Cliffs Natural Resources Inc. (CLF)

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Cliffs Natural Resources Inc. (CLF)

Q3 2010 Earnings Call Transcript

October 29, 2010 10:00 am ET

Executives

Steve Baisden – Director, IR and Corporate Communications

Joe Carrabba – Chairman, President and CEO

Laurie Brlas – EVP, Finance & Administration, and CFO

Analysts

Jorge Beristain – Deutsche Bank

Michael Gambardella – JPMorgan Chase

David MacGregor – Longbow Research

Brian Yu – Citigroup

Tony Robson – BMO Capital Markets

Mitesh Thakkar – FBR Capital Markets

Mark Parr – KeyBanc

Wes Sconce – Morgan Stanley

Paul Massoud – Stifel Nicolaus

Presentation

Operator

Good morning. My name is Jodie and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2010 third quarter and nine months conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

At this time, I would like to introduce Steve Baisden, Director of Investor Relations and Communications. Mr. Baisden?

Steve Baisden

Thank you, Jodie. I’d welcome everyone to this morning’s call. 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 Web site. 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 Web site 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, Finance and Administration and Chief Financial Officer, Laurie Brlas.

At this time, I’ll turn the call over to Joe for his initial remarks.

Joe Carrabba

Thanks, Steve, and thanks to everyone for joining us today. The third quarter was a very productive period at Cliffs, as we continued to successfully execute on a number of fronts. Operationally, we had record volumes from our North American Iron Ore segment and we are well on our way to recording record volumes at our Asia Pacific Iron Ore operations for the year. Our numerous capital projects are progressing well, which I’ll expand on in a moment.

We were also successful in closing on two strategic acquisitions this quarter. As many of you know, we finalized the acquisition of INR Energy’s coal operations as well as Spider Resources during the quarter. This combined with the Freewest assets acquired earlier this year gives Cliffs controlling ownership interest in what may be the most attractive chromite deposits in the world.

We also increased our financial flexibility in the quarter with the placement of $1 billion in senior notes. Our announced capital outlays for several infrastructure upgrades at our Asia Pacific Iron Ore operations will increase annual production capacity from 9 million tons to 11 million tons. Finally, we generated third quarter records for revenue, operating income, net income and cash flow.

As we enter this year’s final quarter, Cliffs is extremely well positioned with a variety of balanced growth initiatives, a committed and focused management team and a strong financial position.

Staring with Cliffs North American Iron Ore operations, this business segment turned in a record breaking quarter, with significantly improved volume and pricing versus last year. The incremental pellet volume we picked up in the acquisition of our former partner’s interest at Wabush Mines continues to positively contribute to the segment’s performance.

In addition to the seaborne volume, given the strong pricing and demand for iron ore pellets, Cliffs also successfully placed additional tons from our operations in Minnesota into the seaborne market.

As indicated in the release last night, we are still working through arbitration with two customers to settle final 2010 pricing. This is a result of changes we have seen in the industry’s historic benchmark system. These benchmarks had historically been used as factors for determining prices in certain long-term supply agreements.

Given the current stage that one of these particular arbitrations is in and the uncertainty of the timing of the collectability in 2010, we have adjusted our reported and expected average revenue per ton assumption for this business segment. Upon settlement of this arbitration, we expect to recognize the additional revenue for the 2010 sales to this customer.

In our legacy coal operations, all of our capital projects are progressing well and scheduled to be implemented as anticipated. The new longwall at Pinnacle Mine has been installed, and will be ramping up production in November and December.

We are enthusiastic about the efficiencies the new longwall will contribute to this business segment. An example of this is the ability to advance significantly faster to the coal panel compared with the previous longwall, which was installed over 19 years ago.

The upgrades at the Pinnacle preparation plant are expected to be finished during the first quarter of 2011. The capital improvement is anticipated to significantly increase clean coal yield on every ton brought out of the mine.

The progress also continues on the new mine shaft at Oak Grove, with nearly 400 feet of the planned 800 foot excavation as of October 15. We remain on track to complete this mine shaft by next summer.

Taken together, we expect to significantly increase production and lower unit cost at these mines as volumes ramp up. As we have stated a number of times, we will need to continue building scale in our coal operations and believe growing this business is paramount to optimizing our future results.

Read the rest of this transcript for free on seekingalpha.com