Cleveland-Cliffs Inc (CLF) 2009 Q2 法說會逐字稿

Good morning. My name is Andrea and I will be your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2009 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.

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

Thank you, Andrea. Before we get started let me remind you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially.

Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC which are available 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 Cliff's 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. Considering the difficult economic environment our team is managing through, I am very pleased with our performance in a number of areas during the second quarter.

First, despite what many are calling the bottom of the cycle for steel production in the US and Canada our North American iron ore segment managed to achieve $34 million in positive sales margin for the quarter. Impressive for a business with such a tremendous fixed cost base. Second, our North American coal business narrowed its sales margin loss on both a year-over-year and sequential basis to $19 million. And, finally, our Asia Pacific iron ore segment is positioned to have a record year in terms of sales volume.

I am extremely proud of the fact that operating results for the quarter were breakeven, adjusting for the $17 million related to retroactive pricing adjustments outlined in our press release. This is not to say that we didn't experience our challenges.

At Sonoma Coal we are producing more thermal coal out of the current section being mined than was anticipated at this point in the year, an issue we expect to address through changes in our mind plan going forward. And Amapa continues to ramp at a slower pace than we would like or had expected. Of course, the market environment in North America continues to be extremely challenging and is having a tremendous impact on sales volume.

As previously announced during the quarter we also undertook initiatives to enhance our financial flexibility through the public offering of 17.25 million common shares raising $348 million, along with a decrease in the quarterly dividend and reductions in compensation from the Board through all levels of management. I would like to note that these decisions were not taken lightly and I recognize the sacrifices all of our stakeholders are making, including our shareholders and employees throughout the organization.

However, these steps have served to bolster our balance sheet and cash flow and were necessary given the uncertainty at the time of the announcements. They have also resulted in a meaningful lower cost structure with SG&A down 55% from the second quarter of 2008. Strategically, these steps give us the ability to fund capital expenditures, pay down debt, and to possibly take advantage of bolt-on acquisitions where increased scale can support our long-term vision.

As you know, our North American operations have taken the brunt of the macroeconomic decline, strongly reinforcing our geographic diversification efforts. Our Asia Pacific assets are providing revenue streams that are helping significantly to offset the weakness in North America. Absent the benefits of our Asia Pacific operations we would have no doubt experienced declines in sales and profitability well beyond those currently expected for the year.

Also reinforcing our strategy are the long-term sales contracts we have had in place for many years with steel producers in North America. While the world pellet price has come down 48% this year, because of the formula-based pricing and lag-year adjustments contained in our contracts we are estimating our average revenue per ton in North American iron ore will be down only by 15% to 20%.

Preliminary signs of stabilization in the North American steelmaking industry are encouraging. Currently, we believe that second quarter will mark our production low point in this cycle. As sales volumes rebound we will gain leverage over fixed costs and improved profitability.

Nevertheless, until sustainable progress is realized management will continue to drive efforts to maintain flexibility, reduce cost, and preserve cash flow. And our operation teams remain focused on striking a prudent balance between production and demand.

Recently steel makers in Europe and blast furnace pellet producers agreed to a price settlement decrease of approximately 48% with the Eastern Canadian producers subsequently adopting the same decrease. This has provided more clarity regarding our North American pellet pricing.

With regard to our Asia Pacific iron ore business, we are currently selling under provisional pricing to our customers in China consistent with the 2009 settlement for lump and fines reached between producers and other Asian-based consumers outside of China.

I will provide additional details on the operations and outlook before we open the call for questions, but will now turn the call over to Laurie for a financial review of the second quarter and the first half.

Thank you, Joe, and good morning, everyone. The dramatically weaker year-over-year global demand for steelmaking raw materials was reflected in volume and pricing reductions during the quarter, leading to the 61% decline in consolidated revenues to $390 million. We reported net income of $46 million or $0.36 per diluted share in the second quarter compared with $270 million or $2.57 per diluted share for the year-ago period.

As Joe said, we are very pleased that after adjusting for the $17 million retroactive impact first-quarter sales had an operating income in the second quarter. At the operating income line we were breakeven. However, because of these adjustments our six-month comparisons are much more indicative of actual operating results than what you see on the quarterly P&L.

