Cleveland-Cliffs Inc (CLF) 2008 Q2 法說會逐字稿

Good morning. My name is Chrissy and I will be your conference operator today. At this time, I would like to everyone to the Cleveland-Cliffs 2008 second-quarter and first-half conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). At this time, I would like to introduce Steve Baisden, Director of Investor Relations and Corporate Communications. Mr. Baisden.

Thank you, Chrissy. Before we get started, let me remind you that certain comments made on today's call will include predicative 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 results to differ materially. Important factors that could cause actual results to differ materially are set forth in reports on Form 10-K and 10-Q and news releases filed with the SEC, which are available on our website.

Today's conference call is also available and being broadcast. At 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 Joe for his prepared remarks.

Thanks, Steve and thank all of you for joining us on today's call. We achieved outstanding results during the quarter driven by the continued strong market for iron ore and met coal. I want to take a moment to describe some of these dynamics in greater detail.

Over the last several years, we have executed a focused strategy designed to capitalize on an increasing demand for steel-making raw materials in the US and around the world. As you know, the US steel industry has seen a remarkable resurgence in recent years, gained impressive efficiencies and is currently positioned as the global low-cost producer.

In addition, the continued increase of demand for materials used to fuel the infrastructure, build out of the BRIC and other countries around the world provides for a significant upside to be realized in the steel cycle over a long-term time horizon.

This phenomenon, coupled with known supply side constraints, has Cliffs well-positioned in the current environment. We see no signs of this trend weakening in the near term. Specifically, new supply continues to be limited by logistics generally and in particular, the rail and port constraints in Australia.

The industry continues to see very long lead times for capital equipment, a lack of available skilled labor and the demographics of an aging workforce. Moreover, these supply concerns are highlighted by the focus of global steel producers on the acquisition of mining assets. We also see a movement to negotiate 2009 met coal contracts earlier than in prior years.

This combination of supply constraints and continued strong demand provides an opportunity to achieve greater scale and a stronger position within the market. The nature of the mineral and natural resources processing business is long-term-oriented and we firmly believe shareholder value will be optimized by continuing to pursue a long-term strategy.

We attribute our strong stock performance, which has achieved a compounded annual growth rate of more than 65% since 2005, to our management team successfully positioning the Company through the execution of this strategy to take advantage of the macro environment.

As many of you know, we have achieved a number of significant milestones during our transition from a North American mine manager to an international natural resources company that we are today. These include expanding globally with our interest in Portman and Amapa and into other minerals, such as met coal with Sonoma and PinnOak. Each has been integral to the growth and the success that we have achieved in recent years.

Just two weeks ago, we announced a definitive merger agreement with Alpha Natural Resources, which capitalizes on our strong industry outlook and signifies the strategic milestone that will increase our position in met coal, extend our global reach into the marketplace and dramatically enhance our size and scale.

As you know, we have been specific in sharing our strategic goals with you and this includes our goal to grow globally through acquisitions. We see this combination as a great opportunity from both a strategic and financial perspective and one that provides compelling value creation for our shareholders. The combination of Cliffs and Alpha will create a major global player and the leading independent supplier of critical raw materials to the North American and global steel industries.

With expected annual sales volume of more than 30 million tons of iron ore and 18 million tons of met coal, Cliffs is well-positioned to meet growing demand for steel producers in the US and around the world. Furthermore, we believe that Alpha's strong earnings report this week underscores the (technical difficulty) be created through this combination.

Laurie will talk later on the call about our financial assumptions for the combined company. In a few minutes, I will provide additional commentary on other recent strategic and tactical events since our last call, but first I will turn to Laurie for an overview of our second-quarter and first-half results. Laurie?

Thanks, Joe, and good morning, everyone. In order to open the floor for questions a little sooner, I will forego reading all of the numbers that were disclosed in the press release issued last night and keep my comments to our high-level performance and thoughts.

We are extremely proud of our results in the quarter. We eclipsed the previous record revenue set last year for the second quarter with our top line growing 84%. Reported revenues for the second quarter of $1 billion considerably exceeded last year's $548 million.

As you probably remember at the time of our first-quarter call, benchmark prices had not yet settled. Since they settled in the current quarter, we recognized revenue of approximately $70 million in the second quarter related to first-quarter sales. Even after adjusting for this, Cleveland-Cliffs' revenues in the quarter increased to $939 million or up 71% from last year.

Net income reached $270 million, an increase of $183 million or 211% from the $87 million reported in the second quarter last year. Adjusting for the Q1 benefit, net income was $232 million or a 167% increase from last year. Cliffs achieved diluted earnings per share of $2.57, up 210% compared to the $0.83 reported last year. And adjusted for the retroactive Q1 sales, diluted earnings per share was $2.21. The strong revenue and earnings increases for the quarter were driven by the continuing strong market for iron ore and met coal.

