Cleveland-Cliffs Inc (CLF) 2008 Q4 法說會逐字稿

Good morning. My name is Sarah, and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2008 fourth quarter and full-year conference call. All lines have been place on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

At this time, I would like to introduce Steve Baisden, Director of Investor Relations and Corporate Communications. Mr. Baisden?

Thank you, Sarah.

Before we get started today, 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 actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Form 10-K and 10-Q and news releases filed with the SEC, which are available on our website.

Today's conference call is also available and being broadcast at CliffsNaturalResources.com. At the conclusion of the call, it will be archived and available for replay for approximately 30 days.

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 thanks to everyone for joining us today.

As you know, business conditions around the world have changed dramatically since we last spoke. Simply put, throughout 2008, Cliffs was operating in a peak cycle environment that ended abruptly in the fourth quarter. This was true not only our Company but for the mining and metal industries as a whole. It was a year of consolidation deals that ultimately fell away to the credit crunch and the global financial crisis. This included the second largest proposed merger ever between BHP Billiton and Rio Tinto.

Also around the same time we terminated our proposed merger agreement with Allpha Natural Resources. We continue to believe the combined company would have had dramatically improved scale and an extremely important market position. While the termination was disappointing, we have as an organization and management team moved on and will focus on the continued execution of our strategy.

Throughout the highs and lows of the demanding environment, our team has reacted rapidly. This meant a standing production at the height of the market and quickly implementing measures to align production with lower demands of service near year-end, including production curtailments and workforce cutbacks. While these decisions are difficult and never taken lightly, steep and swift declines in steel production by our customers n the U.S. and Asia demanded that we respond accordingly.

Actions taken since we spoke last include initiating the idling of furnaces and workforce reductions beginning in October at our North American Iron Ore business segment that have resulted in current annualized production rate of 15 million equity tons.

Slowing production in our North American Coal segment and suspending underground operations at Pinnacle Mine in February and closely monitoring the Asian iron ore to ensure we produce at a rate that matches current demand. Specifically in Asia-Pacific Iron Ore, we are maintaining our operating levels at over 8 million tons of production as we are seeing signs of demand on a customer-by-customer basis in China.

Notwithstanding the market degradation late in the year, our annual results show we kept focus on taking advantage of the strong market that was present from the first nine months.

In our North American Iron Ore segment, 2008 revenues surged 36% to $2.4 billion, driven primarily by average selling price increases, which were up 40% versus last year.

At our Asia-Pacific Iron Ore segment, we realized a 73% increase in revenues, again primarily driven by pricing as volume was down slightly from 2007. Compared with 2007, average per ton sales revenues in Asia-Pacific were up 81%.

Our North American Coal operations contributed just over $345 million in revenues, and the Sonoma Coal Project added another $123 million to this year's consolidated revenues. All of this culminated in a record $3.6 billion we reported last night, which exceeded our prior revenue record, set last year, by 59%.

Operating income was up 146% from last year, reaching $939 million, and net income was up 91% over last year, coming in at $516 million.

From an execution standpoint, we've successfully closed on a number of transactions that presented no integration or execution risk, including acquiring the 20% minority interest in Portland Limited not already owned by Cliffs and acquiring our minority partner's 30% interest in the United Taconite Mine in Minnesota, resulting in an additional 1.6 million tons of equity capacity.

In addition to these transactions, in 2008, Cliffs also made two strategic equity investments in Australian junior mining companies. The first was in Golden West Resources. Cliffs currently owns approximately 17%, and we paid approximately $22 million for our position. The strategic significance of our investment in this firm's high-grade Wiluna West iron ore resource, which is located near our Koolyanobbing operations, and its geographic position makes our infrastructure the natural fit in some form to bring the resource to market in the future.

The second investment was in [Allsquest], a mineral exploration company. Cliffs currently owns approximately 30%, and we paid approximately $18 million for our position. Under the strategic alliance with Allsquest, we obtained the right to appoint a representative to the Allsquest board and work directly with the company to most effectively -- efficiently capitalize on its first-class exploration portfolio. Allsquest currently holds more 39,000 square kilometers of exploration titles spread over 13 project areas. The firm is focused on exploring for several commodities, including iron ore and manganese.

