CLEVELAND Jan 27, 2016 (Thomson StreetEvents) -- Edited Transcript of Cliffs Natural Resources Inc earnings conference call or presentation Wednesday, January 27, 2016 at 3:00:00pm 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 ================================================================================ * Timna Tanners BofA Merrill Lynch - Analyst * Jeremy Sussman Clarksons Platou Securities - Analyst * Garrett Nelson BB&T Capital Markets - Analyst * Lucas Pipes FBR & Company - Analyst * Evan Kurtz Morgan Stanley - Analyst * John Tumazos John Tumazos Very Independent Research - Analyst * Chris Haberlin Agincourt Capital Management - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. My name is Sally and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2015 fourth-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 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. 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. -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources Inc. - EVP & CFO [2] -------------------------------------------------------------------------------- Thank you, Sally. Thanks to everyone joining us on this morning's call. I'm joined today by our Chairman, President and CEO, Lourenco Goncalves. I'll begin our call with a review of our fourth-quarter results and related financial commentary including our outlook for 2016, before turning it over to Lourenco for his remarks. Once again our focus on cost reduction, operating efficiencies and optimizing cash flow, drove our final results for the year. The worst market environment for Cliffs in over a decade has clearly presented ample challenges, but our teams at every level have not only met our financial objectives, but in many instances beat their own aggressive targets. There's no better example of this in looking to our USIO operating costs. Our USIO cash reduction cost was $45 per ton during the quarter and $54 for the full year, solidly beating our guidance of $55 to $60 per ton. This quarter's USIO cash production cost represents a 23% cost reduction from the prior-year's quarter. Looking ahead into 2016, we expect our USIO cost to once again improve, such that we are bringing the guidance range for both cash production cost and cash cost of goods sold down by $5 each. This performance and outlook clearly shows that despite top line revenue pressure from weak demand and low iron ore and steel prices, Cliffs' strong operating performance has made the difference. You will see that our Australian operation has gone toe to toe with the US business in terms of its operating results. Despite the significant headwind of depressed seaborne iron ore prices, the focus of our Australian management team on costs and productivity delivered fourth-quarter cash production costs of $26 per ton compared to $43 per ton reported in the prior year quarter. While our APIO division, like every other Australian miner, big or small, did benefit from a weak Aussie dollar by about $5 per ton in the quarter. These impressive production costs were driven mainly by a relentless focus on optimal mine planning and productivity gains. This cost performance enabled APIO to maintain its status as a solid EBITDA contributor in 2015. Looking in to next year, we are expecting even further cost reductions out of APIO with cash production costs of $25 to $30 per ton, down from 2015 full year average of $31 per ton. We'll continue to operate APIO with a clear bias toward cash optimization and as circumstances require we will do everything possible to protect our EBITDA. In short, we will remain vigilant in identifying cost saving opportunities and do what is in our power to avoid sustained losses. Let me now turn briefly to SG&A. Our fourth quarter SG&A expense was $28 million, down about a 30% from the pre-discontinued operations figure of $42 million that we reported this time last year. We closed the year with a total of $110 million in SG&A expense, almost half of what we recorded at this time last year. Rest assured we have not taken our focus off further cost reduction opportunities as we expect $95 million of SG&A in 2016, which would be the first time we have expected a sub- $100 million level of SG&A since the Cleveland Cliffs days back in 2006. Finally, it's also worth noting of this $95 million, about $29 million is non-cash items, such as equity comp accruals and appreciation, leaving cash overhead expenses of about $65 million. While we are understandably pleased with the cost performance of our business which is certainly what we can directly control, our revenues have clearly been under considerable pressure both as to volumes and realizations. The prices of iron ore in the seaborne market and hot rolled steel in the US have been a drag on our revenues all year, and the fourth quarter was no exception. This pricing weakness did impact our realizations in both USIO and APIO with our USIO pellets realizing $74 per ton and APIO realizing $34 per ton, both multi-year loans for each segment. Despite this top line weakness, which was mitigated by lower cost, we reported an adjusted EBITDA of $76 million in the fourth quarter. This EBITDA result was the strongest since the first quarter as quarter-over-quarter cost reductions more than offset the decline in realized revenues. As we look at 2016 we are expecting to sell 17.5 million tons of pellets in our USIO business, a slight improvement from the 17.3 million tons sold in 2015. This is based on our current customer nominations as well as our market intelligence. Consistent with the usual seasonality of this business, due to the frozen lakes and lock maintenance, we are expecting just under 2 million tons of sales volumes for the US in the first quarter. You will also note from our press release that our expected production tonnage in 2016 is 16 million tons or 1.5 million tons less than our sales tonnage. With our current levels of inventory in the US, we will first convert that inventory into cash and then depending on customer demand, we will look to bring back idled production. Given the importance of liquidity it makes sense for us to leverage our working capital to contribute positive cash flow which we anticipate should exceed $100 million. While we're still incurring idle expenses for our UTAC and North Shore mines, which is a detriment to EBITDA. We can meet forecasted sales tonnage and at the same time improve our cash position. In APIO our approach is very similar. Our production expectation is 11.5 million tons with about 9 million tons actually mined, and the remainder being sold from our work in process inventory pile. This too, will improve our cash cost and lower inventory levels. Another area where we have focused, is