Cleveland-Cliffs Inc (CLF) 2008 Q1 法說會逐字稿

Good morning. My name is Brie, and I will be your conference facilitator today. I would like to welcome everyone to the Cleveland-Cliffs 2008 first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. At this time I would like to introduce Steve Baisden, Director, Investor Relations and corporate communications.

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

Today's conference call is also available and being broadcast on our website. At the conclusion of the call it will be archived and available for replay for approximately 30 days on Cleveland-Cliffs.com. Joining me today are Cliffs' Chairman, President and Chief Executive Officer, Joseph Carrabba and Executive Vice President and Chief Financial Officer, Laurie Brlas. At this time I will turn the call over to Laurie for her prepared comments.

Thanks, Steve. And good morning, everyone. I will begin today's discussion with the first-quarter financial review and outlook, after which Joe will review our operations and provide an update on some actions the Company has recently taken. Highlights for the year's opening three months include record first-quarter revenues of $494.4 million, 52% higher than the $325.5 million posted last year. A $94 million revenue contribution from the met coal business we acquired last July and a $54 million increase from our North American Iron Ore businesses primarily drove our topline growth.

It is extremely important for everyone to understand the strong revenue growth we experienced in the quarter occurred despite the fact that some benchmark prices referenced in our various contracts had not settled at the end of the quarter. What this means is we billed our customers and recognized revenue at 2007 pricing. When the benchmarks are determined, the additions are retroactive to the first of the year. So, because of the recently announced 87% increases for Eastern Canadian pellets, we will recognize approximately $500 million of additional revenue in the second quarter related to first-quarter sales. Although the benchmarks referenced in our Australian contracts have not settled yet, there have been numerous fine settlements at a 65% increase.

If our benchmarks settle at that assumed increase of 65%, we expect to recognized approximately $50 million in additional revenue in a future quarter relating to the tons sold in the first quarter. Most of this additional revenue will flow directly to operating income. Reported first-quarter 2008 operating income declined approximately 5% to $43 million, primarily reflecting higher SG&A expenses. SG&A of $45 million was significantly higher than the $19 million we reported in the first quarter last year. However, included in that number is $6 million attributable to our North American Coal segment.

Because of the rock intrusion and slowed production there was no sales margin to cover the operating expenses this quarter. Joe will talk a little bit more later about our operational outlook for coal. In addition, we recorded a $7 million charge resulting from a legal ruling that we are currently in the process of appealing. Also included in SG&A is about $10 million related to additional management infrastructure and corporate development costs incurred in Latin America and the Asia-Pacific region. This is because we've invested in growing our international management teams and increased our focus on evaluating development opportunities in geographies outside the US. Joe will talk more about that later, as well.

Net income for the quarter was approximately $17 million or $0.32 per diluted share versus $33 million or $0.62 per diluted share last year. However, it is important to understand that if the settlements had already occurred we would have expected approximately $0.75 in additional earnings per diluted share, which will be recognized in a future quarter upon settlement. We also had a higher tax rate for the quarter, but we still expect our full year rate to be 26%. Frequently quarter to quarter blips are experienced due to the size and mix of the earnings in a given quarter, but it does even out over the year.

Turning to the business segments, in North American Iron Ore Cliffs' pellets sales volume for the 2008 first quarter was 2.7 million tons, up 10% from last year. Average per ton price realization rose 15% to $76.32, and costs increased just 2%. This resulted in significant margin expansion to $23.55 per ton versus $14.92 last year. Our higher average price per ton is being driven primarily by higher pricing for steel. Again, as of the end of the first quarter the eastern Canadian pellet price had not settled, so we expect to recognize about $5 million of additional revenue related to that in the second quarter.

Costs in the quarter were impacted somewhat by a major furnace repair at Empire, as well as higher energy costs for electricity, natural gas and diesel fuel. Our total energy spend this quarter was up 7% compared with last year. In the North American Coal segment first quarter product sales and service revenues were $93.9 million, 998,000 tons of sales volume. Sales margin was a loss of $2.5 million and primarily due to development and planning work, as well as other fixed costs incurred to deliver future production enhancements. Average price realization of $81.02 per ton for the three months was exceeded by unit production costs of $83.57 per ton.

In our Asia-Pacific iron ore business we reported product sales volume of 2.01 million metric tons during the first quarter of 2008, an increase of 9% from last year's comparable period. Reported average price per ton realization was $56.12, up from $52.14 in last year's first quarter. Most of our contracts with customers based in China run on a calendar year while those with customers in Japan run on a Japanese fiscal year. Since the Australian pricing for lump and fines iron ore referenced in all of our contracts has not settled yet, we estimate we will see $50 million of additional revenue related to the first quarter, which will be booked upon settlement. This is based on an expected 65% increase in our mix of customers. Foreign exchange, higher fuel and labor cost all continue to be challenging in Australia, although we did report a modest sequential quarter cost per ton improvement.

