Cleveland-Cliffs Inc (CLF) 2010 Q2 法說會逐字稿

Good morning. My name is Christine and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2010 second-quarter and first-half conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. At this time, I would like to introduce Steve Baisden, Director of Investor Relations and Corporate Communications.

Thank you, Christine. Welcome, everyone, to this morning's call. Before we get started, let me remind you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on our website.

Today's conference call is also available and being broadcast at cliffsnaturalresources.com. At the conclusion of the call, it will be archived 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 initial remarks.

Thanks, Steve and thanks to everyone for joining us today. As we mentioned during our first-quarter conference call, business conditions in 2010 have significantly improved since last year. The North American steel industry capacity utilization rates, while having moderated, remain in the 70% range and better pricing across all of our business segments is compounding the positive impact from higher volumes.

Although early-stage signs of recovery from last year's global financial crisis emerged strongly last quarter, leading economic indicators are pointing to a softer growth over the next six to nine months. At this time, we are not seeing anything in the market that would dramatically weaken the demand for our products and we expect our business to generate continued solid results throughout the balance of the year.

Consolidated revenue more than tripled to a second-quarter record of $1.2 billion compared with $390 million in last year's second quarter. Net income improved to $261 million, or $1.92 per diluted share, up from $45 million, or $0.36 per share in the second quarter of last year.

Although we had strong results in each of our business segments, I take a lot of pride in reporting that our North American coal business shifted to profitability in the second quarter, contributing $23 million to consolidated sales margin.

With this operation turning the corner to profitability and considering the supply constraints within the met coal market, the validity of our strategy is reinforced. We have always considered met coal to be an ideal strategic fit for our emerging diversified mining business model and we will continue to enhance our met coal assets with bolt-on acquisitions as they line up with our high operating standards.

This month's recent announced acquisition of INR Energy's coal operations demonstrates our commitment to executing this strategy. These operations will increase our North American coal production capacity to more than 7 million tons next year and 9 million tons in 2012. These assets strengthen Cliffs' global resource base to more than 175 million tons of metallurgical coal and more than 57 million tons of thermal coal.

In addition, this acquisition affords us additional opportunities for geographic diversification with increased exposure to seaborne markets. Along with a reserve base, we acquired access to a river loading terminal, which enhances shipping flexibility for all of our North American coal production. This is consistent with our intent to increase exposure and access to high-growth markets.

In addition to this major acquisition, we are maintaining the acceleration of several of our North American coal projects. Last week, many of you attended a joint event with the Bucyrus executive and manufacturing teams featuring a live demonstration of our new Pinnacle longwall. Delivery of the longwall is expected by September with production expected to commence in the fourth quarter.

We are still on track to complete the Pinnacle prep plant upgrade in early first quarter 2011, six months ahead of our original plan. The portal project at Oak Grove is underway with more than 100 feet of shaft constructed. We expect this project to be fully operational by second quarter 2011.

Turning to iron ore, we expect demand for blast furnace pellets to remain steady for the remainder of 2010, providing us confidence in our North American iron ore sales volume guidance. Our North American iron ore operating team was successful in seamlessly implementing more than $30 million of capital projects in the quarter that could have represented major risks in 2010 production.

One of the two major improvement projects included a kiln ring and roller replacement at the Tilden mine. This is a major piece of equipment for firing pellets in our operations there. The other major project was the installation of the new rotary car dumper at Northshore Mining. This major piece of equipment allows the dumping of crude oil hauled from our Babbitt mine to begin the beneficiation process.

In addition to these major accomplishments, production at our Hibbing mine successfully resumed in April without any challenges after being idled for nearly a year.

In our Asia-Pacific iron ore business, we have increased our sales volume outlook to approximately 8.8 million tons, up from the previous expectation of 8.5 million tons. This is a result of some ingenius engineering employed by our operating team at the Cockatoo Island joint venture, which is allowing us to resume production quicker than originally anticipated.

With iron ore volume targets -- while our iron ore volume targets are well on track, final pricing and the replacement of what has historically been the annual benchmarking system continues to evolve. Although we have determined final pricing mechanisms or final pricing for a significant amount of our anticipated 2010 global iron ore sales, much of our volume remains provisionally priced or will be subject to the influence of the spot market.