For the first six months of 2009 consolidated revenues declined 43% to $855 million from $1.5 billion in the same 2008 period. Compared with the year-ago operating loss for the first half of 2009 was $6 million versus operating income of $452 million. And we earned $38 million in net income or $0.32 per share versus $287 million or $2.73 per diluted share in the first half of 2008.

To provide more insight into actual operating performance in our earnings release issued last night and our discussion today we have adjusted our quarterly segment information for the retroactive impact of price settlements from the first-quarter sales in both years. In North American iron ore we reported positive sales margin of $34 million. This compares to the $273 million in sales margin generated in the second quarter of 2008.

The year-over-year decline primarily reflected the 58% decline in sales volume, lower pricing related to declines in hop and steel pellet settlements and other factors, as well as deleveraging of fixed costs. Per ton revenues in North American iron ore decreased slightly during the second quarter to $98.88 compared with last year's $102.04. Total costs including DD&A were up 59% to $84 per ton.

As a result of shutdowns to balance production with demand, our cost per ton includes a significant component of idle costs. This idle cost component for the quarter was $22 per ton. On a cash basis our per ton costs increase 53% to $78 from $51 a year ago.

In North American coal average realized revenue for the second quarter was just under $94 per ton, an increase of 2% from the $92 per ton realized in the second quarter of 2008. However, much higher average cost of goods sold of approximately $160 per ton lead to the $66 per ton sales margin loss for this segment. Similar to North American iron ore lower volumes, which were down 49% to 300,000 tons, have resulted in much lower leverage over fixed costs.

In our Asia Pacific iron ore business revenue per ton averaged about $59 for the second quarter. This represents a decline of 47% reflecting the current year's lower pricing, a significant mix change year-over-year emphasizing fines versus lump ore, as well as a foreign exchange impact. We continue to successfully place tons with Chinese steel makers that are accepting shipments under provisional pricing arrangements consistent with those reached between large Australian miners and other Asia-based steel producers.

On the cost side average per ton cost of goods sold increased 3% to approximately $59 during the quarter. Contributing to this was $4 per ton related to inventory step up resulting from our mop-up acquisition of the former Portman Ltd. last year. On a cash basis cost per ton declined from $50 to about $38, or 24% from last year. Favorable exchange rates, lower mining costs, and lower royalties all combined to lower cash costs during the quarter.

Turning to Cliff's 45% economic interest in Sonoma Coal, the operation generated $23 million in revenues and a $7 million loss in sales margin for the quarter. Per ton costs were $104. However, for the year we are expecting costs per ton of between $75 and $85. As Joe indicated, we also had a higher than expected proportion of thermal coal production versus met coal.

Production at Amapa more than doubled from last year's second quarter to approximately 500,000 tons. Equity losses of $25 million primarily reflecting unanticipated non-operating items including a $3.4 million inventory write-down and $7 million asset impairment charge, as well as an unfavorable variance in exchange rates. We are maintaining our estimate of $50 million to $60 million in total equity losses for the full year including the current quarter non-operating items.

Turning to the balance sheet, our liquidity position remains strong. At second-quarter end 2009 cash and cash equivalents stood at $275 million versus $179 million at December 31, 2008. Major uses of cash year-to-date were $61 million in PT&E and $38 million related to investments in the Amapa operation. Cash used by operating activities was $161 million, primarily due to the lower earnings.

Long-term debt was $525 million, none of which is due prior to 2012 and we have no borrowings under our $600 million revolver. Also, as Joe mentioned previously, we raised $348 million from our equity offering in May. As many of you know, the primary reason for our equity offering was to improve our ability to maintain financial flexibility.

With iron ore settlements occurring at the lower end of our expected range, we are carefully monitoring our operating forecast and resulting financial position. Our results over the next several quarters will be dependent on a number of factors including exchange rates, customer shipping schedules, and hot band steel pricing. Given our prudent nature, should we see any covenant issues we would proactively engage with our bank partners to ensure we continued to maintain maximum flexibility under any circumstance.

Moving to our outlook for the balance of 2009, we expect to generate cash from operations in the range of $200 million to $250 million for the year. This is the result of our strong focus on cash costs and working capital and limited SG&A spending combined with cash collections from customers in the second half of the year. Cash collections will be significantly higher as we have typically generate 60% of our revenue in the back half of the year and we will collect cash for our traditional stockpile sales.

This would imply positive free cash flow generation for the year based on our expectation of $130 million in CapEx.