Turning to the balance sheet, at March 31st we had 5.8 million tons of pellets in our North American inventory compared with 6.1 million tons in last year's first quarter and 3.4 million tons at 12-31-07. North American Coal had 87,000 tons of met coal inventory at March 31st compared with 100,000 tons at year end 2007. Asia-Pacific iron ore had 1 million tons of finished product inventory at quarter end 2008 versus 900,000 tons at quarter end 2007 and 1.1 million tons at 12-31-07.

At March 31, 2008 we held $187 million in cash and cash equivalents compared with $157 million at 12-31. The Company had $600 million of borrowings outstanding under the $800 million credit facility versus $440 million at year end. Cash used in operations during the first quarter would be approximately $120 million. This was primarily inventory related, and it is consistent with our historic use of cash in the first quarter of the year. Our cash capital expenditures totaled approximately $34 million in the quarter. While we did use cash in the first quarter for the full year we expect to generate approximately $700 million in cash from operations. This is an increase from our previous estimate of $650 million, which brings us to our outlook for 2008.

We've refined all of our estimates based on the latest information that we have. And in estimating our price expectations in North American Iron Ore for 2008, we increased our assumption from a 65% increase in eastern Canadian pellet price to the recently announced agreements for an 87% increase. We also would share the following other factors that impact pricing in our North American Iron Ore contracts. We expect approximately a 3% to 4% increase among the various producer price indices, an approximate 25% increase in factors related to steel pricing, including hot-band steel at $700 per ton.

The impact of a recently negotiated amendment to our supply agreement with Severstal increases the quantity and changes the price structure. That agreement also extends our relationship through 2022. Joe will share a little bit more with you on that in a moment. And finally, incorporated into our assumption are the traditional combination of supply agreement contractual based price increases, lag year adjustments and various caps. So based on all those factors, we are raising our North American Iron Ore estimated revenue per ton for 2008 to $81.

We also updated the sensitivity of that to the key input assumption as it relates to steel pricing. So now you would look at each $10 change from that $700 per ton at a certain steelmaking facility will change our realization by $0.24. Because of rising energy costs, we are also updating our cost per ton expectation to $53 per ton for the year.

Revenue per ton for North American Coal is expected to increase to $94 from our previous expectation of $91 as we anticipate the improving market for met coal will boost our average realization. As a result of the fault area we encountered at the Pinnacle mine, we expect our cost per ton at North American Coal to increase to $86 per ton for the year.

In our Asia-Pacific iron ore segment we are assuming a 65% increase in Australian lump and fines, although (inaudible) continue their negotiations, this is still subject to change. With the 65% increase we expect average revenue per metric ton of $89. Our guidance for cost per metric ton is $53 and includes $3 per ton for our previously announced exploration and evaluation program.

At Sonoma we expect an average sales price of $129 per ton as our sales mix benefits from some of the recently announced record pricing for metallurgical coal out of Australia. Cost per ton are expected to be $83 at Sonoma, higher than originally expected as we recover from the flooding in eastern Australia that occurred earlier in the year. As previously announced, startup delays and ramping production levels at the Amapa venture are expected to produce equity losses in 2008.

SG&A expense for 2008 is expected to be approximately $160 million, up from our previous estimate of $150 million and primarily due to the legal settlement that I mentioned earlier. With that, I will now turn the call over to Joe.

Thanks, Laurie. I will begin with an overview of the operating performances for each of our segments and conclude by providing you with some information on some other tactical moves we recently made. Our North American Iron Ore segment achieved equity production of 5.2 million tons for the quarter, up from 4.8 million tons for the year for the period a year ago, with all the mines running at or near capacity. The bulk of the production increase is attributable to Hibbing, which has fully recovered from last year's weather-related shutdown, producing 2 million tons in the first quarter versus last year's 1.2 million tons.

Idled furnace number 5 at our Northshore Mine has been restarted and very pleased to announce on time and within the budgeted time allotted. We expect this operation to add another 600,000 tons of incremental pellet production in 2008 and 800,000 tons annually thereafter. Our expected share of total production for the year is approximately 22 million tons and includes a full year share from Wabush and increased production rate at Empire to 4 million tons and a slightly increased production rate estimate for Tilden.

We also continue to move forward with our plans for a commercial scale plant at our Empire Mine capable of producing 500,000 tons of iron nuggets per year commencing in 2010. We expect to produce 35.6 million tons of pellets in 2008 with the sales volume of 24 million tons as we sell down some inventory.

