Cleveland-Cliffs Inc (CLF) 2009 Q4 法說會逐字稿

Good morning. My name is Jackie and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2009 fourth-quarter and full-year 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 your host, Steve Baisden, Cliffs' Director of Investor Relations and Corporate Communications.

Thank you, Jackie. I would like to welcome everyone to today's call. 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 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 on the website 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. The early signs of stabilization we discussed in our third-quarter call continued throughout the final quarter of the year. Our view that the low point in steel production manifested in the first half of 2009 was reinforced by a number of metrics as the year came to a close. Accordingly, we realized notable improvements in our operations and business outlook across the board.

Highlights from the fourth quarter included net income, up more than 100% to $108 million or $0.82 per diluted share on revenues of $821 million, nearly 7 million tons of iron ore shipments -- iron ore pellets shipped from our North American business and a 21% increase in shipments from our Asia-Pacific iron ore business versus fourth quarter 2008, helping us reach a new annual record of more than 8.5 million tons.

Despite an extremely challenging environment throughout most of 2009, we achieved strong financial and strategic performances delivering respectable earnings and ending the year in a position of strength. Full year revenues reached $2.3 billion with net income of $205 million or $1.63 per diluted share, and we ended the year with $503 million in cash and equivalents.

This performance was the result of exceptional execution by our management team and operators whose experience and professionalism allowed them to recognize 2009's challenges early on and act swiftly and strategically to position the Company to benefit from the opportunities that often accompany difficult business environments.

Other 2009 achievements included raising $347 million of net proceeds from our May equity offering, the Wabush mines acquisition, the acquisition of Freewest Resources and its valuable chromite deposits, establishing the Cliffs Natural Resource Global Exploration Group to form partnerships with prospects for commercially viable projects, and the recent addition of Cliffs to the S&P 500 index.

Each endeavor was undertaken with the objective of advancing our long-term strategy of enhancing Cliffs' exposure to the world's largest and fastest growing steel markets and achieving scale in the mining industry. Our Wabush and Freewest transactions are cases in point.

In October, we announced that we would exercise our right of first refusal to acquire US Steel, Canada's and ArcelorMittal to [Fosco]'s interest in Wabush. With the successful completion of the acquisition earlier this month, Cliffs now owns 100% of the operation that we have managed since 1965.

With this $88 million transaction, Cliffs adds more than 50 million tons of additional iron ore reserves and 4 million tons of incremental iron ore pellet production capacity with the capability to easily reach the seaborne market.

Subsequent to year-end, Cliffs closed its acquisition of Freewest Resources, positioning the Company to become the leading North American primary producer and exporter of chromite and ferrochrome, which are categorized by many countries as strategically important.

We believe the project's high-grade chromite deposits, expected lower operating costs relative to other producers and strategic position to serve markets in North America and Europe will make it a world-class project.

This will mark our entry into the chromite business and is instrumental in our mission to broaden our mineral diversification in steel-making raw materials and capitalize on our expertise in open pit mining. Furthermore, this project will serve to expand our customer base beyond carbon steel producers.

The next steps in bringing this project to fruition will include continuing to refine scoping feasibility studies. Other major milestones will include completing all necessary environmental permits, as well as reaching agreement with First Nations. Cliffs will also begin executing organization and staffing plans for the project.

As announced in yesterday's earnings release, Cliffs Global Exploration Group has been charged with seeking global commercial opportunities with junior exploration companies that offer commodity and geographical diversification and low-cost entry into potentially significant projects. The group was developed in 2009 with a mandate to grow our long-term project pipeline. In 2010, we are budgeting approximately $25 million $30 million on these efforts. The Exploration Group will focus primarily on projects that are in a conceptual stage with the maturity continuum when the price of entry is low, but the rewards for project success are extremely high.

As I've indicated to many of you, I believe our presence as one of the few independent midsized mining companies positions us as a preferred partner for many in the exploration community.

Additionally, we made substantial progress in 2009 in regard to our majority-owned renewable energy operation. With recent Board approval, renewaFUEL is moving forward with a $19 million capital project to build and operate a commercial steel plant in Michigan. The facility is expected to produce 150,000 tons of biofuel cubes. We anticipate production to commence in late summer.

Turning to a brief overview of Cliffs' core projects, the North American scenario, the improving scenario in North American Iron Ore segment enabled us to end the year with most of our facilities operating at full capacity or taking steps to increase production.

On the customer front, 25 out of 39 blast furnaces are running in North America. Recently, we've seen an additional restart announcements from customers and expect these will push North American steel-making capacity utilization above the 70% threshold.

