CLEVELAND Jul 30, 2015 (Thomson StreetEvents) -- Edited Transcript of Cliffs Natural Resources Inc earnings conference call or presentation Wednesday, July 29, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kelly Tompkins Cliffs Natural Resources, Inc. - EVP & CFO * Lourenco Goncalves Cliffs Natural Resources, Inc. - Chairman, President & CEO ================================================================================ Conference Call Participants ================================================================================ * Michael Gambardella JPMorgan - Analyst * Brett Levy CRT Capital - Analyst * Kevin Cohen Imperial Capital - Analyst * Timna Tanners BofA Merrill Lynch - Analyst * Aldo Mazzaferro Macquarie Research - Analyst * Jorge Beristain Deutsche Bank - Analyst * Garrett Nelson BB&T Capital Markets - Analyst * Tony Rizzuto Cowen and Company - Analyst * Nick Janovich Stifel Nicolaus - Analyst * Jeremy Sussman Clarkson Capital Markets - Analyst * Matthew Fields BofA Merrill Lynch - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. My name is Michelle and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources' 2015 second-quarter conference call. (Operator Instructions) The Company reminds 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 at the Company web site. Today's conference will also be 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. The Company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I would like to introduce Kelly Tompkins, Executive Vice President and Chief Financial Officer. Please go ahead. -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [2] -------------------------------------------------------------------------------- Thank you, Michelle. And thanks to everyone for joining us on this morning's call. I am joined today by our Chairman, President and CEO, Lourenco Goncalves. I will kick off the call with a review of our second-quarter results and related financial commentary before turning it over to Lourenco, for his remarks. Last quarter, and my first call as Cliffs' CFO, I stressed the importance of focusing on what we can control in this challenging business environment, including maintaining ample liquidity. As I review our results, certain metrics stand out considering the challenging market conditions we have been operating in this past quarter. Let me state right out of the gate that Cliffs has ample liquidity, as we ended the quarter with cash and available capacity on our ABL facility in excess of $600 million, net of existing letters of credit commitments. As for our results this quarter, I will begin by addressing the single biggest item that negatively impacted this quarter results; namely, a significant reduction in one of our customer's hot-band steel price estimates. In short, based on quarter-end input from one of our major formula-based customers, whose pellet supply agreement is heavily influenced by their selling price of hot-band steel, our customer's estimate for hot-band prices dropped by approximately $60 per ton compared to the estimate in the first quarter. This adjustment resulted in a cash margin and EBITDA hit of about $20 million in the quarter. As we have noted before, this price is not tied to any publicized price such as AMM or Platts, but rather the actual selling price of our customer's end product. Throughout the year, we adjust the forecasted price based on information provided by our customer and provisionally book our revenues accordingly. After the end of the quarter, our customer's updated forecast for their prices was substantially lower than the prior quarter. To put this quarter's price in context, our current hot-band estimate is approximately $150 per ton lower than our estimate at this time last year, or about $6 per ton on the overall revenue rate between years. If we had not been presented with this forecast change, our realized revenue per ton this quarter would have been about $83 per ton, right in line with our previous guidance. Moving on, we have revised our sales and production guidance down to reflect the current nominations we have on hand from our clients. Given our existing inventory on hand, we have the opportunity to optimize working capital and still meet our current sales forecast. We expect sales of about 5.5 million tons in the third quarter, with the remainder coming in Q4. Importantly, we have been able to maintain our cost guidance, despite these additional volume cuts, with much credit owed to our operating teams who continue to do outstanding work on our operating costs. Lourenco will have further comments on this in a few minutes. As we move into the height of the shipping season during the second half of the year, we should see most, if not all, of our working capital usage reverse, and to further bolster our cash position, we expect to receive, in the next few weeks, an anticipated $160 million federal tax refund. In terms of our capital expenditures and SG&A expenses during the second quarter, I can assure you that both continue to be managed closely. Including our coal operations, cash capital spending dropped to $19 million this quarter, a 70% reduction, when compared to last year's second quarter. It is worth noting that included in our $100 million to $125 million CapEx guidance is approximately $25 million related to our remaining coal operations, which, if divested, would further reduce our overall CapEx spend. Our second-quarter SG&A expenses were $31 million, down 25% from the prior year's second-quarter expense of $41 million. As conditions dictate, we will continue to adjust our overall SG&A expense to make sure it matches our US iron ore strategy and operating footprint and would expect some reductions beyond this year. For 2015, we are maintaining our annual SG&A guidance of $120 million. One point regarding interest expense worth noting, before I turn the call over to Lourenco, as we have guided to 2015 interest expense of around $235 million, please note that this includes both cash, interest and non-cash deferred charges and discount amortization. The cash flow impact on a full-year basis is approximately $205 million. With that, I would like to turn the call over to Lourenco for his prepared remarks. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Thank you, Kelly. And thanks to everyone for joining us on this morning's call. Looking over the past year, we are executing our strategy with discipline. Against a backdrop of a brutal market for iron ore and coal, we continue to resolve all of the issues left to us by the previous regime, while making the tough decisions needed to ensure Cliffs' long-term prosperity. Among those decisions, the most important one was to exit the Eastern Canadian iron ore business by means of a well planned and executed CCAA filing. Further, the inclusion in May of Wabush in the CCAA process should facilitate a more comprehensive restructuring and sales process of both the Bloom Lake Group and the Wabush Group and a more complete exit from Canada. The Wabush filing also mitigated approximately $135 million in liabilities associated with the Wabush Group, which contributed a substantial gain for the quarter. For the last three months, as part of the CCAA proceedings, our Canadian entities have been involved in court supervised sale process. Binding bids for our Canadian access were due July 16, and we are now evaluating the various proposals received. The process is on schedule. And further information is available on the monitor's website, which has been published in our recent SEC filings. During the Q&A portion of the call, Kelly and I will be happy to answer any questions you may have regarding the CCAA process. We have also moved forward with the divestiture of several other assets, such as the next-to-impossible sale of the chromite assets in the Ring of Fire and the sale of