Cleveland-Cliffs Inc. (then Cliffs Natural Resources Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The company operates U.S. Iron Ore and Asia Pacific Iron Ore segments. All dollar amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Revenue: $461.6 million, up 51.1% from $305.5 million in Q1 2016. The increase primarily reflected higher sales volumes and stronger Asia Pacific realized pricing.
- Sales margin: $95.7 million versus $30.9 million; margin rose to 20.7% from 10.1%. U.S. Iron Ore margin was $48.4 million and Asia Pacific Iron Ore margin was $47.3 million.
- Profit: Operating income was $81.9 million, compared with an operating loss of $0.3 million. Net loss attributable to Cliffs shareholders was $28.1 million, or $0.11 per diluted share, versus net income of $108.0 million, or $0.62 per diluted share. The 2017 result included a $71.9 million loss on debt extinguishment/restructuring; Q1 2016 included a $178.8 million gain on debt restructuring.
- EBITDA: $34.4 million versus $216.4 million, heavily affected by the differing debt-related items. Adjusted EBITDA, a non-GAAP measure, was $92.2 million versus $36.3 million.
- Cash flow: Operating activities used $25.1 million, improved from $126.5 million used in Q1 2016. Investing activities used $27.4 million, including $27.9 million of property, plant and equipment purchases. Cash declined $28.1 million to $295.3 million.
- Debt and liquidity: Long-term debt carrying value was $1.643 billion at quarter-end, down from $2.175 billion at year-end. Cash plus available ABL borrowing capacity totaled $456.1 million; $160.8 million of ABL capacity was available after letters of credit, with no facility borrowings. The company reported total liabilities of $2.629 billion and a total deficit of $703.0 million.
- Capital and shares: The company issued 63.25 million shares in February, raising $661.3 million net. Common shares outstanding were about 296.4 million as of April 24, 2017.
Changes versus the prior comparable period
- Revenue and sales margin increased substantially, supported by a 1.208 million long-ton increase in U.S. Iron Ore sales and a 239 thousand metric-ton increase in Asia Pacific sales. U.S. Iron Ore realized revenue per long ton fell 5.4% to $79.35, while Asia Pacific realized revenue per metric ton rose 32.0% to $54.35.
- U.S. Iron Ore and Asia Pacific Iron Ore sales margins rose from $13.2 million and $17.7 million, respectively, in Q1 2016. Higher volumes and pricing contributed, while Asia Pacific production declined 137 thousand metric tons due to adverse weather.
- Operating cash use improved by $101.4 million, primarily from better operating results and working-capital movements, including collection of prior-year receivables.
- Debt refinancing and repayment reduced debt and interest expense, but the 2017 transactions generated a loss where Q1 2016 restructuring activity had generated a gain. Share issuance also materially increased the share count.
Outlook, commentary and risks
- Management forecast approximately $380 million of 2017 net income and $700 million of adjusted EBITDA, assuming iron ore and steel prices for the rest of 2017 average their April month-to-date levels. These are forward-looking estimates, not guarantees.
- Full-year volume guidance was 19.0 million long tons for U.S. Iron Ore and 11.5 million metric tons for Asia Pacific Iron Ore. Expected cash operating cost rates were $55–$60 per long ton and $34–$39 per metric ton, respectively.
- Other 2017 expectations included approximately $100 million of SG&A, $135 million of interest expense, and a $105 million capital expenditure budget. The company expected $100–$110 million of cash capital spending over the following 12 months and approximately $25 million of additional 2017 spending to complete the Mustang pellet project.
- Management cited stronger Q1 steel production and iron ore pricing, but emphasized commodity-price cyclicality, Chinese demand and inventory, and changes in major producers’ supply behavior. The Platts 62% iron ore price averaged $86 per metric ton, up 77% year over year.
- Key exposures include volatile iron ore and hot-rolled coil prices, fuel and energy costs, foreign exchange, customer and joint-venture partner performance, mine production and weather, environmental and closure obligations, and the company’s significant indebtedness. The company had no hedging program for iron ore or Australian currency risk; it began a U.S. natural gas and diesel hedging program in Q1.
- Contingencies include ongoing Canadian CCAA proceedings, with uncertainty over recovery of the company’s $49.0 million Canadian-entity receivable and potential claims against affiliates; management recorded $37.5 million for certain Canadian environmental guarantees. A $13.6 million potential Michigan electricity/SSR cost liability was accrued and remains contested. The filing also describes litigation, including a newly amended coal-mine flooding complaint; Cliffs denied liability and intends to defend it.
- Subsequent event: On April 24, 2017, the company redeemed $35.6 million of 8.25% First Lien Notes, recording a $5.0 million debt-extinguishment loss.
Important facts for investors to verify
- Whether iron ore and steel prices, demand, and realized contract pricing support the assumptions underlying 2017 earnings and adjusted EBITDA guidance.
- Whether planned production, sales volumes, cost targets, and completion of the Mustang project remain on schedule and within budget.
- How refinancing, debt maturities, interest expense, and available ABL capacity affect liquidity and the ability to meet obligations.
- The impact of the share offering on per-share results and dilution, and the reconciliation of adjusted EBITDA to GAAP results.
- Developments in Canadian CCAA recoveries and claims, Michigan SSR cost proceedings, and other litigation or environmental obligations.