Turning our focus to the business segment results, it makes more sense to discuss the six-month comparisons as these are more reflective of our actual operating results than the Q2 numbers because of the impact of the price settlements and the related retroactive adjustments that I mentioned.

In North American iron ore, first-half sales margin more than doubled to $337 million. This increase reflects a 42% increase in blast furnace pellet revenue per ton to $94.17 compared with $66.20 per ton in the first half last year. The $94 includes approximately $6 per ton in revenue that represents adjustments related to 2007 shipments where we have contracts that provide for an adjustment based on some of our pricing factors and where those factors sit at the time the product is actually consumed in 2008.

North American iron ore is benefiting from higher steel prices, increased benchmark pricing, as well as renegotiated and new supply agreements with some of our customers. In Asia-Pacific, average price realization for lump and fines rose 88% to $98.80 for the half reflecting the new international benchmark settlements for Australian producers. Also boosting our top line were coal sales from the Company's North American met coal operations acquired in the second half last year and initial coal sales at our Sonoma coal project in Australia, which commenced shipments earlier this year.

Turning to the balance sheet, at June 30, we had $320 million in cash and cash equivalents compared with $157 million at 12/31. The Company had $685 million of borrowings outstanding, including our recently closed $325 million private placement. The balance of the borrowings were under our $800 million credit facility. This compares with $440 million in borrowings outstanding at year-end.

In the quarter, cash provided by operations was $203 million, bringing us to a year-to-date total of $83 million. Our cash capital expenditures totaled approximately $59 million in the first half. For the full year, we expect to generate approximately $750 million in cash from operations. This is an increase from our previous estimate of $700 million and is an increase of over 150% compared to 2007. Perhaps more illustrative is the fact that we will generate approximately $500 million in free cash flow in 2008 compared with $89 million in 2007.

Continuing our outlook for 2008 by turning to the business segment, in North American iron ore, we expect to realize an average price per ton of $90, up from our previous estimate of $85 and a 36% increase over last year's $66. Because of increasing royalty payments, rising natural gas and diesel fuel costs, as well as deferred maintenance activities that will now be completed at Empire and Tilden due to our recently announced expansion, we are seeing significant year-over-year pressures on our costs. Our current cost per ton expectation is $57, up slightly from our previous estimate of $56 per ton due to the depreciation related to our recent investments, which will result in expanded production.

In 2008, North American iron ore is expected to have equity production of approximately 24 million tons and sales volume of an estimated 25 million tons as we sell through some inventory. The increase in equity production and sales volume as a result of our announced expansion in Michigan and the mid-year acquisition of our minority partners' interest in United Taconite.

In our North American coal segment, average sales realization per ton is still expected to be approximately $94. Cost per ton for the year is expected to be $89, a $3 increase from our previous guidance due to a reduced production outlook. North American coal is now expected to produce and sell approximately 4 million tons in 2008, a 300,000 ton reduction from our previous guidance. This decrease is the result of extended time for longwall development at Oak Grove due to the challenges of adding additional equipment and personnel and an increasingly tight market.

In Asia-Pacific iron ore, we expect to achieve average revenue per tonne of approximately $102. This is primarily due to the recent iron ore settlements in Australia of an 80% increase for fines and a 97% increase for lump ore. Our cost per tonne in Asia-Pacific iron ore is expected to average $58. The cost increase compared to last year is primarily the result of higher expected royalty premiums related to higher than expected price increases, rising fuel costs and the impact of foreign exchange. Production and sales volumes are both expected to be 8 million tonnes.

At our Sonoma coal project, we expect total production of approximately 82 million tonnes for 2008. Sonoma will benefit from significant year-over-year increases in met coal pricing and will generate average revenue of $142 per tonne. This is a $13 increase from our previous guidance of $129 per tonne. Costs at Sonoma are projected at $92 per tonne, up from our previous estimate of $83 per tonne. This is the result of expenses related to mine plan changes aimed at increasing met coal production.

We reported equity losses of $13 million year-to-date from our Amapa investment. As we indicated, we expected start-up delays and ramping production levels at the Amapa venture to produce equity losses in 2008. Earlier this week, Anglo-American and MMX indicated they expect their transaction to close next week. We look forward to having Anglo as a partner at Amapa and believe their operating expertise will help the project quickly ramp to its 6.5 million tonne design level in 2009.