Our long-term sales agreements with North American-based integrated steel producers substantially mitigated lower pellet prices during the downturn. We posted a comparatively modest 11% decline in our average revenue per ton compared to a -- with the 48% decrease in seaport price settlements.

We believe our North American coal business is finally recovering from the profound impact of the recessionary conditions we experienced, particularly early in the year. Sales margin loss consistently approved on a sequential basis as we progressed through the year and the outlook is getting brighter for 2010. Sales margin is expected to turn positive with lower costs and some help from higher pricing. Pricing is being driven by the rising tide of demand for metallurgical coal from China and the tightening supply around the world. This is consistent with our original thesis when we first made the decision to invest in met coal assets.

With greater volumes in our operating improvement efforts to date, we expect our cash costs in this business will fall below $100 per ton in 2010. Based on these expectations, we are investing $75 million in 2010 and $20 million in 2011 in expansion projects in our North American coal mines. These investments are designed to enable production to ramp from 3.4 million tons in 2010 to a run rate of 5 million tons in 2011.

These projects include the installation of a new longwall mining system at Pinnacle expected to be completed in the fourth quarter of 2010, an upgrade of the Pinnacle preparation plant expected to be completed in the third quarter of 2011 and installation of the new mineshaft closer to current mining areas at Oak Grove, which is expected to be complete in the first quarter of 2011.

Cliffs' Asia-Pacific Iron Ore segment continued to perform strongly during the quarter, leading to record sales volumes for the year and providing clear support for the logic behind our long-term diversification strategy. In saying this, we recognize the exceptional execution of our Asia-Pacific operating group. The team reacted swiftly to strong steel demand in Asia and without benefit of contributions from the Cockatoo Island joint venture during the year. It drove 2009 production levels well beyond previous expectations. For 2010, the demand outlook in Asia-Pacific remains positive with China continuing to import record levels of iron ore.

Looking at developments at Sonoma Coal and the Amapa iron ore projects, at Sonoma Coal, the month of December marked record volume for the project since we began shipping in January 2008. Sales volumes for our 45% economic interest in Sonoma for fourth quarter 2009 was 405,000 tons versus 328,000 tons a year ago. Production at the mine is currently favoring thermal coal to met coal at about a 65%/35% split.

During the fourth quarter, production at Amapa was approximately 900,000 tons. Equity losses was approximately $8 million for the quarter and $62 million for the year. As we have communicated in the past, we continue to discuss ways to improve the mine's financial performance with our operating partner, Anglo American.

And with that, Laurie will provide a financial review of this, as well as additional details on our operations and outlook. Then we will open the floor up to questions. Laurie?

Thank you, Joe, and good morning, everyone. Compared with the same period a year ago, fourth-quarter 2009 consolidated revenue was down 10% to $821 million from $916 million. Lower price realizations around the world and lower sales volumes in our North American operations were partially offset by higher sales volumes in our Asia-Pacific operations.

Despite lower sales margin, operating income expanded to $156 million from $147 million, an increase of 6% during the period. The change was primarily due to the $90 million acquisition termination costs recorded in the final quarter of 2008. However, given the year's unique challenges, we are very proud of our overall performance. The structure and philosophy of our Company, combined with the efforts of everyone throughout the organization, were key to the results.

Net income basically doubled to $108 million compared with $54 million last year. Diluted earnings per share in the quarter were $0.82 versus $0.47 in last year's fourth quarter.

Now turning to the business segments, North American Iron Ore sales volume of 6.6 million tons in the fourth quarter was up 19% sequentially from the third quarter and 1% from last year's fourth quarter. North American Iron Ore revenue per ton was down 9% to $81 for the quarter, reflecting the lower pricing for iron ore and steel. However, as Joe mentioned, absent the long-term supply agreements that employed pricing formulas for our North American customers, pricing would have been much lower. Cost per ton was down 2% from the year-ago quarter. Part of this improvement is attributable to Cliffs' purchasing pellets from our mine partners at variable costs and reselling these on a merchant basis.

As we indicated last quarter, in North American Coal, development efforts at both the Pinnacle and Oak Grove facilities have resumed and are currently running five days a week, three shifts a day. Sales volume in the 2009 fourth quarter was 748,000 tons versus 773,000 tons last year. And cost per ton was down 8%, reflecting the impacts of cost reduction efforts at our mines. This resulted in a sales margin loss of $8.5 million versus last year's $7.6 million loss.

Fourth-quarter 2009 Asia-Pacific Iron Ore sales volume increased 21% to 2.1 million tons compared with 1.7 million tons in the 2008 fourth quarter. The increase was primarily the result of Cliffs' operating team increasing production to record levels in order to take advantage of strong steel demand in Asia during the quarter.