With regard to income taxes you may have noticed we reported an income tax benefit for the quarter. We expect a 29% tax benefit for the full year. This is the result of a greater amount of income being derived from tax jurisdictions with lower rates than the US statutory rate, combined with benefits from percentage depletion. This is in contrast to our historic rate of about 25%.

Before I turn the call back to Joe, I wanted to spend a moment to address our hedging program in Asia Pacific in our current portfolio. As you know, exchange rate fluctuations have varied widely over the last year and had dramatic impacts on our P&L. The legacy of our hedging program has its roots in the former Portman Ltd. being a publicly-traded Australian company with results reported in Australian dollars and sales in US dollars.

Now that Cliffs owns 100% of Portland we have changed our program to suit a US-based firm. We expect the size of our hedge book to be correlated more to costs than revenue, and as a result the total hedge book will be smaller. This will reduce the volatility in our P&L and better match the hedge book to our exposures. Over the recent weeks we have been active in the market selling some of our positions in order to close that gap and have reduced approximately 25% of our overall hedge exposure.

With that I will turn the call back to Joe for an operations review and other expectations for the balance of the year.

Thanks, Laurie. I will begin with our North American iron ore operations where we have contractual obligations for 17 million tons of iron ore pellets in 2009. We expect to collect cash in the current year on this tonnage. As of today we expect 4 million to 5 million tons of stockpile sales that are unlikely to meet revenue recognition requirements. As a result, we expect to book 13 million to 14 million tons to sales volume.

As I touched on previously with iron ore producers and consumers agreeing to a decrease of 48% for blast furnace pellets along with the impact of the other pricing factors, we anticipate average revenue per ton of approximately $75 to $80 this year and average cost per ton based on 15 million tons of production of between $70 and $80.

In North American coal we continue to anticipate an increase in real demand from North American and European-based steel producers the natural market for our coal production. When this occurs we expect to better leverage our fixed costs and produce at a much lower per ton cost levels than the $150 to $160 per ton we are guiding to for the full year. This estimate also includes $23 per ton a DD&A.

Sales volume in North American coal is expected to be approximately 1.5 million short tons with an average revenue of between $95 and $100 a short ton at the mine mouth. Our Asia Pacific iron ore business continues to generate encouraging sales activity with our full-year sales volume estimate at 8.5 million tons, up from a previous estimate of 8 million tons.

Based on the estimates that have occurred, which are the basis of our estimates -- I am sorry, based on the settlements that have occurred which are the basis of our estimates, we expect to achieve per ton revenue averaging $60 to $65 and costs at $45 to $55 per ton. At Sonoma we are projecting sales volume of 1.4 million tons for our 45% economic interest, and as Laurie just mentioned cost per ton of between $75 and $85. We expect average revenue per ton of $100 to $105.

With that we will open the call for questions.

(Operator Instructions) Kuni Chen, Bank of America.

Good morning, everybody. Just to start off on the bill-and-hold sales of 4.5 million tons, does that basically all get recognized as revenue in 2010 or kind of does that end up pushing tons from 2010 into 2011 and so forth? And then can you also talk about the accounting treatment for bill-and-hold? It still seems a little bit uncertain there when you expect to get more clarity on that issue.

Well, we would get the cash in the current year, so that we have clarity on. Then the revenue would be recognized as those tons ship and at this point we see no reason not to expect that it would all ship in 2010.

Okay. Then on the accounting treatment?

The accounting treatment, we get the cash and so we have a debit to cash and a credit to liability that we owe the tons to the people. And then we get -- we book revenue when we ship the tons.

Right. All right, that is fine. Next question, can you perhaps maybe give us some sensitivity around your sales volumes and how you expect that to correlate as steel utilization rates improve? So for example, what level of sales in North American iron ore would you expect to see at, let's say, 60%, 70%, and 80% utilization rates?

Well, we would certainly see -- if those projections on utilization were to pick up, certainly we would see the volumes come across than where we are right now. And it would be more of, I think, an effect on the stockpiles at year end and then of course that would translate into higher volumes.

I don't have an absolute number for -- there are so many variables around an industry average of 60%, 70% utilization capacity moving up versus the individual blast furnaces and the stockpiles that sit between them and the mines at this point in time.

Right. Then last question, on acquisitions would you consider met coal to be basically off your radar screen at this point? Do you think it's a good idea to increase your scale in met coal or perhaps add more to your management bench strength in that area? Can you just comment on whether or not that is strategically appealing?