Total operating expenses for 2008 are expected to be approximately $140 million. This is made up of an SG&A number of about $180 million, which is offset by casualty recoveries, royalties and any gain on sale of assets. We also expect 2008 capital expenditures of approximately $250 million and depreciation and amortization of approximately $190 million.

The increase from the previous estimate of $200 million for expected CapEx is related to the expansion we have talked about at our Empire and Tilden mines, as well as upgrades on the rail line at Portman and the acceleration of our longwall system down payments that we have on order for our Pinnacle mine.

Before I turn the call back to Joe, I want to reiterate some points on the Alpha merger and our expected financial profile upon completion. Cliffs Natural Resources is expected to have a very strong credit profile with anticipated pro forma leverage of approximately 1.2 times debt to EBITDA at December 31, 2008. We will generate substantial free cash flow in 2009 and 2010, enabling us to do a variety of activities to support increasing shareholder value, including supporting growth initiatives, potential share buybacks or increases in dividends, as well as paying down any debt.

In 2009, we estimate the combined company to have consolidated revenues of approximately $10 billion and EBITDA of approximately $4.7 billion with Cleveland-Cliffs' operations contributing $2.5 billion to $2.9 billion in EBITDA toward the total. Annual synergies of approximately $200 million are expected from 2010 forward, primarily due to our ability to enhance processing and blending efficiencies and opportunities at our coal facilities. In short, we will have an extremely strong financial position, an enhanced size and scale that will position us to continue our legacy of building shareholder value. With that, I will turn the call back over to Joe.

Thanks, Laurie. Our results today clearly demonstrate the value of our strategic actions over recent years. Many of the actions our management team has taken are now providing tangible benefits to Cleveland-Cliffs' shareholders in terms of enhanced financial results. We continue to build on those decisions with new projects that will provide immediate, as well as long-term benefits. In addition to pursuing external strategic growth projects, our business team is also focused on internal growth opportunities that add value with minimal risk.

In our North American iron ore segment, we reported very strong results for the quarter and expect to increase our equity production by 10% and our sales tons by 12% for the year by focusing on organic growth opportunities. Recently, we announced a $290 million capacity expansion project for our Empire and Tilden mines designed to increase North American iron ore sales volume by an aggregate 43 million tons through 2018.

In addition, we consolidated our minority's 30% interest in the United Taconite mine giving us 100% ownership of that facility, further increasing our North American equity production and future sales volume. And importantly, those two projects carry no integration risk whatsoever.

In North American coal, we continue to face operational challenges that we believe the Alpha management team can help quickly correct. We are making progress on evaluating short and long-term mine plans, making capital improvements and enhancing organic prep plant efficiencies. On the commercial side, we have also recently signed a contract to deliver met coal from Pinnacle in the mid $200s price range per ton at the mine.

In the Asia-Pacific iron ore segment, the team at Portman continues to deliver exceptional results. Although Cockatoo Island is expected to close in the third quarter, we continue to evaluate opportunities to extend its life. Upgrades to the rail will take place throughout the balance of the year to secure the consistency of the production from Koolyanobbing. Portman has also recently taken a 19.9% position in Golden West and its Wiluna West iron ore project.

We are very pleased that our ownership position in Portman Limited increased from 80% to 85% as Portman closed its previously announced share buyback program. Portman has contributed exceptionally well to both our long-term strategy and financial results since we acquired our position back in 2005.

In short, Cliffs continues to explore avenues for creating value and with that, we will be happy to open the calls for questions.

Christy, we are ready to take questions at this time.

(OPERATOR INSTRUCTIONS). Jorge Beristain, Deutsche Bank.

Good morning, Steve and Joe and everybody. Great results, Laurie. I just -- one of the things that has been a little difficult to keep on top of with Cliffs do to your rapidly evolving nature has been your guidance. And we have noticed that your realization guidance for North America again moved up from pre-quarter, I believe it was $85 a metric ton. Now you are talking $90 a metric ton, yet your guidance for HRC only moved up $25 a ton, which would imply only something like $0.65, $0.70 of that $5 change. Can you account for the difference? Is that mainly due to the recent contract renegotiations with certain clients or are there other escalators that are kicking in there to drive up your guidance so much quarter-on-quarter?

Well, actually, the hot-rolled does have a pretty significant impact because, remember that we do have some things that are retroactive and as things are consumed, that has an adjustment on it. Also the PPIs have moved up somewhat as well.

Order of magnitude of that $5 increase, could you kind of quantify what percentage would be HRC-driven, what percentage cost escalators and what percentage retroactive?

I think that would be pretty difficult to do on the call, Jorge, to split that out and be accurate in that. I think Steve Baisden, our IR guy, would be happy to follow up with you.

