Cleveland-Cliffs Inc (CLF) 2010 Q1 法說會逐字稿

Good morning, my name is Latania and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2010 first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session.

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

Thank you, Latania. Before we get started let me remind you that certain comments made on today's call will include 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 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 on the website and available for replay for approximately 30 days.

Joining me today, are Cliff's Chairman President and Chief Executive Officer, Joseph Carrabba; Executive Vice President and Chief Financial Officer Laurie Brlas. Also with us today is Cliff's President of North American Business Units, Don Gallagher. Don will be available to assist us during the Q&A portion of today's call.

At this time I will turn the call over to Joe for his initial remarks.

Thanks, Steve, and thanks everyone for joining us today. In terms of performance and outlook, the first quarter of 2010 stands in stark contrast to the first quarter of 2009. The signs of stabilization and improvement that emerged in the second half of last year have evolved in what appears to be a sustainable early stage recovery. Our business outlook continues to improve across the board and is supported by very strong supply demand fundamentals that are manifesting themselves in improved pricing for our products. Highlights for the first quarter include consolidated revenues up 57% to $728 million, and sales margins that more than tripled that of last year. A sharp rebound in net income to $94 million from last year's $7 million lost, and, a sales volume increase of over 50% in iron ore and over 10% in coal.

I know many of you have been following with great interest the emergence of new pricing mechanisms replacing the historic benchmark systems for iron ore and metallurgical coal. While I expect these will result in pricing more reflective of currently supply and demand dynamics, the transition is resultant in uncertain pricing models for those of us who are price takers in the industry. As you would guess we are in discussions with customers regarding how our current supply agreements will take into account these new mechanisms. We will work to understand our customers' preferences around quarterly or annual pricing and attempt to adjust supply agreements to meet our respective needs. While too early to provide specifics, we do feel the shift will change the entire industry including Cliffs.

In seaborne iron ore, many of the larger international producers are reportedly using lagging quarterly adjustments most commonly referencing an average of flat 62% iron ore index as a basis for agreements that start in the second calendar quarter. While discussions with customers are ongoing, we expect pricing in our Asia-Pacific iron ore business will broadly follow publicly stated mechanisms for major Australian producers, that are using lagging quarterly adjustments, referencing an average of industry accepted delivered price indices into China. Although some Australian suppliers and their Asian met coal customers have recently announced quarterly pricing mechanisms for coal, we're not yet seeing this adopted by US producers that sell into Europe. Therefore, in 2010, we are maintaining an annual pricing system for these contracts. As things develop we may adjust in the future.

Turning back to our first quarter results, in North American iron ore, capacity utilization for North American based integrated steel producers has rebounded to the low 70% range. This is up sharply from the 30% to 40% we saw in the first three months of last year, reinforcing our confidence in the sustainability of the North American recovery. Sales volume in North American iron ore increased 116% to 4.4 million tons from 2 million tons in the year-ago quarter. All of our mines realized year-over-year production gains and we're now running at or near capacity. This resulted in a 36% increase in North American pellet production volume to 5.3 million tons from last year's 3.9 million tons. The continuing recovery of the North American coal business from the profound lows experienced at this time last year was reflected by a 34% increase in met coal sales volume for the quarter. The sales margin losses narrowed reflecting lower per ton cost of goods sold and operating expenses versus last year. And is expected to improve further through 2010 as the global tightening of supply plays out and ultimately results in pricing at a higher level.

We are particularly pleased that this business was able to show meaningful improvement during the quarter becoming cash positive and contributing to EBITDA generation for Cliffs. Where possible we're accelerating capital projects that will help this business segment ramp production capacity to over 5 million tons next year. We are expecting production and sales volume increases throughout the year, for the strong ramp in the fourth quarter when we anticipate reaching a 4.5 million ton annual run rate.

Sales volume in Cliffs Asia-Pacific iron ore segment during the period was essentially flat with last year as production continued to run at capacity. For full-year 2010, demand and pricing outlook at Asia-Pacific remained very positive. Our 2010 production is essentially sold out. And we expect to match the sales volume record of 8.5 million tons achieved in 2009.

Moving into our capital plans in 2010, the strong first quarter results and the increasing optimism in the global and North American steel industries have resulted in our decision to accelerate some of our planned projects. Accordingly, our full-year guidance for capital expenditures in 2010, is now $250 million, versus the previous estimate of $200 million. In North American iron ore we made the decision to restart a smaller furnace at our Northshore operation ahead of original plans. This will provide another 150,000 tons of production in 2010. In conjunction with this, we will accelerate the purchase of mobile equipment and the recommissioning of a concentrator. We also expect to process some magnetite ore from our Tilden mine for processing at our nearby Empire pellet plant. This will increase our annual production there 300,000 to 400,000 tons.