Revenue per ton for the fourth quarter decreased 26% to $64 compared with $87 in the prior year. Per ton cost in Asia-Pacific Iron Ore increased 14% from the previous year to $55, reflecting unfavorable exchange rates. Excluding this impact, cost of goods sold per ton fell 15%, which I think is a testament to the cost reduction efforts of our operating team in Australia.

Turning to the balance sheet, at December 31, 2009, cash and cash equivalents stood at $503 million versus $179 million at December 31, 2008 and we had no borrowings against our $600 million revolver. For the year, we generated more than $185 million in cash from operations. This does not include a $148 million customer payment that was due in December, which we did not receive until January 4. This is obviously not reflected on the year-end balance sheet nor included in 2009 cash flow.

Major uses of cash in 2009 included $116 million for capital expenditures, $70 million related to Amapa, and $27 million in investments primarily for our initial investment in Freewest Resources. A strong focus on cash throughout the organization allowed us to be free cash flow positive in one of the worst years on record for our industry.

Looking forward, we expect continued stabilization of the macroeconomic environment throughout 2010 and corresponding improvements in the demand for the raw materials used in steel production. To that end, we are increasing sales volume expectations for our North American Iron Ore business to approximately 25 million tons from the previous estimate of 23 million tons on the strength of improving customer demand. These volumes reflect 100% of Wabush beginning February 1.

As you know, we don't yet have a price settlement, but we have projected an estimate for revenues based on current external estimates. Based on a 40% average increase in blast furnace pellets, revenue per ton for 2010 is expected to be between $90 and $95. This number reflects additional estimates, including hot band steel prices averaging $550 to $650 per ton and no inflation for any other factors contained in our supply agreements.

If you want to consider some sensitivities around these numbers, for every 10% change from the 40% estimate for blast furnace pellet price settlements, Cliffs would expect its average realized revenue per ton in North American Iron Ore to change by $4 to $5. And for every $25 change in the average hot-rolled steel price, Cliffs would expect its average revenue per ton in North American Iron Ore to change by $0.40.

At the 25 million ton production level, 2010 cost per ton is expected to be $65 to $70. This expectation includes an approximately $5 per ton benefit from increased volume. Somewhat offsetting this is the higher volume from Wabush, which carries a higher cost per ton than our other mines and thus raises the average. Also driving our costs higher this year are increased labor expenses, primarily due to profit sharing and maintenance expenditures that were deferred from 2009 to 2010.

In our North American Coal business segment, we are increasing sales volume expectations to 3.4 million tons, up from 3 million tons previously. We began 2010 with 1.4 million tons of coal priced and under contractual obligation, representing about 40% of current annual production guidance. Another 30% is committed, but not priced, pending 2010 benchmarks. We expect to sell the remaining 30% on a spot basis throughout the year. Taking this into account and assuming hard coking coal settlement pricing equivalent to $125 per short ton, FOB the mine, which would equate to about $170 per metric ton at the port, Cliffs expects annual revenue per short ton in North American Coal of $115 to $120. Cost per ton is estimated to be between $105 and $110 with $14 per ton of that representing DD&A.

Asia-Pacific Iron Ore sales volume is expected to be 8.5 million tons in 2010, with production of 8.6 million tons. Based on an assumption of 35% and 30%, Australian iron ore settlements for lump and fines respectively, we expect revenue per ton to be $80 to $85 with cost per ton of approximately $50 to $55.

Turning to our interest in Sonoma Coal and Amapa, in 2010, we expect total production at Sonoma of approximately 3.3 million tons and sales volume of 3.5 million tons. Our sales mix is expected to be approximately 65% thermal and 35% metallurgical coal. We anticipate average revenue per ton of $85 to $90 and per ton costs to be $80 to $85.

If we assume a 30% increase in iron ore pricing settlements for iron ore concentrate products, we would expect to report an equity loss of approximately $10 million to $20 million for our 30% interest in Amapa, which is a significant improvement over 2009.

Based on all this guidance, we expect to generate $900 million in cash from operations in 2010. Capital expenditures are expected to total about $200 million, of which $110 million is sustaining capital. We have earmarked about $90 million for expansion projects, including those Joe mentioned at our North American Coal operations.

Other expected major uses of cash include approximately $90 million related to the Wabush acquisition. We expect an additional investment of $30 million in Amapa to cover expected losses and capital spending. We also expect to use $70 million to pay down debt obligations at the Amapa project.

In summary, we are optimistic about strengthening demand for our products moving forward and we believe we are well positioned for 2010 and beyond. And with that, let's open the call for questions.

(Operator Instructions) Kuni Chen, Bank of America-Merrill Lynch.