We can see if we have got the detail that makes that clear.

Okay. And my second question was just related to the coal operations where I guess, in North America, we still continue to see negative EBIT contribution I guess. Are you confident that, by the second half, we will start to see it turn around in the EBITDA contribution from PinnOak?

Yes, I believe we will. As you know, we had a tough first-half start. We had some more geological conditions in Pinnacle that we worked through. Again, as we said in the first quarter, I think the remarkable part of that is the Cliffs team along with the Pinnacle team down there went from a dead stop a year ago to working through that and just force majeuring a few hundred thousand tons. So that was great progress on the part of the team.

We are starting to get some [pawn] fines from the recovery system that are starting to come through in the second half and the organic efficiencies, we are making some small capital changes, particularly down at Oak Grove and we are starting to see efficiency gains in Oak Grove.

We still do face, through 2008, longwall moves. Our challenge is for us just simply to get the development far enough ahead. It's strictly a mining and engineering system. It is not a mystery and as we lay our plans out, we are going to have to work through the latter half in Oak Grove, particularly with the mine moves to try and get those orchestrated and cut the time down on longwall moves. But I am much more confident of a better second half.

David MacGregor, Longbow Research.

Good morning, everyone. Great quarter. Joe, in your prepared remarks, you mentioned that you had sold some met coal forward for '09 in the mid-$200s. I wonder if you could maybe provide a little more detail how much met coal and whereabouts in the mid-$200s.

Well, I guess, David, I could, but I'd prefer not to. We are in the middle of negotiations and the reason is not to share the advice, but we are in the middle of negotiations with a lot of different brokers and buyers at this point in time. We do see the buyers moving forward in their purchases from where it is from. This was a small contract that we have let out first as we layer in the '09 pricing. It is from the Pinnacle mine and it is a domestic mine. The mid-$200 is FOB, the mine, and it is a standard ton on that for the factors. Pricing is beginning to start, the pricing season and like I say, it is very early and we just want to make sure we get the full market price for our coal this year.

Okay. Maybe just talk a little bit about the market conditions around that met coal. I presume it is a backward-dated market. How much of a discount do you have to take on selling -- how far forward? Can you give us some sense of what that price structure looks like?

We don't see any discount whatsoever in selling forward at this point in time. I think it is just a matter as the market heats up and we look at global conditions around the world on the supply constraint, which we think will continue to tighten, it is a matter of how much more out of the pricing we can get this year. So we are not real anxious to settle contracts early as we were last year as we just got into the coal business and we are just learning to understand the market dynamics. So we are going to take our time layering in the coal business this year.

Okay, good. Can you talk about the potential for further capacity expansion in North America? You talked about Empire and Tilden. Is there an opportunity to conduct a similar type of expansion at Northshore and UTAC or are you sort of impeded by the fact that you don't own the underlying property?

The underlying property is not a problem whatsoever. The biggest hurdles that we faced are environmental permitting as it is with any mine in any location within the US, David. Recently, we did announce we are going forward on the permitting for an expansion at UTAC for about -- I think that is about 500,000 to 700,000 tons. I mean that is the kind of bite you will see as incremental bites coming in are organic growth, but they are beginning to add up into a few million tons as well. So we are just getting the permitting ready to submit for another small expansion at UTAC.

Okay, and then last question, the Mesabi Nugget, maybe we could just get up to date on the economics of that if the plant were up and running today. Where would you be able to sell that today and what would be the cost of production today?

Well, the discussions that we have held with potential customers are really overwhelming as far as a merchant plant coming on. As you know, pig iron right now is somewhere in the neighborhood of $800. I think that is priced FOB New Orleans. That is the area of pricing that we would be looking at. We would benchmark against pig iron as it comes in.

The pricing on the plant will certainly move up and as it escalates, the engineers are really working forward to final design and not feasibility, but final design and tying those numbers down. But I would say we are going to be 250 to 275, that is 250 million to 275 million in the capital of this plant as it moves forward and I would suspect operating costs will also move up with natural gas coming in much higher into the probably $300, $275 to $300 would be the upper end of the range. But you can still see that is a pretty robust profit margin for this project.

Right. So $275 to $300 would be your cost of production?

Yes.

Okay, thanks very much, Joe.

Mark Parr, KeyBanc Capital Markets.

Good morning. I will just echo and say great quarter.

Thank you.

I am more interested though in the '09 EBITDA outlook that you provided. I think -- is this the first time -- the $2.5 billion to $2.9 billion range -- is that the first time you have publicly disclosed that number?

Yes, that is.