During the question, we reported an impairment charge on our investment in Goldman West as well as our position in PolyMet, the North American junior with development projects in Minnesota's Mesabi range. I think it is important to understand the impairments are the result of the stock market value changes we've seen in virtually all commodities-related companies. In the case of Goldman West particularly, the impairment isn't indicative of the strategic value it may have to the Company in future years.

Despite our record financial results and fulfillment of many corporate development objectives in 2008, we realize we must adapt to the realities of the new environment we're living in. We're cautiously watching end markets but believe we have the right operating plan and flexibility for 2009.

With that, I'll let Laurie go through the financials of the quarter.

Thanks, Joe, and good morning, everyone.

Despite the dramatic change witnessed at year-end, revenues for the 2008 fourth quarter grew to $916 million, surpassing the record established last year by 17%. Moreover, this increase does not include revenue recognition on approximately 1.2 million tons of iron ore, or an estimated $80 million. We did, however, as our supply agreements require, receive cash payments for this ore from our customers. The cash payments were received as a result of the unique structural design of our North American supply agreement. This supply agreements are designed to optimize cash flow in the event of difficult economic environments such as the one we are currently in.

Reported net income for the quarter was $54 million, or $0.47 per diluted share, compared with $94 million, or $0.88 per diluted share, for the year-ago period. Fourth quarter results this year include a number of non-recurring items totally $209 million pretax related to the costs associated with the termination of the Alco merger, negative mark-to-market adjustment in our currencies hedges and the impairment of the securities that Joe mentioned. Excluding these factors, diluted earnings per share for the Fourth quarter would have been $1.72, or roughly 95% higher than the $0.88 we reported last year.

Turning to the business segment results, for the quarter, North American Iron Ore generated record sales margin of $208 million, $53 million higher when compared with the year-ago period. This increase reflected 34% higher average realized pricing for black furnace pallets, with revenue per ton reaching $89.16 compared with $66.42 last year. Our North American Iron Ore segment benefitted during the quarter from higher benchmark pricing from iron ore and higher steel pricing, both components in our pricing formula.

Per ton costs in North American Iron Ore increased 20% to $57.25 versus $47.76 last year. The increase was driven primarily by a couple of things, first approximately $3.40 per ton higher labor cost associated with our new collective bargaining with the United Steel Workers. We also had approximately $2.60 per ton in higher fuel and supply costs, primarily due to steel-related products used at the mines such as maintenance materials to mine and grind ore and approximately $1.50 per ton related to our expansion project in Michigan.

In North American Coal, average realized revenues for the quarter was $100.78 per ton, an increase of 43% compared with the $70.72 realized in the previous year's fourth quarter.

As we continue our ongoing long-term mine planning and development activities and combine with rising supply, service and royalty expenses, we continue to report high cost of goods sold. In the quarter, these costs were $110 and $0.61 per ton. Our focus in this segment is to position the mines to be more efficient producers for the time when market demand improves.

Asia-Pacific Iron Ore experienced the greatest degree of margin improvement, with average price realization increasing 47% for the quarter versus the prior year fourth quarter, primarily reflecting the international benchmark settlements for Australian producers. Cost of goods sold per ton increased just 5% for the quarter. Costs were negatively impacted due to fair value accounting adjustments and higher depreciation and amortization related to our acquisition of the Portman minority interest, as Joe mentioned.

Cash costs improved for $39.37 per ton in the fourth quarter last year to $31.83 per ton this year. Sales margin jumped $42 million to $67 million for the quarter compared with $25 million in 2007.

Turning to the balance sheet, at December 31, 2008, cash and cash equivalents stood at $179 million versus $157 million at December 31, 2007. Long-term debt was $525 million, including the $325 million private placement we closed earlier in the year before the height of the difficult credit environment and our $200 million term loan.

It's worth noting that we remain in a position of great financial flexibility. Our revolving credit facility and term note loan are not due until 2012, and the first tranche of the senior notes is not due until 2013.

We currently have $600 million of capacity under our revolver. At year-end, our ratio of debt to 2008 EBITDA was 0.6 times and our debt to total capital stood at 23%. With cash on hand, the remaining capacity on our revolving credit facility and our credit facilities in the Asia-Pacific business, at year-end, Cliffs had approximately $750 million in available liquidity. Our effective tax rate was 20%, down from our nine-month rate of 25%, and was actually a benefit in the fourth quarter. This was due to some planning initiatives that are likely to result in recovery of previous Australian payments along with deductions related to the alpha termination at a rate greater than our normal effective rate.