In Asia-Pacific iron ore we produced 1.9 million metric tons in the first three months of 2008, slightly higher than the same period a year ago. And we expect to produce 7.8 million metric tons of fines and lump ore with sales of 8 million metric tons for the year.

Now I would like to take a few minutes to discuss our slowdown at our North American Coal, the Pinnacle Mine in West Virginia. In April we declared force majeur on coal shipments from this facility after encountering a fault area in the coal seam being mined. Since then we have made significant progress through the fault area, which accounts for approximately 1200 feet of the approximate 10,000 foot coal section. We now expect the impact on our full year North American Coal production will be approximately 200,000 tons. As such, we reduced our 2008 production and sales volume guidance to 4.3 million tons.

Turning on to our early stage projects, operations at our Sonoma coal project have recovered from the severe rains and flooding throughout the Bowen Basin that caused a slight delay in scheduled shipments during the first quarter. We sold approximately 28,000 tons for the quarter and expect full year combined production of hard coking coal and thermal coal to be approximately 2 million tons. Per metric ton cost was $189 for the three-month period. The increased cost per ton resulted primarily from high stripping rates associated with the ramp up in production and costs associated with the flooding. As the project ramps up through the remainder of 2008 and into 2009 we would expect cost per ton to come down significantly.

In regards to the, Amapa venture MMX is progressing with the sale of its interest in the project to Anglo American. In the interim MMX is maintaining managerial control of the project and moving forward with commissioning of the concentrating facility. The reported loss for the quarter at the Amapa iron ore project is $6.9 million, primarily reflected in preproduction cost.

Although, as we've said, we expect a loss in 2008 but it is currently difficult to tell to what extent, particularly as MMX and Anglo work through their deal and operating plans get hashed out, MMX has provided production and sales estimates of 3 to 4 million tons for this year and 6.5 million tons next year.

Before we take our questions, I did want to provide you with some information on a few strategic and tactical moves we have recently made. As Laurie briefly mentioned in North American Iron Ore, we recently negotiated an amendment to our supply agreement with Severstal. While we are not at liberty to discuss the specifics of the amendments in terms of our pricing or volume, it does increase the quality of iron ore Severstal will buy from us, and also changes the way we calculate the price compared to the previous agreement. It also extends our supply agreement from 2012 to 2022. This is consistent with our philosophy of building mutually beneficial long-term relationships with our customers.

Turning to another North American development, as you may know in December Cliffs made a strategic investment in a small green energy company called Renewafuel. The company produces high-quality, low emission biofuel in the form of dense cubes made from renewable and consistently available components like cornstalks, switchgrass, grains, soybeans, and oat hulls, wood and wood byproducts. In addition to our initial R&D facility in Battle Creek, Michigan, we are in the process of building our first plant in the Upper Peninsula of Michigan. We have also recently targeted Northeast Minnesota for another facility, which we hope to have permitted and operating by early next year.

These plants take a very little capital to build and produce about 150,000 tons of dried biomass cubes annually. We may eventually use the product in our mining operations as a fuel alternative. But for now we are focusing on developing markets outside the Company that can use the cubes as potential substitute for Western coal or natural gas. We have already conducted successful product testing including operating industrial oilers using 100% biomass. The product has the potential to help large plant operators meet the more stringent emission requirements many expect they will be dealing with in the near future as burning biomass does not contribute to global climate change in the same way as the burning of fossil fuels. Once the project is tested and scaled appropriately this could have a significant impact on Cliffs' carbon footprint, as well.

On the corporate development side many of you heard me say that Cliffs has absolutely no lack of deal flow. Our group in Latin America continues to be very active exploring numerous potential projects. Our strategy there is to find mineral projects with growth potential outside the influence and control of the large mining players. Countries we are considering include Brazil, Peru and Chile. In addition, we are not limiting our options to just iron ore. Other steelmaking minerals are leveraging our know-how and relationships for downstream processing of ores are also possibilities. Many greenfield projects in this part of the world are structured such that you must fund an exploration phase that acts much like an auction, intermediate progress phases and then a back-in production royalty based on output in the out years.

In Asia-Pacific we are also keeping our eye open as changes in the credit markets are providing opportunities. In April Portman Ltd. acquired a 14.5% stake in Golden West Resources, an Australian stock exchange listed iron ore mining company for approximately $15 million. The purchase provides us a strategic interest in Golden West and its Wiluna West project.