Good morning, everybody. Good job and I certainly appreciate the additional detail there on the revenue per ton sensitivity to the benchmark settlements. I think that was very helpful. I guess just first off on the North American iron ore production, if you look at total production on a 100% basis, I think that puts you back to roughly 35 million tons or so. Can you sort of elaborate a bit on what you are seeing as far as blast furnace utilization and where you think that gets to in the second half of this year? Are we back to sort of above an 80% utilization level at that level of iron ore consumption?

Sure, Kuni, I'll be glad to. That is certainly not what our plans are based on at this point in time. As we mentioned in the script just now, about 70% or maybe a little more to the 72% is what we are planning on in the business. That kind of works out with the 25 blast furnaces we see that are -- have been announced to either come on or are going to be in a restart mode somewhere this year.

We don't see the outlook looking at the end markets of the steel industry really supporting rises into the 80%, but we're fairly confident in that. I guess more conservative, but I think more realistic, 68% to 72% of utilization.

Okay, got you. Just as a follow-up, on the met coal cost guidance, obviously the costs have continued to come down pretty well sequentially. Just wondering on the cost outlook for 2010 why that is not sort of below the fourth-quarter run rate.

Well, we've got -- still have some continuing development to do. I think as we've said in previous calls, we're not going to get ahead of ourselves on development. Push the longwall ahead of development and then have to go down for a substantial period of time. We've pretty well mapped this out with our development. We have also got to put in place, including that new longwall system in Pinnacle in the fourth quarter, so all that has to be carefully timed with the mine plan. So there's still some further development work to really get ourselves for 2011.

Got you. All right, I will turn it over. Thanks.

John Sullivan, Citigroup.

This is actually Brian Yu. A question for you. Can you help me break out the 25 million ton production guidance, like how much of it is minimum contractual obligations, how much is above that domestic, and does that 25 million include any export sales?

Well, I will start with the 25 million of the export sales. That is the easier part of your question, on the breakout, is the export portion of that will come from the additional sales that we now have the incremental tonnage that comes out of Wabush, which I think we've cited at about 4 million tons. That will also be priced in world pellet price. That is not contractual as to contractual obligations around it from there.

Yes, I mean really well over 90% of it is under contract now. That is not the -- if you are thinking about the take or pay minimums, but we have already gotten nominations for 2010 from our customers, so those types of things won't come into play as much in 2010 as they did in 2009. So really we've got a contractual obligation in one form or another for well over 90% of that number.

Got it, okay. Then just switching over to the Asia-Pacific side, how are you selling the iron ore in terms of pricing during Q1? Is this still under last year's contract? Because it seems like some of the big diversifieds are talking about going to a spot basis or even quarterly settlements. So just want to get your perspective.

Well, it will be a mixed answer, Brian. We have some contracts that are annual and right now what we are still working off with our customers is a provisional benchmark just like we did last year and we have done in the past when we don't have settlements. And just as a reminder, our customers are the smaller customers, more in the long products than the flat products. They go forward. They don't carry big stockpiles. They don't have big working capital balances to work off of and they are more comfortable with provisional pricing and settlements.

We did the same thing last year and we have done that in previous years as we go. The only spot tonnage we would have this year, as we go into that market, would be if Cockatoo Island, which is some small tonnage and is going to have a very short life of about two years, once that project to extend the sea wall a little bit is completed, we might get some tons out of that third, fourth quarter and that would be price spot into the marketplace. So we are still primarily almost 100% committed into the benchmark system at this point in time.

All right, thank you.

Mitesh Thakkar, FBR Capital Markets.

Hi, guys. Good job on the quarter. Good morning. Just a quick question on your Asia-Pacific coal. What are the underlying assumptions for your coal realization guidance of 85 to 90 range for 2010?

It's the mix of thermal and met coal based off of that 65/35 percentage range. I don't have the numbers in front of me of what that is.

It gives a separate price for each one, but that is based on the mix during the benchmark settlement expectations.

I think one of the areas you may be looking at is for our coal out of -- our met coal out of Sonoma is priced at a discount to the hard cooking coal price and maybe that's where some of the discrepancy in your model would be. It gets a slight discount to the BHP hard coking coal price.

And do you have any feelings with respect to some royalty payments, which you need to make to (inaudible) coal out of Sonoma?

Well, there's -- any royalty payments are based -- are included in our cost per ton in terms of what we expect to be profitable and how we expect the full-year results to play out. That's already included in our cost per ton guidance.

Okay, that sounds good. And one follow-up question on your North American annual business, how much of the deferred tonnage is included in this 25 million ton guidance for 2010? Like, I remember we have about 2 million tons from your last guidance.