At Wabush we will also make some capital improvements to our rail spur to accommodate additional future rail volumes. Incremental capital in 2010 related to these projects in total is approximately $25 million. In North American coal, we are accelerating the upgrade of the Pinnacle complex preparation plant, by approximately six months. This would pull forward our expected completion date to the first quarter of 2011, from our previous expectation of the third quarter. In addition we're accelerating capital plans for a water management program at Oak Grove we anticipate wouldn't have occurred until 2011. Combined incremental 2010 capital related to these two items is approximately $20 million.

Before I turn the call to Laurie and her first quarter financial review and outlook, I wanted to provide a brief update on our Ring of Fire chromite project. With the acquisition of Freewest, Cliffs now controls a world class chromite deposit and is expected to form the foundation for North America's only ferro-chrome production operation. This land operation is expected to produce 400,000 to 800,000 tons of ferro-chrome annually. This will be available for sale ta a new customer set of stainless steel producers with operations in North America, Europe, and Asia. We have also begun discussions with First Nations and the local governments. With also expect to continue free feasibility work with completion of this during the fourth quarter. When we announced the original deal we indicated an estimated $800 million in capital. We do not expect to invest any large portion of this until 2012. And only after a great deal of geotechnical analysis, permitting work and a number of engineering studies are complete.

With that, I will turn the call over to Laurie.

Thanks Joe, and good morning everyone. As Joe indicated in his opening remarks, the environment that produced the strong revenue and margin contributions from our North American markets in the first quarter was in sharp contrast to what we experienced at this time last year. On a consolidated basis, revenues increased 57% to $728 million, from $465 million a year ago. And sales margin reached $150 million, more than triple last year's $42 million. Net income improved to $94 million, or $0.69 per diluted share, from the year-ago loss of $7 million, or $0.07 per share. As we noted in our press release, net income included income of $61 million, resulting from the mark-to-market adjustments of our minority interests in Wabush and Freewest resources. Excluding that, and normalizing our tax rate by excluding the $25 million of discrete items, diluted earnings per share in the quarter would have been approximately $0.55.

On a segment basis, in North American iron ore, the higher level of steel production in North America drove Cliffs iron ore pellet sales volume up 116% versus last year's first quarter. Per ton revenues in this business increased to approximately $95, compared with the $77 realized in the prior-year quarter. Sales volumes in the quarter, included a mix of pricing levels, including revenue recorded using a provisional pricing factor of a 90% increase in the seaborne price for pellets as well as 2009 carryover tons recorded at 2009 prices. Lower cost of goods sold of approximately $70 per ton, led to a $25 per ton sales margin for this segment. This compares with the $7 per ton sales margin loss in the first quarter, 2009.

In North American coal, average realized revenue was approximately $104 per ton, an increase of 9% from last year's first quarter. Our reported average selling price contains a blend of domestic contracts, which reset in January, and international contracts which reset April 1. As a result, our sales volumes included a mix of pricing levels among customers, with a portion priced at 2010 market prices, and a portion primarily for international customers remaining at 2009 pricing. In a moment, I will highlight where we currently think our average pricing will end up for the year, based on the contracts we have signed to date. Cost of goods sold declined to approximately $120 per ton, from $154 per ton. Holding the sales margin loss per ton to $16, compared with a $58 loss last year.

In our Asia-Pacific iron ore business, first quarter revenue per ton averaged $76. This was up from $67 last year. We are currently recording shipments to our Chinese customers on a provisional basis. Revenue in the first quarter was recorded using an estimated seaborne price increase of 26%.

As you can imagine, it is difficult to apply the mechanisms that are being discussed by the major Australian producers to our first quarter when most of them don't report quarterly information, and sell primarily to customers on a fiscal year beginning April 1. This is particularly relevant because the most widely discussed mechanisms use lagging quarterly adjustments, referencing an average of industry accepted delivered price indices into China. The quarter preceding the recently ended quarter saw prices at a much lower level than what we see today. All we can say right now is that we will continue to monitor the situation, and adjust as appropriate.

On the cost side, average per ton cost of goods sold, rose 12%, primarily due to exchange rate variances. Also, it is important to note that last year's reported numbers, were pre settlement estimates, and as such, have been adjusted for comparison to reflect the final per ton revenue and cost based on the subsequently concluded 2009 pricing negotiations.