In another creative development as we execute our exploration program at Portman we are finalizing a commercial agreement with two other mining companies that provides us the iron ore rights to a number of tenements areas adjacent to some of our current mining operations in exchange for unencumbered access by these companies to some of our tenements. While too early to tell if this will pay dividends, it allows for some tenement rationalization and access to additional perspective exploration areas. I also think it is a great example of how Cliffs makes the most out of every opportunity we have.

To close out my prepared comments, we are very pleased with the results of operations this quarter. We are well positioned for the expected increases in iron ore and met coal pricing in 2008 that will fuel very strong cash generation for the year. The cash generation will allow us to continue our strategy of geographical and mineral diversification and with the recent worldwide credit crunch, we expect there will be some unique opportunities to put this cash to work in projects that now carry more reasonable valuations. Should these not come to fruition we have multiple alternatives for returning value to the shareholders.

At this time we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) David MacGregor, Longbow Research.

I wonder if you could help with just a couple numbers here. If I look at the Portman revenues of the 117.5, I guess we add the $50 million to that and divide by the tonnage we come up with an adjusted sales price of $79.99 -- say $80. Is that a fair way to look at this?

Yes.

Yes, very much so, David.

Okay, so help me understand an $80 realization versus the $89 that you expect to realize there for the year.

Well, you're going to have some in the first quarter that is not priced at the 2008 level, so you're going to have a different mix going forward through the balance of the year.

So is it really just some carryover of some previously priced tonnage and we should expect closer to an $89 realization the second quarter?

Yes.

Okay, secondly, on again a couple of pricing questions, the PinnOak, you realized $81. You have been talking previously about $91 and now $94. I guess the force majeur may have some influence on mix here, but can you help us understand that discrepancy?

David, it would have some on it, some minimal pieces that come on and think a lot of it is just the calculation of the contracts as we got deeper into them through the year of when the international contracts came on and when the domestic contracts were fully valued we have upped the estimate more on that basis.

The price increase on international contracts doesn't kick in until the first of this quarter, so you've got a quarter where, again, you got some '07 pricing still recording.

That is helpful. Then in terms of the force majeur tonnage, I realize it was relatively small, but does it come off domestic business or come off export, or is it proportional?

It comes off the -- it goes right back to the first contracts that were settled, which most of those were domestic. It just happened to be that way. But they would be in order of the contract's life. But yes, the majority of them were domestic.

Okay. Certainly on the iron ore business in North America if you take the shipments multiplied by the price you get $209 million, not $278 million. Is the difference Amapa?

There is freight and the other piece in there, the reimbursements.

These are all numbers excluding freight.

Okay.

David, I can follow up with you on that specific question (multiple speakers)

Good, thank you. Finally, on Severstal, you had mentioned the fact that with this new agreement not only is there an extension in terms of the day from 2012 by an extra ten years, but there's also a change in calculation. I guess we would have assumed that. Can you elaborate a little bit on the change. I realize there is an ability on your part to provide full disclosure or full transparency, but can you just talk at least conceptually about how the change in calculations occurred?

We will give you the broad answer, David, that I'm sure won't satisfy you. But again, they are consistent with what we've talked about in the past. But the way we structure contracts that go forward, obviously we think they are favorable to the marketplace that we've settled for ourselves, for Severstal. Again, we are very happy to be with a very large and up-and-coming customer within North America, and we think this contract allows them to grow their business and reline blast furnaces that may be in doubt. I can't give you much more than that.

Can you say whether the contracts now have a higher level of sensitivity to change in the seaborne price market?

No, I really can't.

Thanks very much.

Jorge Beristain, Deutsche Bank.

Good morning. I just wanted to clarify a little bit on the guidance regarding the hot rolled coil that you are now quoting at a $700 benchmark. We are all aware of what is happening in the market recently with HRC going north of $1000 a metric ton. Could you just clarify what you mean by giving that guidance? Are you simply trying to update the rule of thumb and you are allowing the analyst to extrapolate from the 700 base versus what current prices are? That is my first question.

Yes, we are certainly allowing you to plug in what you would like, and we are updating that. And I would encourage you to remember that this is not just the general spot market. It is a full year average of a specific situation. So you want to be a little bit cautious.

Sure, (multiple speakers) but for the $81 blend that you are talking about in North America, is that using $700 HRC?

Yes, it is.

All right. And I understand you're saying it is full year average and so there is some sensitivity there. The other question I had was just regarding the nature of this Severstal renegotiation. Was this something that was up for renegotiation anyway and you took the opportunity to improve a little bit your pricing, or is this something that you proactively went out to that client and do you expect to do more of these type of contract renegotiations going forward?