Probably about 2 million is probably pretty consistent still.

Still 2 million tons? All right. Sounds good. Thank you.

Mark Parr, KeyBanc Capital Markets.

Thanks very much. Good morning. Nice job on the quarter. I'm glad to see that markets continuing to look better. That's all very encouraging.

Aren't we all?

I had one question, Joe. Related to your comments on the Exploration Group, you talked about a $25 million to $30 million budget for that group in 2010. How does that compare with what you spent in '09?

We are really just starting the group. We just formed the group, Mark, in '09 and they are just really getting their legs underneath them and getting the organization of this. This is a very small group of three people. I think right now we are trying to take advantage of some of the exploration folks that we do have in the group that we are fortuitous to have. They've got a lot of global knowledge in the areas that we are interested with that. So it is a new emerging look at how we get growth in the business. You know, Cliffs has traditionally not been in the mining business, had any exploration attached to it. And it's time that we try and get, if you will, the third leg of the stool, organic growth, M&A activities we've always been involved in.

This is kind of exploration-lite too. This isn't putting drills and lots of geologists in the field. This is more working contacts and working with juniors looking to move projects from exploration into funded projects such as you see at Freewest that's coming on with the chromite deposits. This is a new venture for us and we are kind of going into it pretty cautious.

I would say in 2009 that group and the startup costs have probably spent a few million dollars, but not significant. As Joe said, they were still really just getting organized for the most part.

Okay, so given that there's not a lot of people here, so the P&L impacts for 2010, most of the money you are talking about would be balance sheet-related or investment type of activity as opposed to --.

No, it would be expensed, Mark.

Fully expensed?

It would be paid to outside third parties or different things like that. It would be -- I am assuming that it would be for the most part expensed. There may be some that ends up on the balance sheet, but that would not be my assumption.

Okay, all right, terrific. Well, thanks very much. I'll get back in the queue. Congratulations on the results.

Tony Robson, BMO Capital Markets.

Laurie and gentlemen, good morning. Good to see you finishing the year on such a positive, strong note. Can we have a little bit of quarterly guidance please in terms of the iron ore sales from North America and US met coal sales? You've also got a couple of projects that are tied into Pin Oak and obviously there is some cold weather -- you know, the lock has being closed in the first quarter or the pellet size. Any color there please?

Well, we never give specific detail on the quarters, obviously, but I think our seasonality will be fairly similar to what it's been in prior years in terms of volumes shipping out throughout the year. I don't see any major change in that front.

Okay, and tying in the projects for Pin Oak, any impact there on tonnage?

No, really it will be a little further out, Tony, on those. They're just starting the shaft work and finishing up the permitting over at Oak Grove, but that's a way in distance from where they are currently mining from that. The longwall is just being shipped and assembled for testing within the US up in Pennsylvania and the prep plan is still under permitting and we've just started ordering the long lead times. So no, there won't be any interference with those projects right now.

Okay, great. Last question if I could, please. Pellet pricing, again good to see that sensitivity you have quoted. Do I get the impression that your leverage to the global pellet price changes is increasing? If my back of the envelope math is correct, and is that because of the Wabush acquisition, which is -- (multiple speakers)?

Exactly. You are spot on, Tony. That's the reason not only in the pricing and having the knowledge of the Wabush asset with minimal integration risk, but this really gave us some nice exposure to export world pellet price.

Great. Okay, thank you.

Mark Liinamaa, Morgan Stanley.

Hi, all. With your North American coking coal costs, presumably things are being inflated as you try and get the development ahead of the longwalls. Is that correct?

Yes, it is. Yes, there is still some more development work to be done as we try and get those next couple of panels ahead of us in case we get any geological conditions underground.

And so from a normal run rate operating perspective, if you weren't doing extra development, roughly where do you think costs would be and where do you think they would be at a 5 million ton targeted run rate?

I think as we have guided to, you know, we think we are going to be below $100 on cash costs.

But that includes presumably some excess development costs.

It does. When we get there with it, the 5 million tons out in 2011, while we think we're going to start getting competitive in the longwall costing with that at the 5 million tons, I don't know that we've given --.

It'd probably be below 80. We think that definitely below 80 is doable.

Below 80? And just from a -- you've talked in the past about wanting to either get bigger in coking coal and you needed to reach a critical mass type level, would you consider taking an operating joint venture partner to create that mass maybe artificially?

We will consider all avenues for growth if it's the right thing for the shareholder, Mark. As you know, we work in a variety of different arrangements throughout the globe and this Company has done that for a number of years from a minority managing partner to -- such as an Amapa where we've got a 30% steak without the management rights. So we wouldn't take anything off the table if it advanced our aspirations in the coal business.