The majority of producers supplying the Asian iron ore markets appear to be transitioning toward mechanisms utilizing shorter pricing periods that more accurately reflect spot prices. In contrast, suppliers to the North American and European iron ore markets appear to be partial to negotiating some type of annual pricing where possible. We continue to keep dialogue with customers open as these two different mechanisms emerge in the marketplace. Laurie will now address these different pricing mechanisms being applied to our North American and Asia-Pacific supply agreements.

Now looking beyond our current business segments and toward our new ferroalloys business, I am pleased to report that we achieved our objective of obtaining majority control of the Big Daddy chromite deposit in northern Ontario. We have successfully acquired over 80% of our outstanding shares of Spider Resources, which will allow our development team to move forward with technical and feasibility studies to determine the most efficient strategy to develop these world-class assets.

We are very excited about the growth potential these projects bring to further diversify our asset portfolio and products we can offer to customers. We are committed to advancing this new mining district and have recently announced the appointment of Bill Boor to President, Cliffs Ferroalloys. Under Bill's leadership, we are confident Cliffs will be able to apply our expertise in open pit mining and mineral processing as we enter the market for chrome ore and ferrochrome.

Overall when taking into consideration what has transpired over the past two years within the world economies and the related effect this volatility has had on the commodity markets, I believe our Company has done a remarkable job responding to the ebbs and flows that present themselves on a day-to-day basis.

When the uncertainty of 2009's global financial crisis emerged, our teams across the globe explored every cost-savings tactic, which turned out to be a significant contributor to our respectable performance last year. In 2010, we have maintained our controlled cost approach, which I feel is evident by the record-breaking second quarter we just reported.

By sustaining this cost structure, our team will be well-positioned to respond to the extreme changes in supply and demand through the bottom of the cycle and back. This has been a very busy year thus far here at Cliffs and I would like to acknowledge our entire management team for their tireless commitment to execution. We are more energized and excited than ever to continue executing our proven strategy. And with that, I will turn the call over to Laurie.

Thanks, Joe, and good morning, everyone. We were very pleased with our second-quarter financial results, which reflects strong demand in all of our markets and a stark improvement over the prior year. Revenues increased significantly for the quarter, reaching $1.2 billion versus last year's $390 million. The increase was due to higher volumes and pricing in the current year. Consolidated sales margin improved to $415 million for the quarter, up sharply from a sales margin loss of $12 million in the second quarter last year.

Net income for the quarter surged to $261 million, or $1.92 per diluted share, from $45 million, or $0.36 per diluted share in 2009. Sales volume at our North American iron ore operations increased 185% to 6.6 million tons versus the year-ago period. In this year's second quarter, we shipped approximately 2 million carryover tons that were recorded at the lower 2009 prices. These carryover tons lowered our overall second-quarter average revenue per ton to $99.80.

Also, the prior-year second-quarter average realized revenue of $98.88 per ton was a slight anomaly due to an unusual customer sales mix and the extremely low volume. Average pricing for the full year 2009 was $83 per ton, which is a better comparison.

As Joe mentioned, due to the changes in the pricing of global iron ore, we are in negotiations with customers in North America to determine what will replace what has historically been the annual benchmark settlement factor of our long-term supply agreement.

Turning to the coal business, in North America, as Joe mentioned, we were pleased to report a healthy contribution to consolidated sales margin during the second quarter. Sales volume for the quarter increased nearly 150% to 719,000 tons versus 289,000 tons in last year's second quarter.

Average price per ton for the quarter improved 54% to $145 compared with $94 last year and realized cost per ton declined 30% to $113 from $160 last year. We are enthusiastic about the progress being made in this business and look forward to the efficiencies that will be gained with the planned capital improvements that Joe mentioned.

As part of the integration of these, we will execute three planned longwall moves in the next two months. While we anticipate sales margin to remain positive, costs related to these moves will impact the segment's third-quarter profitability. However, with the improvement, we are also expected to position North American coal's fourth quarter to be the strongest period of the year with significantly higher production and lower cost.

At our Asia-Pacific iron ore operations, sales volume increased 43% to 2.2 million tons, up from 1.6 million tons in the prior year. During the second quarter, our marketing team successfully negotiated a 69% increase over the 2009 seaborne iron ore price for the first quarter for final pricing. This compares with our first-quarter assumed pricing of a 26% increase.