Okay, that is what I thought. And so I am a little new to the story, so I apologize if I have missed something. I was wondering, Joe, what sort of additional color you might be able to provide on the components of that growth forecast?

Well, starting from the volume side next year, Mark, we will pick up additional tons. We will get the full-year benefit of the Northshore expansion this year. That will be about another 200,000 tons that come on. We will get the 30% minority ownership. We would see a full year of that at UTAC, which will impact both the volume and well, everything all the way through and the recent 5% pick-up on the share buyback at Portman will also impact things as well. So just organically, you are going to get those to come through with no risk as it comes forward.

Obviously, iron ore pricing, we are pretty bullish on where that is going to come out. I don't have a number for you yet, but in the '09 guidance, as we did state, if nothing changes in '09, we are looking at a 26% price increase that is already locked in, if you will and obviously --

Would that 26% represent the midpoint of that EBITDA guidance range?

No, that's already --

Would it correspond to the midpoint?

No, that is already locked and loaded. That would be more on the low end.

Yes, I think everything can go up, up from there. And obviously we -- certainly the PinnOak mines will have a full year and a half of ownership with a lot of investment in those mines. As you can see, we are working our way through the problems one by one, getting those systems ready to go and enjoy full pricing in the coal business and full volumes for '09. I'm sure the guys are going to do a much better job both in volume and pricing going through. So that is just some of the highlights to get you started with on it, but they are mechanical features. There is not a lot of stretch in the imagination on that.

Okay, terrific. If I could ask another question, I know you had commented in your release on the fact that you had been making -- you had been talking with a lot of shareholders about Alpha. It continues to be somewhat of a controversial situation. But based on the way that the stocks have been acting recently, both your stock and ANR, there seems to be some clear evidence that there is support for you guys to do this. If you could just provide some general color on what are the puts and takes, what are shareholders telling you they like about this? I am just curious the kind of feedback you are getting.

Well, Mark, as you say, you are new to the story, but you know us well and most of our investors and shareholders do with that. I think they are happy to see us executing on a strategy that we have been touting for the last 18 months. We have stayed within that strategy for our growth and certainly within the Alpha side, we have been talking a long time about consolidating Central Appalachian coal and this is a move that we have talked about since PinnOak.

So I think people are -- as always, it is easy to talk a strategy, but they are glad to see us delivering on a strategy. I mean sometimes it might be surprising, the large step that we took, but when people step back following Alpha's earnings earlier this week and the '09 guidance, you see the strength of the iron ore business, people get this story pretty quickly.

And the $4.7 billion EBITDA number can get filled in rather quickly and I think most people can still see there is upside to the pricing, which would extend the cycle. So I think it has been a bullish response. We are letting the numbers and the data do the talking for us. Certainly all of the analyst communities can put these numbers together and come to their own conclusions. It is all about value for everybody and for every shareholder and we still continue to believe in that and we think our shareholders do as well.

Okay, I really appreciate that color and just one last question. I think you had had some discussion with MacGregor earlier. I mean he had indicated he thought that the met coal market might be in backwardation. I am assuming by that he meant he thought that the 2010 pricing outlook for met coal would be lower than the '09 outlook. I am just wondering if you are having any response from customers that would be willing -- are you thinking about extending contract pricing into 2010? Or I guess maybe another way of asking that question is what would it take to get you to extend contract pricing into 2010 at this point?

Well, it would have to be something north of 300 to get to 2010 at this point in time, Mark.

So is it fair to say that you and Mr. MacGregor are in disagreement about the state of the global met coal market?

I'm not -- I don't want to speak for David. He may come back on and comment for himself, but --

I wish he would.

My impression is that David is pretty bullish on the met coal market and it may have been just a time factor that the longer you go out, that continuing increases might not be something that a customer would be interested in.

I guess, Mark, just to add to that, again, we are not, at this point in time from where we see the met coal cycle and the supply constraints, we are not going to give pricing for '10 for security of supply. We are strong enough on that as we look out into '10.

I just thought it was interesting that on the Mittal call yesterday -- it was yesterday or the day before yesterday -- Mittal had indicated that China was now a net importer of met coal and that is quite a change from where they have been over the last several years.

Well, they have been for about 18 months now and I think also you can't rule out, on the long term, the South African power supply constraint, which, in recent weeks, the mining industry there has already taken a 10% decrease in power and it looks like they are expecting another one as well. So there are a lot of factors going into this, but each one are not event-driven like the floods of Australia, but more long, cyclical nature supply constraints.

Okay. Well, I really appreciate all the incremental color, Joe. And Laurie, congratulations on the great results and look forward to the next call.

Thanks, Mark.

Thanks, Mark.