Certainly. Our strategy is still firm and I think our results as we have indicated today on the call indicate the diversified miner approach, the global miner approach is certainly where we want to be versus just confined to North American integrated blast furnaces. I am still extremely bullish on the met coal market in the future years.

If you see what is going on in China right now, inquiries are picking up. We do buy mines such as the PinnOak properties that we bought to build off of a platform. And we are still quite interested in growing the met coal business and bullish on the met coal market in the future.

Great, thanks. I will turn it over.

David McGregor, Longbow Research.

Hi, guys. This is actually Rob filling in for David. A quick question. Regarding the bill-and-hold agreement were there any favorable concessions that you guys got, like better pricing, anything that we can expect to impact 2010?

No, we are really just managing the contract. We have had a contract, a long-term contract in place with the majority of the volume that we will see in bill-and-hold in those stockpiles. And we are managing to the contract and the customers are honoring the contract.

The contracts require the customers to pay for the tons in 2009, which they will do. In terms of revenue recognition that is a matter of when they actually take it off our hands. And that is not really required by the contracts for them to move it that quickly.

Okay. Moving on to some of the SG&A savings that you guys had. If you had to quantify it, what percentage of that would be variable? And then if you could add some color on maybe what is left moving forward, if there is more to come?

I don't know that you will see much more cut on SG&A beyond the level that we have guided to for the current year. Some of that certainly is variable. If it's a good year, if it were a different year, some of the things would be different. There is variable compensation in that but we have also really watched very closely all of the dollars that we spend.

Right. You know, it's a real balance of how far you go in this business or in all the businesses to cut your strength, your management's strength within SG&A, your CapEx so that when things do turn around and come back up we are able to support the higher volumes. If we had, obviously we can always take more cuts. But at this point in time we are feeling very comfortable with where we are and poised for the upturn.

Okay. One more question. Regarding your Amapa earnings, excluding the one-time items, it appears that maybe it's recovering a little bit faster than you originally expected. If pricing was flat heading into '10 and guys were able to sell everything that you produce, what would you look at in terms of your expectations for 2010 profitability?

Well, we really haven't finished our 2010 planning process at this point so we are really not prepared to comment. We certainly expect it to get a bit better than it is this year, but we are not ready to give a number at this point in time or a magnitude.

Okay, great. Thanks a lot.

Mark Liinamaa, Morgan Stanley.

Good morning. In your iron ore segment you commented about the fixed cost absorption and how that was moving cash costs. Can you do the same with the coal business and kind of what a normal run rate cost would be embedded in that 150 to 160 cost you have cut?

It is probably $50 to $60 in idle costs in that number.

50 to 60 cash costs related to idle --?

Not all cash costs, no.

Not all cash. Including -- so that would include the DD&A?

Yes, yes. But that is the idle cost portion of the total cost per ton that we will be reporting this year.

Okay, thanks. And just to help me get to the almost $100 per ton pellet price this quarter, can you help me reconcile that and what the moving pieces are that go to the full-year guidance?

There is a bit of a mix. It just depends on which customers (technical difficulty) does have some affect on it. And when your volumes are lower like this, you know, one shipment can move the numbers a little bit more than normal.

So the high end -- what is the high end that you are charging some customers for pellets these days?

We don't really reveal pricing with customers, Mark, and we wouldn't do it at this point in time. It's just that there is variable pricing just as there is with any business. As Laurie said, the volume is just so sensitive right now being on the low end.

It just seemed like that was a pretty strong number relative to what I think most people were looking for. And maybe just finally a lot of talk about a move internationally to more of a spot price mechanism, certainly related to the Chinese, which would affect you. Can you talk about how that might affect your pricing dynamics both in Australia and in the United States?

Sure. I think it's obviously a very big topic of conversation in the iron ore business and certainly the pricing settlement structure is changing as we watch with it. And I think you have to separate the two, Mark. The lump and fines as you see, one of the major Australian producers is driving to an index spot-type pricing with that. They have announced yesterday, as you saw, a mix of about two-thirds benchmark and a third I think indexed or spot. That is probably a pretty healthy mix for a company that has that much volume to work with.

We do not sell any spot in Australia at this point in time going into our Chinese customers. And I think, like any dynamic of a pricing structure that is changing, you are going to have a mixed bag probably for a few years before that gets settled. We will, in Australia, with lump and fines we will work with the customers and work through those issues on what they are comfortable with.