Looking at developments at the Sonoma coal and Amapa iron ore projects, in the first quarter of 2010 for our 45% economic interest in Sonoma, we reported sales volume of 301,000 tons, revenues of $30 million, and sales margin of $8 million. Production continues to weigh towards thermal coal versus met coal at about a 65-35 split. Per ton revenue at Sonoma was $99, with cost per ton of $72. Costs were negatively impacted by unfavorable exchange rate variances during the period, which amounted to $19 per ton. During the quarter, total production at Amapa was approximately 900,000 tons, resulting in a $2.2 million equity loss for our share of the project. During the quarter, we paid off $54 million of fairly high cost project level debt, leaving approximately $103 million as our share of project level debt remaining.

Turning to the balance sheet, at March 31, cash and cash equivalents stood at $550 million compared with $503 million, at December 31, 2009. We generated $67 million in cash from operations in the quarter versus a use of $45 million last year. A swing of $112 million. Long-term debt was $725 million, versus $525 million at the end of fiscal 2009. In March, we issued $400 million of tenured senior notes at 5.9% and used a portion of the proceeds to pay off our $200 million term loan resulting in a net increase of long term debt on our balance sheet of $200 million. This is part of our strategy to increase the average term of our debt, and ultimately reduce our weighted average cost of capital. We were very pleased with the investment grade rating afforded us by both Moody's and S&P which will allow us access to the most liquid and best price capital as we grow and execute our strategy.

Now looking ahead, for the full-year, we expect continuing economic recovery to result in corresponding improvements in steel-making raw material demand and higher prices. The recent emergence of new pricing mechanisms, replacing the historic benchmark systems are resulting in pricing more reflective of current supply and demand dynamics. However, this shift is also resulting in uncertain pricing models. We are currently in discussions with customers regarding how our supply agreements will take into account these new mechanisms. Before I provide our current outlook, it should be understood that these discussions may result in changes to the current pricing mechanisms and this could impact sales prices realized in current and future periods. This impact could have a material effect on the Company's results of operations.

With all that as a preface, for our North American iron ore business we're increasing our sales volume guidance to approximately 27 million tons versus 25 million tons previously. We expect revenue per ton of between $107 and $112, up from a previous guidance of $90 to $95. Most of the change is due to using an estimate of 90% increase in the C1 price for pellets versus the 40% we were expecting at the start of the year. And it also takes into account various other contract provisions. We also provided the approximate sensitivities to pellet prices and steel prices in last night's release so that you can estimate for yourself. Our per ton cost estimate in North American iron ore remains unchanged, at$65 to $70 for North American iron ore. In our North American coal business segment, the sales volume expectation is unchanged, at 3.4 million tons. We begin the second quarter with approximately 1.5 million tons of coal under contractual obligation and priced at $111. This represents approximately 44% of current expected annual sales volume.

Pricing on another 1.4 million tons, or 42% of expected 2010 sales, is currently being finalized with customers. The remaining 500,000 tons or so representing 14% of full-year volume are expected to be sold in the second half of the year in the spot market. Barring any major change in spot prices, we are estimating full-year revenue per ton to average between $140 and $145. This is up from prior guidance of $115 no one $120 per ton. Cost per ton in North American coal is estimated to be between $110 and $115 with $13 per ton of that representing DD&A. This is up slightly from earlier cost guidance of $105 to $110 per ton and is primarily due to increased expected royalty expense related to the higher pricing environment.

Asia-Pacific iron ore sales volume is unchanged at 8.5 million tons in 2010. We now expect revenue per ton to be between $100 and -$105, up from our prior guidance of $80 to $85. The revised estimate is based on expectations that pricing will broadly follow publicly stated mechanisms for major Australian producers, as well as the assumption that prices hold steady at the second quarter rate of up 81%. Our expectation for cost per ton has increased to $55 to $60, up from a previous estimate of $50 to $55. This is primarily related to higher royalty expense. We are also noting that we expect to incur an increase in SG&A expenses to $165 million for the year. This is up from prior guidance of $130 million due both to higher performance-related compensation, and reporting the Sonoma performance royalty and SG&A. Based on the aforementioned guidance we expect to generate in excess of $1.5 billion in cash from operations in 2010. As Joe commented, capital expenditures are now estimated at $250 million, $120 million of that is sustaining capital. Other expected uses of cash could include additional payments of debt related to Amapa as we continue to evaluate our options for our debt obligation there.

In closing, we believe the prevailing environment signals higher prices and strong demand for our products moving forward, and we're very excited about our opportunities for 2010 and beyond. And with that, Steve, let's open the call for questions.

Thanks, Laurie. Latania, at this time why don't we take questions from the call participants.

(Operator Instructions). Our first question comes from Kuni Chen from Bank of America. Please proceed with your question.