So you could sell down your interest. What is your preferred avenue for the North American coal business?

I think it really depends on the value of each one of those opportunities. I think as Joe said, we are open to a variety of options, but you have to kind of go through the exercise of determining which one actually adds the most value. There's a lot of moving parts to any analysis like that, as you know.

Great. Thanks very much, guys. Good luck.

David MacGregor, Longbow Research.

Good morning, everyone. Just on the North American iron, you've increased your volume guidance from 23 to 25. I think you had two additional lines at North Shore. Is that where the incremental tonnage comes from?

No, we're just -- as we ramp up and the productivity of the existing lines have come up, we don't have those small furnaces up at North Shore at this moment, yet they are the high-cost producer. So we're really not pushing the tonnage there. It's just coming out of the existing assets.

So what is the upside for 2010 in terms of iron? If we've got a good market, could you do 27? Could you do 28?

I'm sure the guys will push as hard as they can. The two limiting factors we have, and it's really helping to when you look at that cost line as the volumes rise and why aren't the costs coming down even further, is we've got to put a riding ring on one of the large kilns up at Tilden, which these types of capital projects that shut the process down. So that's one and it's hard to make any tonnage up off of that when you come to a full stop.

The other is we've got a car unloader system that is on its last legs up at North Shore internally into the plant, and that's going to take about a 30-day shut as well. That will bring North Shore to a full stop at that point in time. So while they will try and push and get some more out in other places, Hibbing is projected to come up May 1. Certainly now that we own the Wabush assets, we will try and start pushing some tonnage out of there as well. Those two limiting factors we just can't get around them this year and we held them off last year and it's time to do the maintenance on them.

Are you seeing incremental demand in terms of steel-making or do you think the 2 million tons is more just furnace yard replenishment?

I think we are seeing incremental demand around the world and there does seem to be a -- certainly in the pellet market, I will speak for that -- a very tight supply again worldwide with the customers we deal with, as well as internally in the US on pellet supply.

Okay, the North American coal, you're talking about 5 million tons in 2011 once you get all of the work done. What is the opportunity to exceed that number?

Well, I think we will get this one first, David.

Deal with 2010 first and then '11.

I realize you are trying to manage expectations around that 5 million and you've been down a difficult road with that operation, but give us a sense of just what is achievable there over the next maybe two to three years in terms of --.

Well, it certainly got the reserves. If the business is anything like people are -- the expectations that are in the marketplace on met coal, it certainly -- both mines have the reserve base to look at expansion type opportunities. But they would be big. They would be second longwalls, which would require long lead times, and then you'd need an additional prep plant or a large expansion to a prep plant. It would be that type of expansion, which would be expensive and long as far as putting those types of expansions in to get it. But the reserves are certainly there to support it if the demand was there.

Just last question on Amapa. It was nice to see fourth quarter you got back up to 900,000 tons. When you forecast $10 million to $20 million loss for 2010, on what kind of volume is that forecast based?

On about 3.8 million tons next year. We're going with -- we are following Anglo's guidance and their mine plan and operating plan this year, David. They have had their technical folks in over the third quarter to make some recommendations. They have got a new management team that is starting to take hold and improvement is coming on down there. We continue to give our suggestions and talk about the pathway to profitability on that, but they have had some improvements in the -- late in the fourth quarter.

I guess same question there. Can you talk about the upside in volume? What is potentially achievable down there?

I think 5 million tons. I think our original aspirations were off of 6 million and we've derated the plan at this point in time. The biggest problem we have is the ore is just harder than we had anticipated and if we do want to move it up beyond that, and even to get to those levels, I think we are questioning technically right now whether we need to bring another crusher and another grinding mill in to help get the product fraction down across the spiral. So I would put 5 million tons as the new capacity and the goal to get to in the next few years.

And the bottleneck behind just that crushing in the drum mill would be, what, another concentrating line?

No, I don't think you'd need that. I think we've just got to get the product sized appropriately so it doesn't get lost out to the tailings (inaudible).

Okay, and then your Aussie dollar assumption under the guidance for 2010?

About $0.90. I have no speculation beyond -- on FX, but we've targeted $0.90.

It is tough enough on the coal and the iron. Thanks very much, Joe.

Tim Hayes, Davenport.

Good morning. A question on North American Iron Ore on the cost side. The guidance for 2010 is above the level of the cost rate in Q4, even though volumes are going higher. Do we read that -- is that all because of the addition at Wabush or are there some other cost pressures that are going to occur?

There are some other things. There certainly is the addition of Wabush, which had a significant impact. There's also some maintenance. As everyone did, we were very, very focused on cash in 2009 and so we really deferred a bit of maintenance, so there's some of that coming into 2010 as well.