After adjusting for this and last year's retroactive impact, revenue per ton nearly doubled in the second quarter to $123 compared with $59 per ton in the year-ago quarter. Average cost per ton was up 5% for the quarter. The increase was primarily attributable to utilization of higher-cost inventories shipped from stockpile.

Sonoma Coal and the Amapa project both generated positive results during the quarter. Sonoma Coal contributed $44 million in revenue and $15 million to consolidated sales margin and our equity income in Amapa was $9.1 million for the quarter.

As we look to the balance of the year, for North American iron ore, current sales volumes are consistent with the prior-quarter expectation of 27 million tons. Also, by maintaining our prior-quarter assumptions of a 90% annual increase in blast furnace pellets and a hot band steel pricing range of $600 to $700 per ton, our 2010 full-year revenue per ton outlook remains unchanged at an average of $107 to $112.

During the quarter, we became party to arbitration with two of our North American customers. Arbitration is often utilized in settling pricing disputes in our contracts and can typically take anywhere from six to eight months to reach a resolution. As several data points in the global iron ore markets suggest dramatic increases in market pricing for iron ore, we believe the outcomes of these arbitrations will overwhelmingly be settled in our favor.

However, in the event arbitration proceedings with a specific customer stretch beyond year-end, our recorded average price per ton could be negatively impacted by approximately $11. The revenue related to this would be recognized when the proceedings conclude. Costs per ton in this segment are anticipated to be between $65 and $70.

Our full-year North American coal guidance also remains unchanged with expectations of 3.4 million tons of sales volume, average revenue per ton of between $140 and $145 and average cost per ton of $110 to $115. Since the INR Energy acquisition has not been closed, this guidance does not include any contribution from INR's operations, which, given the timing of closing, we expect to have little impact on profitability this year.

For our Asia-Pacific iron ore segment, we are increasing our 2010 tonnage and pricing guidance. As Joe indicated, we now expect to sell approximately 8.8 million tons, up from our prior estimate of 8.5 million tons due to contributions from Cockatoo Island. Average price per ton is now expected to be between $110 and $115, up from previous projections in the $100 to $105 range. Our full-year cost-per-ton expectation remains unchanged at $55 to $60.

Now looking at Sonoma Coal and Amapa, we are experiencing better pricing and coking yields at Sonoma Coal. As a direct result, we are increasing our average revenue-per-ton guidance to $110 to $115, up from $105 to $110. Also, assuming a 90% increase for iron ore concentrate products, Amapa is expected to be modestly profitable for the 2010 full year.

Full-year 2010 SG&A expenses are now expected to be approximately $180 million, up from the prior estimate of $165 million. Higher performance-related royalties at Sonoma Coal are primarily driving the increase.

Our full-year tax rate is currently anticipated to be approximately 30% and depreciation and amortization is expected to be $300 million.

Through the first half of the year, we have generated $236 million in cash and expect the majority of our cash generation to occur in the second half of the year as is typically the case. We are maintaining our full-year cash from operations estimate of more than $1.5 billion, which assumes we resolve all arbitrations and reach final pricing in North American iron ore by year-end.

We are maintaining our capital expenditure expectation of $250 million for the full year 2010. In addition, the Board resolves to increase our quarterly cash dividend during the second quarter by 60% to $0.14 per share based on our cash position and outlook for future cash flow.

Looking back at the first half of the year with Freewest and Wabush acquisitions and taking into account our recently announced acquisitions of INR Energy and Spider Resources, we have announced approximately $1 billion of acquisitions in 2010.

In addition, subsequent to quarter-end and the announcement of our acquisition of INR's coal operations, the two rating agencies that cover us confirmed their investment-grade ratings. Echoing Joe's sentiments, it certainly an exciting year for Cliffs and we are looking forward to continuing the execution of our growth strategy. With that, Steve, let's open the call for questions.

Christine, we can go ahead and open the queue for questions at this time.

(Operator Instructions). Michael Gambardella, JPMorgan.

Yes, good morning, guys and congratulations on the strong results and also adding a lot of new information in your release.

Thanks, Mike.

Thanks, Mike.