reducing CapEx. As a result capital expenditures for 2016 are expected to be $50 million, down from $83 million in 2015 and $284 million in 2014. This 2016 CapEx expectation is mostly all USIO related and is our lowest projected CapEx spend since 2003. This is a result of both disciplined spending decisions and a continued success in shedding non-core assets including the December divestiture of our remaining coal assets which alone carried an ongoing CapEx burden. This sale also resulted in the transfer to the buyer of substantially all liabilities, including those related to reclamation, pensions, and various litigation matters, all of which would have been a significant cash drain in the future. While the coal sale did result in about a $40 million reduction in our asset base lending facility borrowing base, the cash flow benefit of not owning these assets is quite substantial, particularly given current coal prices and in many respects more than mitigates the loss of ABL availability. We entered the quarter with over $450 million of total liquidity, net of outstanding letters of credit. We had $285 million of cash on hand and no borrowings on our asset-based lending facility. As I've noted before, liquidity remains a key focus of management through these difficult times, but given where we sit right now, the working capital benefits we expect to see and the reduced CapEx, I am comfortable with our outlook for 2016. To wrap up, let me offer a few comments about our capital structure. At the end of the quarter we had net debt of $2.4 billion which marks an improvement from $2.5 billion last year and $2.6 billion -- I'm sorry, last quarter, and $2.6 billion at this time last year. Even with all the challenges, we have been able to accomplish meaningful debt reduction. That said, our net debt balance of $2.4 billion in 2015 full year EBITDA of about $300 million is not an acceptable level of leverage. With that reality in mind, we have announced today an exchange offer utilizing our 1.5 lien secure debt capacity. For those who participate in the exchange, they will receive a premium over the current market value of their bonds and have a chance to move up in the capital structure. We see this liability management exercise as yet another step in our progress of better aligning our debt and EBITDA. So with that, I will now turn the call over to Lourenco. -------------------------------------------------------------------------------- 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. Let's start reviewing what changes since August 2014, when I joined Cliffs as Chairman and CEO. Our ore prices changed a lot. The IODEX pricing for the fines sold in China went from around $100 per ton when I joined Cliffs to a recent low of $38 per ton. The steel prices changed as well. In United States, they are both $600 per ton average price for hot rolled steel in place since 2010 hit a 10-year low of $360 per ton in 2015. Steel production and the massive consumption in China changes too, despite the mistaking assumption by the Australian and Brazilian Iron Ore majors, insisting on increasing their supply to an ever growing demand of their imaginary China. The steel production and demand of the real China peaked in 2014 and began its decline in 2015. Last but not least, the arrogant statements of the major iron ore producers are gone. Once stating, that the seaborne price in the $30 range was actually a good thing because it would make for the complete elimination of all other mining companies in the entire world. These major players are now realizing that they will bear the consequences of their own bad behavior. At this point in time we can no longer hear their excitement about becoming low cost per ton producers, by means of investing billions of dollars to increase their tons to unnecessary levels. In fact, these companies are now realizing that their returns on investment, that they promised to their respective boards have not been achieved and will not materialize. Furthermore, these major producers of iron ore have actually become major producers of dividend yield, as a direct consequence of their share prices at multi-year lows. By now the pressure is only increasing on the individuals responsible for such enormous destruction of value, and they should be badly regretting their previous statements. Particularly, the assurance they gave to investors regarding their untouchable ever growing dividends. To paraphrase one of them, these individuals are now, hanging on by their fingernails to their respective jobs. Now, what has not changed? Sixteen months ago I laid out our strategy for Cliffs, predicated on one fundamental fact. China's steel demand is actually shrinking, not growing. We have not deviated from our strategy. And in 2015 we were able to check many boxes in line with what was put in place on my first day at Cliffs, leading us to a refocused and re-energized company. All our moves were motivated by the recognition that China 's appetite for iron ore was no longer increasing, which was actually the opposite direction adopted by the majors and also adopted by the old Cliffs. By insisting on their imaginary ever-growing China, the iron ore majors brought iron ore prices down to a level that severely hurt themselves and their shareholders. Case in point, if we had not implemented a new US centered strategy here at Cliffs in August 2014, the old way of doing business would have driven this company into bankruptcy early last year. A very important component of our strategy was the complete divestiture of the coal business. After selling the three Logan County coal mines in December of 2014, we ended 2015 on a high note with a closing of the sale of our two remaining coal mines, Pinnacle and Oak Grove. As you may recall, we announced just last quarter that we were eliminating (inaudible) development work at both mines, which we believe provided the buyer with the necessary motivation to finalize the deal. By year end, Cliffs' natural resources was completely out of the co-business. Also in 2015, we took Blue Lake out of the picture. Our former restructuring proceedings in Canada under CCAA for the Bloom Lake Group and Wabush mine made substantial progress during the year, and particularly the fourth quarter. Interested parties entered in to asset purchase agreements to acquire subjective court approval, the Bloom Lake mine, Sun mineral claims, and related port and rail assets. We anticipate the court to conduct their hearing this quarter and we look forward to wrapping up the CCAA process consistently with our previously stated expectations. In addition, we are able to divest all other noncore assets, including the chromite Ring of Fire and Decar Nickel projects, as