the three coal mines that constitute Logan County Coal. And for the remaining coal assets, Pinnacle and Oak Grove, we continue to work diligently with interested buyers toward a deal, which we expect to announce in the very near future. Another significant accomplishment of this past year was the successful replacement of the overly restrictive government-heavy revolver line of credit, which, if maintained, would have precluded us from making several important moves. The revolver was replaced with a much more user-friendly ABL and supplemented with senior notes issued with no restrictive payment basket. Let me repeat that. Our senior notes have no RP basket restriction. With that, we control our destiny and our use of cash. Not the banks. Not the bondholders. Now, turning to the quarterly results, our Asia-Pacific iron ore generated an adjusted EBITDA of $17 million. Continued cost reductions in this segment have been essential and our Australian team has definitely delivered. During the month of May, we ceased operations at the Windarling site, and currently only operate out of two sites, Koolyanobbing and Mount Jackson. In addition to increased efficiencies and lower mining costs, we are also benefiting from an aggressive headcount reduction effort. We saw the full benefit of these actions during the month of June, when our cash production cost was in the $28 per ton range. To the extent that the current seaborne pricing environment persists, we will continue to pursue further cost-reduction opportunities in order to stay cash flow positive, as we have done so far this year. Now, let's move on to the results for the US iron ore business. As Kelly noted earlier, there was an adjustment this quarter for one of our customer contracts that ties to their realized hot-rolled steel pricing. Despite these unfavorable adjustments, we were still able to report adjusted EBITDA of $77 million in the US IO segment, helped in large part by our impressive cost reduction. While our 21% EBITDA margin is not as good as what we reported in the previous three quarters, it is still a sign of a strong US-based business when compared with all other US players, including the steel mills, the service centers and the pellet supplier, currently operating in bankruptcy. Our cash production cost of $56 per ton is the lowest we have seen in years out of this segment and confirms Cliffs' position as the most efficient high-quality pellet producer in the country. Besides our relentless focus on cost-reduction initiatives, ranging from maintenance and repairs and reduced headcount, to decreased overtime and profit sharing costs, we have also been helped from reduced energy rates, related to both natural gas and diesel fuel. During the second quarter, we saw Blackburn's clients reduce their nominations. Only yesterday, the mills filed an anti-dumping lawsuit that should bring their sales and consequently their production, back up in the second half of the year. However, our clients have not yet increased their nominations. In view of the current customer nominations we have in hand and our current inventory levels, we will be temporarily idling production at our United Taconite facility. We will execute the idle of UTac in a manner to ensure that we can promptly bring production back as soon as the level of demand from our clients justifies that. Bottom line, as the absurdly high rate of imported steel penetration reverts back to normal levels and our clients' blast furnaces return to normal operating levels, we expect to be able to adjust our production and our sales volume accordingly. And importantly, let me reiterate, despite the reduction in production tonnage, we are maintaining our previously guided cost expectations. We remain highly confident in our US IO-centric strategy despite these compressed, yet still strong, EBITDA margins. The US is the place that Cliffs belongs and where we will be long term. With the very real prospect of growth that lie in serving the Electric Arc Furnace market, Cliffs will prosper and be stronger, supplying both blast furnace and EAF steel makers in the United States. China, on the other hand, may just be seeing the very beginning of a long, debilitating hangover, and we want to avoid that as much as possible. Our decision to exit Eastern Canadian, thankfully, reduced our overall exposure to the very volatile seaborne iron ore market, and our aggressive cost cutting in APIO has enabled that business to remain profitable. The actions of the iron ore majors have the clearly stated intent to, first, create an impression of oversupply, and second, if not stopped by their respective Board of Directors and shareholders, proceed to actually oversupply the market until no other miner in the world can even give their iron ore to the Chinese. China does not need any more low iron ore content iron ore as a major source of pollution. And our US market does not need any more subsidized imported steel fed by that ore. As this unfolds, the next year, or even the next two or three years, would be very painful for those that bet the farm on China. Luckily, we have the ability to separate ourselves from this catastrophe before it is too late and focus on our US market, whose worst days are likely behind us. Finally, I would like to send a word to all Cliffs' employees who are working day in and day out to build the future of this great American company. You have done a great job and I thank you all very much for that. Because of your great expertise in this business and your phenomenal execution against the backdrop of the worst market conditions ever, we will be here at Cliffs well after each one of the naysayers are long gone. Spreadsheet specialists and computer screen wizards do not know a good pellet from a bad one and have never built a pellet plant within a realistic budget and against a real tight timetable. As this first year has passed, a second one will pass as well. With the actions we have taken and the discipline of the implementation of our strategy, we are fully prepared to prosper and to be here for a long, long time. With that, I will turn it over to the operator to direct the Q&A part of the call. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Michael Gambardella, JPMorgan. -------------------------------------------------------------------------------- Michael Gambardella, JPMorgan - Analyst [2] -------------------------------------------------------------------------------- Yes, good morning. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Good morning, Mike. -------------------------------------------------------------------------------- Michael Gambardella, JPMorgan - Analyst [4] -------------------------------------------------------------------------------- I have a question just in terms of you are cutting your guidance somewhat on production on the US IO, but you're also talking about the potential for the US industry to pick production with some of the trade pieces and with the premiums I guess being down in the US on pricing will distract some of the imports to much lower level than other locations. Are you seeing any signs from your customers yet of a pickup in production? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [5] -------------------------------------------------------------------------------- Yes, I do. Thanks for the call, Michael. Thanks for the question, Michael. Yes. The answer is yes. We are seeing some signs. However, it is too -- the trade case they filed, they basically filed the last one yesterday. And we still are expecting for the one on hot rolled, so they haven't officially revised their nominations yet. So based on current nominations on hand, we have enough inventory to take care of the existing business. But we do expect those nominations to go up during the second half. And as soon as that happens, we will revise our guidance accordingly. But at this very point, that is what we have on hand. I am a realistic guy. I never promise what I can't accomplish. -------------------------------------------------------------------------------- Michael Gambardella, JPMorgan - Analyst [6] -------------------------------------------------------------------------------- And in terms of -- I think everyone would agree, imports are heading down whether from the trade cases or the lower prices here in the US, but in terms of the domestic producers, in the second quarter, with scrap prices down, we saw Steel Dynamics' sheet shipments up 24%. I think Nucor was up 12%, but X and AK were relatively flat and modest increase. So do you see that continuing into the third quarter? And minis gaining share and how does that impact you? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [7] -------------------------------------------------------------------------------- Like I said, based on the nominations we have on hand, that's what we can, at this point, commit in terms of volumes of shipments. But even price has affected our guidance going forward. If things go the right way, that guidance will go up as well. As far as the impact of hot rolled price. But at this point, that is a we have, Mike. And hope is not part of my strategy, facts are. We are dealing day in and day out with situations like cash flow, like paying down debt, like taking care of business. Like staying in business, taking away press the long-term viability of this company. So we are comfortable with the current guidance. But the upside is clearly a possibility and I believe that is very concrete at this point, but it's still -- -------------------------------------------------------------------------------- Michael Gambardella, JPMorgan - Analyst [8] -------------------------------------------------------------------------------- All right. Thank you very much. Keep it up. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [9] -------------------------------------------------------------------------------- You are welcome. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Brett Levy, CRT Capital. -------------------------------------------------------------------------------- Brett Levy, CRT Capital - Analyst [11] -------------------------------------------------------------------------------- I am going to quote Jim Wainscott directly from yesterday's AK call. He says that in addition to continuing his relationship with Magnetation that he's got significant other folks wanting to supply him and that sort of thing. Sort of the eyes, obviously, would look towards you guys as a likely source of increased interest, potentially, given that situation. Can you just talk about the competitive environment? Sort of what you are seeing from SR Minnesota as a potential new competitor. And then also talk a little bit about your opportunities among the EAF producers, sort of where you see the end uses being most a source of demand for additional Cliffs Iron Ore Pellets. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [12] -------------------------------------------------------------------------------- It is a big question about a lot of things. Let's try to address all of your points, Brett. First of all, competition in the marketplace. At this point we have one supplier of fluxed pellets in the US market and that's Magnetation. Their cost structure is well-known and took them to bankruptcy. So that is a fact. So we don't need to say anything beyond that. As far as that quality, you should ask that to Jim Wainscott because he is the one using the Magnetation pellets and I'm a competitor so I will not comment on the quality of the pellets that are produced from tailings instead of from a real mine. As far as SR Minnesota, it's still a thing that is under construction and until they produce their first pellets they are not a competitor. They are just pretend competitor. I don't see any threat coming from that place. As far as supplying the EAF, that is our future. We're going to, in the next couple of years, to be a company supplying blast furnaces and EAF is to make us through their DRI facilities or through and a combined DRI effort with mini-mill. We are very excited about the current development that has been done together with a major mini-mill, Nucor. We are very excited with the steps that we are taking together. That is the only thing I can have to say at this point. -------------------------------------------------------------------------------- Brett Levy, CRT Capital - Analyst [13] -------------------------------------------------------------------------------- And any curtailments on Lake Michigan or anywhere else have you concerned about future volumes from your major customers? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [14] -------------------------------------------------------------------------------- Can you repeat the beginning question? -------------------------------------------------------------------------------- Brett Levy, CRT Capital - Analyst [15] -------------------------------------------------------------------------------- There's people who sort of idle blast furnaces or cut down the size of their overall businesses that may or may not be a threat to your long-term contract. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [16] -------------------------------------------------------------------------------- Look, like I said, we are working with the nominations we have in hand right now. And they are basically reflecting the current situation of our current blast furnace customers. If that changes, it will change for the better. Do we have anything in hand right now, no we do not. But with the trade case, that is what we expect. But we're making all of our calculations, all of our projections and all of our forecasts for the worst-case scenario. And that's the worst-case scenario that I am putting on paper, on the press release and I'm talking about that in this conference call. -------------------------------------------------------------------------------- Brett Levy, CRT Capital - Analyst [17] -------------------------------------------------------------------------------- Thanks very much, Lourenco. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [18] -------------------------------------------------------------------------------- You are very welcome, Brett. Good luck with your new position at CRT. -------------------------------------------------------------------------------- Brett Levy, CRT Capital - Analyst [19] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Kevin Cohen, Imperial Capital. -------------------------------------------------------------------------------- Kevin Cohen, Imperial Capital - Analyst [21] -------------------------------------------------------------------------------- Good morning and thanks for taking the questions. I guess, Lourenco, going back to your comment about Cliffs controlling its own destiny, this is probably a bit of a Kelly question as well. When you think about the minimum liquidity the Company needs to maintain on hand and taking into account current perspective industry trends, do you think there is a logic to the Company perhaps continuing to repurchase debt in the secondary market? Or do you think the better use of excess liquidity to the extent there is any, is to keep that on the balance sheet? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [22] -------------------------------------------------------------------------------- Kevin, thanks for asking the question. It is always a pleasure to speak with you. Look, like I said, with my prepared remarks, we control our destiny as far as the use of cash. Not the bank. Not the bondholders. So we will make that decision at the time that we will make that decision. All options are open. I had to work very hard when I was issued the bond to keep it free from an RP basket. But I want it this way. That is the way I want. I want the market to expect the unexpected. That is the way Cliffs will survive. I know it is a tough battle here. I knew coming in. I wasn't even invited to come in. I came in because I wanted and the shareholders elected me to come here. But a difficult war like that will take a lot of difficult decisions and I am ready to take them at the right time. So I am not going to give you that. -------------------------------------------------------------------------------- Kevin Cohen, Imperial Capital - Analyst [23] -------------------------------------------------------------------------------- And then as it relates to the $160 million of cash inflow from the PACs receivable, any contemplation on the use of proceeds there? Or is it just cash on the balance sheet for now? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [24] -------------------------------------------------------------------------------- That is a good chunk of dough. And it is coming soon. We are expected to receive that more toward the end of the year, but our financial folks here at Cliffs are very good. They are the best group, doing a phenomenal job. And expedited things so this cash will come very soon. We're expecting that check to be received here in the next few weeks. How I'm going to use that cash, I'm not going tell you. -------------------------------------------------------------------------------- Kevin Cohen, Imperial Capital - Analyst [25] -------------------------------------------------------------------------------- Last question. Thanks for the patience with it. When you think about the coal asset sale and the general tone in commodities, it sounded like you had an optimistic tone about being able to divest the remaining two mines. Is there anything sort of new in the marketplace that gives you that confidence or keeps you confident on that front? -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [26] -------------------------------------------------------------------------------- So far, since I joined Cliffs, there was only one meaningful transaction in the coal market. And that was the sale in Logan County for cash and nobody was expecting that one. So one more time, stay tuned, because we are working hard to get that deal done for Oak Grove and Pinnacle. -------------------------------------------------------------------------------- Kevin Cohen, Imperial Capital - Analyst [27] -------------------------------------------------------------------------------- Thanks very much and good luck is always. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [28] -------------------------------------------------------------------------------- Thank you very much, Kevin. Appreciate it. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Timna Tanners, Bank of America. -------------------------------------------------------------------------------- Timna Tanners, BofA Merrill Lynch - Analyst [30] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [31] -------------------------------------------------------------------------------- Good morning, Timna. -------------------------------------------------------------------------------- Timna Tanners, BofA Merrill Lynch - Analyst [32] -------------------------------------------------------------------------------- I really appreciated the insight into your contract pricing that we got this quarter in light of the HRC component and the major customer that you detailed. But I just wanted to understand a little bit better, I didn't realize this was the lumpy when they come up with the updated forecast. Can you help us understand, is it possible that they, in light of a price recovery, would again raise that and you could raise your assumptions? Or how could we see this trajectory if we were expect prices to increase by the end of the year? How could that affect her realizations? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [33] -------------------------------------------------------------------------------- You perceived well. We were surprised as well. We -- historically, we have not seen in this company, I'm not even talking about just the time I am here that's just one year, but our folks here at Cliffs they were kind of surprised by the depths of the variation between one port and the other. That was extremely unusual. However, it goes both ways. So as soon as we have a recover and I'm sure that the steel mills are not filing anti-dumping lawsuits just because they would like to have fun in Washington DC, it is because they need to recover their prices badly because Q2 was not good for any of the blast furnace that reported so far and we are tied by the hip with him. They go up, we go up. They go down, we go down. And the fluctuations in their hot rolled prices, will affect us positively, if they push their prices up, as we expect them to do. -------------------------------------------------------------------------------- Timna Tanners, BofA Merrill Lynch - Analyst [34] -------------------------------------------------------------------------------- And they give you their forecast next what? Twelve months, next quarter? For hot rolled and what they are charging their customers? Is that how it works? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [35] -------------------------------------------------------------------------------- I will let Kelly answer that, Timna. -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [36] -------------------------------------------------------------------------------- Yes, Timna, they give us, at the end of each quarter kind of what their hot rolled pricing is and we make our own internal adjustment based off that. But, it's if you will, a rolling quarterly look. And then we true it up at the end of the year. To Lourenco his point, there is certainly upside potential as much as there was this time with the downside. -------------------------------------------------------------------------------- Timna Tanners, BofA Merrill Lynch - Analyst [37] -------------------------------------------------------------------------------- And then the only other question I wanted to ask is just to understand, on the EAF side, my conversations lately with Steel and Air Max and Grundel suggest that they are expecting scrap prices stay low forever and are not as concerned about finding an iron unit alternative. I just wanted to know, besides the Nucor's DRI facilities, is there still chatter of other alternatives we had been hearing in the past? I just don't know what the updated thinking is, outside of the publicly traded companies. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [38] -------------------------------------------------------------------------------- Timna, As far as scrap and DRI, I think it is about time for the analysts to understand that for the mini-mills, it is not just a matter of cost. It is a matter of market. It is a matter of the ability to do things that they can't do and produce products that they can't produce and address markets that they can't address, if they stay on with scrap. Let alone the fact that the availability and the quality of good scrap has been deteriorating quickly in the United States. So, going toward iron substitutes I'm sorry, iron-based scrap substitutes, it is not only a matter of cost. Even though cost will be always a factor, no doubt about it. But will be a matter of being able to address a more valuing use, to address markets that will pay more for value added. And that is what Nucor, and you mentioned Steel Dynamics, I have not been discussing with Grundel recently, but I believe that would be the same approach. That they need to go after iron substitutes like Nurcor's already going. Like Steel Dynamics is interested in doing as well. And hopefully, we will become a client when we put our DRI facility here in the Great Lakes area. So this is an opening, a market for them, that will be very important, as they sell to more sophisticated and highly paying clients. And for us, it is a matter of growing our business here in our market. We are the ones that can do that. We have the iron ore. We have the technical competency to develop the product and the process. And we have the partnership with the Nucor at this point that we are very excited about. That is the way I see it. -------------------------------------------------------------------------------- Timna Tanners, BofA Merrill Lynch - Analyst [39] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [40] -------------------------------------------------------------------------------- You're welcome. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Aldo Mazzaferro, Macquarie. -------------------------------------------------------------------------------- Aldo Mazzaferro, Macquarie Research - Analyst [42] -------------------------------------------------------------------------------- Hello. Good morning, Lourenco. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [43] -------------------------------------------------------------------------------- Good morning, Aldo. -------------------------------------------------------------------------------- Aldo Mazzaferro, Macquarie Research - Analyst [44] -------------------------------------------------------------------------------- I just had a couple of random questions. On the coal side, there was a big earnings number, I know it is discontinued operation, but can you break that down a little bit for us? How say did you generate that kind of income? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [45] -------------------------------------------------------------------------------- It was, remember that discontinued operations includes coal but includes other things as well. That one came from the inclusion of Wabush into the CCAA thing and when we did that, we had some liabilities that were reverted into gain. I will let Kelly explained that in a little more detail. -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [46] -------------------------------------------------------------------------------- Sure, Aldo. What Lourenco laid out is basically the case. And there will be additional detail in our 10-Q, which will be filed later today. In short, the de-consolidation of Wabush and the reversal of Wabush liabilities is what contributed substantially to driving that gain this quarter, offset by coal's discontinued ops, which took away from some of that gain. That detail will be laid out in the 10-Q. Suffice to say, it is driven by the Wabush liability reversal. -------------------------------------------------------------------------------- Aldo Mazzaferro, Macquarie Research - Analyst [47] -------------------------------------------------------------------------------- That reversal was probably a non-cash item, right? -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [48] -------------------------------------------------------------------------------- Yes. For the most part. -------------------------------------------------------------------------------- Aldo Mazzaferro, Macquarie Research - Analyst [49] -------------------------------------------------------------------------------- Kelly, one separate question for you too. On the working capital, I missed a little bit of what you said. I know you have used working capital in the first half a little bit around $235 million. Did you say you were going to reverse that in the second half? -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [50] -------------------------------------------------------------------------------- Yes, we'll see. Consistent with the seasonality of the business, although we would see a reversal of that working capital, certainly more so in the fourth quarter. But we will start to begin that reversal in Q3, just with the velocity of receivables and, obviously, the action we have taken to work off the inventory, will also contribute to it. -------------------------------------------------------------------------------- Aldo Mazzaferro, Macquarie Research - Analyst [51] -------------------------------------------------------------------------------- Right. And then that the tax refund will be in addition to whatever you do on working capital, right? -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [52] -------------------------------------------------------------------------------- Correct. Yes, it is baked into our overall cash flow guidance, but it would be in addition to the working capital benefit. -------------------------------------------------------------------------------- Aldo Mazzaferro, Macquarie Research - Analyst [53] -------------------------------------------------------------------------------- Great, thank you. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [54] -------------------------------------------------------------------------------- Thanks, Aldo. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Jorge Bernstein (sic), Deutsche Bank. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [56] -------------------------------------------------------------------------------- Good morning, guys. It is Jorge Beristain with Deutsche Bank. Lourenco, I guess my question is, thanks for the very clear guidance. I just wanted to kind of do a top-down as to how you see generating large buckets of cash to make a dent in your net debt. So if we just kind of run through the very rough, maybe a $20 per cashed ton margin on USIO 20 million tons, that gives you about $40 million of EBITDA, Australia give our take is $50 million, roughly at spot or maybe up to of $100 million of EBITDA. So that puts your mind-level EBITDA at about $450 million to $500 million, less corporate SG&A puts you back to $400 million, but your uses of cash, your interest expense at $205 million and your sustaining CapEx at around $100 million and change, seems to imply from a sort of operations point of view, that things are very tight and inability to lower net debt. My question is, are there other opportunities besides the refund of the cash, taxes, the coal sale that you mentioned is still pending at Oak Grove, and possibly the buyback of your debt, that's trading at cents on the dollar. Are those the main buckets that you see as your ability to actually lower the net debt going forward? More on the balance sheet moves is what I'm asking. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [57] -------------------------------------------------------------------------------- Jorge, of course we are not at this point in this iron ore business in United States, as we see today. We are not in a position to say we are going to be very comfortable. We have never been. This last year has been very tight as we right the ship here. However, we need to really understand that the current situation for iron ore in the world is unsustainable. It is not going to persist forever. You can argue that it would last another year. Another two years or another six months. Or just a quarter. But one thing we all know, the Australians and the Brazilians will not be able to continue to finance their business, their dividend policies, their political goals within their respective countries, giving iron ore to the Chinese that $50 per ton so that is the first thing to consider. The second thing is that, I have been around for a long time. I remember one report from you, when you said that this is not the Cliffs of your grandparents anymore and you upgraded the price target from $100 per share to $150 per share or something like that. This market changes fast. The anti-dumping lawsuits will have an impact. Still prices will go up, our prices. We don't need to tell that because Q2 is proof of that. Our prices, our iron ore -- our pellet prices are tied very, very close to the price of steel in the United States. So, we have to put forward and to work in projections that are pretty conservative. But things can't get worse than that. And there is a big chance that they will get a lot better. Did I answer your question? -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [58] -------------------------------------------------------------------------------- I guess what I am trying to get at is, thus far, you have been successful at acquiring your debt at a discount in the market and that has materially lowered your net debt balance. So is that kind of where you are thinking, in terms of how you can continue to improve Cliffs's financial position. Because on the face of it on current market levels, it seems difficult to justify that the cash flow would come from operations. So that is what I am trying to understand. Do you view it coming more from asset sales and sort of more debt restructuring or is there some other sort of source of cash that we should think about? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [59] -------------------------------------------------------------------------------- I already talked about the operations that you are denying. I'm saying that it may come from operations, it is more than expected that it will come from operations. But of course, all other possibilities that we are lining up, they are all possible. And they are all in the realm of things that we are going to address going forward. We have bought debt before. We can buy again. We can do a lot of other things. We still have capacity to issue that we have other levels to pull. And we will continue to cut costs in this business as we go forward. I don't know if Kelly wants to give any more specifics. -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [60] -------------------------------------------------------------------------------- No, I think, Jorge, you picked off the other items that are non-operating related. We talked about the tax refund. The optionality of the sale of coal. The optionality of whether or not we enter the debt market to buy bonds back at a discount. All of those things are clearly there. The fundamental blocking and tackling in managing operating cash flow is going to be critical. And if the second half recoveries, as we certainly expect, that we will see some improvement there. I think you have hit the right levers. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [61] -------------------------------------------------------------------------------- If I can add something. We have our goals on how much EBITDA we must take in this company. And then we divide by the number of tons that we're going to be willing to sell in 2016 and beyond and that will give us, more or less, the price that we need to reach. The good news is that, we have contracts that are expired and not soon. We have a year and a half to go for the first one that will expire. And we have the ability to push those prices up. We have leverage to do that. The pellet plant that is set to debut to compete against us will not start until, my assessment, at least 2018. You are going to see a lot of good money being put back to bed until everyone will give up on that. The other one, that is getting technical support from a private equity fund, will fail as well. So what we're going to have in this market at the end of the day, Cliffs Natural Resources. Anything else I can do for you Jorge? -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [62] -------------------------------------------------------------------------------- Thank you. That covers it. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [64] -------------------------------------------------------------------------------- Thanks. The lower US iron ire sales guidance down from 20.5 million to 19 million tons, I'm trying to understand what the driver was there. Should we interpret that as reflection of current market conditions? Or does it reflect customer deferral request? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [65] -------------------------------------------------------------------------------- Current nominations, Garrett. Like I said during my prepared remarks, current nominations. They have not revised up their nominations, by the way, I don't know even if they will. They have not told me that they will. But with the current cold ore anti-dumping lawsuit already filed, with the new one of hot rolled that we expect to be fired soon. We expect that they will be selling more. They will be producing more. And they will need to revise up their nominations. So far, they haven't. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [66] -------------------------------------------------------------------------------- Okay. And when do you expect to start receiving nominations for 2016. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [67] -------------------------------------------------------------------------------- Kelly? -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [68] -------------------------------------------------------------------------------- Yes, Garrett, typically it would be around November. The latter part of the year. Mid-fourth quarter. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [69] -------------------------------------------------------------------------------- Great, thanks. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [70] -------------------------------------------------------------------------------- Thank you, Garrett. -------------------------------------------------------------------------------- Operator [71] -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [72] -------------------------------------------------------------------------------- Thank you. Hello, Lourenco and Kelly. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [73] -------------------------------------------------------------------------------- Good morning, Tony. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [74] -------------------------------------------------------------------------------- I was wondering if you could update me with your thoughts on your contracts with ArcelorMittal. I was on a trip recently up there and they seemed to indicate that they have a fair amount of flexibility. Quite frankly, it was more flexibility than I thought heading onto the trip. They talked about their ability to derive more tonnage at their mining operations up there. They also talked about that some of their contracts would be rolling off. And they have got additional flexibility to potentially supply some of their operations to maybe a little bit larger extent. Notwithstanding the transportation differentials, et cetera. I was wondering if you could just bring us up-to-date with how that currently stands, as your thought process, as it relates to those two very important contracts. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [75] -------------------------------------------------------------------------------- Did you travel to London to negotiate get this information? -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [76] -------------------------------------------------------------------------------- No. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [77] -------------------------------------------------------------------------------- I assumed you traveled to Canada, right? -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [78] -------------------------------------------------------------------------------- This was just on a field trip. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [79] -------------------------------------------------------------------------------- You were basically visiting the mine in Canada and they told you they can deliver pellets to the United States. Is that what you are saying? -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [80] -------------------------------------------------------------------------------- Not fully across the board. Realizing that the transportation cost can be quite onerous. But to different areas. It just -- -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [81] -------------------------------------------------------------------------------- That is an embarrassing question because, you know, you're basically giving me pieces and pieces of what you've got. But, you know, we are a year and a half away from the expiration of the contract. So what you would like me to do, I am not going to do. You're going to have to sit still. Sit tight. And continue to see Lourenco in action. As you have seen for a long time at Metals USA. And you are seeing for a year here. It will be fun to watch. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [82] -------------------------------------------------------------------------------- Very well. I look forward to it. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [83] -------------------------------------------------------------------------------- Lots of people are looking forward to it. Lots of people are looking forward to my -- for Lourenco to crash to the ground. It's not going to happen. Any other questions, Tony? -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [84] -------------------------------------------------------------------------------- No. That's not what my implication was. I was not implying that. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [85] -------------------------------------------------------------------------------- I know that. I appreciate as always. Just throw me a pre-curveball that you know I can't answer. But that's okay. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [86] -------------------------------------------------------------------------------- All right. Thank you, Lourenco. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [87] -------------------------------------------------------------------------------- You are forgiven, my friend. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [88] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [89] -------------------------------------------------------------------------------- [Nick Janovich], Stifel. -------------------------------------------------------------------------------- Nick Janovich, Stifel Nicolaus - Analyst [90] -------------------------------------------------------------------------------- Good morning. I had a couple questions regarding the commentary on United. The first one is, are there any nonrecurring expenses with the care and maintenance? And what is the annual care and maintenance on it? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [91] -------------------------------------------------------------------------------- Kelly. -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources, Inc. - EVP & CFO [92] -------------------------------------------------------------------------------- Yes. There will be some. It is relatively minimal. It has been factored into our cost guidance. Call it $10 million a month would be a rough modeling figure. But that is factoring in our guidance and as you have heard from Lorenzo, we reiterated our cash production cost guidance, which assumes you tacking down and being able to stay sub 60. -------------------------------------------------------------------------------- Nick Janovich, Stifel Nicolaus - Analyst [93] -------------------------------------------------------------------------------- And question for you regarding -- -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [94] -------------------------------------------------------------------------------- Nick, one good thing about idling UTac is that it facilitates our development of the transformation that we need to make to the plan in order to produce the super fluxed pellets that should feed ArcelorMittal is starting in 2017. As we shut down in part and replace the Viceroy pellets produced at Empire with another super fluxed pellet called Mustang that will be produced out of United. At least for a little bit we will have UTac idle, will facilitate the implementation of the change in equipment to produce that pellet and that has been a pretty interesting development together with ArcelorMittal at this point. -------------------------------------------------------------------------------- Nick Janovich, Stifel Nicolaus - Analyst [95] -------------------------------------------------------------------------------- So does that actually suggest that you've got positive progress with Arcelor contract? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [96] -------------------------------------------------------------------------------- It does. It does suggest that. -------------------------------------------------------------------------------- Nick Janovich, Stifel Nicolaus - Analyst [97] -------------------------------------------------------------------------------- The second one, in terms of being able to service Arcelor out of UTac, does that suggest that you would be able to, potentially, close Empire earlier than the end of 2016, given that you've got lower guidance for this year, maybe you can stockpile pellets? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [98] -------------------------------------------------------------------------------- Look, it is a possibility. If we conclude everything ahead of time and we are in a position to be ready to produce the Mustang pellets out of UTac, then we don't need to supply ArcelorMittal with Viceroy pellets RFI and even more important, because of the high cost of that mine, because it's a mine that is at the end of life mine, of course, it's basically backed by the higher price that ArcelorMittal pays for that pellet would be a positive for us and ArcelorMittal as well. Because we produce not only a pellet that would be as good, or probably better, at UTac than the pellet that was produced out of Empire. But will also be cheaper. Because it is not a mine at the end of life mine. I am giving too many details about that. We are a year and half away. So stay tuned. -------------------------------------------------------------------------------- Nick Janovich, Stifel Nicolaus - Analyst [99] -------------------------------------------------------------------------------- How long are the upgrade project at UTac to get the super flux pellets, so it can produce the super flux pellets? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [100] -------------------------------------------------------------------------------- It is not a thing that will take too long. But it is a lot more of a thing that needs a lot of preparation, permitting and environmental permits, things like that, that are all in the making with a lot of support and a lot of help from the government of Minnesota. I can't thank Governor Dayton enough for all of the facilitations and eliminating red tape for us to be able to execute very quickly. We're working very well together, all together. Ourselves, the clients and the government of Minnesota. -------------------------------------------------------------------------------- Nick Janovich, Stifel Nicolaus - Analyst [101] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [102] -------------------------------------------------------------------------------- You're very welcome. -------------------------------------------------------------------------------- Operator [103] -------------------------------------------------------------------------------- Jeremy Sussman, Clarkson. -------------------------------------------------------------------------------- Jeremy Sussman, Clarkson Capital Markets - Analyst [104] -------------------------------------------------------------------------------- Hello. Good morning, Lourenco, and thanks for taking my question. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [105] -------------------------------------------------------------------------------- Good morning, Jeremy. -------------------------------------------------------------------------------- Jeremy Sussman, Clarkson Capital Markets - Analyst [106] -------------------------------------------------------------------------------- Just following up on an earlier question. You've talked, obviously, about getting more involved on the DRI front over the next couple of years. And your color was very helpful. I guess I'm wondering, in terms of potential opportunity, specifically, are you looking at this more from a long-term supply standpoint or would you be willing to invest some capital if the right opportunity arose? Thank you. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [107] -------------------------------------------------------------------------------- Jeremy, I would be happy to invest capital if I had it. And let's face it, I don't have it. So in order to develop a new DRI facility in the Great Lakes, we're going to need capital from someone else. And we are discussing with several different interested parties, that came to discuss with us about that development. I can't give you details yet. It's not right. But it is in the making. In the meantime, we are going to be able supplier of DR pellet and I really appreciate the work together with Nucor because at the same token that we believe we are doing something really good for Nucor, Nucor is doing something really good for us. Because it is giving us the ability to develop the perfect pellets for them, both at Covent, Louisiana and Trinidad. So we are serious about developing our ability to produce DR pellets. We're going to be a supplier of DR pellets for sure to Nucor and, hopefully, if we are able to get all things together and all of the parties compromised and working in sync, we are going to have a new DRI facility to the Great Lakes that is going to be the supplier. Customers, will not be a problem. They are all aware. And they are all willing to buy. And there is a lot of demand here in the Great Lakes. -------------------------------------------------------------------------------- Jeremy Sussman, Clarkson Capital Markets - Analyst [108] -------------------------------------------------------------------------------- That is very helpful. Thank you very much. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [109] -------------------------------------------------------------------------------- You are very welcome. -------------------------------------------------------------------------------- Operator [110] -------------------------------------------------------------------------------- Matthew Fields, Bank of America. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [111] -------------------------------------------------------------------------------- Hello, guys. I wanted to ask about the reduction in iron ore sales and structure guidance. Is the 1.5 million-ton reduction coming from one customer or more than one customer? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [112] -------------------------------------------------------------------------------- Yes, it is a combination. It is coming from the lower nominations that we have on hand from all of our clients at this point. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [113] -------------------------------------------------------------------------------- Okay. And then do you get the sense that it's tonnage that the steel producers are just not producing? Or is it potentially getting iron from another source? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [114] -------------------------------------------------------------------------------- No, they are not producing. They don't have, based on the contracts we have, they don't have the option of getting ore from other sources. This quarter is pretty strict in terms of what they have to comply, as far as nominations. But like I always say, Matt, when our clients suffer, we suffer with them, as far as production. As far as the ability to produce their products. On the other hand, when they thrive, we thrive with them. Because that is the way the contract works. But when they go up, we go up. When they go down, we go down. Unfortunately, Q2 was a time that our blast furnace clients did not buy as much as we would like. But they bought at the minimums or close to the minimal tonnage that the contracts would allow them to do. But they did not buy from anyone else because that is the way contracts work. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [115] -------------------------------------------------------------------------------- Okay, thanks very much. I just want to follow-up on a question that some of the other analysts tried to ask. Regardless of where it comes from, you know, it seems like you're going to get a good chunk of cash coming in the door in 3Q and in 4Q, what is your priority for using that cash? Whether it is buying back debt at a discount. I know you have the $200 million in stock buyback authorization or investing in some kind of CapEx in the business. What is your sort of priority for using that cash? What do you think needs it the most? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [116] -------------------------------------------------------------------------------- Math, I bought my freedom, when I used the first lien and second lien and we kept that thing without an RP basket. Know how tough this is. I have been around. I know how this game is played. That is the reason we don't have a restriction on the RP. So I am going to use the cash for the thing that is better for Cliffs Natural Resources, for Cliffs Natural Resources' shareholders, for Cliffs Natural Resources' employees and to hurt as much as I can the ones that are making my life miserable here. Because it is difficult enough to run this company, going against all of the bad perceptions of iron ore, all the perceptions of coal. And it is annoying to see how much a bunch of guys hiding behind the screens, and doing what they are doing, trying to take down a great American company. That is not going to happen. This company has a very, very good group of employees. They are extremely committed to make this company thrive. We just need investors to understand that. There is nothing they can do that will derail that. Does that answer your question? -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [117] -------------------------------------------------------------------------------- Good enough. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [118] -------------------------------------------------------------------------------- No. I'm going to answer your question, but I'm not going to give you specifics. Okay. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [119] -------------------------------------------------------------------------------- Absolutely. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources, Inc. - Chairman, President & CEO [120] -------------------------------------------------------------------------------- Okay. All right. Now we're talking. Thank you very much. It was our pleasure to have this call with you. That is the bottom. I will see you at the top. Bye now. -------------------------------------------------------------------------------- Operator [121] -------------------------------------------------------------------------------- Thank you, everyone. This concludes today's conference call. You may now disconnect.
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