activities | $1.320 billion | $185.7 million |
Revenue doubled year over year, reflecting higher prices and volumes as steel markets recovered, as well as the inclusion of acquired Wabush and CLCC operations. North American Iron Ore sales margin rose to $922.0 million from $275.5 million; Asia Pacific Iron Ore rose to $566.2 million from $87.2 million. North American Coal remained loss-making, though its sales-margin loss narrowed to $28.6 million from $71.9 million.
Cash and cash equivalents were $1.567 billion at year-end, versus $502.7 million a year earlier. Net cash used in investing activities was $1.368 billion, including acquisitions and capital spending; financing activities provided $1.088 billion. Capital expenditures were $266.9 million. Senior notes had a $1.725 billion face amount and $1.713 billion carrying value; the $200 million term loan was repaid and no revolving loans were drawn. The $600 million revolving facility had $535.3 million available after letters of credit, giving reported cash plus facility availability of more than $2.0 billion. The filing states the company complied with its debt covenants.
Year-end total assets were $7.778 billion and total liabilities were $3.940 billion. Pension and other postretirement benefit liabilities totaled $528.0 million; environmental and mine-closure obligations were $199.1 million. The common dividend increased during 2010; declared dividends totaled $0.51 per share for the year.
Material changes versus the prior period
- Steel demand and pricing rebounded substantially after the 2009 downturn. North American iron ore sales volume increased 60%; Asia Pacific Iron Ore sales volume increased to 9.3 million metric tons from 8.5 million.
- North American iron ore pellet pricing settled with some customers at an average increase of 98% over 2009 for contracts tied to world pellet prices. Australian iron ore pricing also strengthened; average 2010 prices increased 87% for lump and 98% for fines versus 2009.
- Acquisitions expanded the business: full ownership of Wabush, Freewest and Spider, plus the July acquisition of CLCC for $775.9 million. These transactions contributed to higher reported revenue, assets, debt and operating scale; comparisons are therefore not wholly organic.
- Cash generation improved sharply, while debt rose following two senior-note offerings totaling $1.4 billion. The company also increased capital investment and its dividend.
- Reported results included $40.7 million of gains on acquiring control of Freewest and Wabush, $39.8 million of gains on foreign-currency contracts, and a $292.0 million tax provision. The tax rate was 22.5%, versus 7.2% in 2009; discrete tax effects included legal-entity restructuring and a $16.1 million charge related to health-care legislation.
Outlook, commentary, risks and unusual items
Management described the long-term outlook as healthy and expected steel production to continue growing in 2011. Its 2011 guidance was approximately 28 million long tons of North American iron ore sales and production, at $140–$145 revenue and $65–$70 cost per ton; 6.5 million short tons of North American coal sales and production, at $135–$140 revenue and $105–$110 cost per ton; and 9 million metric tons of Asia Pacific iron ore sales and production, at $175–$180 revenue and $70–$75 cost per ton. Sonoma equity sales and production were expected at 1.6 million metric tons. Management forecast more than $2.7 billion of operating cash flow, approximately $700 million of capital expenditures, $200 million of SG&A, and an effective tax rate of about 30%. These are forward-looking estimates, not reported outcomes.
The North American Iron Ore revenue outlook assumes successful collection of approximately $300 million relating to a pending arbitration. Separately, Cliffs received a $129 million Algoma true-up payment in January 2011 after prevailing in arbitration, but Algoma continued to seek to vacate the award. Pricing disputes with major customers, potential contract revisions and arbitration outcomes could affect current and future revenue.
- Proposed acquisition: In January 2011, Cliffs agreed to acquire Consolidated Thompson in an all-cash transaction valued at approximately C$4.9 billion, including net debt. A $3.7 billion bridge financing commitment was obtained; completion remained subject to shareholder, regulatory and other customary approvals.
- Market and concentration exposure: Results depend on global steel demand, iron ore and coal prices, and blast-furnace utilization. Three customers each represented more than 10% of 2010 consolidated product revenue; the three together represented 41%.
- Operations and costs: Risks include mine geology and production interruptions, energy and fuel prices, transport constraints, labor relations, reserve estimates, and the ability to maintain permits and expand production. Pinnacle faced geological and roof-fall issues and declared force majeure on some shipments in 2010.
- Regulatory and environmental matters: Potential GHG, air-quality, coal-mining, water-discharge and mining-financial-assurance rules could increase costs or restrict operations. The proposed Australian minerals resource rent tax was expected to apply from July 2012 if enacted. Environmental and mine-closure liabilities were estimated at $199.1 million; final Rio Tinto site remediation and potential natural-resource-damage exposure remained uncertain.
- Other contingencies: The filing describes customer arbitrations and litigation, mine-permit and environmental disputes, and maritime asbestos claims. Management did not expect pending litigation to create a material liability overall, while cautioning that unfavorable rulings could have material effects. A proposed selenium-discharge compliance extension for Pinnacle had been denied and was under appeal.
- Reporting scope: Management and the auditor concluded internal control over financial reporting was effective, but CLCC, acquired in July 2010, was excluded from the company’s 2010 controls assessment (11% of assets and 2% of revenue). The financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Whether the pending Consolidated Thompson acquisition closed, its final financing and purchase price, and the effect on leverage and liquidity.
- Actual 2011 segment volumes, realized prices and costs versus guidance, especially the assumed $300 million arbitration recovery.
- Final outcomes and cash impacts of the Algoma and ArcelorMittal pricing disputes, including any challenge to arbitration awards.
- How much of 2010’s earnings and cash generation reflects sustained operations versus commodity-price recovery, acquisitions, foreign-exchange gains and other discrete items.
- Progress on planned expansion projects and whether their capital costs, schedules and production targets remain achievable.
- Changes in customer concentration, pension and postretirement funding needs, environmental obligations, and regulatory or permitting exposure.