Meredith Bandy, BMO Capital Markets.

Hi, guys. Again, great quarter obviously, good morning. I guess I'm going to go back a little bit to the steel prices and how they are affecting your iron ore pricing. Can we still use that sensitivity of the $10 change and the $0.24 unrealized?

Yes, you can still use that.

So taken in an extreme, if I threw into that the spot prices of hot-rolled, which is obviously quite a bit higher than your guidance, would I run into any problems with caps or does that sensitivity take into account any sort of cap and that sort of thing? Does that make sense?

Yes, I don't think you're going to run into anything with a cap on that. It is more related to the international benchmark price that we get into caps.

Okay. All right.

Definitely not for 2008.

Okay, that's helpful. Thank you. And then just sort of a ticky-tack question. It looks like you still have about half of the Q1 '08 adjustments to come through. Is that right and if so, do you know what the timing of it is? Is it just going to be next quarter and then you are done?

No, we should have seen all the adjustments in this quarter, Meredith.

Oh, okay. Because I thought that you had guided to like $0.75 last quarter and now we only saw $0.36 come through.

Pre-split. That was before we split.

Oh, I'm sorry. Yes, of course. Thank you so much. I appreciate it.

That's okay.

Mark Liinamaa, Morgan Stanley.

Good morning. Regarding Amapa, there was some discussion about rail rights and things like that going through the court system. Is there any update on that at all?

Yes, there is, Mark. We have spoken with Anglo. They have completed their due diligence to get their deal finished with MMX and it was around the rail concessions at Amapa. They are satisfied. Believe me, they have spent a lot of time and effort to get this deal finished, that the rail concessions are fine, are in good shape and I think their recent announcement is they are going for the full close based on the results of their investigation August 5. So that seems to be getting behind us.

That's great. And just on the iron ore markets, you mentioned that you were bullish. There has been a lot of discussion from various parties, Fortescue being one, about growth expectations in the fairly near term. Can you give us any sense of how you see supply/demand balances unfolding over the next little bit?

Well, we still see it very, very tight. We still see the supply side in deficit project work that everybody is talking about, continues to be pushed out by three months, by six months at a time and again, the supply deficit cycle continues to be pushed out, Mark. We don't see anybody getting anything to the market in advance.

And with coking coal as tight as it is, are you seeing any change in the steel industry's desire for pellets to help offset some of the efficiencies?

Yes, we certainly have. There is a huge desire at these prices for hot band to push every ounce you can out of those blast furnaces and certainly the pellets, along with premium coking coal, gives them the chance to get their efficiencies out as much as they can. And yes, there is a big desire for more pellets.

So do you think pellets could outperform lump and fine in the negotiations next year?

Boy, that's just too early to call. I guess anything is possible, but I don't think these guys have gotten off their break from the last negotiations yet. I think it is just too early to call.

Okay, great. And good luck with everything.

Thank you.

[John Healy], [Forrest Investment].

Good morning. John Healy, Forrest Investment. Great quarter. With regard to the proposed takeover of ANR, since you announced this deal, your stock price is unchanged and given the very, very strong earnings you just reported, it would seem to me like the market is telling you it doesn't like this deal.

Also your largest shareholder who opposes this deal, I did some research, this is a pretty accomplished investor. My question is why would you continue to pursue a deal if the market and the largest shareholder are telling you it doesn't make sense and is not in the best interest of shareholders?

We are in the second week of this deal being announced, so it is pretty early days, John, if you will. We want to get the investment community up to speed, if you will, with recent results so that I think some of the data that the first remarks were made on were pretty stale and was pretty old data. I think certainly with the results of this week and the '09 guidance, people can go back now and dust off their models and redo this. And it still has incredible shareholder value for both sides and we have no thoughts of anything but pursuing this.

Okay. And in terms of -- you mentioned $200 million a year in synergies. If you look at the premium you are paying for ANR, it is over -- it is like $2.3 billion. I mean is there, aside from the synergies, is there any sort of incremental EBITDA that would -- because that would be sort of a long payback period based on $200 million of synergies. Is there any incremental EBITDA that would shorten that payback period in terms of this combined company?

Well, when we did the valuation work, we spent a lot of time in valuing both companies and we felt that, given the value that we ascribe to their stocks at, this was an appropriate way to think about it and that the payback will be appropriate and will be there.

Okay, thank you.

Alex Mitchell, Scopus.

Alex, are you there?

Hello.

Hi, Alex. We can hear you.

Good morning. I don't want to take away from the earnings because they were fabulous, but just the other way around, can you just talk about the strategic value of the Company let's say without ANR considering that you have such a large buyer in North America of your product?