Good morning. First question on the coal side of the business. Can you just talk about your thoughts around safety inspections, and how that could potentially impact your production plans this year and going forward. And then also on coal, can you talk about cost per ton, and what you see as the sequential change as we go through the year there. Is the first quarter basically the highest point of the year and then it trends down from there?

Sure, Kuni, this is Joe. Let me handle the first part on the safety and let me turn the cost question over to Don then and he may have some remarks as well for the safety. On safety let me start with we are committed to the highest safety standards within the industry and the coal business, as well as our iron ore business around the world and we have always worked and survived to be ahead of the regulatory environment. As you know, with Emshaw we have had some very heavy regulation in the past few years since the other series of accidents have taken place and we think we have handled that quite well both from a compliance standpoint as well as improving everything in our safety area. Certainly there are signs of more regulation coming within the industry, following the tragedy of Massey's mine in West Virginia. We feel that we are geared up for that, we're going to take this on as a positive note and try to make the best out of it and always try to maintain our high safety standards. Too early in the day to figure out if the impact either of cost or of production losses with it, because I don't think the cause of the accident in West Virginia has been determined yet, and I don't know how you write deregulation to prevent that in any further coal mines until they get the results of that. But nevertheless we are geared up. Our folks are always thinking about it and we will continue to work with all of the regulatory bodies within the US to maintain the standards. And Don, I don't know if you want to go any further into safety and then maybe you can answer the cost question.

Sure, I would like to do that. I think, hopefully, everybody on the call is aware that at the top of our list of core values is safety, safe production, in all aspects of our business. For those of you on the call that have toured our iron ore or coal mines you have a first hand understanding of that for sure. We have had comments back from the investors and analysts who have been to our facilities about the housekeeping and safety mantra that we follow. On the coal side in particular, very, very tragic accident but this notion of increased inspection and increased accountability has been in play here for a number of years. Following a number of accidents in 2006, things ramped up dramatically in the mining space in the US and particularly in underground coal.

Just a few statistics. In the coal area, inspector hours from 2007 to 2009 increased 41%. They had been relatively flat through the 2000 years and they jumped up dramatically. In our area, North American coal, we saw 57% increase. So, we had a little higher inspection numbers. As far as the citations are concerned since '07 to '09 there was a 22% increase in citation in orders in all coal mining, a 22% increase. In our underground coal mines we saw a 32% decrease in citations during that period. I think as most of your are aware, we acquired the coal mines in the middle of 2007 and have put in a lot of time and effort, processes to safety and capital to make sure they operate better. One other metric is, during that same period, 2007 to 2009 there has been a 93% increase in the dollar amounts of the citations. In addition to ramping up the citation or inspection hours, the penalties were ramped up dramatically. Our coal mines saw a 37% decrease in our citations.

So we take safety very seriously, as Joe said. We don't know what impact this most recent horrific tragedy will have on our mines but we're there to operate safely every day in our operations.

And as to cost, as the year progresses we're ramping up our production, and some of the effects of the capital that we have invested over the last few years, and particularly, Laurie mentioned the prep plan at Pinnacle we're pulling that forward. We're also going to see some impact in the third and fourth quarter of this year so we expect our costs to go down commensurately as the volumes ramp up to the 4.5 million tons.

We reported $120 in this quarter and our guidance is the $110 to $115. You will see the most of that offset to get to that average in the back half of the year. The second quarter will probably still be more consistent with the first quarter.

Great, and one follow-up, if I may. On Brazil, can you just talk about the market down there a bit. We're seeing larger companies and also junior miners expanding iron ore production there. Do you see any opportunities to participate in any of these expansions and would you consider joint venture structures given some of your experiences around JVs?

Sure, Kuni. Let me just say that in Brazil, certainly that is the place where iron ore has the potential to become available, as we all know. There is a lot of activity down there. A lot of exploration activity and start-up mines that are beginning to come with it. As always, the minerals are there, it is the logistics to the coast and the expense of the logistics, both either rail, pipeline, or port to get those out that makes us very cautious when we go in and look at these project. While we are open to them, obviously, as you know, we have an office in Rio with some very skilled technical people, to evaluate these projects, we still have a very difficult time overcoming the logistics within the country to support these projects. But, continue to look as we go forward with it.

We would consider JV structures as we go forward, particularly in some of the larger mines. Obviously I think we would certainly change the way we would do business in a JV structure even in a minority position. We would certainly need some management control within the JV structure to go forward, if we were to do that once again in a minority position. But we do remain open, but there are high, high hurdles that come, particularly with logistics in Brazil.

Great, thanks.