Our operators continue to scrutinize capital projects and other planned expenditures, as you can see in the fact that CapEx came in at $183 million for the year, well below our guidance of $240 million.

As we've moved some projects into 2009, we are expecting expenditures this year of approximately $200 million. We will proceed cautiously with investments this year, but let me assure you we will only spend to ensure we are properly positioned when the market improves.

Cash generated from operations in just the fourth quarter was $271 million. This compares with approximately $208 million in the same quarter last year. We think it's particular important to note that this occurred despite the environment we are currently operating in. For the full year, cash from operations totaled $853 million. This was a 195% increase versus 2007.

Also, in light of the current environment, I wanted to provide some commentary around Cliff's very manageable position on our pension and OPEB liability. At year-end, our total liability was approximately $1 billion. Of that amount, we are currently funded at $548 million. To reach our minimum funding level required, we expect to make an estimated cash contribution in 2009 of approximately $67 million. While this is $23 million higher than our 2008 contribution, the amount will not be problematic based on our liquidity and our expectations for strong cash generation in the back half of the year.

With that, I'll turn the call back to Joe.

Thanks, Laurie.

Before we take your questions, I'll discuss our current outlook for 2009. Our priority in 2009 is to generate and preserve cash until visibility returns. The continuing production cuts made by steel producers and low-capacity utilization make it extremely difficult to provide realistic guidance. Moreover, negotiations for benchmark iron ore settlements and international METCO contracts are ongoing and will have a meaningful impact on our forecast for revenue per ton.

There are limited data points and little visibility. As such, we are unable to provide guidance for revenue in each of our business segments today. However, we will tell you our thoughts around where we are currently operating.

As I said previously, in North American Iron Ore, our annualized production rate is currently at approximately 15 million equity tons. At this rate, our production -- at this rate of production, our cost per ton for 2009 is expected to be between $70 and $80 per ton. The increase for 2008 will be the result of lower fixed-cost leverage, as about a third of our cost of goods sold in 2008 is fixed.

We also previously said that we have contractual obligations for North American Iron Ore sales of approximately 18 million tons in 2009. These commitments combined with the eventual revenue recognition of the aforementioned 1.2 deferred tons will total approximately 19 million tons of sales volume for 2009. The number assumes we will recognize, bill and hold sales anticipated to occur in the fourth quarter of 2009. It goes without saying we will continue to monitor the marketplace and adjust production up or down as needed.

In North American Coal, we have initiated similar production curtailments. We are currently operating at an annualized production rate of approximately 3.6 million tons. In terms of sales volume, we currently have approximately 1.6 million tons of coal contracted. This is approximately 45% of our current production rate and is priced at an average of $108 per ton, which includes production earmarks to fulfill obligations for tons deferred as a result of past production disruptions. As we and others in the industry are in the midst of negotiations for international contracts, we're not in a position to provide average revenue guidance for our uncommitted 2009 production.

Throughout the year, we will continue our long-term mine planning and development work, including taking delivery of our new continuous miners at the Pinnacle mine. As a result, costs per ton is expected to be in the $110 to $120 range.

As I mentioned, we are seeing some positive signs out of our Asia-Pacific based businesses. Our Asia-Pacific Iron Ore business segment is expected to produce sales volumes of 8.4 million tons. We are looking for costs per ton of approximately $50 to $60.

Once the relevant price negotiations have concluded, we should be able to provide additional guidance on our outlook for the year. Despite the year's radical shifts, I'm extremely proud of Cliffs' performance in 2008. In addition to our financial results, we continue to make progress in our strategy to build scale through diversification. Today, I expect the wisdom of adopting this strategy, which included creating multiple revenue streams through product and end market diversification will become extremely apparent in the coming year.

I also believe we are well positioned to meet the challenges ahead and will be ready to capitalize on opportunities that these difficult times can yield.

With that, we will open the call for questions.

Sarah, we're ready to go ahead and take questions at this time.

(OPERATOR INSTRUCTIONS).

And your first question comes from the line of David MacGregor from Longbow Research. Your line is now open.

Yes, good morning, everyone.

Hi, David.

Good morning, David.

Joe, what assurance can you offer investors that the 18 million tons of North American take-or-pay is a number we can rely upon?