well as other exploration endeavors. In each instance we selected the best exit strategy for the noncore assets, and I am pleased to have all these transactions behind us. Another fueller of our strategy was that reduction. We have been very successful in reducing our debt, especially in light of the current commodity environment. My initial plan to take care of a big chunk of the debt, was the sale of our Australia mine. During a time when iron ore was still over $100 per ton, we would have been able to sell APIO for hundreds of millions of dollars. Unfortunately, due to the successive maneuvers applied by the previous Board of Directors during the first half of 2014 to the late 2014 shareholders meeting, by the time we're able to prevail in the (inaudible) battle and lead the company, iron ore prices had already started to slide. And the trend was clear to the potential buyers. Which is exactly what I feared would happen. Not surprisingly APIO lost its marketability during that timeframe. Despite this course of events, we have been able to implement several liability management exercises. Each of these moves was done in preparation for the next one. As you saw this morning, we are now offering our bond holders the opportunity to move up in the capital structure by offering them new secured notes in exchange for the current holdings. By capturing the discounts available across our entire (inaudible) complex, we should be able to accomplish two goals, significantly break down our debt values and reduce our cash interest expense. This transaction represents another step in our strategy and should offer a similar amount of debt reduction in equity value accretion that the missed opportunity to sell APIO would have offered. That said, let me clarify that given various legal and regulatory constraints, we will not offer any further comments nor will we address any questions about the exchange offer during the Q&A portion of this call. As we always do in our quarterly calls, the Q&A session should be focused only on our performance and business outlook. If you are an investor and have questions regarding the exchange offer, please contact Global Bondholder Services Corporation or our lead dealer manager, Bank of America Merrill Lynch in Charlotte, North Carolina, or your BofA Merrill Lynch salesperson. Now, let's turn to the global iron ore business. The demand for steel in China, which accounts for about half of global steel production is shrinking and the growth of their economy -- as the growth of their economy is lost, prompting Chinese steel mills to a scale back production. It has been reported that inventory levels of iron ore at the Chinese ports continue to build over the past couple months, heading back to above 100 million tons. Earlier this month China's biggest steel producing province announced that a steel output would be cut this year to ease pollution and help curb oversupply. Three days ago the Chinese Premier Li Keqiang released target numbers for steel production cuts to the order of 100 to 150 million tons. The pressure on the pollution issue in China continues to mount. I have said this before and I will state it again; China will resolve its pollution problem and it cannot do so without major impact on its steel production and a significant reduction of the consumption of [sinter] (inaudible). One of the root causes of pollution in China is the environmentally unfriendly characteristics of the production of sinter from iron ore mines. Differently from United States and Europe, the vast majority of the blast furnaces in China use sinter as feed stock and not pellets. Making matters worse, a good number of Chinese sintering plants utilize lower grade iron ore sinter feed finds purchased from the iron ore majors, as well as from their own domestic mines. Overtime, the Chinese steel mills will find it difficult to overcome the environmental issues associated with the use of sinter as feedstock for their blast furnaces. And that will eventually impact all the market players who are clinging to the flawed assumption that China will continue to buy what they sell, just because it is apparently cheap. Mainly, because the major producers of iron ore finds have kept feeding a level of Chinese demand that no longer exists. Iron ore prices are now well established into the price range that was once called Fantasy land. At this point, every other iron ore miner should have been long gone. Once again, they were wrong and just for the record, Cliffs' APIO achieved in 2015, a record year in production and cash cost per ton. That was accomplished even as we approached the end of life of our mine in Australia. We know that with the constant deterioration of seaborne price levels our Australian business was not a good fit for the US centric pellet focus [ways]. However, at today's IODEX, our expect cash production costs are still lower than what our price realizations are. With that said, we'll keep a close watch on conditions with this business and we'll act appropriately if and when we need to. In sum, we will not allow APIO to become a drag on Cliffs' EBITDA. Now turning to the United States; the most adverse condition we've dealt with here in the US was not our oil price, but rather the demand for pellets from our domestic clients. The price of steel in the US has been hammered by record levels of imports, the vast majority of that unfairly priced (inaudible) in our domestic steel market. The price of steel in the United States, not only directly affects our realized prices, but also affects the utilization of the steel mills we serve. As a result we sold far fewer pellets than we originally anticipated. Of course this illegal steel trade situation must and will be fixed. So far I have been generally pleased with the preliminary duties coming from Washington on the steel trade case, especially the extremely punitive percentages placed on China. That has already started to positively affect the order books of our clients. While seaborne iron ore prices continue to be low, domestic steel prices in the United States are up substantially from their bottoms. As the preliminary rulings for hot rolled cold rolled steel are released by the Department of Commerce in the next couple of months, domestic steel prices and steel demand should continue to recover for our clients. In turn, Cliffs profitability should improve as well. With that as a back drop, let's move on to USIO and its performance. The very first thing I would like to point out, is just a bit back of the USIO business segment. For the fourth quarter USIO adjusted EBITDA was $98 million, with $352 million for the full year. We continue to reduce costs quarter-over-quarter and year over year for this