I have a question in regards to the North American iron ore contracts. Yesterday, on the Arcelor Mittal conference call, one of your biggest -- your biggest customer mentioned in the Q&A, when I asked a question about their mining operations at the old QCM iron ore mine in eastern Canada about what price realizations they were getting, the CFO quoted a price of $165 per ton FOB the mine as the price. And I believe they put out a press release later that day or during the day at some point -- the press release is a little bit confusing I think maybe implying $153 per ton FOB. But the CFO mentioned in his remarks that he was following the Eastern Canadian iron ore pellet price that I guess was recently established. I would assume if it wasn't by QCM or Mittal or by you, it was from IOC. Have you heard anything on that? And that is quite a bit -- I think that would be anywhere from like 110% to 126% higher than the pellet price last year.

Yes, Mike, thanks. We did read the transcripts from yesterday, as they are our largest customer and we always have an interest at hand how our largest customer is doing. We do also appreciate the comments about the acknowledgment of an Eastern Canadian pellet price. As you know, that is very important in our contractual discussions with our customers and is some benchmarking that is done. We have not heard anything in the marketplace on iron ore of Canada as far as establishing a price or an Eastern Canadian pellet price, but it certainly does seem to be in line with what other producers are indicating as market pricing and in that 105% to 115% range of pricing that we are seeing in the press for other producers in the pellet industry, and we really look forward now to be able to sit down and discuss the details of our contractual arrangements with Mittal given this recent announcement of the ECPP.

Joe, I know you are in arbitration with Essar. Are you also in arbitration with Mittal?

Yes, we are.

Well, I mean, isn't their announcement yesterday ending the arbitration?

Mike, we haven't -- this is fresh news, as you know, as it came yesterday through the Q&A with that. Being busy this morning, getting ready for this call, I am not sure our sales folks have had discussions with Mittal as well, but you would think it would certainly be strongly in our favor at this point in time as we have indicated in the script and our press release. And it is very helpful.

As you know, Mike, those are pretty complicated contracts and I am sure there will be a lot of variety of discussion, but that is a very helpful piece of information.

What pricing are you assuming in the second quarter for the seaborne component on average for everything, ones you have finalized, the ones in arbitration and the ones you provisionally price? Can you give us an average of what seaborne Eastern Canadian pellet price assumption you are using for the second-quarter results?

We have generally assumed 90% for anything that has been unpriced.

And that includes things in arbitration?

Yes.

Yes, that's correct.

So it would be somewhere around 20%, maybe even 30% higher than that based on these comments that were made yesterday?

Yes, that's correct.

Yes, it would. And getting more in line with the marketplace as well.

With the market, yes.

Right. One last comment. Just in terms of these contracts you have in North America, I think I have told you before I don't like them, but when you look at the prices, even if you assume a $153 price FOB, one of the Eastern Canadian mines and it is expensive to go through the St. Lawrence, but even if we just say $153 compared to what you are forecasting for this year, about $110 before this news yesterday, we are talking about a major differential in price for the iron ore that you're selling.

I mean it seems like these contracts are leaving a lot of money on the table. I mean if you just multiply the price difference, the $153 minus what you're expecting this year and you are pricing around $110, multiply it by your production, that is like $1.2 billion in EBITDA that you are kind of giving to your customers with these contracts. I mean you crank that out by like a 5.5 EBITDA multiple, we are talking about a market cap loss of like 80% or a market cap improvement of 80% where the whole Company is right now. Are you going to let these contracts expire and go more to a seaborne price or just go to the Eastern Canadian benchmark price in the future?

Mike, certainly we have had these conversations with yourself and many other analysts and I think the focus is always on what is left on the table. Let me take you back to 2009, if I may, where there was a 48% decrease in pellet pricing worldwide and our decrease was 17% -- 11% sorry -- an 11% decrease and I don't think any, yourself or any of the analysts, ever factor in -- as we have always said, these are long-term contracts. When you go back to the beginning of these contracts and you true-up the plus and minuses, they almost come out dead even over the long term. And that is what these contracts in a stagnant market to declining market in North America were built to. This is not a rising market or a growth market that comes forward.

So I think your focus point is always on the one year and you have got to take the holistic view of the entire contract, and if you do that, I think you would have a different view on where that comes from. And as we have said before, that gives us the stability to go forward and allows us to work in the volatility of the spot market, if you will, of Asia and the annual markets with some spot sales of coal as we move forward. So that is the first part of the question I would like to address.

Then the second part, when we do have negotiations, we are moving more and more into the annual world pricing market and we continue to move those contracts more in favor of that and less in favor of the traditional contracts as they go forward. So as these contracts work off over time, there is nothing I can do about them today. We have honored the contracts in the highs. We hope that customers will also -- or in the lows rather. We hope the customers will honor our contracts in the high point of these things. We will continue to work through these contracts and yes, essentially move them more into the world pricing market and arena is where everything else is going.