Well, David, I would say that we have contracts, as you know, in place that have withstood the test of time. These are long-term contracts that at times we have used different mechanism, both from the customer and our side to resolve disputes. So we think they're extremely strong from a legal sense, and they're well understood by ourselves and by our customers.

But I think in the current environment, the most positive evidence that I could give you, or assurance, is that at year-end, the 1.2 million tons that will be consumed sometimes in 2009, those payments were made in full by those customers on that take-or-pay arrangement.

Is it possible that you would negotiate a portion of that 18 million tons into 2010 in much the same way as that 1.2 occurred transitioning into 2009?

I think anything is possible, David, given this environment. I don't think there are any absolutes. But at this point in time, we're pretty firm on that volume.

Okay. And then, what's the carry forward with respect to pricing in '09 in terms of benefit. You've expressed it in the past in terms of if nothing else changes, pricing would be up X. I'm just wondering what that number is now.

That number that we talked about in June, which was about $107 per ton, that math still stands, and that was assuming nothing else changes. So if you want to think about the third, a third, a third relationship that we've talked about, it can start with that and then think about what you think is going to happen with pellet pricing and what you think is going to happen with steel and CPI. So it's a good -- it's still a good starting point.

You had expressed that in the past in terms of a percentage increase year-over-year. Could you do that for me here?

Yes, David, it was -- I think at the time we said a 26% increase, so it'd just be a matter of taking -- and we were at a lower average revenue per ton in 2008 base then. So it's just a matter of taking where we ended up for 2008 revenue per ton, which in North American Iron Ore was $86. So whatever the percentage change between that $86 and $107, that would be -- that's how we got to that percentage.

Okay. Just a couple final questions. We lost the better part of $200 million on a currency hedge in 2008, and I guess I realize you want to hedge against a weak U.S. dollar, but a weak U.S. dollar environment's typically accompanied by a stronger spot market pricing for iron ore, and I'm just wondering is there an alternative to engaging in these hedges where we get these massive margin calls such as maybe adjusting your contract to spot mix in favor of a little more spot so you could get the benefit of that relate with the dollar rather than deal with these big margin calls.

Yes, definitely understand your point there, David. I think to understand this we have to go back to the point that Portman was a separate publicly traded company on the ASX, and so we had shareholders there. And the approach is a little different because they have revenue in the U.S. dollar and costs in the Aussie dollar. One of the advantages that we see now in 100% ownership is the way that we can look at things like hedges, and we're taking the different look at it and really believe that we have some natural hedges within the company, so we will be less likely to enter into hedges of that magnitude in the future.

Okay. And then last question, just on Amapa. That was a much bigger expected loss in '09 than I think most people were anticipating. Can you just give us an update on what's going on there and what's the possibility that you come back midyear with an even bigger loss expectation?

Yes, David, I'd be happy to address Amapa. What really occurred in 2008, from a Greenfield mine -- we got it built within the parameters of the cost that we looked for. The railroad was reworked and ready to go, and is ready to go, as well as the port. The deal between MMX -- the lead partner, the 70% partner -- and Anglo was announced mid-January of 2008, and that deal wasn't concluded until mid-August of -- right at -- of 2008, right at a critical time of the Amapa startup. And I would have to say there was a little bit of -- Anglo could not get in a position to manage it, and I think a few people took their eye off the ball, as ramp-ups are always difficult.

As you go into 2009, my congratulations to the Anglo team that has taken over the management of Amapa down in Brazil. We've got a new management team in place. They're very focused. The numbers are heading the right way, and the costs are just a matter of activity versus inactivity in the ramp-up phase. So we think the numbers are firm. We've also put our own thumb on those numbers, if you will, in a very conservative fashion, and we think they're in good shape.

Joe, what's the production plan for Amapa now for '09?

The production plan is to hit the ramp-up rate -- if you listened to the annual call -- of the $6.5 million by year-end, and we're looking at about 3 million tons from our side, David.

David, I just wanted to clarify too. I misspoke on our North American Iron Ore revenue per ton for 2008. It was actually $93, as we reported in the release.

Right, okay. Thanks very much.

Okay, thanks, David.

Your next question comes from the line of Michael Gambardella from JPMorgan. Your line is now open.

Good morning, Joe. How are you?