Not everybody, particularly the smaller customers that we deal with, really want the variability of indexed pricing. There is a lot of customers that are quite comfortable with the benchmark as it goes.

North America, people are lumping all that into an indexed pricing and I think you have to remember this is a pellet market. The size of the pellet market is rather small when you compare it to the natural ore and I really haven't seen a mechanism for an index for pellet pricing at this point in time. And while I am sure it can always be done, it would be on a relatively small base and, if you will, in North America we are the market.

So you expect to see some sort of Eastern Canada benchmark price that you are going to still be setting your contracts to for the foreseeable future?

For the foreseeable future, I do, yes. There might be some modifications but, yes, I haven't worked out or have been asked for a different mechanism for pricing for pellets.

Okay, thanks. Good luck with everything.

(Operator Instructions) Luther Lu, FBR Capital Market.

Morning, Joe and Laurie. Question on this bill-and-hold, if you don't deliver this year would that impact the 2010 volume at all?

No, the 2010 contract year is the 2010 contract year. These are just volumes that are part of the 2009 contract year. We had bill-and-hold sales like this last year, it's just that the size of the -- the number is a little bigger this year than it was last year.

Are you seeing the -- is the equity partners with your mines are they cutting back their own production in order to meet your minimum take or pay agreement?

They have and as witnessed, Luther, just a few weeks ago the partners, which we are the minority partner at Hibbing, made an announcement to shut Hibbing down -- Hibbing Taconite down until the spring of 2010.

Okay, okay. Switching gears to North American coal, do you have any contract position for 2010 at all at this point?

We do not, no.

Okay. So if, say, come 2010, January 2010 are you going to essentially idle the mines again?

Well, it will depend on a whole bunch of factors, Luther, obviously between pricing and volumes as to get into the new year and all those discussions take place. Management has taken quick reaction to shut the mines down and bring them back up as business requires and we wouldn't hesitate to continue to do that. We wouldn't operate a mine and just burn cash and put it out on the ground. So we will continue to operate these on a variable mode as the business dictates.

But in our business model in any year, a very good year we wouldn't expect to have contracts at this point in time already for 2010. So the fact that we don't is not indicative of what we expect volumes to be next year.

Okay. So for the remainder of 2009 where are you producing these 700,000 tons of coal that is to be shipped? Is it in Alabama or in Pinnacle mine?

It's both. It will be primarily more in Oak Grove in Alabama than it will be in Pinnacle, but there will be some continued shipments out of Pinnacle as well.

Okay, got you. Thank you.

Brian Yu, Citi.

Hi, this is actually [John Sullivan] filling in for Brian. I just had a quick question. I was wondering if you could give a little bit more detail on the forces which led to the tax benefit on the quarter, just given where the segment sales margins fell out.

Yes, it's an interesting question, isn't it? It's something that actually we expected a lot of people to have some questions around. We have a couple things going on and these things actually have a bigger impact. Again, because of our earnings for the year being closer to a breakeven level.

A lot of the positive things in our tax profile, like depletion, are a fixed number and so as the earnings get lower they become a larger percentage of that. So that is what we mean by the percentage depletion has a much bigger effect on our results this year than it did last year.

We also have as a percentage to total our earnings are more in countries with a lower rate, the statutory rate than the US. So those things combine to get us a benefit for the year.

Okay, great. Thanks.

[Chris Haverland], Davenport.

Good morning. Can you just touch on any impact that the 1.2 million tons that was deferred from '08 to '09 may have had on pricing in the quarter?

I don't think --

We collected cash for that last year.

We collected the cash in '08 and so any of the impact -- just it would be changes in some of the PPIs or steel pricing. As those flow through they could have an impact on pricing.

So have you all shipped any of that tonnage this year that was deferred from last year?

Yes.

You have? So that shows up in your revenue in the segment, is that right?

Yes.

Okay. And then on the balance sheet, the decline in your deferred revenue line is that simply the change in your shipments, what you have shipped this year from deferrals last year?

Yes, that is what it is. You are right.

Okay. And then turning to the income statement, can you just touch on the 17 million reported on the miscellaneous line?

What that is, Chris, is it's intercompany financing loans that are denominated in Australian dollars that there is currency change on. If you want, I can walk you through that after the call.

Okay, all right. That is it. Thank you.