Okay. Just one last question, on the Asian iron ore pricing forecast, it seems like you are assuming flat. Are you following the quarterly contracts for fines in Asia?

Yes, generally, there is a lot of it that is on the quarterly basis. Some of it is actually moving more and more towards spot. We have essentially assumed that it stays fairly flat from today's pricing. We are not going to get into the business of exactly projecting where that pricing is going to move up and down in terms of spot. So we will leave that to you if you want to adjust that up or down. But for our -- incorporated in our guidance is generally an assumption that it stays flat from this point till the end of the year.

And we acknowledged the recent rise in spot pricing in Asia just over the last week or few days, if you will and again, you can't react on one of these calls to a daily spot movement as it goes forward. So we are doing -- making the best estimate attempts that we can as we go forward, but in a spot market, it is rather new to all of us and we can only take those projections from what management sees in the next few months.

Okay because I thought like POSCO and Valsteel had commented in their public statements that they are paying an additional 25% for iron ore in the third-quarter contract?

I am not aware of those, Mike. So we will get into that and we can get back to you.

Thanks a lot.

Yes, Mike, I think that actually references some of these 90-day moving averages that you have heard reported on and as Laurie mentioned, more and more of our business is being negotiated closer to a spot rate with customers.

Okay, thanks a lot, guys.

Kuni Chen, Bank of America.

Hi, good morning, everybody. I guess just wanted to circle back on the arbitration issue. The $11 per ton risk that you call out, that is basically the difference between what you are currently billing at 2009 levels versus the assumed 90% increase, is that how we get to $11?

There are a number of complications in terms of thinking about through the accounting rules and the legal ramifications. And if we get to year-end, some different accounting -- yes, we are talking about a projection right now and so what you can record as actual revenue may change. So our projection of $107 to $112 assumes a 90% increase. If we get to year-end and some things haven't settled, that would bring that down by $11 because of the accounting rules. The ultimate revenue we believe we will get for the tons we ship will mirror that $107 to $112.

Okay. That's fine. And I guess just on the -- can you give us a little bit of color around the price mechanisms for the volume that you have put to bed thus far, probably about half your volume? Is some of that more quarterly? Is it all annual? Just give us a little bit of flavor there.

In North America, it is consistent with our contract. It is formula-based. It was just concluding what to plug-in for this benchmark. We are hearing now there may be an actual benchmark settlement, but a couple months ago, we really didn't have a benchmark settlement to point to. So plugging the number in there, that is a full-year settlement number put to bed for the whole year for those particular customers.

Okay, got you. And I guess just on the coal side of the business, nice to see that turn the corner, so congrats again there. One commenting that we have heard out of the coal sector this earnings season is just on cost impacts and loss productivity in the underground mines and certainly increased safety inspections. How do you feel about that going forward and how that -- how you can manage your costs and continue to move that down, especially now that you are basically doubling down on underground mining?

Well, there is certainly the pressure on the safety regulations and the increased inspections are going to continue, Kuni, but these really started back from several years ago when the other mine tragedies occurred. It is really hard to imagine how there could be more of a ramp-up than there has been in the last two years. We have inspections almost on every shift of every day and we are working very hard with MSHA and within the regulation to have the safest minds in the industry we possibly can.

The biggest thing that we need to do is focus and continue to focus and improve the safety that we have, continue the relationship with MSHA on understanding the new regulations that we go forward and get ahead of it as we are. It will certainly bring some cost pressures that continue to come on that maybe are not already in the business, but this isn't Cliffs, this is the industry as we go forward. We fully recognize that in the INR purchase and actually built some cost into what we felt the cost per ton would be in that purchase price. So we are trying to get ahead of it.

Okay. And then just one last one and I will turn it over. Just on M&A, are you guys basically done for the time being or still potentially opportunistic if things come across the radar screen?

I think potentially optimistic is the right word. We have got a very good integration team working full speed ahead with INR. Compliments to INR's management for allowing us to work with the teams during this transaction period so we could be ready to go and have a smooth transaction as we move that into the coal business. And yes, we would continue to look at opportunistic methods if they come forward.

Okay, thanks. Good luck.