Hi, Mike. Doing well.

Good, good. Hey, Joe, what is your Plan B for operating North American Iron Ore and Coal if the market stays at this ridiculously low level for the whole year?

Well, Mike, we've worked very hard on the scenario planning, both on the upside as well as the downside. We do have a firm Plan B. We know the cost-per-line of production units on all of our mines. Our business and improvement folks are very much focused on the cost reduction side. And as you saw in the recent announcements, where we're going to take North Shore, our 100% mine owned, down in April for a month. We've taken the Pinnacle mine down for a month.

So we will continue to match production with sales and particularly keeping a strong eye on inventories, but there's a very strong plan based on focusing on cash to balance these mines that could be enacted very quickly throughout the year.

And is there anything you can do to bring down those costs at the coal operations in North America? They've jumped quite a bit.

There certainly is, Mike. What we have done in the initial plan is through 2008 we struggled to get the machinery we needed to get ahead of the development of the [long moles], that is the continuous miners, and certainly to get the people that we could get in place then to use that new equipment. Well, as you can imagine, the new equipment has come in. We have accepted delivery of the continuous miners. And at this point in time, we are continuing on with our development so we can get ready for the upturn of the business. But everything is discretionary in this business, and if we need to drop those costs and drop the development back once we feel like we're at a little safer position going forward, we can certainly do that.

And last question on Portman. Earlier in the year, at the beginning of the year when we were talking, you had mentioned that the Portman operations was seeing a decent order book coming out of China for iron ore. Any update on that?

Yes, I think the order book is strong, Mike, through the first half of the year. It's not full, but it I certainly strong. I think the strategy that the guys in Australia and selling in China on our behalf, pointing their tonnage at the good solid second-tier mills that are supplying -- that are producing long products for the China stimulus is certainly paying off for us, but it's a very strong order book at this point in time.

And several other Australian iron ore properties have had interest and actual bids by Chinese for these iron ore properties in Australia. Have you discussed any of that for Portman?

We have not. We have not had any discussions or any phone calls around Portman.

Okay. Thanks a lot, Joe.

Thanks, Mike.

Your next question comes from the line of Jorge Beristain from Deutsche Bank. Your line is now open.

Hi, Joe, Laurie and Steve. Jorge Beristain from Deutsche Bank here. Just following up on that coal question, again, the guidance on coal several quarters now sequentially continues to be a negative surprise, and I just wanted to understand -- you quoted very clearly your revenue per ton previously contracted was about $108. Your quoting your unit costs projected in $110 to $120 range. So it's pretty easy to figure out that unless you get a price increase in the upcoming negotiations, you're going to be below water on those coal operations. So my question is is it a zero-one thing where if you don't get a minimum price that you're seeking, you will then back away from the uncontracted volume forecast and just, as you said, those costs become discretionary? Could you elaborate on that?

Yes, I certainly can, Jorge. Certainly the $108 blended revenue price that we have for the committed tons, as you can imagine, is a blend of carryover tons, which is about 50%, and new contracted tons that we have sold. So we are anticipating prices above that as we go forward for the uncommitted tons. It would be very difficult for us to sell tons below what our production tons are. If we can't pull the discretionary costs down as well in conjunction with the pricing that we see and the visibility, then we certainly won't run these mines at a negative margin this year.

I'm sorry, could you clarify? You certainly will run them at a negative margin or you would not?

No, we will not. Sorry, Jorge, we will not.

We will not.

Oh, okay. And just to follow up, can you give us a sense of the profile of unit costs expected in the coal business, medium term, next two or three years? Because you guys keep putting in a lot of money down there, and we're just trying to get a sense of will the unit costs there ever come back down.

I think they will. Jorge, obviously I will be the first to admit, as I have to many investors and shareholders, that we are behind in turning these mines around. We do have specific projects in mind that will also help the operating costs and the productivity of both Oak Grove and Pinnacle. We have chosen not to spend that capital yet until the market clears a little bit, but we have the engineering and those projects ready to go.

And also, it's very volume sensitive. At the 3.6 million tons, one, there is now a selling constraint, if you will, with the market backing off, but we also expect to get these mines into the 5 to 6 million ton range as well over the next couple of years.