I would say the contract was not up, and I think it is more proactiveness on both parts. Certainly we have on our side for Cliffs we have large capital spends and expansions that we want to put in. So we need the solidity and the long-term nature of the contracts to go in. I would think on the independent steel producers part I think what you're really starting to reflect is the scarcity of metallics all over the world, including North America. And the ability to obtain those metallics for long-term as they also put their capital plans in. So it is a bit of both.

Thanks very much.

Mark Liinamaa, Morgan Stanley.

Can you give a little commentary regarding your coking coal pricing strategy for next year? Already we are starting to hear talk of $300 plus deals being set for 2009; how long you would hold out or are you looking for multiyear deals?

I think yes, Mark, I would be glad to. As we said moving into this year, this was our first year in the coal business and of course everybody only remembers last week when the floods occurred in Australia and the BHP priciness. We did settle our pricing early for '08. We are new to the coal business, and we weren't ready to speculate in the spot market at that point in time. And those same things for '09. We have nothing committed for '09. Our group, our sales group is certainly discussing the strategy going forward, and they are going to start discussions with customers later this month in regards to '09. But we would certainly look at international pricing as the benchmark for our 2009 pricing.

Okay, thanks. And as far as the -- it sounds like you're reasonably close to doing some sort of M&A activity, would a minority interest type thing still be of interest? And can you talk a little bit about how big a transaction you might be willing to take on?

We are all sitting here stumped, Mark. We are not aware of anything we are relatively close to doing. But again, as we've always talked about through our strategies is we will look for the best deal possible. We are good at joint ventures. We prefer a majority share, but in the right circumstances where it doesn't concern us to have a minority share either.

Thanks very much. Sorry I stumped you.

That's okay.

Jack Franke, Duquesne Capital.

Thanks for taking my question, Joe. First question is on the coking coal for '09 if you know we are seeing 315 metric ton in the market. What does that net back to the mine would you think?

Is usually about a -- it would be about $315 would take it back to about $240 to $250 the mine.

For both mines?

Yes.

Okay, that's a short ton?

That's a short ton, yes.

Jack, you've got to make the adjustment from metric ton to short ton. And then you also have to build in the freight costs for, from mine mouth to port.

And given the Severstal contract renegotiation and I know the middle contract, umbrella contract comes up due in 2010. Are you guys starting to begin dialogue there on changes to that contract?

We always have constant dialogue with our very large customers, as you can imagine that carries along. Both parties are aware of the umbrella agreement. Nothing is officially started. But I'm sure we are both aware of it.

Okay. Thank you, guys.

(OPERATOR INSTRUCTIONS). Tony Robson, BMO Capital Market.

Thank you for your time for this call. I will come back on the issue of pellet pricing. It strikes that for this year the Cockatoo and Koolyanobbing fines price mostly will be actually higher than your North American pellet price. And of course pellets are much more valuable than fines. What can you continue to do to increase the price you receive from the customers? That is my first question, please.

Again, as we say as customers want to engage, Tony, on these contracts and certainly again I think it is scarcity of supply that would drive those conversations we are certainly as open as we possibly can be. Beyond that we have long-term contracts that are in place. We are going to honor those contracts. We are certainly not looking, as some have suggested in the past, to find a way to break those contracts. And we have to work with what we've got.

No, I understand that absolutely that you can't break contracts. But I guess the pricing mechanism which was suitable for, if you like, the '80s and 90s with the steel industry in the US keeping when times were tough, is no longer relevant now when we see steel companies even with the higher input costs making some pretty attractive margins. And I guess you guys are aware of that, of course, too and no doubt are fighting for better contracts. I suppose also following one of the previous questions, are you trying to increase the sensitivity to the global pellet price into your new contracts in a general sense?

In a general sense we are going to do the right thing, and the closer we can get to world pricing, we're going to fight pretty hard for that if we get the chance in contract reopeners. But we also still in North America -- we like the semblance of longevity with our contracts and tying them down for a long time.

Two more practical questions, if I could, please. Can you give us guidance for 2009 for PinnOak coal production assuming no more intrusions or sandstone faults or intrusions?

It is just too early. We are coming out of the -- I'm happy to report we're coming out of the second sandstone intrusion quite nicely. I think also a credit to the management team down there the first sandstone intrusion, caught us right after we bought the mine and just stopped us dead in our tracks. And to the credit of the management team, they have worked through this one and they are just now coming out of it. So we really have to get them out of it and have them move forward so we can focus. But I'm just a little too premature to give you any guidance for next year.

We still believe it is going to increase over what we've expected this year. As we've said before, we've indicated I believe around 5 million, so certainly we will be getting that direction.

Final question, please. Closure costs for Cockatoo Island in the third quarter, anything material there?

It is all accrued for.

