Cliffs Natural Resources Inc. (CLF)

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Cliffs Natural Resources (CLF)

Q4 2011 Earnings Call

February 16, 2012 10:00 am ET

Executives

Steven Baisden - Vice President of Investor Relations & Corporate Communications

Joseph A. Carrabba - Chairman, Chief Executive Officer and President

Laurie Brlas - Chief Financial Officer and Executive Vice President of Global Finance & Administration

Analysts

Kuni M. Chen - CRT Capital Group LLC, Research Division

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Anthony Robson - BMO Capital Markets Canada

Brian Yu - Citigroup Inc, Research Division

Wes Sconce - Morgan Stanley, Research Division

Garrett S. Nelson - BB&T Capital Markets, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Cliffs Natural Resources Fourth Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. Now I'll turn the conference over to Steve Baisden, Vice President of Investor Relations and Communications. Please begin.

Steven Baisden

Thank you. I'd like to 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 Form 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.

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.

Joseph A. Carrabba

Thanks, Steve, and thanks to everyone for joining us this morning. With the full year results recorded in last night's press release, Cliffs continues to achieve record growth by nearly every measuring stick.

Looking back on 2011, I'm extremely pleased with the record financial performance our management team accomplished, particularly in light of the strategic transactions and operational expansions and challenges we faced in the year. In addition to completing the $5 billion acquisition of Consolidated Thompson, we also remained on track to complete our 11 million ton per year expansion at the Koolyanobbing complex in Australia on time and within budget. We restored Oak Grove's overland conveyor system and prep plant after severe damage caused by a tornado. We restarted the Pinnacle Mine after shutdown earlier this year and achieved significant lower cash cost per ton. We also achieved the 8 million ton run rate at Bloom Lake Mine and completed approximately 20% of the mine's Phase 2 construction.

I would also point out that excluding Bloom Lake Mine's contribution, Cliffs still have achieved a record-breaking financial performance for the year. Our strategy of placing more products into the seaborne market, along with successfully increasing our legacy assets with [ph] more exposure, is directly impacting our bottom line results.

We believe the world's emergent economies will continue to urbanize and, as a direct result, will continue their need to produce record amounts of steel. Specifically, in China, fundamentals of urbanization, household formation and labor force growth remain strong. We believe monetary policy is likely to ease and already strong growth by western standards will continue. In China, we anticipate crude steel production to reach 730 million tons in 2012. This 7% increase from 2011, coupled with a steadily improving outlook for the U.S. economy, will continue to support demand for steel making and raw materials. As previously disclosed, we anticipate 2012 average pricing for seaborne volumes product with a 62% iron content to be $150 per ton. We also believe it's likely that any recovery within the European markets could support an even higher average full year price for iron ore.

Now turning to the performance of our core businesses during the quarter. U.S. Iron Ore's fourth quarter and full year sales volume were 7.8 million tons and 24.2 million tons, respectively. The quarter volume included approximately 700,000 tons of pellets from our U.S. operations going into the seaborne market. On a full year basis, we placed a total of 1.2 million tons of pellets into this market, more than doubling 2010's full year seaborne volume from our U.S. operations. During the fourth quarter of 2011, North American steelmaking utilization rates averaged 74%, approximately 5% higher than 2010's fourth quarter. Despite the fact, production in our customers' end products, including autos, light goods, heavy machinery and construction, remain below historical level. Today's utilization rate is expected to sustain a healthy demand for our products. We believe this supports our anticipated 2012 North American utilization rate range of 70% to 75%, and our expected 2012 U.S. Iron Ore sales volume guidance of approximately 23 million tons. This level is essentially flat with last year's volume, considering we had approximately 1 million tons of volume recognized in 2011 that we collected cash for in 2010.

In Eastern Canadian Iron Ore, full sales volumes reached 7.4 million tons, more than double 2010's of full year sales volume of 3.3 million tons. This increase was driven by the incremental sales volume for Bloom Lake Mine, which was acquired in May as part of Consolidated Thompson acquisition. Eastern Canadian Iron Ore sales volume for the quarter was 1.9 million tons, which was made up of approximately 1.2 million tons of iron ore concentrate from Bloom Lake and 700,000 tons of pellets from Wabush. Although this segment's fourth quarter sales volume was significantly higher than 2010's comparable quarter, frankly, I am disappointed with the operational challenges we experienced at Wabush. These challenges, largely driven by equipment failures and the dryer operation of the mine, have led [ph] to increased downtime, resulting in lower production and sales volume out of Wabush Mine. They currently have temporary repairs in place and are studying the long-term solution. In addition, we have made operational leadership changes, putting one of our strongest operators over all of Eastern Canada as we look to better coordinate our production there.

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