Brian Yu, Citigroup.

Thanks. Good morning, Joe, Laurie and Steve. With regards to -- going back to Kuni's question, with this arbitration case, you have quantified the impact at $11 per ton. I just want to get a better understanding of the difference. Does this basically assume that there is no change in the seaborne index for those affected tons and that is how you get to $11 or is it more complicated than that?

Of course, it is a little bit more complicated than that.

All right.

So as I said, you do get into obviously some accounting requirements when you are talking about recording actual revenue at year-end versus how I can estimate and project what we think we are going to earn from the tonnage. And so we have considered all the different accounting rules and the legal provisions involved in this. So it is difficult to give you a little more detailed explanation than that.

Okay, is there like a dumbed down ratio you can provide of what it means once you take that $11 out? Does it assume a 10%, 20% increase in the seaborne index, again, just for those affected tons?

Brian, this is Steve. If you would like, I think maybe after the call, we can follow up and I can talk through some of the nuances around revenue recognition for various scenarios.

Okay. And then just on the 90%, does that effectively represent the cash that is changing hands or your billing rate? And I ask that because, early in the week, another steelmaker, AK, said that they are using 65% of their assumption because that is what they are effectively being billed at.

Yes, we have a variety of provisional agreements with our customers. I would say that the 90% is in the general vicinity of being an average of what we are collecting cash on.

I think it is fair to say too that they are truing up to the provisional arrangements that we have on the cash side.

Okay. And then one last one. I notice that your North American iron ore sensitivity changed by $1 from what we had in the last quarter. Is that just a reflection of the settlements that you have done throughout?

Yes. Once you lock certain things in, then obviously the variability range narrows.

Okay. Thank you.

Mark Liinamaa, Morgan Stanley.

Hi. Also on the arbitration, is it all about price or are there other things that the counterparties, presumably Essar and Mittal, are concerned about?

Certainly price is the most significant factor. There is always a lot of things involved in that type of arbitration.

But essentially it is price, Mark.

That is the biggest issue.

It's all price. So can you give a little more detail? You gave a timeline for the arbitration process. Can you just -- I am not real familiar with it. What happens? Do you show up and both appear in front of the arbiter and give your case for where you think the market is?

That is essentially how it works and then the arbiter listens and rules on what the arbiter believes.

Yes, the timing, Mark, though, if you will, you lose control of it when we put six to eight months and it could be, I would say, longer, not shorter. The arbitration boards have to be picked. They set the dates at that point in time. Depositions are taken and they set the timeline for when they give an answer back to the two parties in conflict. So we put the six to eight months in, but it can be a rather lengthy process and again, we just lose the ability to manage the time around it.

But given the QCM comments from yesterday, that would be a fairly significant line in the sand it seems then.

Again, I think the Eastern Canadian pellet price being established is a key within our contracts as benchmark pricing and QCM and IOC are both the big players, if you will, in Eastern Canada and that certainly helps to have that pricing disclosed and out there.

Okay, thanks. And just one last quick one. On the coal side, nice to see the profit swing into that side of the ledger. Any update on costs, and cash costs look like it is around $100. You have given us some benchmarks before on where you think it could go at full production. Any update on that? Thanks.

I think we are still confident that we can get -- obviously, at this point, we are already getting in that $100 range of cash costs and with the additional capital projects that Joe mentioned, we are still confident we are going to be pushing the $80 range once we get fully ramped up.

Right.

Great. Thanks. Good luck.

David MacGregor, Longbow Research.

Yes, good morning, everyone. What are the expected second-half shipments to the arbitration customers?

I don't know exactly what the shipments are, David, but we wouldn't -- we wouldn't change the shipping schedule with customers. It is really the arbitration would be more around --

Pricing.

-- what the price that we bill and collect would be.

I understand that. I am just trying to get a sense of how much of your tonnage is subject to this uncertainty.

Well, I think we have provided a percentage of the 27 million tons in the release.

Yes, I think it's in the release, David.

Okay. I guess Amapa -- it seems like we have turned the corner here at least. There was not much increase in the tonnage; you were still at about 900,000 tons. Is the return back to breakeven really just a function then of better pricing?

There is a lot of it that is pricing; that is certainly overwhelming in the majority. But they are on schedule to hit their plan this year of volume at 3.8 million I believe it is as that comes forward. And again, they are starting to get some more management practices in place as well and get the products established in the market.