And in Q4, you do need to look at kind of the full-year number. So Q4, there's maybe a little bit of a slightly artificial, if you will, depression to the cost per ton. So look at the full-year number and you will see a better picture of a comparison of '09 versus '10.

Okay, thanks. And then for the realizations for the segment, the 2010 guidance, what impact are the caps and lags having? Is that a plus or a negative -- a minus for the 2010 versus --?

That would be a negative because we are expecting prices to go up, but we are not going to get the full benefit of that, just like in 2009 we didn't take the full hit for the decline. So usually you will just kind of see a little bit of a lag to what happens to us.

Right, okay. Thank you.

Wayne Atwell, Casimir Capital.

Good morning. Could you share your thoughts on your new global exploration initiative, which commodities you are going to attack and give us a little more detail on how you're going to approach this?

We are still, Wayne, targeting primarily into the steel sector. We are still looking at the minerals there, our strategy of diversification within the steel sector hasn't moved out from that. But as you know, mother nature isn't perfect in that. So some other minerals as byproducts or co-products may drag along as they come in with it. But we are looking at trying to be geologically a little more unique in the approach with some of the deposits that we're looking at. I don't think just straight out heavy-duty exploration is going to get us anywhere and that is certainly what we are not trying to do.

With that, we are going to try and take advantage of our processing knowledge on some of these deposits and also size. Where some of the larger mining houses may not look at some of these deposits just strictly from a size basis, that's really more in our wheelhouse and sizing in a mid tier basis could offer some advantages as well. But haven't changed our tune a lot. Again, mother nature won't be perfect in some of the things. I'm sure there will be some byproduct/co-product that will go with it, but we are still heavily focused in the steel sector.

Okay, another question. Industry -- the iron ore industry seems to be moving in some respects toward spot pricing. Have you given any thought to that at putting some of your product out on a spot basis?

We've given a lot of thought to it and I think what we also try and think about too is, as I mentioned earlier, is our customer base and their needs and desires as well. Again, if you go to the Asian market primarily, we've got smaller customers. They are very viable customers. They are in the long products, as I mentioned, which we think really makes sense that infrastructure in China will continue and maybe some flat products might slow down with the rest of the global recession and slow down that goes with it. And our customers don't sit with large stockpiles and lots of cash, Wayne, out there. They need to take the volatility out of their business. So we have been working with them and they certainly came through in these -- in '09 versus '10.

But we will continue to debate the spot market, continue to look at the spot market as it goes, and try not to be dinosaurs in this business. The world moves to that, eventually we will as well. I'm not afraid of it, but the formula seems to be working pretty well with our customer base.

Great. Thank you very much.

Nick Kovich, Kovich Asset Management.

Good morning. As we model 2009, you've got North American production forecasted at 25 million tons. As we look at North Shore, I know there have been several questions about that. And in 2006, 2007 and 2008, you produced 5 million to 5.5 million tons.

Is that range a reasonable estimate for 2010, somewhere around 5 million, 5.5 million tons for North Shore production in 2010?

Yes, Nick, after the call I can take some individual -- give you some individual information on the mines. But we typically don't drill down into detail by mine. So if we can take that offline, I would appreciate it.

Okay, that's great. Thank you very much.

Bob Richard, Southridge Investments.

Great quarter. Just a quick question on your fourth quarter '09 North American ore volume, a little bit under plan. Just for clarification, that's mostly due to revenue recognition issues, Laurie?

Certainly there's some revenue recognition in there. We gave cash, we don't ship, and then we also had the one customer as we mentioned that did not pass until January 4. So, obviously, if we didn't ship and we didn't get the cash, that certainly is going to be some revenue that's not going to get recognized in the quarter.

It just seems like with your October guidance, you guided to 17.4 million of ore shipments, and then it's 16.4 million. That's a pretty big miss. I was just wondering if anything surprised you or it was just totally revenue recognition.

We don't really -- that is probably the most of that. At least three quarters of it is probably the revenue recognition issue, and I don't know that we consider that a real significantly large miss, but I wouldn't think.

No, I don't think so, Bob. And I think also the two factors you need to put in is as steel mills were ramping up and the locks always close -- and again, I need to remind everybody by law on certain dates and reopen with the Corps of Engineers in certain dates. You know, people were scrambling pretty hard to get as many tons down through the locks. Of course, there wasn't shipping capacity.

The boats, most of the boats -- a lot of the boats in the shipping business were on dry dock. They weren't going to come out for a couple of weeks or a month even if they could have scrambled. And we also hit some weather. As you know, December was a pretty tough month as the last shipping month. So if you add all that together, the million tons really came from those factors.