Yes, there won't be anything. We will just be finishing production up there, Tony, and we are still negotiating with the environmental bureaus in Australia on the type of closure that it will go. So I suspect it is accrued for, but even the activity of it.

On a cash basis we are talking low single-digit millions. It's not going to be anything that is going to be a significant problem.

Okay, great. Thank you.

Zach Schreiber, Duquesne Capital.

A follow-up question. You talked about in terms of going forward you value sort of long-term contracts with your customers in North America. Just wanted to understand if the things you value about it is having a physical home for the metal or if it is having certainty of price. And given the scarcity of the metallics that you highlighted, and given the recent deal you cut with Severstal, can't you sort of have your cake and eat it on a going forward basis, and can't you have guarantee of much higher pricing going forward as well as a physical home for your product? I wasn't sure if you were trying to intimate that you are sort of forever in a situation where you have to accept a discounted price for your product relative to the global price, given what you value for certainty or if you actually can have in this environment for the foreseeable future, have your cake and eat it. Thanks.

It is hard to see how big that cake would be to 2022; when we start looking at tying up contracts up that far, we think we are getting what we need to do. We are moving closer to world pricing. We will not see world pricing at this point in time. And again, we have chosen to sacrifice some price for longevity and security of supply in North America once again. We could take the short-term view, but we don't think that is all nice right now and everybody has forgotten we have just come into this in the last three years. When the cycle does turn it will be nice to remind people of these long-term contracts. So no, we are quite satisfied with our track record and where we're going with it.

And the 2022, is the new Severstal contract?

Yes, sir.

I think it is also important to remember that it is relatively expensive to ship the pellets out of North America. That is an important factor to keep in mind.

To make sure I understand it, how does -- how do the existing contracts roll off? You've spoken about physical supply, physical deliveries between now and I believe 2016 and then also different plants within the umbrella agreement rolling off in I believe 2011 and so forth. Just sort of back of the envelope a bunch of this stuff starts getting market pricing in 2010, 2011 without any new contract structure being put in place. Is that correct?

Yes, our contracts, the first of the contracts do start coming up in 2010. And again, those will be renegotiated prior to those dates.

And to be clear, the Weirton plant, there is no obligation to serve that plant at this contractual rate, that is after 2010, right? That expires, and that steel plant no longer exists, and there is no way Arcelor Mittal can sort of divert those pellets to another plant and say that they are still owed the pellets that are below market price, i.e. that is clear there is no way that contract goes away?

The umbrella contract covers the three prior contracts that we had with the former entities that now make up Mittal. And all that umbrella contract does it gives Mittal some options as to where they can ship pellets. Once we come to the end of 2010, we will renegotiate that umbrella contract. And at that time we will sit down with Mittal and say, this is the current state of the umbrella contract. How do we move forward together as partners? And that is really all we are ready to say.

The underlying contract still survives beyond that point in time.

The underlying contract but not with Weirton, right, because Weirton no longer exists.

Well, Weirton no longer exists, but the contract for that tonnage that was going to Weirton still exists.

So they can divert that Weirton tonnage to other facilities?

Under the umbrella agreement right now they can.

But the umbrella agreement expires in 2010.

That's right.

So then post 2010 do they have a call on the Weirton tonnage or not?

We have really taken it to be quite honest with you Zach, as a mute point with Weirton being down and dead in our eyes forever, and we've kind of moved on with the umbrella agreement. So I don't know that we've put much thought into that to be honest with you.

Do you have any obligation to sell them the Weirton tonnage post 2010 under any contractual agreement?

I really don't know at this point in time. Again, I think that would have to dive deep into our contracts and our contract experts at this point in time.

I will follow up off-line, guys. Thank you so much. Congratulations.

Wayne Atwell, Pontis Capital Management.

You seemed to have encountered sandstone intrusions in your North American Coal several times. My understanding was that was not uncommon in the past. Is there anything you can do to anticipate this or deal with it more easily in the future?

Actually there is, Wayne, and again, as I say is none of us are happy with the force majeur and the loss of a couple hundred thousand tons on this panel. It certainly beats what we fell into last year right after we bought the mines, which was a dead stop and a loss of three weeks of production while we got development up and running. We have actually in the next panel we have found that fault where it runs through. Again, it continues to de minimize as it runs through and cross cuts through the panels. They have already mined through that panel or through that fault rather with continuous minors, you know the plow just can't make it through the tough sandstone and backfilled it for support. So when we jump to the next panel and get through this one we will be able to mine right through the mine right up to it. We know where it is, remove the backfill and move forward. So yes, there are some things we can do as we get our feet on the ground in this business and encounter that. So we will have much better results in the next panel.