3.8 million is essentially a 900,000, 950,000 ton per quarter run rate. I mean is there a plan here to eventually ramp this up a little further?

Yes, there is, yes, yes. We are looking at a steady ramp-up into about the 5 million ton range over the next two years.

5 million over two years.

Yes, Right.

So profitability at this stage is really just a function of pricing?

A lot of it, but I don't want to discount a lot of Anglo's efforts up there, as well as the managing partner. They have done a lot of good things to tighten it up as well.

Okay. And then on your coal business, any committed tonnage for 2011 yet?

Nothing, no.

I don't think so, no.

The only thing would be international (multiple speakers) --

Yes.

-- that would spill over into the first --.

Run to April. Yes, that is an April to April. So we look at that as a contractual year, but that would be the only thing committed.

Right. Can you just remind me again what that would represent in terms of percentage of your shipments?

I don't think it's a big number. We can check and get back to you, but I don't think it is a big percentage.

Okay. I can follow up with you on that afterwards. And then now that you have got Spider kind of done, what is next for Freewest in terms of capital spending and just kind of the next stage?

The next stage is, and they are well into, David, is we are getting Bill Boor in place to manage the business. He is busy putting his team together, along and working alongside with our Cliffs technical group as well. We are proceeding along with the environmental baseline work that takes about a year to do. Golder's has got that work. The prefeasibility work is underway and we have named SNC-Lavilan out of Canada as the lead engineering firm on the prefease work that is doing. We have hired our community relations person, so we are working with the First Nations groups within the country.

But the spend will be slow as we have said in the past. Over the next couple of years, there will be a lot of engineering, the permitting work to go forward and all of that and then you will see the heavy spend in the end in years four and five. So I don't have a number for you, but it is -- it is a minimal spend at this time for the next couple of years for engineering and environmental baseline work and community relations.

Okay. And than 2011 CapEx, I guess it is still a little early to be putting a number on that.

Yes.

But you must have a good sense of just kind of what the bigger projects are going to be at this point. Roughly how should we be thinking about 2011 CapEx? Should it be a major departure from the $250 million number this year? Or I mean you have got --.

Just not ready to comment on that, David. We are just -- we haven't even started our planning cycle for 2011 yet. That kicks off in the next six or eight weeks or so. And there is a lot of conversation around a lot of projects, as you can always imagine and I just wouldn't have a comment at this point.

Yes, and we have to factor in the chrome business and we have to factor in the -- we have to factor in INR as well. So there is a lot of things to figure out here.

All right. And then the 2 million ton carryover price, should we just continue to use 2 million tons of carryover into 3Q and 4Q or how does that change through the second half?

That 2 million was shipped in the second quarter, so that is gone. We came into the year with about 2.5 million of carryover tons, so we have got about 0.5 million left.

0.5 million to go.

That is factored into our annual numbers.

Your guidance, right. Okay. Good, thank you very much.

Mitesh Thakkar, FBR Capital Markets.

Hi, good morning, everybody. So just similar to what you gave on the North American iron ore pricing side, like the [breakup] of unsettled contracts and stuff like that, which obviously was very helpful, can you give us some sense of is there any sort of breakup that you can give us on the Asia-Pacific side? I know you mentioned that you are in negotiation with a customer on determining what kind of mechanism you should use. Can you give us some sense regarding your Asia-Pacific operation as well?

I will be glad to, Mitesh. We essentially have volume contracts with all of the customers in place that we are doing. The mechanisms that continue to get discussed are, as you know, from really -- everybody has moved to the quarterly spot, but there are derivations around the spot that I think most of the suppliers have discussed from a pure quarter to a quarter plus a lag and even going to a spot price if people start playing games with the contracted tonnage versus the pricing that they see going forward with that.

So the discussion that we are given is the tonnage is tied up. The mechanisms are -- we have moved all to customers and they have moved over to this quarterly index one way or the other and some spot pricing. So it is more of the fine detail than it is -- it is really apples and oranges to the North American contracts that we are talking about.

Just to maintain the consistency, is there like a possible benchmark or maybe like a possible spot price reference which you can use across all customers in Asia-Pacific or you would go by customer by customer, everybody has a different choice kind of stuff?

I think it is a customer by customer and again, it just depends on what we have negotiated and what the customer is comfortable with when it comes to the way that we are going to put these mechanisms in on the new spot price or the new quarterly pricing mechanisms.