Okay. And then, just sorry, lastly, on the Iron Ore business in North America, the data through mid-February is pointing down -- roughly down 50% year-on-year. I think based on your current sales volume guidance, if I recall correctly, you expect sales to be down roughly 20% year-on-year including the carryover of -- is it now 4.2 million tons from last year?

No, 1.2.

1.2, Jorge.

Right. But I also thought -- sorry, but there's also 3 million tons in inventory that you plan to also sell.

But that wouldn't be additive. That would be in lieu of producing additional tons.

Right.

Yes, so I guess what I'm trying to ask is do you think that your sales volume expectations are still realistic in light of what -- the data that we've seen year-to-date of steel output still being down roughly 50% in the U.S.

We believe, given the way that our contracts are written and administered, that yes, that volume is still secure.

Okay, thank you.

Your next question comes from the line of Lloyd O'Carroll from Davenport & Company. Your line is now open.

Hi, this is Chris for Lloyd. In the North America Coal segment, your cost guidance, what volume does that assume?

The 3-point -- 3.5 million tons that we're currently producing at.

Okay, so you're relatively confident that you'll be able to sell that volume once contracts are negotiated?

We think so. These are low-vol coalmines. They don't have a lot of competition in other mines, and they do have an export feature that goes with them. So yes, at this point in time, that's what we're basing those cost figures off of.

Turning to the hedges in Asia-Pacific, how far out do those hedges go?

We have some that go out three years, but most of them will roll off in the current year and 2010. There's a really good detailed table in our 10-K, which should be filed today or tomorrow.

Okay. And then can you just quickly talk about the tax benefit you received in the quarter?

Sure. There are several tax planning strategies that we've got in place. Some of them we're now able to trigger because of the 100% ownership of Portman. Some of them involve maximizing our depletion credits. The other thing is that because of depletion, the rate we pay on mining income is lower than actually the benefit we get on certain things like the alpha termination. So we got a higher benefit rate on that than the rate we pay on our income.

Okay, thank you.

Thanks.

Thanks, Chris.

Your next question comes from the line of Mark Liinamaa from Morgan Stanley. Your line is now open.

Good morning.

Good morning, Mark.

Good morning.

Can you comment at all on what volumes you have under contract for iron ore in 2010 and also give a little bit more detail around any price floors that you may have in the iron ore business for this year? Thanks.

I don't think we give a lot -- our contracts run out through an average of six years at this point in time. So I don't know an exact number. I don't think we would give an exact number. But there would be a material change in the volumes that we would have under contract for 2010.

Okay. And any -- can you comment at all about downside protection --?

Well, the formula in and of itself is our downside protection, and there are, as you saw on the way up, some caps and collars and some things that create a little bit of a slowing. Overall, the formula-based pricing takes out volatility. So we go up slower than everyone else, and we will go down slower than everyone else, and that's what these contracts are designed to do, and I think we're going to see them come into play now.

So if we got -- if we did get a 30% fall in global iron ore prices and (inaudible) coil prices staying roughly where we are, where roughly would that put us?

We're waiting to get some more visibility on that before we give absolute numbers. But certainly if you think about a fall of 30% and only about a third of that drops through to us, with our formula that's a 10% decrease. And obviously if steel pricing comes down, we get a little bit more than a 10% decrease, but we wouldn't get the full 30.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Mark Parr from KeyBanc Capital Market. Your line is now open.

Hi, this is Phil Gibbs for Mark. How are you?

Good morning, Mark.

Good morning.

Hey, Phil. How are you doing?

Doing okay. That 45% backlog, per se, against your production in the North American Coal business, how do we look at the other 55% that's not contracted for the year? Is that a reflection of lack of export demand given the macro realities recently?

It certainly is, Phil. I think it's that and the buying season, if you will, is open right now. Remember, Europe works on an April-to-April basis, so there's still time for the international buyers to lock their contracts up. And given the uncertainty of the environment and where coal supplies are in Europe right now, it's just been a very quiet negotiating season at this point in time.

Now, what sort of volume assumption do you have around that $110 to $120 as far as the cost per ton?

The 3.5 million.

Okay. In the North American cost structure -- North American Iron Ore -- how are we looking at that? You provided the $70 to $80 per ton range, but what are the puts and takes relative to 2008, given energy and supplies, and I know labor costs have likely gone up. But what you've done is headcount reductions and have had production curtailments and some facility temporary closures. How do we weigh those against each other as far as puts and takes?

