Cliffs Natural Resources Inc. (CLF)

CLF 
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Cliffs Natural Resources Inc. (CLF)

Q3 2009 Earnings Call

October 30, 2009 10:00 am ET

Executives

Steve Baisden - IR

Joseph Carrabba - Chairman, President and CEO

Laurie Brlas - EVP and CFO

Analysts

Michael Gambardella - JPMorgan

Kuni Chen - Bank of America-Merrill Lynch

David MacGregor - Longbow Research

Mark Liinamaa - Morgan Stanley

Jorge Beristain - Deutsche Bank

Mark Parr - KeyBanc Capital Markets

Tim Hayes - Davenport & Co

Brian Yu - Citi

Mitesh Thakar - FBR Capital Markets

Wayne Atwell - Casimir Capital

Presentation

Operator

I would like to welcome everyone to Cliffs Natural Resources 2009 Third Quarter and Nine Months Conference Call.

At this time I would like to introduce Mr. Steve Baisden, Director of Investor Relations and Corporate Communications. Thank you, Mr. Baisden, you may now begin.

Steve Baisden

Before we get started, let me remind you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC which are available on our website.

Today's conference call is also available and being broadcast at cliffsnaturalresources.com. At the conclusion of the call, it will be archived on the website and available for replay for approximately 30 days.

Joining me today are Cliffs' Chairman, President and Chief Executive Officer, Joseph Carrabba and Executive Vice President and Chief Financial officer, Laurie Brlas. At this time, I will turn the call over to Joe for his prepared remarks.

Joseph Carrabba

Thanks, Steve and thanks to everyone for joining us today. The early signs of stabilization we discussed in our last call were further validated during the third quarter. As we stated back in July, our view that the first half of 2009 marked the low point in steel production has been reinforced as we realized notable improvements in our operations and business outlook across the board during the third quarter. Highlights during the quarter included a swing to operating income of $81 million in the quarter, compared with operating losses in each of the first two quarters. The generation of nearly $155 million in cash and nearly 6 million tons of iron ore shipped from our North American business and just is important the most iron ore tonnage shipped by our Asia Pacific business in any prior quarter, which is helping us close in on a new annual record of roughly 8.5 million tons.

Our view of long-term megatrends in the global steel making industry has always been positive. However, we have also recognized that we operate in a cyclical market. As a result, how our operating teams manage through the (inaudible) of the business cycle is crucial for Cliffs' decisive actions taken during the initial phase of the recession directly contributed to our operating results this quarter and to improvements in our balance sheet and cash flows.

As a consequence, we believe we are well positioned for what now appears to be the early stage of an industry recovery.

According to published reports between January and August 2009, global steel output was 760 million tons, 18% below the same period in 2008. Chinese production which now accounts for 49% of global production increased 5% to 370 million tons and reached a record 52 million tons in August. Global production, excluding China, declined 32% during the first eight months of this year but in August saw some improvement, coming in at 54 million tons, the highest level since October of 2008.

The industry's cautious optimism is reflected in rising steel production rates in all major areas, and has led to our increasing guidance for both iron ore and met coal volumes from our North American businesses. In Cliffs' North American iron ore segment, the improving scenario has positively impacted our operations.

Recently, capacity utilization at North American steel-making facilities reached approximately 63% from 35% at the beginning of the year. As we wrap up the year, North Shore's two largest furnaces will be operational. Empire continues to produce and Tilden and United Taconite will be running at full capacity.

We began ramping up the idle Line-1 furnace at UTAC in the third quarter after a nine-month shutdown, and the hourly workforce who had been maintaining a shortened schedule returned to a full 40 hour work week. The outstanding cooperative effort between management and the union enabled United Taconite to operate safely and efficiently with no reduction in staff during this difficult period.

While clearly we are seeing an improved environment in our business; there continues to be questions around the stability and pace of the recoveries in North America and Europe. As such we will monitor the markets closely and continue to align production with demand.

During this downturn, Cliffs' long-term sales agreements with US based integrated steel producers have helped to mitigate price declines. Combined, our North American iron ore operations achieved $90 million in positive sales margin for the quarter. While those who have settled benchmark prices for pellets in 2009 are down 48%, primarily because of our formula based pricing in North America, we expect only a modest decline of 14% to 19% in our average revenue per ton.

In other actions, just after quarter ended, Cliffs’ announced its intention to acquire full ownership of the Wabush Mines joint venture by exercising the company's right of first refusal to buy our partner's 73.2% interest. This [built-on] acquisition is consistent with our strategy to increase our exposure to steel-making markets outside of North America. The $88 million cash deal which remains subject to regulatory approvals carries no integration risk and is expected to provide approximately 4 million tons of incremental pellet capacity and more than 50 million tons of additional reserves. Wabush Mines has produced an average of 4.6 million tons annually over the past 10 years. Also, because the port at (inaudible) can accommodate most [capsized] vessels, these tons can be a 100% exportable to the seaborne market.

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