Our next question comes from David MacGregor Longbow Research. Please proceed with your question.

North American sales going up by 2 million tons from 25 million to 27 million, is that just coming out of inventory?

Primarily bringing the inventory down. Don, you want to comment?

Sure, Laurie. Yes there is some inventory reduction, David, with the robust year. You're very familiar with our infamous stockpile sales and they will come down as more tons are shipped. But as Joe mentioned, we're also ramping up at Northshore, some additional production in Michigan and some incremental production at Wabush from where we thought we were going to be when we put the last guidance out. So there will be some increased production which, of course, will benefit us in spades in 2011 as we will only get a part year of that this year but we will be able to produce more next year. So probably 3 to 1 out of inventory, but at least a 500,000 tons of extra production, David.

Are you going to restart one of those two concentrators up at Northshore?

Northshore, we are restarting another concentrator. We have about seven running at this point in time, smaller. Yes, we are. We're bringing on a furnace and we're also bringing on a concentrator.

Okay. Just with respect to the contracts, Don, while we have you on the call, so thanks for participating today, a lot of your contracts I believe reference Eastern Canadian pricing. And you have already said there's still a lot of uncertainty as to how this whole thing will play out with respect to the mechanics. But, if Eastern Canadian pricing switches to quarterly pricing and your contracts are just referencing the Eastern Canadian, don't you just automatically by default switch to quarterly pricing and still track Eastern Canadian price?

As Laurie and Joe said, we're in discussions with the customers. It is not that black and white. It certainly talks about the Eastern Canadian and some the valet price, the international pricing, as well, David. And it talks about generally annual average, so the question becomes, we're very confident we will recognize the percentage increase but exactly how do you do it. Quarter-by-quarter on the tons that sell during that quarter? Do you take and aggregate all the quarters for the full-year on the ton? Again, there are some details that have to be ironed out but we're very confident we will get this worked out here in the not too distant future and then be able to give a little clearer picture on where the pricing is going to go.

Last question, you raised your cash-flow operations guidance by $600 million. It sounds like the liquidation of inventory off the stockpile might be $50 million, $60 million, $70 million, somewhere in that magnitude. Can you walk us through the balance of that delta?

The pricing increase is a significant portion of it, really the lion's share because when we talked to you three months ago we did not expect pricing increases of this magnitude. We were more in the 40% range. So that's really the biggest piece. The incremental 2 million tons out of North American iron ore are a big piece of it, as well. Cash taxes are actually down, as well. Those are probably your major categories that contribute to it.

Okay. And the cash taxes, how much is that delta?

Probably $100 million of it.

Okay. Thanks very much everyone.

Our next question comes from Brian Yu with Citi.

Good morning and congratulations on a good quarter. First, with the Asian PAC iron ore, Laurie you mentioned earlier you had some pricing assumption built into the guidance. I missed that number.

There is 26% was what the first quarter was built on, and we have assumed 81% for the balance of the quarters, for the balance of the year.

And that number, it seems lower than some others that were being discussed. Is there a particular reason why it is 80% in Asia-PAC versus 90% in North America?

In Asia it seems to be more certain that we're moving towards quarterly assumptions, and so we don't want to speculate on future quarters, so the 81% is more consistent with what we have seen in the quarter just ended. And that's basically a known number.

And then, it looks like you do have some sale sensitive costs. Can you provide us a number, like for every $5 increase in realization your costs would be up $0.50, $1.00?

Steve will get back to you on that in a little bit of detail if you want him to walk you through that.

Okay. Where would the North American capacity be as we look out into 2011 based on all these expansions that you're implementing this year?

Don, why don't you take that one?

At 25 million this year, we're running, most of our operations are ramping them up towards capacity, but we have a number in Hibbing and Wabush yet to bring up. We will probably ramp up and may not get it all by 2011, but probably another 3 million tons of production.

Okay that's helpful thank you.

Our next question comes from Jorge Beristain from Deutsche Bank. Please proceed with your question.

Good morning. My question is more strategic to understand what's going on with North American iron ore. You had said earlier in your comments that things were uncertain. You were in the process of speaking with clients as to whether they preferred to go on quarterly or stay on fixed annual, but then you said for 2010 you would stay on fixed annual pricing. So could you just clarify why that is and what the tradeoffs are between perhaps giving away further upside on the spot pricing versus maybe the downside on a weakening spot.

Jorge, just to be clear, it was on the coal that we expect to be sticking with full-year annual prices at this point, and the iron ore is a little bit more fluid. With that clarification I will turn it over to Joe.