Okay, I appreciate that color. And just a quick follow-up. You mentioned Asian trials on your met coal. How did those go?

They went well. There was good acceptance with the coal, with the customers, and they were quite pleased with it. Now, you know, as always it comes down to price and freight rates.

Yes, and will they pay for it? Okay, thanks so much. Great quarter.

Tony Rizzuto, Dalhman Rose.

Thank you very much for taking my question. Good morning. As you look to identify mineral resources, does it make any sense to possibly join up with sovereign wealth funds? And I think about the kind of skill sets that you bring to the table, and I think about the possibility of sovereign wealth funds that could maybe help you to navigate in certain parts of the world and certainly help you with financial firepower. Have you given that any thought?

Well, we've always -- it gets passed across the bough, you know. I won't say in the financial meltdown as much as it used to, but I guess two factors on that. One is we seem to be finding plenty to do in countries that we don't consider to be risky for us. Now, that's for Cliffs. We are not built for some of these countries that other people are in, and that's just the profile that we have.

The second thing is I think you'd go to sovereign wealth and those types of things if you needed the cash to drive your exploration. We feel we're on the right pace. Our metrics of dollars spent fall in line with the big mining houses, if you will, and with our three geologists that I mentioned. Not a big staff.

We think that's as about as fast a pace that they could go to. So we're not cash-restricted in this, and we think the pace that we have set and the money we're going to spend is right in line with where we need to be.

Thanks, Joe. That's great insight.

(Operator Instructions) Mitesh Thakkar, FBR Capital Markets.

Hi, guys. One more question. Can you give us a little bit of color on the progress you have made on Freewest after the acquisition, and kind of your thought process going forward in terms of where to deploy your excess cash?

Sure, I would be happy to. We're certainly well into thinking about the organization that we need to put forward, and identifying the right people for that and the execution phase of the processes. The good thing is in the Freewest acquisition is we worked with Freewest for about 12 months prior to this, so we've got a pretty good knowledge of the orebody going into this.

I would say we are well into the scoping phase of this business. There's been a lot of environmental baseline studies, for example, that have been done so we can get the permitting and those types of things.

We just had two senior executives in Thunder Bay a week or two ago meeting for the first time with the First Nations groups and introducing ourselves, as well as with a lot of the top officials within the Ontario mining space and with the government. So all those introductions are being made.

We're thinking carefully about the execution phase and setting that organization in line so that we can do that, and talking to the consultants that are well into the scoping phase to make sure those are the right people to carry forward. So carefully working our way through the early days of this.

That's definitely good color. Just on the follow-up, what kind of other avenues are -- I remember you mentioning that you might consider a JV partner for your Freewest project. Is that still the plan or just looking at the cash flow from operation expectations, there is a change in that?

Yes, most -- the spending in the next year or so is pretty minimal, so we keep that certainly as an option that is available to us, but we will explore that as time goes on and as the spending ramps up what we think is the most appropriate structure for the Company.

All right, sounds good. Thank you. Thank you very much.

Tony Robson, BMO Capital Markets.

Hi, back again. Thank you for taking my second call. Just sort of elaborating on the gentleman's previous question, you've got a very strong balance sheet. You'll generate several hundreds of millions of dollars in cash this year. I understand Cliffs has obviously got a very strong growth focus. And I think the last 12 months showed that we do need cash and balance sheets much better than debt. By end of the year point in time, if you can't find a suitable target, would you consider returning some of that cash to shareholders or do you think you would want to keep that cash and let it build up for things that may come up in 2011?

Well, first thing we have to do is earn it. That is our first philosophy. We don't like to spend it before we've earned it and we will certainly evaluate as the year goes on what the marketplace is like and what the opportunities out there are and review all those options with the Board and hopefully make the appropriate decisions.

I think, Tony, I just want to add a little color to that. We don't feel if these cash projections come forward, we don't feel compelled to do a deal just to do a deal for growth. I mean we are pretty patient and I think as you can see with the quality of the deals that are coming for us while people offer questions like, gee, what's next? We don't see anything. As you can see, there's been quite a progress -- quite a lot of progress on things that do come our way, being the mid tier mining company, being well-capitalized, I think having the right ethical approach when it comes to the junior exploration companies. So I just want to make assurances that we are not compelled to do a deal for a deal's sake.

Okay, good to hear. Joe, Laurie, Steve, thank you.

Jackie, since we are approaching the top of the hour, we want to be respectful of everyone's time. So we're going to go ahead and conclude the call today. Of course, as always, I will be available for follow-up questions that anyone may have. Thanks, everyone, for joining us.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.