Well, there is a big component that is this one-third of cost base in 2008 was fixed. So you have to factor that in when you come down from our production levels in '08 to the 15 million that we'll add in 2009.

In addition to that, there was the union contract that was settled which will add to that base after you use the fixed variable ratio to calculate a number. And then there are certain cases where just some of the cost have come up.

And I know a lot of people are looking for a flow-through of the decrease in natural gas and diesel fuel, and it doesn't work that quickly. We had some hedges in place. Not all of it, certainly, was hedged, but the percentage gets higher as your production comes down. So if we had our target percent of natural gas hedged, we're a little over-hedged on a percentage basis if that comes down.

What about the production curtailments and the temporary facility closures you're doing in Minnesota? Is that supposed to take any meaningful absolute cost out of the business?

Well, that's the variable piece, so if you think about we brought volume down and you've got your fixed component -- your variable has to come down as your production comes down. And the way you do that is by not spending on supplies but also taking out the variable labor piece.

Okay. I was just wondering if you wanted to just put any range around how you came to that number as far as a cost.

It's really the -- it's rolled up from the bottom, and the easiest way to get at the math is to really think about the fixed and variable piece and assume that the fixed cost base gets spread over whatever production tons that we've got, whether it's 15 or something less or something more or whatever it is. And then you've got the variable piece, and it's our guys in operations job to make sure that that variable piece stays variable and it floats up and down with production.

Okay, thank you.

Thanks.

Thanks, Phil.

Your next question comes from the line of Wayne Atwell from [Cashmere]. Your line is now open.

Good morning.

Good morning, Wayne.

Good morning.

There's obviously a lot of changes going on in the economy, some of which, unfortunately, may be permanent with the auto industry scaling down and manufacturing coming off the United States. The steel industry may not come back to its old size. You have long-term contracts in iron ore for your iron ore sales. Have any of your customers come to you and talked about maybe modifying these contracts and pulling down the volumes, maybe stretching them out but taking less over the next few years?

Of course, Wayne. We're in discussions with all customers, just as we are in discussions with all of our vendors on the same types of scenarios that may be going on. It would only be prudent for -- in this environment for everybody in a number of conversations. But certainly we've had conversations with our customers given the economic times.

So is there anything you can give us in terms of a heads up? Can you maybe give us a probability that there might be a change? Presumably they would be coming down, not up, and would you say there's a good chance you can hold your volumes or there's a high probability you'll have to modify them on the downside? Or can you give us a little reading on what might happen?

Well, it's really hard for me to look out into -- given the doomsday scenario that you just painted in manufacturing and autos to do that. But I will tell you, again, today, as we speak, we honored our contracts as things were on the way up. As you know, we were well below world pricing in our contracts that our customers took -- benefitted of. And we expect those contracts to be honored on the downside as well, which is our minimum take-or-pay in the volumes as they go forward. And our pricing formula, as you know, is built to take, as Laurie said, volatility out on the way up and volatility out on the way down. So that's how these were constructed, and we are quite comfortable with the language in those contracts.

Thank you. And if we could talk about coal for a second, if we think about the long-term pricing for metallurgic coal over the last number of years, your cost structure is about in line with, or maybe a little higher than the average metallurgical coal pricing. Is any there probability that you can take your costs down materially $20, $30, $40 a ton to put you in a better margin outlook for that particular product? Or can you talk to us about the outlook for costs over the next three to five years?

Sure. As you know, the Appalachian coal basin is certainly continuing to be restricted as far as expansion. There was very little expansion, again, with the higher prices we saw last year. And obviously everybody was trying very hard to sell more coal. But when you put the new environmental laws and restrictions that are coming into Central Appalachia, the new [in-shoal] safety regulations, which let me say we highly endorse, within the mines -- but certainly has been a loss of productivity, which are increasing costs and make less -- make fewer mining properties in the coal basin available to be mined profitably. Certainly we've got some ideas on how to lower our cost. That's why we bought these mines, and we fill that's what we're very good at. As I described earlier in the call, we have specific projects that do require some capital, and we're just not going to trigger those until we can see the events unfold in 2009. But it's certainly our thoughts and our strategy to lower the cost in those two operating coalmines that we have.

Can you give us any kind of a broad thought in terms of how much you might be able to pull costs down on those properties?