I think that is the first clarification, thanks Laurie for that on the coal. I think there was a little mix-up there. I think what we're saying, Jorge, from a strategic standpoint is it is early days, as you know, in the new pricing mechanisms that are taking place around the world. As Laurie had stated earlier, in Asia for sure it looks like it is a quarterly pricing system, as was discussed on how it was going to work and the mechanisms that we're putting in place. In North America it is not quite as clear as to how all that will work out. And I agree with Don, we are going to get our pricing, but, there is a difference in the end marketplaces with the more stable to flat to declining industries that we have, both in western Europe and here in the United States. If a customer wants to work out an annual contract agreement we will work on that basis. If it goes to quarterly we will work on that, as well. Obviously we're not going to leave any money on the table to accommodate those types of requests.

But all we want to do is leave it open in those discussions just to begin with customers really around those mechanisms, particularly in the US. We want to make sure that we don't have anything misleading. It doesn't seem to be quite as a finished story on quarterly pricing as it is in Asia. And I just want to leave you with the openness that we're going to work with the customers to, as we said, both of our benefits, as we move towards these new contractors.

So just to clarify, just for argument's sake, if the Q1 provisional price that you used was plus 90 and the spot market is indicating a further spread of 30%, I am just talking fines, in future quarters you would still leave the door open to try to capture that differential in North American iron ore? And again I'm just excluding the fact that pellets may settle above fines, as well.

The pellet market will work totally independent. We haven't used spot pellet pricing in the past. We have always fallen back on the benchmark of a world pellet price, however that is defined, which I don't see a spot pellet price emerging at this point in time. The market is so small in pellets relatively to the fines that I think we will continue to work against some kind of a quarterly system or an annual system, however, it works out. And I suspect many contracts will go on an individual basis on the settlements.

Also Jorge, as we mentioned, everything we booked in the first quarter is on a provisional basis. So, we haven't finalized the contracts. So there will likely be some level of adjustment, as that is finalized.

Jorge, if it does increase, as you suggest, we will be going after the increase.

Yes, for the first quarter.

Maybe I am confusing the terminology by referring to spot pellets as opposed to quarterly pellet changes. Could you see the contract in North America moving towards a quarterly?

Oh, yes I'm sorry, yes. I think it is the nomenclature. Yes, I could see it very easily moving to a quarterly basis. The word spot just doesn't quite fit in the pellet market. So yes, absolutely, we could see that fluidity at the marketplace.

Could you give us a little bit of update as to what is happening at Amapa and what kind of provision in price you were reflecting in those ores. I understand that they are mainly sold to the Middle East. And so would we be expecting already to see the impact of a price hike in the first quarter? Is there more price hikes coming there? And at what point do you see this operation turning to black as opposed to break-even?

It definitely could get there this year. We have assumed roughly in that 90% price increase range. It is priced off of benchmark so as the benchmark moves around, there probably is, I would say there is probably more upside in that break-even that we've indicated, than there is downside. But in the first quarter, we have booked it around a 90% increase.

Sorry to belabor this but are there any caps or collars in your North American existing contracts that if iron ore prices kept going up in the spot market you would hit a ceiling and not be able to, on any specific contracts, pass that along?

Don, you can chime in but there are some contract provisions like that, that would result in something like that in the current year, and then we would actually get a lag effect and a benefit in 2011.

That's correct. The majority are not. The majority would not have that provision in, but there are still one or two that do have that, the caps and collars in them at this point. And Laurie is correct. You wouldn't see the benefit but it gets carried over to the following year.

Okay thank you.

Our next question comes from Michael Gambardella with JPMorgan. Please proceed with your question.

Yes, good morning. Couple of questions. One, could you go through the rationale of using 26% on the Asian, the Australian, the Portman iron ore and 90% in North America, if you're referring to the benchmark price in the world?

And they are definitely different market and different products, so the lump in fines in the Asian market seems to be moving towards this quarterly lag so that would mean, and as we said, everything is provisional, so we are recording it based on the best information that we have at this point in time. But if you think about a quarterly lag, this 26% is based on previous months only, where the pellet price is more of an annual projection.

That's effective in North America, January 1?

Yes.

That's right, yes. Mike, I think you have to remember, too, though, I know it is only a quarter but how quickly things have moved. In January, when there was everything was at a discussion state, you we have always worked on a provisional pricing basis with our Asian customers that had the annual contract. So in January we had to establish some type of provisional pricing with the customers and at that point in time that seemed to make sense. It is hard to believe that three months later we're in that 90% range of discussion but that is actually what has occurred in just a few short months that goes with it. And of course, as you know, with the pellet pricing getting firmer around that 90% or above range with everything we're reading, we were just more confident in booking that 90% pellet price range.