So it should be less painful in the future?

Yes.

What is the market price for that coal right now if you were to sign a contract? You can -- don't be too specific about what you would do, but just coal like that, what would the price be at this point?

You know what the export market is being quoted out on a spot basis, Wayne, right now would sit somewhere in the 290 to 315, again that is metric ton FOB on the water. And again, that coal is a premium coal; it would sit in that range if we were able to do that at this point in time.

Lastly, the biomass business you're getting into, how much capital is that going to require and what kind of return on investment can you generate there?

It is not a lot. The initial investment was about $6 million, $6.5 million in it. These are primarily cubing machines, if you will, for the some crushing systems too, so we can get it and cube it as we bring it in. The real trick in this business is distribution angles and channels to bring the products into these facilities. So there is not a lot of money when it comes into us. It is more of the concept that goes around it, when there is not a lot of intellectual property around the cubing as well, that goes with it either. And we are using it more strategically for the anticipation of the greenhouse gas legislation that we think is coming, that will be passed. And we think this will give us a leg up to reduce our carbon footprint in the outer years with our plants, we are big carbon producers to go forward. So it is more of the strategic intent to get it up and running. We have test fired it in our kilns, as well, and it works quite nicely. And move it forward when the legislation comes in.

This will be economic, though, it is not just a greenhouse gas --

This is very economic.

But this is sort of a hobby in terms of P&L. It's not going to be a huge contributor. It makes a lot of sense it will be positive but it will never generate huge dollars, will it?

No, no, listen, in this business we are not going off the track of our primary business in there. It is everybody is trying to think of defensive strategies for greenhouse gas, climate change legislation. We spend like every other company in this business a lot of time on that, and we think alternate solutions are going to have to come in, Wayne. I think when carbon taxes if they do hit in at $15 or $20 a ton as they are being kind of bantered around right now, this could have a nice impact on meeting our goals and not having to buy safety valve carbon credits. So it is some futuristic thinking.

Super. Thank you very much.

[Meredith Bandy], BMO Capital Markets.

Thank you for taking my question. First of all on the North American coal costs, you had $83.57 per ton this quarter, but then you guided to $86 for the year. I would have thought this year would have been heavier on the cost. But it looks like the rest of the year is going to be heavier than this quarter. Is that right, or am I missing something?

The intrusion is rolling into the second quarter. There is very little of the intrusion in the first quarter; most of it is in the second quarter.

Okay, and then that is somewhat offset I guess by in the second half of the year you have more tons.

Yes, that's right.

And then on the revenue per ton in North American Iron Ore, I am just trying to get a feel for the lag year adjustments and that sort of thing in your contracts. If we were to assume the $700 per ton average hot rolled steel for 2008 and 2009, everything flat, that the settlements came out flat next year, everything that goes into those contracts flat, would you still say that your estimated revenue per ton for '09 would be $81, or would you have a lag and so you would see an increase from there? Does that make sense?

Meredith, what we've said in the past is if all things equal and all other factors are flat because of some of these contractual arrangements that we have, we would see an increase in pricing.

Okay, and can you give any sort of window or frame? Is it a 10% increase? Is it still capped? Would it all go through or --

Yes, we haven't at this point, Meredith. I don't think you are going to see Cleveland-Cliffs getting in the habit of trying to put out guidance for 2009 after the first quarter of the year. So as we get closer to 2009 we will give guidance, but right now we're just not ready to.

So it would be north of $81, but you can't really say how far north?

That's right.

Okay. Thank you.

David MacGregor, Longbow Research.

Just a question of costs come in North American Iron Ore, is there anything that is moving of significance outside of energy? So I mean you've got I guess steel costs associated with some of your replacement parts. I wonder if you can just talk a little bit about that and how much of the cost revisions are associated with energy versus non energy?

I think you're seeing a little bit David, in anything that is more energy-related, such as explosives, which you know is a big component for us. And it would come in small bits and pieces around the price increases on materials, more petroleum related, as well. Of course, with the increased prices in the hot-band that you see in steel; obviously replacement parts are also going to go up significantly I would guess as those prices get passed through that aren't already covered in our alliance agreements. But they are kind of all over the map.

There is also some impact from FX on the Wabush cost because of the Canadian dollar. That translates into an overall cost impact for the Company.

Okay, thank you. And I guess the question I wanted to ask you has to do with the Portman acquisition of the 14.5% interest in Golden West Resources. I know you've been looking at a lot of different acquisition opportunities and a lot of different corners of the world and I guess I'm interested in why Golden West Resources, why now? Is 14.5% kind of where you're going with this, or what is the vision for this investment and maybe just talk a little bit about why you found it so appealing.