segment, achieving cash production cost of $45 per ton in the fourth quarter. The USIO management team work very well in 2015 to implement a production plan to address current customer demand and also to work down product inventory levels. Our operators made sure that our equipment was operating reliably and in top working order. All being done safely and responsibly through an environmental standpoint, while we're spending a lot less in CapEx. During 2015 we also had very good cooperation from our partners, customers, rail providers, shipping companies, and last, but for sure not least, the United Steel Workers, as we made difficult but necessary decisions related to our production plans to respond to evolving market conditions and fluid customer demands. I'd like to recognize our USIO team led by Terry Fedor, and our general managers, Jack Croswell at Hibbing; Dean [Cor] at Michigan; Ed LaTendresse at North Shore; and Santi Romani at UTAC. This group had an incredible 2015 and every aggressive target I set for them, they not only reached but beat. I assured those listening on the call that these mines are in great hands. Now to address the status of our idled mines, United Taconite and North Shore, both in Minnesota. Based on our clients' nominations the winter season and our current inventory levels, this mine will remain temporarily idled during Q1 2016. As Kelly mentioned, the idling of these mines is not totally optimal from a cost perspective, but that has allowed us to recoup the cash from the inventory we produced in 2015. We expect domestic steel production and our inventory tonnage to be back to normal levels sometime in 2016 so we can bring this mine back to operation sometime this year. Looking more broadly at our market position in the Great Lakes; what a difference a year makes. In short, the so-called competitive threats that were present in this market have all but faded away. Moreover, as a result of this market tragedy in Brazil, there's now a shortage of pellets in the seaborne market. I will repeat that. Moreover, as a result of this remarkable tragedy in Brazil, there's now a shortage of pellets in the seaborne market. This has created opportunities for eastern Canadian pellet suppliers for example, to supply additional pellets to Europe and to the Middle East which are low cost voyages for them. We are seeing this take shape already as December shipment data has shown major increases in vessels loaded with pellets in Eastern Canada, to fill the void of steel makers previously supplied by Samarco in the seaborne markets for iron ore pellets. In addition, potential threats from inside the Great Lakes are now effectively gone or very close to fold. I would be happy to elaborate more but I have already discussed this so called threat at length and all but the few unformed observers can see the handwriting on the wall. We also don't believe that any steel maker with a temporary availability of their in-house produced pellets, due to their own particularly weak steel order book, would supply cheap pellets to other steel makers in a permanent basis. Steel companies don't give their competitors a cost advantage. Now what does this mean for Cliffs? We have the opportunity to solidify our market leading position and improve our profitability, all while being mindful of our customers' costs and their need to be competitive. Turn to our new business as a supplier of DR-grade pellets to DRI producers, we have reached a significant milestone in our tasks with very positive early results coming from the successful care operation or trial of DR pellets in the customers' actual production process. At this point we can confidently state that DR-grade pellets have been added to our portfolio of custom made pellets, available to be produced and sold to our clients. While we are still in the early stages of our DR-grade pellet business it's nice to have the stamp of approval, our foot in the door if you will, to make DR-grade pellets an important portion of our product mix. In closing my prepared remarks, let (inaudible) those of you, that are still skeptical about the Cliffs' turnaround story we have been writing every day since August 7, 2014. You will point to our debt load and the challenges we face in this industry. I hope I have given you the proper commentary that has shown you the roadmap to our future financial success. First, maintaining our no stop focus on cost reduction. Second, using our technical expertise and strong marketing position in the United States to increase our product offering and foster improved profitability. And third, promoting debt reduction through liability management exercises. We are entering 2016 to include the implementation of our strategy as we execute the final steps of our action plan. At the same time in 2016, the major producers of iron ore will have no option other than acknowledging that their strategy of self-destruction has led them to the urgent need of actions, not very different from the ones we have already implemented here at Cliffs. At the time, these major players start to endure the pain they signed up for, the Cliffs' turnaround chapter will have been successfully completed. With that I'll turn it over to the operator to direct the Q&A part of the call. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator instructions) Timna Tanners, Bank of America Merrill Lynch. -------------------------------------------------------------------------------- Timna Tanners, BofA Merrill Lynch - Analyst [2] -------------------------------------------------------------------------------- Good morning, everyone. I wanted to draw down on your volume guidance because I just wanted to understand the commentary. It sounded like was it in the first quarter you were keeping some of the mines that are closed, closed, with the intention of being able to potentially restart them later on through the year, as I believe you said, the US had restored to historical utilization levels? Does that assume that some of your customers restart idled blast furnaces? Or is that just assuming they go from taking the minimum to a more normal level? Can you give a little bit more color about what your volume guidance assumes for your customers? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Sure, our guidance is based substantially on nominations that we get, we have already gotten from our clients. And it's also based on our market intelligence. We have options outside of our two main clients at this point, and I mentioned during my prepared remarks the substantial impact that we expect from DR-grade pellets. So there's a lot happening here in the USIO market and even more important, it has become very clear that in the domestic steel market we have a clear differentiation between the steel mills that are focused on automotive and the high end of the market, more toward cold-rolled and galvanized steel, and the ones that are more leveraged to (inaudible). Fortunately, we served the ones that have more leverage to the markets that are performing well, like the best example is the automotive markets. So I'll leave it at that, but that's the way we are seeing our market developing in 2016. -------------------------------------------------------------------------------- Timna Tanners, BofA Merrill Lynch - Analyst [4] -------------------------------------------------------------------------------- Okay. I understand about a million tons probably supplied to new core on the DRI side and they're happy having you as a supplier; and your existing customers hold on to their current operating model. I understood from your comments that you're expecting a return to more normal operating levels. And I just wanted to know if that was embedded in your guidance or was that potential upside? And are you assuming it comes equally from integrated (inaudible) mini mills to be able to give you a full benefit on your integrated customer base? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [5] -------------------------------------------------------------------------------- Your comment about the one million tons [up delis] to a specific client is your comment. I'm not endorsing or negating the comment. But you're absolutely right -- we are expecting a much more normal situation as far as operations in United States, mainly because the impact of the trade case will be real and it has already been started to be realized by the other books of the clients -- our clients at least. And we expect that only to improve. -------------------------------------------------------------------------------- Timna Tanners, BofA Merrill Lynch - Analyst [6] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons. -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons Platou Securities - Analyst [8] -------------------------------------------------------------------------------- Thanks for taking my call. Lourenco, very good job on costs in the fourth quarter and nice to see it flowing through to next year -- or I guess this year now. Along those lines, one piece that did go up a bit is the non-production cash cost, which I believe includes idling. Can we just get a sense of how much of the increase in 2015 was idling-related and kind of maybe what the right level of that component is going forward? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [9] -------------------------------------------------------------------------------- Sure. I'll let Kelly take this one. -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources Inc. - EVP & CFO [10] -------------------------------------------------------------------------------- Jeremy, you're right. We are going to have idle expense again in 2016. You're looking at just say roughly somewhere in the $55 million range of total idle expense for the year, based on looking at our sales ton forecast, looking at how we see production evolving over the course of the year, based on market conditions and customer demand. We tend to have a little higher amount of idle expense in the first quarter simply because we've got some continuation of sub pay and some other elements of the idle expense that are higher in the first quarter; and those will start to decline and more normalize over the course of the year. And obviously there are a number of elements that go into the idle expense, everything from take or pay requirements to maintain, energy to the facilities, and skeletal crews to make sure the facility is under good care and maintenance, et cetera. Obviously, that could change and be lower if we're able to bring back facilities sooner than we expect at this point. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [11] -------------------------------------------------------------------------------- I would just one additional comment. It's more like when we bring back production, not if. We will bring back production. This is United States of America. We're not going anywhere. We're going to continue to have a resilient economy, domestic steel production, domestic steel consumption, and we are going to continue to sell pellets. -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources Inc. - EVP & CFO [12] -------------------------------------------------------------------------------- And Jeremy, just one other point. The idle expense that we're looking at is baked into our COGS guidance -- just so you get that picked up for modeling. -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons Platou Securities - Analyst [13] -------------------------------------------------------------------------------- That's helpful. Along those lines, when you do bring back production, there's been a pretty substantial reduction in the cash cost of production, before the line item of the non-producing cash costs. So do you envision this as sort of a twofold benefit, greater volumes but also once you get the idle component of costs out of the way, that you should also see margin expansion on the back of that? Thanks very much. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [14] -------------------------------------------------------------------------------- Absolutely. You're right about that. Thank you, Jeremy. -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons Platou Securities - Analyst [15] -------------------------------------------------------------------------------- Okay, thanks, Lourenco. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [17] -------------------------------------------------------------------------------- Would the closing of Oak Grove and Pinnacle transaction last month -- is that the final asset sale we should be expecting? Or are you still considering selling the Asia Pacific assets and/or your terminal there at Esperance? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [18] -------------------------------------------------------------------------------- That's a very good question. And the answer is no, this is not our last transaction. We are always looking for opportunities of doing better and opportunities to divest assets that may be divested during transactions that may make sense. And the most clear one is absolutely the complex Koolyanobbing, Port of Esperance. It's a dedicated port. We're the only users of that port. It's a deep-water port, the only one in that area of Australia, the Yilgarn, that can accommodate Capesize vessels, so we have a very good asset in the port. We are going to continue to discuss opportunities related to the Koolyanobbing/Esperance complex. Of course Koolyanobbing -- that continues to be reduced, because not only the seaborne prices are going nowhere but down, but also because we are really approaching the end of life of mine. But even for other companies out of the iron ore business, the port investments may represent a value proposition. We have some discussion of going there are too premature at this point to be discussed in details. Good question. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [19] -------------------------------------------------------------------------------- Okay, great. And then one more. You're expecting to produce 16 million tons from US iron ore this year. What's your annual production capacity? And how quickly could you ramp up if domestic steel fundamentals were to improve? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [20] -------------------------------------------------------------------------------- To ramp up is quick; we can ramp up in less than a quarter. We can be back to full production, any mine that we have. Our production capacity is sub-20 million at this point -- not at this point because we still have Empire. But when Empire reach the end of life of mine it would be sub-20 million. With Empire it is a little more than 20 million. But keep in mind, the 16 million is production, but shipments will be 17.5 million with an increase in compared with 2015. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [21] -------------------------------------------------------------------------------- Sure. Thanks a lot, Lourenco, and good luck. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Lucas Pipes, FBR & Company. -------------------------------------------------------------------------------- Lucas Pipes, FBR & Company - Analyst [23] -------------------------------------------------------------------------------- Good morning, everybody. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [24] -------------------------------------------------------------------------------- Good morning, Lucas. -------------------------------------------------------------------------------- Lucas Pipes, FBR & Company - Analyst [25] -------------------------------------------------------------------------------- Lourenco, in the past you were providing details on the kind of new entrance to a USIO market. And today I think you made some comments, but it would be helpful to have more granular update on what you think is happening in terms of competitors coming to the US market. Where do you think that stands right now? How is the supply situation going to change? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [26] -------------------------------------------------------------------------------- You're absolutely right, because in the past this was important. At this point it's no longer important because, short of a miracle from God, the one that was being built in Minnesota will not be able to start in the next quarter or two quarters or three quarters or two years or three years. So it's gone. It's game over. So all that talk, all that great predictions about a competitor establishing himself, first to produce steel in the DRI and [belts], then to produce only DRI and belts, then to produce only belts, now they're producing just disappointment, sadness, unemployment, lack of respect -- lots of great things over there. So it's gone. So that's the reason I did not even bother commenting. The other one is still grasping the last straws of their existence. We are really standing by respecting the legal process that's going on over there and we'll wait and see how we're going to address. It's so great. It's all positive. Even for the current [guys] in funds, bankrolling their miserable existence continues to put good money after that. That's their decision, not mine. We have a situation in the USIO that can be profitable and can generate good revenues and return on investment for our investors is well established. And the other one is not doing the same thing. It's operating under Chapter 11 and continuing to struggle day after day after day, just relying on legal opinions to stay afloat and to stay supplying a client that doesn't like them. So that's the current situation. I don't know if I missed something, but if you want to ask a more specific question, I'll give you a more specific answer. -------------------------------------------------------------------------------- Lucas Pipes, FBR & Company - Analyst [27] -------------------------------------------------------------------------------- No, no, this was exactly what I was looking for. Thank you for that. Just to make sure I understood your prior comments on USIO output from Cliffs at current steel capacity utilization factors, where would that shake out if things stay at the status quo? What sort of volumes should we be looking at for 2016? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [28] -------------------------------------------------------------------------------- 17.5 million tons, 16 million from mill production and 1.5 million from inventory. -------------------------------------------------------------------------------- Lucas Pipes, FBR & Company - Analyst [29] -------------------------------------------------------------------------------- At the current utilization rate? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [30] -------------------------------------------------------------------------------- At current utilization rate. Exactly right. -------------------------------------------------------------------------------- Lucas Pipes, FBR & Company - Analyst [31] -------------------------------------------------------------------------------- Okay. Great. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [32] -------------------------------------------------------------------------------- Lucas, which I fully believe it will improve during the year, by the way, for the record. We tend to build our worst case scenario in our forecast to protect the downside. -------------------------------------------------------------------------------- Lucas Pipes, FBR & Company - Analyst [33] -------------------------------------------------------------------------------- Got it. That's great. Good luck with everything. I appreciate your color. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [34] -------------------------------------------------------------------------------- Thanks, Lucas. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [36] -------------------------------------------------------------------------------- Good morning, guys. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [37] -------------------------------------------------------------------------------- Good morning, Evan. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [38] -------------------------------------------------------------------------------- So first one: good work on controlling what you can control. Looking at costs coming down and continuing into next year, certainly a positive. So I was trying to take your guidance and back into what the seaborne price for iron ore would be for Cliffs to be free cash flow breakeven. At least, on my math -- and this is not including that $100 million in working that you mentioned at the beginning of the call -- I was shaking out somewhere near $50 a ton or so. I was wondering, you were about $10 a ton away from free cash flow breakeven at this point. What do you see or what can you do footprint-wise to get there over the next year or two? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [39] -------------------------------------------------------------------------------- Evan, look. Here's the thing. The number that would be the answer to your question would be very relevant for iron ore mining companies that are fighting to be cash cost breakeven in the seaborne iron ore market. That's not my goal. My goal is to be profitable in United States, helping our clients to continue to be profitable in United States, enhance the product mix in the United States, and last but not least, as kind of the tail of the dog, not be generating any negative EBITDA out of Australia. So far, so good. So you have the answer and the number that you have already realized. And then you plug your own price assumptions for seaborne iron ore, and then you see if we are going to be cash flow positive, cash flow neutral, or Australia will have to drop out of the picture. That will be the three options that we'll have as far as Australia. I don't have an answer for the number because here in United States, this number is totally irrelevant. At $42 per ton seaborne iron ore prices can only go down $42. This will not mean anything for the United States market because our market is driven by steel prices, not seaborne iron ore prices. If it was driven by seaborne iron ore prices when we are in the 70, 80, 90, 100 plus our IODEX price. At this IODEX price this number is totally irrelevant for the US in oil prices. But now that you're talking here, I have a question for you, Evan Kurtz. Why are you still calling Cliffs high-cost producer if you're saying that we have been cutting costs so much? Our last report still calls us high-cost producers, like if you're writing about Cliffs of 2014 -- we are in 2016. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [40] -------------------------------------------------------------------------------- Taking into account your new guidance, we'll see how where you shake out on the cost curve and revisit it then. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [41] -------------------------------------------------------------------------------- Say it again. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [42] -------------------------------------------------------------------------------- Taking into account of your new guidance, we'll see where you shake out on the cost curve again, we'll refresh that. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [43] -------------------------------------------------------------------------------- Cost is not guidance. Cost is numbers that we publish every quarter. We did it in Q3 2014, Q4 2014, Q1 2015, Q2 2015, Q3 2015, Q4 2015. You're still calling it high-cost producer. So it's hard to convince people when they don't want to be convinced. Have a nice day, Evan Kurtz. Next, operator. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- John Tumazos, John Tumazos Very Independent Research. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Very Independent Research - Analyst [45] -------------------------------------------------------------------------------- Congratulations on all the progress. Two questions if I may. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [46] -------------------------------------------------------------------------------- Thank you very much, John. All is nice here. You are my old friend. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Very Independent Research - Analyst [47] -------------------------------------------------------------------------------- Good. The fall of Ferrous Scrap for publicly traded companies has fallen about 20% and many of the private scrap yards have closed, so to companies that are down 20% probably are gaining share. First question is, if the mini mills are short 10 million to 15 million tons due to the lower scrap flows, do you think that they'll bid the 12 million tons of scrap exports into the domestic market? Or simply stop producing the products that have the lowest price like hot rolled sheet? Or bid up scrap? You can't give them iron units fast enough for them to build DRI plants, given how quickly the scrap flows have fallen. How do you think that plays out? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [48] -------------------------------------------------------------------------------- It plays out, John, in a way that the mini mills of today are not the mini mills of the early 90s. The mini mills of the early 90s were really low cost scrap, easily available driven big reservoir, nobody [tapping] to produce flat roll. That was when Crawford [sued can] corporation in1989, and then Hickman, then the Steel Dynamics plants, and so on and so forth. You and I saw that happening real-time. Fast forward, we are in 2016. We have a much more mature market, a bigger -- a huge presence, majority presence of mini mills in the marketplace. They have done a phenomenal job in improving the quality of their steel and their ability to produce high end materials, and to be competitive against the blast furnace producers, including some markets that were not the markets that were designed for it -- as high as automotive. So at this point in time, what the mini mills -- I have a problem calling them mini mills at this point -- but the producers are aiming when they go to DRI HBI or any other iron [sub] institutes is to be able to cater to a clientele that they would not beat, no matter how cheap, no matter how available, no matter how simple life would be by using only scrap. So DRI or HBI or any iron [sub] institute, gives the (inaudible) producers the ability to compete in markets that they were not able to compete before. And that's priceless. It's like MasterCard. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Very Independent Research - Analyst [49] -------------------------------------------------------------------------------- Thank you. If I could ask a second question, Lourenco -- congratulations on the debt exchange, which looks like it will create at least $1 billion of fresh equity on your balance sheet if accepted without issuing any dilutive stock. You should get the Nobel prize for trying to preserve shareholder value. Thank you. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [50] -------------------------------------------------------------------------------- I appreciate the congratulations, but I have to stop you, John. I will not discuss the debt exchange. I can't. That's illegal. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Very Independent Research - Analyst [51] -------------------------------------------------------------------------------- Excuse me, if it is a legal restraint. Thank you again. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [52] -------------------------------------------------------------------------------- Appreciate it. Thanks a lot. I'll take the last question, Operator. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Chris Haberlin, Agincourt Capital Management. -------------------------------------------------------------------------------- Chris Haberlin, Agincourt Capital Management - Analyst [54] -------------------------------------------------------------------------------- Thanks for taking the question. On your inventory reduction, can you talk about how you expect that to go through the year, I know at some point you mentioned you expect some of it to happen in the first quarter? Is that the whole 1.5 million tons? How should we think about the working capital benefit of that reduction? Is it just simply looking at the $71 to $78 iron-ore realizations and multiplying that by the volume? Or is there some other math that I'm missing there? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [55] -------------------------------------------------------------------------------- I'll let Kelly take this one. -------------------------------------------------------------------------------- Kelly Tompkins, Cliffs Natural Resources Inc. - EVP & CFO [56] -------------------------------------------------------------------------------- Chris, your math isn't really wrong. I don't think you should look at the working capital benefit, which will be substantially driven by USIO inventory. Obviously there are a lot of other elements contributing to working capital, but that will be the main driver. It should follow largely our seasonal patterns, maybe a little bit more in the first quarter than normal. But I think you can just look at it pretty typical to our normal seasonality. We finished last year with about 2 million tons -- about 2 million tons higher inventory than I'll say more normal levels. So we've got an opportunity to work it down and that is a very significant driver of our cash flow operations this year. -------------------------------------------------------------------------------- Chris Haberlin, Agincourt Capital Management - Analyst [57] -------------------------------------------------------------------------------- And then just a second question here -- on your volume guidance for USIO, I guess I was a little bit surprised to see it increasing from 2015 just given that you had six-plus months of the SR contract that was terminated. And I know you've talked about this quite a bit, but is this all -- it implies that you're shipping increased volumes to other customers. Is that indeed the case? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [58] -------------------------------------------------------------------------------- We are not going to break down our shipping forecast for you, but it's a combination of new [blanks] and old mills getting more pellets than they got last year. That's pretty much it. -------------------------------------------------------------------------------- Chris Haberlin, Agincourt Capital Management - Analyst [59] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [60] -------------------------------------------------------------------------------- I know that's not the answer you'd like to get, but I'm not going to go beyond that. -------------------------------------------------------------------------------- Chris Haberlin, Agincourt Capital Management - Analyst [61] -------------------------------------------------------------------------------- That's fair. Just one last question: can you just kind of update where you stand with the Middle contract and how you expect that to play out over the balance of the year? -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [62] -------------------------------------------------------------------------------- We have two contracts with [Isolavital]; and one expires in December of 2016, the last month of this year; and the other one expires in June of 2017, first months of next year. So we still have 11 months left in one contract and 12 in the other one. So that's the status of both contracts. The renewal will come at the right time and I am 100% sure that the contract will be renewed in a situation that will be very good for Cliffs and very good for Isolavital. That's all I can tell you right now. -------------------------------------------------------------------------------- Chris Haberlin, Agincourt Capital Management - Analyst [63] -------------------------------------------------------------------------------- Thanks for the update. I appreciate it. -------------------------------------------------------------------------------- Lourenco Goncalves, Cliffs Natural Resources Inc. - Chairman, President & CEO [64] -------------------------------------------------------------------------------- I appreciate the call. With that, we are going to wrap up the call. We are really at the last stages of implementation of our strategy, but we still have a lot to do here in this Company. The US domestic market for steel and consequently for pellets should improve in 2016, especially for the clients that are focused on the higher end of the US domestic steel market. We have a lot of hope -- and hope is probably not evenly the right word -- but a lot of conviction that the US Department of Commerce will do the right thing to fix the legal trade of steel that we have been subjected to, especially in 2015. And we continue to feel that our decision to refocus Cliffs into a USIO pellet center company, was the right thing to do. We look forward to continuing the dialogue with you all and we will stay in touch as needed. Thank you very much and have a great day. Bye now. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen, for your participation today. This concludes today's conference call. You may now disconnect.
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