And have you heard of any pellet price deals in the world, either in Asia or in Europe?

We have not, Mike. We're only using public information that you have seen and we're reading the same press releases that everyone in the industry is reading.

Okay. Thank you.

Our next question comes from Mitesh Thakkar with Friedman, Billings.

Hi, guys. Can you just talk a little bit about what kind of pricing you are seeing for your met coal in North America, and what kind of numbers are you using for $140, $145 pricing?

Don, do you want to take that one?

Sure. On a lot of the North American coal we have booked that and priced that last fall. So those numbers are a bit lower and I think that Laurie commented what the average at the mine price was. About $111 or something like that.

Yes, that's right.

Numbers that we're seeing now, again, I think you're all seeing them, they are in publications, they range anywhere from the lower numbers in the $230 to the higher numbers, perhaps up to $250 per ton, net ton, and that's FOB the port. When you back off transportation and you add those results to our $111 at the mine that's where we come to average of $140 to $145 per ton.

I just wanted to make sure whether you're using this $230, $250 kind of numbers or is there something else.

Those are the numbers. That is what we're talking with people right now. Those are the numbers that are the market-based pricing. And we will end up in that range we're pretty confident.

On your Sonoma coal operations, I know you have a guidance number of $105 to $110, 65-35 kind of mix of thermal and mel, but if you look at the met coal pricing and the steam coal pricing, based on the property discount, is there still some contracts which are open, not priced and stuff like that in there?

We have a fair amount, not a large amount but we have some carryover tons. That's a pretty small volume, as you know, Mitesh. With some carryover tonnage from 2009 priced at a lower number it has a bit of an impact on that overall average.

So you right now don't have any open tons in your Sonoma operations?

I don't think we have any open.

No, I don't believe so.

Some of it will move with market. But we don't have any open to be sold. Only in North America.

Okay. And, you have a Sonoma performance royalty flowing into your SG&A now, right?

That's correct.

Is that a ballpark number based on your pricing assumptions which you can share with us?

It's probably about $17 million.

About $17 million? Great.

For the whole year.

For the full-year. And this was not there previously in your SG&A number, right?

It was previously in cost of goods sold.

Okay. Just one last question. You guys (inaudible) a significant amount of free cash flows. Can you share a little bit about whether you're planning to return some of it through share buy backs or you're planning to pursue growth projects? I know you pulled forward some of your projects but still when you look at the amount of cash flow getting into it, you can do more?

As you know, our strategy has always been growth. Which should come to nobody's surprise on the call or in the market. Everywhere we go or what we talk about and certainly the growth strategy that we have employed, is what is allowing us to see the high returns and the profitability that we're anticipating on this call today in 2010. So, we're still looking at growth, be it internally within our own organization, as you've heard Don talk today about restarting another concentrator line and getting some incremental tonnage out of our Tilden line and looking at Wabush to improve the transportation, or whether it is M&A across the globe as we go forward. Certainly that's our first priority in this business. Obviously if not successful there, we will look at being prudent and responsible with the shareholders' money as we go forward and we would look at different forms of dividend type of payouts, if that's appropriate at the time. And obviously it is a board decision and it is discussed at every board meeting. But first and foremost we would like to get the money in the bank and see these profits come forward and the uncertainty settle down in the economy as we go forward to make these plans.

Sounds really good. Thank you very much, that's all my questions.

Our next question comes from Mark Parr with KeyBanc, please proceed with your question.

Thanks a lot guys, good morning. One thing I was curious about, to try to get more color on the new long wall that you're putting in in West Virginia. And, you're cost per ton assumptions for this year, are a little north of $110. How do you see that new long wall impacting the cost position for 2011 and 2012? Do you have any color you can share on that?

Sure. Don, do you want to talk to Mark about that one?

Sure. Basically we feel it will drive down our cost and we're looking at, we have a program over the next two or three years to ramp up coal production, as we shared with you, well above 5 million tons. As we get there we can also put continuous miners in. I know you have been down there. We feel we will drive cost well below $100 per ton. I don't want to commit to an exact number at this point in time, with all the other mitigating factors that might come in, but it certainly will drive our mining costs down into more of the world class type mine once we get these up and running and with this equipment in.

And I apologize if you mentioned this. You might have mentioned this before. The mine curtailment or the explosion that Massey suffered through earlier this year, is that something that you operations have benefited from in terms of purchasers shifting their supply requirements over to you?

I think on the fringes we have benefited a bit but it is a different coal. It is a high vol coal rather than our lo. It is actually not quite as high quality as we have and it is coal that you have to put in the mix for the coke ovens. Not directly on that one, Mark.