Well, the strategic value continues to be enhanced by the execution off of our strategy, Alex. We have done anything but sit still in the last few years, since we have embarked on this new strategy that we have explained and have been very transparent on. So we see the value of this Company continuing on with the Alpha --

I was asking -- I was asking, if you were not to pursue the ANR, what would be the strategic value of the Company when Mittal is such a large customer?

I can't answer that because we are not not going to pursue the ANR acquisition.

Okay.

Tom Molnar, Sandler Capital.

Hey, guys. Congratulations. Just a quick question on the North American coal. Given the reduced production, is there any risk of needing to sell any '09 production in the 90s level or sort of make up the production at the lower cost or does that get just washed off at the end of the year?

A little bit of everything. There will be a minor portion that will flip over into '09, but it is a very minor tonnage at this point in time. But most of the coal will be at '09 prices.

Fair enough. Thanks a lot.

David MacGregor, Longbow Research.

I guess I am just focused on the cost of getting iron out of the North American market into the global market. And I guess in all the years I have covered you, it has always just been understood that it is an inland market, it is landlocked. Pellets coming off the Mesabi or Northern Michigan had to stay in the Great Lakes basin. But what is the cost right now, to the best of your understanding, of loading a vessel at Escanaba and getting it out to Trois-Rivieres, getting it out to a deepwater port on the East Coast?

Well, we think if you take that -- to the East Coast, David or --

Yes, I mean as opposed to railing it out to the West Coast. I am not sure --

See, I don't know that I have those numbers to the East Coast.

I know US Steel did that with a couple of cargoes last year, but primarily to the East Coast.

If you would, what we normally look at is moving -- if we were to move product from Duluth, the loading point over into some European ports with rail --

Well, that works too. That number works too.

You are looking at around probably somewhere around $100 at this point in time to put product into Europe, just on the shipping and again, we put some rail in there because there is very few places that you would just unload from a port and go right into it. So there is a lot of -- $100 a tonne would not be that far off I think depending on which point in Europe.

Joe, just for comparison sake, what is it costing you to send a Wabush pellet to Europe?

I don't have that number off the top of my head, David. I am sorry.

It would be the difference between those two numbers wouldn't it?

Yes, we sell FOB Wabush and most of our shipments are FOB. We don't deal with a lot of ocean freight when it comes due. We have those numbers, but I just don't have them here today.

David, I can follow up with you with what we think it would cost in terms of freight to get it onto a cape size vessel over to Europe.

I guess where I am going is I'm just trying to get a sense of how close are we given the kind of price movement we are getting in iron ore these days and likely to get in 2009 and 2010.

Yes, I think the equation, David, that we are seeing when we get requests, and, again, I go to Europe, particularly from Europe or anyplace else is scarcity, not anybody looking at crossover curves on pricing from other areas and basins starting to move product. It is simply people can't get the product. Again, it is just the bullishness of the cycle that we continue to see. And if you will, they will pay any price, including their freight and shipment just to keep their mills running. But it is more scarcity than it is actually doing an analysis on where the product should come from.

Right. But if you can get more pellets out of UTAC or out of Northshore and you can sell those into the seaborne market because the economics allow you to cover the freight of getting it out of the Great Lakes, I mean that is the analysis I guess I am interested in understanding.

Once we satisfy our customer requirements for our contracts, we will sell, if we have spot tonnage, we will sell it where we need to to get the most value out of that product. We are not averse, if a customer wants product in Europe and we have it available for the right pricing, we are not averse to shipping anywhere.

So if you had the pellet today, I guess to make a long story short, if you have the pellet today and you had the customer in Europe today, could you make money exporting it out of the Great Lakes basin?

Well, we could because we would sell FOB the port. The freight would be --

On the customer's account.

Yes, it would be on the customer's account. We don't take any freight exposure in this market.

Okay. Thanks very much.

Jorge Beristain, Deutsche Bank.

Hi, just maybe following up on quickly two questions. One is I know you don't sell well anything really right now from North America to Asia, but really Asia is the price setter for your commodity and I was wondering what your view was currently on the fact that there is such high international freight rates, particularly from Brazil to China, $85, $90 a tonne current contract for fines is about $80. So you are kind of looking at a delivered cost into Asia of $170, which is very close to sort of the spot prices that the Chinese iron ore producers are charging right now.

What is your view on the market right now? Do you believe that there is an anomaly in international freight rates that will unwind into the second half? Because sort of I guess the competing natural substitute coming out of China does not seem to be pricing north of $200, which would be kind of what you need to have a big spread for another jump-up in international prices.