I would be happy to talk about that. The project is called Wiluna West, and if you can find it on a map in Australia it is due north about 200 K of our Windarling and Mount Jackson deposits. It is a real direct shipping reserve of about 80 to 100 million tons at this point in time of iron ore of good quality. If you look out there in Southeast Australia, we are the natural miners of that deposit given we have the infrastructure and the remote location. And again, it is just not big enough to develop infrastructure off of at 80 to 100 million ton. So we've had our eye on it for quite some time, again, we think we are the natural processors. And like all these deals as I said earlier in my remarks as this credit crunch came on, this came to us as a result of the Opes Prime collapse in Australia where they own these shares and we were very fortunate to jump with the management team over there very quickly to get that at this point in time. That just occurred in the last two weeks. Of course we would love to have control of that deposit so we could develop it in the future years with that, but at this point in time we can't move beyond this right now without governmental approvals. So we are pretty happy with how we ended up with it.

Is the geology such that expansion of reserves is not likely, or is there an opportunity there?

I think there is a little more, but again, it is like we always start out -- these are banded ironstone deposits in the Southeast Australia. We are not going to hit the mother lode down there in any of these deposits. But yes, there is still a little room for some expansion.

Okay, and is this likely to -- is this is the kind of acquisition we're going to see you making going forward? Are these types of kind of bolt-ons, see you feel like maybe you don't have the capacity for a big one right now? Or maybe just talk about philosophically how you're looking at deals.

I think we run the ruler over everything from big to small. I would say at this point in time it seems like things that are going to auction are completely out of control. And we've kind of moved past them. But no, I think you're going to see us go from the best opportunity with a good return that fits with the business. So I wouldn't limit this to just deals of this size.

Would it be fair to say that the coal deals are maybe a little more accessible to you right now than the iron deals?

I think that is for everybody. There is just more point of entry in consolidation, particularly in the United States, and the coal industry just hasn't happened as we all know this is common knowledge. So certainly coal has got a better point of entry.

Thanks very much, Joe.

Jorge Beristain.

Sorry if I could have a follow-up, I just want to identify the potential size of those environmentally friendly coal substitute that you're going to make from natural fibers. You said each (technical difficulty) about 150,000 tons. What would you want to scale that up to? Would we be talking 2, 3 million tons relative to your current 6, 7 million ton coal output? And secondly, if you could quantify the ownership structure in that business, is it (technical difficulty) or is it 100% owned business?

Is a joint venture with two entrepreneurs who start it. We are 70% of the joint venture that goes with it. And by the way, we are very happy to have our partners in. One is an environmental attorney who understands the regulations, and the other one is the gentlemen that is kind of the father of the processing of these facilities. The scale up of these things will not -- will have to come regional. And it really depends on the area or the radius that you can go out and bring waste products in. So it is a facility hopefully in the middle of a waste byproduct, a biowaste product such as wood products. And then how far out you can go to bring these products in economically because we will make money out of these. We won't take a loss to do that. Scale is a little unknown at this point in time, but they are not large. I would think we would be on 200,000 or 300,000 tons would be pretty big to find that much waste to, on a continual basis to run these plants.

Just a follow-up question, if I might as well. On the nature of the contract, if we could, again, just pick up on that theme. You said that you are proactively looking to renegotiate some of these contracts. Is that something that you will be doing on a rolling basis through the next few major clients that you have, or is this sort of maybe a once per year type of event that you see?

No, I think what I tried to intimate was the proactiveness is on both parts of both parties. We are not -- we are satisfied with where we are, as we've said. Yes, we would love to move to world pricing but again, I think the driver has to come from both ends when you have a contract in place. And scarcity of supply in the out years is certainly driving the proactiveness on the part of the customer. So where we can find the need, and the customer's willingness, we will certainly engage in these contract discussions.

Sorry, just quickly, last question, have you guys looked at the maps of [according] through the St. Lawrence Seaway and given where international prices are is this now a viable alternative for your Great Lakes iron ores to get them out to Asia?

Asia would be very difficult. Yes, of course we've look at the maps. We have looked at the supply chain and the logistics chains. Again, it comes down more to that would have to be a spot basis more than world price, and it would come down to scarcity and need of a customer more than economic sense. So then there are a few cases out there.

Okay. Thanks very much.

We are approaching the top of the hour, so I think at this time we will wrap the call up. I want to thank everyone for joining us. I will be available for the rest of the day to handle any follow-up questions. And for those of you who I have indicated I will follow-up with off-line, I will be sure to get back with you. Thanks a lot, everyone.

Thank you all very much.

Thanks.