[Jessica Fung], BMO Capital Markets.

I just had a question about the revenue line actually. I am trying to reconcile revenues from the divisions with the revenues on the income statement, because when I add the revenue from the divisions I get about 410 and it looks like your earnings statement is 390.

Yes, I think it's the difference --

Freight and minority interest.

Yes, between the freight and minority interests that we have and the absolute product revenues.

Okay.

It's spelled out in the 10-Q if you want to take a look at that when we file it. We will have that file later today.

Okay, thank you very much.

Mark Parr, KeyBanc.

Good morning, this is actually [Jason Browches] filling in for Mark. Just one question; I was curious what it was that brought down your shipment expectations for North American ore, I guess, by 2 million or 3 million tons over the last three weeks, since your last release early July. I think at that point you were still guiding toward around 16 million tons this year.

We were talking about the contract and the cash expectations. We didn't really go into the shipment expectations in that release. We still have the same cash expectations, cash collection, and holding that the customers are within the contract year and they think about it as cash. And that hasn't changed, it's just the shipping schedules have firmed up enough for us to share those with you.

Okay. All right, thank you.

Wayne Atwell, Casimir Capital.

Good morning. We are liable to come out of this recession with a smaller steel industry. Have you given any thought to downsizing capacity? And if you did, which capacity would you take off?

Well, we certainly have again and it would go to which blast furnace would come off. But we run these scenarios constantly in the business we are in today and the world we live in and have numerous scenarios with that, Wayne. So it would depend on what the volume was, where the blast furnace was, and all of those types of iterations, but certainly we have a pretty active model on that.

Can you give a handicap in terms of what the probability is that you will have to cut back some capacity permanently?

No, I really couldn't, Wayne. Not at this point in time. I think the industry is too far up in the air. I think we have got to watch the whole US economy. Someone has to back into units of cars and units of houses and where the stimulus construction will come in next year. I think we will see a blip in that in the spring construction season.

So I think it's probably three to six months premature before someone can handicap that.

Really, we expect if blast furnaces don't come back they will be the smaller, less efficient ones which have less of an impact on our business. And we can have a year that is below last year's production level and still we wouldn't feel the need to closure any mines or do anything like that. So I don't think that we expect the steel industry to go into a real dire situation.

Right, right. Well, it seems every cycle some blast furnaces bite the dust and my guess is this will be no different. Your reserve base at Portman, do you feel comfortable with that? Are you going to expand -- are you going to put some money to expand on that or how do you stand?

Well, we are spending about $15 million a year in near mine exploration. We have got good leases weighing around the mine and we continue to do the infield drilling. As you know, it's a series of small pits out there so there is a lot of room.

We have been successful in replacing the reserves year in and year out since we have owned Portman. Again, I think as we have always said, these are banded iron ore deposits so we don't see a large find out there. But we are still comfortable with our near mine work that we can do some replacement. So, yes, we are comfortable in the near term with our reserve basin.

And as you expand your reserve base is it contiguous to your operations or are you going to have to step out at some point and maybe spend some capital to modify your footprint?

We will have to step out. Again, these are small reserves that are spread across. We would have to continue to step out and to spend capital as we chase the deposits.

Great. Thank you.

(Operator Instructions) [Joe Flanagan], [Fundamental Equities].

Joe, your partner in Brazil the management has gotten a lot of publicity lately. I wonder if that is affecting at all your business relationship down there and the operations of the Brazilian company.

We continue to work with Anglo through this. As you know, they are the managing partner of Amapa as we go through this. Mines are always difficult to start up, particularly iron mines that aren't direct shipping but concentrators with this. And we continue to work through the issues with Anglo.

We still have a lot of confidence in Anglo with what we are doing with them, but we are all pushing hard with that. So we have -- on a local basis this is a very small property for Anglo. And we think the local management is focused and not lost in the bigger issues.

Okay. Laurie, what is the approximate affective tax rate in Australia?

The statutory rate in Australia is 30%.

But you would get credits I suppose that would bring that down?

Yes.

Okay. And that is an element in your effective rate?

Yes, it is. You are right.

Thank you.

There are no further questions at this time. I would like to turn the call back over to yourselves.

Thanks, Andrea. If there are no further questions, we would all like to end by thanking you for joining us on today's call. I will be available for the rest of the day if you have follow-up questions.

Thank you all.

Thanks.

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