Right. I don't see it in the second half. I mean, again, when you get into things such as constraints such as ships, those can be overcome and again, when you read the shipping schedules of what is being built, certainly the supply on that can be overcome. But I think, again, we are a few years out and I would think those tons are going to continue to be expensive because those new ships are using very expensive steel to go in them. So what they are going to have to recover on an incremental basis is going to continue to have to stay very, very high versus the current fleet that was built at very low prices. So it could correct itself, but it is a few years and they are going to be very expensive ships that are going to be coming onto the market.

But I guess in a nutshell, you are not concerned right now with where the spot price of Chinese iron ore is relative to Brazilian delivered?

No, that doesn't really bother us when we look at the markets we are selling into.

Okay. And my other question was just related to the Teck Cominco Fording proposed acquisition. Would this, in your view, change the nature of the consolidation of the North American met coal market. I understand already that they basically control that operation, but in your view, are we just starting to see sort of the tip of the iceberg of consolidation?

We have said all along I don't think it is Teck Cominco that -- yes, this is the -- one of the few mining districts in the world that has left that hasn't been consolidated and I think, as the world goes forward and the scarcity of the minerals, particularly minerals that you can use domestically and export with this weak US dollar, I think, yes, it is certainly the beginning.

Okay, thanks.

[Wayne Edwell], [Quantius Capital Management].

Have you thought about changing the pricing dynamic of iron ore pricing in North America? The steel industry has consolidated a great deal over the last number of years. This is probably the most profitable the business has been in 40 or 50 years. Traditionally, you have had a pricing relationship, which kept the price frequently below the market globally and sort of protected you from wide swings. But you are a much more global and a much more healthy and strong company now. So you are sort of leaving some money on the table, vis-a-vis pricing, at a global price either on a spot basis or what the market would price you at globally. I realize you have long-term contracts in a number of cases, but have you thought about changing the dynamic and going more to the global price or a spot price?

Sure, we think about it, Wayne. Again, we are always trying to maximize the profit of the Company and as contracts come due, if the world looks the same as it does today, we will put a lot of thought into that process. We are not married into any particular habit that we have right now. These contracts have served us very well. They served our customers very well, but I think your point is well made and we accept it. But as times change and as the contracts roll off given that time and what the world looks like, we will make the appropriate judgments.

And what is your flexibility? How quickly -- say you decided this afternoon you wanted to do this, how quickly would you be able to -- what is the maturity of your contracts, which would permit you to modify your pricing model?

The timelinks are in the K. They are well-spelled out, but our next significant contract change is out there, 2015.

2015.

2015, Wayne, so we have got a ways to go.

So it is sort of academic. It is beyond the investment horizon of just about everybody I know. So you are talking -- what -- that will be seven years?

That is right, yes.

And it wouldn't be an early reopener? I guess it wouldn't be in the steel industry's best interest to cave in and permit you to charge a higher price so they are going to stick to those contracts?

We have got -- if you read, in the last few months, we actually had one reopener. We certainly do have the steel industry -- because of the shortage, they are interested in working with us in ways that we can generate more tonnage to provide them and certainly if they want to reopen for more tonnage, we are looking to offset that with opportunities. So we have announced some opportunities like that to move things up. But because of the geographic constraints that we have just talked about, this is kind of a relationship that both parties need to have some long-term belief in.

Right, but you don't have a whole lot of flexibility on the upside in the US. You can add some capacity here and there, but you can't add 50% or so to production?

No, we can't Wayne, no.

No.

Right. Okay, thank you.

Mark Liinamaa, Morgan Stanley.

Is there any update you can provide on Wabush? What is going on in Labrador and maybe any commentary on any opportunities you might see in that part of North American iron ore supply?

Yes, the partners are working away on Wabush. We are up there with a lot of business improvement, energy and ideas. We are the managing partner of the three. Our VP of Ops is spending a lot of time up there to maximize the value out of Wabush as we come forth, Mark. As you know, there was a lot of projects that are out there in Eastern Canada. We are really focused on other parts of the world. So we are happy with Wabush. It is providing a good source of income right now and as you know, gives us export potential, but we are really focusing -- Cleveland-Cliffs is focusing on other parts of the world.

And is the litigation issue, is that all -- what is the status?

Motions have been filed and heard on U.S. Steel's behalf. Cliffs has filed a subsequent motion and we're waiting to hear from the judge.

Thank you.

Christy, with that, we are approaching the top of the hour, so we are going to go ahead and finish up the call. I want to thank everyone for joining us today. We will be around for the rest of the day to follow up on any questions that you might have and thanks for listening to the call.

Thanks, everyone.

This does conclude today's conference call. You may now disconnect.