Okay. Thank you very much.

Our next question comes from Chris Haverland with Davenport & Company. Please proceed with your question.

Good morning. Can you give us an idea what the bill and hold sales volume were that you all shipped in Q1 that was held over from last year?

It was about $800,000 tons of iron ore that was recognized in this quarter that was really essentially shipped last year.

And how much do you have remaining to ship this year, or to ship eventually, that is held over from last year?

We will get back to you on that. I don't remember the number off the top of my head. A couple hundred thousand tons, I think.

I can follow-up with you after the call. It's not a large amount of volume based on our 27 million tons that we guided to.

Okay. And then Don, I think had you said that you could do another 3 million tons of production next year in North America iron ore. Is that total production or is that Cliffs equity share?

That will be Cliffs equity share. And again, just not to misstate, but we're ramping up to that, and we may not get it all in 2011 but we're moving up to that. A lot of it will come out of Wabush, obviously, we have acquired it, we're 100% there. Northshore will be on a full-year run wait. Hibbing Taconite, which did not operate during the first quarter this year, that we're a 20% participant in, is planned to operate all next year. So all in all our equity share could move up towards that 3 million tons, so go from the 25 million to the 28 million, but it may only be $2 million to $2.5 million next year, again depending on timing and how fast we can ramp up.

Okay great thank you.

Our next question comes from Wayne Atwell with Casimir Capital.

Good morning. Can we talk about Australia, your possibility of expanding there and what you're doing to modify your transportation.

Yes, Wayne I will be glad to. As you know, we bought the mines a few years ago, it was at 6 million tons and we have moved it successfully to 8 million tons, and then last year the guys did a great job getting it to 8.5 million tons. That has come on the back of a lot of work around the rail. It is a light gauge rail going down to Esperance, and we've put well over $100 million in that project because a lot of different places in the line were weak, and it certainly paid off. Even though it's small and increment, half a million tons for us is quite a bit over there. As you know, we continue to maintain about 11 years of reserves within Australia. The near mine exploration has gone well and has been able to do that, a year in and year out so far. And that's always been the problem trying to think about expansion in Australia, is getting those reserves up. The guys are still working on it. We still continue to run a number of different scenarios to try to ramp that mine up and we're in the midst of another one right now to look at it. If we ever get there, we will have to expand the tons a little bit. There is no big find out there that we think due to the geological structure of the iron ore in that part of the world we're mining in in Australia, but we might be able to eke out a few million more tons in the coming years. But it is just we're in a lot of pre-feasibility and thinking around it as we go forward but we continue to study it.

I thought you were a member of a joint venture that could meaningfully expand your capacity there?

No, we're not.

We own 100%.

Wayne, we have a small joint venture called Cockatoo Island, but that's maybe 100,000 tons.

Okay so it is not really meaningful then.

No, no.

And so, if that's the case then there is really no reason to ramp up your rail capability. If you have 11 years and even if you're able to expand that a bit you really don't need to ramp up your rail capability much?

That's right. We have to get the exploration and get the resource base larger before we would ramp up the rail side.

What is the geology there? Are you excited about the potential of ramping up a lot?

Not a lot. To some degree. They are abandoned ion ore formations out there. They're scattered as they go around. For us a 10 million ton or 15 million ton deposit is a pretty large pit to come in. So it takes a lot of logistics to move that product that far. We won't find one large deposit that we could really put a nice facility in around. But we continue to look. The guys continue to amaze me. They prepped it up, like I say, from 6 million to 8.5 million. I think you would see it more on a creep factor, Wayne, than you would a large volume change.

And are there any grade implications that it will get better or worse as time passes?

I think like everything as time passes grade will decline in that iron or mining district, as every place else. Nothing dramatic but it will continue to decline as the rest of western Australia does.

Great, thank you very much.

Latania, this is Steve. We're going to take one more question as we're approaching the top of the hour and then we will go ahead and end the call.

Okay our last question will be from Roger Mendel with Winslow Capital.

I just wanted to ask, and I apologize, I know the pricing questions have been asked quite a bit but I think there is still some confusion but if pellet prices in North America go back to their historical premium versus fines, you guys will be able to capture that premium under your contracts and there is probably upside to your 90% assumption for North America in that situation?

I would say that is a fair way to think about.

I think so.

Okay. Thanks guys, that's all I had.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thanks Latania. Thanks everyone for joining us on today's call. As always I will be available the rest of the day for follow-up questions. So if you have them, please feel free to give me a call. Again, we thank you for joining us today and we look forward to reporting our results in the future.

Thanks everyone.

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