I really can't at this point in time, Wayne. Sorry.

Got you. Thank you.

Sarah, if there's no more questions, we'll go ahead and conclude the call. Go ahead. I'm sorry.

There's one more question from [Brian Riley] from Wachovia Securities.

Morning, Brian.

Good morning. Yes, I was just wondering -- these are balance sheet or cash flow questions. But if you exclude your balance sheet changes, could you give me what I call net cash flow number for the year and for Q4, if you have that available?

I don't, Brian. If you want, we can talk about it offline. I can give you a call, and we can walk through.

The full cash flow statement with the Company information will be in the 10-K as well.

Right. And that will be out in another day or so?

Yes.

That's right.

So I can call and get the quarter number?

Sure, I can walk you through that.

Okay, and then the CapEx -- I came on late. I apologize. Did you give CapEx guidance for the year?

We did. $200 million.

$200 million. And acquisitions -- do you anticipate spending on acquisition in '09?

We're certainly -- our Business Development Group is still onboard. They're still looking at lots of opportunities. But we are very cautious of making any moves. I would hate to exclude all of 2009 if things do turn around. But we're certainly going to be very cautious in the first half of the year till we can get some visibility into where the economy's going.

All right, great. I'm good. Thank you very much.

Thank you.

Your next question comes from the line of David MacGregor from Longbow Research. Your line is now open.

Yes, just a couple of follow-ons. When you look at the fixed-cost absorption associated with going -- one-third of your costs on 2008 and going from $22-odd million down to $18 million, it looks like the negative productivity is about $6 a ton. Just wondered if we're thinking about that correctly. And if that's the case, taking where you were in '08 to the midpoint of your '09 guidance is about an $18 increment, so that would be about one-third. It seems like that energy might be a bigger part of it, and I was just wondering if you could give us some sense of what the energy in that over-hedged position might be contributing to the cost story.

We'd be glad to.

We can walk you through the detail, but I think your $6 is a bit low on the volume.

Okay. So is the one-third a rough approximation? Is it actually maybe a little bit of a bigger proportion for fixed costs?

Yes, and it's one-third of our '08, so we translate it into well over $10 of the increment. And then we've got the labor contracts, which is another piece of it.

What's that represent in terms of per ton?

It's probably $3 or $4.

Okay. Just the recent news on China that they're going to consolidate down into three groups. Is that going to impact your Portman business over 2009 or maybe 2010?

We don't think so, David. Again, a credit to the Portman group that we bought -- Portman has been around for quite some time in this business. When they went through and did their customer selection many years ago, they actually took this into consideration, had a lot of foresight and have tried very hard to work with quality customers through the years, and I think that's paying off now and will pay off in the future.

Okay, so there's no real risk that business at this point?

We don't believe so.

Okay, and then, finally, in your met coal business, your low-val, hard-coking coal, and I realize that's kind of the upper end of the met coal complex. Can you talk about what might be a little bit different with respect to pricing for that grade of coal rather than maybe the broader met coal complex and some of the softer grades and the PCI grades?

We certainly feel that it carries a higher premium than the grades that you just mentioned, and it has less competition in the marketplace. Certainly the Oak Grove Coal in Alabama and that group -- Blue Creek Seam has been world-renowned. This is the same coal that Jim Walters mines down there and has a very nice exportable feature out of the port of [Noveo]. That coal has always commanded a high premium. So we would have expectations of selling that a premium price when benchmark pricing is finally settled.

Do you have any control over pricing at all, or are you a complete price taker on your coal?

Well, no, on the coal we do have -- it is much more negotiated than the iron ore, which we are a price taker on, but it's certainly individual negotiations and depends on the blends that the customers need and the sources that they can get their low-vol materials from.

Okay. And then your year-end iron ore inventories?

David, I think we were at about 3.5 million tons.

Yes, I think that's right, Steve. 3.5 million.

3.5 million tons.

Yes, right in that range.

And you use LIFO accounting for the North American Iron Ore?

Yes.

Is that correct?

Yes.

Okay, great. Thanks very much.

Hey, thanks.

There are no further questions at this time.

Great. Well, thanks everyone for joining us on the call today. Please feel free to follow up with me on any additional questions you might have. Thank you ,Sarah.

Thank you.

Thanks.

This concludes today's conference call. You may now disconnect.