Platts' index is probably, to give you direction, is the one that is most commonly referenced. So if you monitor that, you will get a good feel for the direction that price is moving.

Yes, and did you see any pushback or any contract renegotiation. For some part of and even today, the third-quarter pricing is -- the spot price is below the contract prices. Do you see any of your customers more kind of trying to renegotiate a little bit?

Well, of course. That is the name of the game, isn't it?

Yes.

In Asia-Pacific, though, we really haven't done much in terms of annual pricing, so there was no annual settlement for them to push back on.

But I guess what we have really discussed with the customers is, look, we have decided on this mechanism going forward. If there is any gamesmanship around it, we will just put the customer on a spot basis.

Great, great. And one last question, going [out] of final pricing, and more focusing on longer-term like Freewest Resources, is there any plan on JV or maybe have a [change in] (inaudible) after you have got Spider and which deposit you will develop first or some update on that.

It's a little early.

It is very early in the day, but it is also -- that is the nice part about having 100% ownership in a project like this is there is numerous offramps that can be taken all the way through this project as we go forward. But as I just previously discussed, our activities are really about getting organized, getting the engineering in place, getting the teams in place and working in the communities and with the government in Canada.

All right. Sounds good. Thank you.

Chris Haberlin, Davenport & Co.

Good morning. A question on the Asia-Pacific realization guidance, I guess with not including the retroactive pricing lookback in the segment in the second quarter, our question is does the $105 to $110 guidance assume the $123 price realization that you all reported in the second quarter or the kind of roughly $140 if you include the retroactive lookback that would have been reported?

It is the full number. When we did the adjustment, it was just so that you could have a better comparison. Our actual recorded number for the quarter is the $140. It is in the business segment and so just in order to enable that year-over-year comparison to be accurate, we illustratively said if you actually move that back into the first quarter, it doesn't go away; it just got moved back into the first quarter. And so the full amount, the $37 million true-up, is included in our full-year guidance.

Okay. And then second question, in North America, can you just give us an idea of how many tons were shipped under arbitration?

I don't have that.

I don't want to -- we don't really give quarter by customer. We gave the total percentage of the full-year volume that is under arbitration. And I think that is probably as much detail as we are comfortable disclosing.

Okay. But it was not included in the 2 million that were identified as carryover?

Not part of the carryover tonnage. No, the carryover tonnage was priced at 2009 pricing. We are talking about 2010 volumes that were in arbitration to finalize the pricing on the 2010 volume.

But that 2010 arbitration volume was still priced at 2009 prices?

No, it was estimated for the year. We said we have used a 90% estimate to estimate the derivative pricing.

For the volume under arbitration?

Yes.

All right, thank you.

And Chris, I can cover more of that with you off-line.

That would be great. Thank you.

(multiple speakers) better venue. Thanks.

George Ireland, Geologic Resource Partners.

Actually you have answered my questions. I was going to ask about the Big Daddy deposit and the timeframe. Thank you.

Thanks, George.

Tony Rizzuto, Dahlman Rose.

Thanks for taking my question and thanks for all the color. I have just got one question and I was wondering, as the North American market is evolving for iron ore, are you finding that it is also gravitating towards premiums for quality with grade and impurities? We have seen Vale do that from their perspective. I am wondering what you guys are seeing.

Our quality is very much set within the contract that we have today, the pellets and where they come from. The sources have been pretty well built into the blast furnaces as our technical people work with our customers' blast furnaces in North America. So no, our North American contracts and quality have been set contractually for a long time.

Okay. No changes there then?

No.

Thanks, Joe. Appreciate it.

Jason Brocious, KeyBanc Capital Markets.

Hi, good morning, guys. I just had a couple quick questions. I was wondering, regarding INR, I guess that will be closed in just a couple days. Could you give us any idea of what that product is pricing at in the market and the kind of costs per ton maybe relative to your existing operations?

Hey, Jason, this is Steve. Most of the product for 2010 is already contracted and priced and when we announced the acquisition, we provided some pretty detailed numbers around what is contracted, what remains open. And then you can look at any number of trade publications to find out what high vol coal is going for at this time.

Okay, all right. I will do that. And then regarding Sonoma, I guess just -- I just wanted a little clarification. The guidance -- you bumped the pricing per ton guidance up and I guess over the volumes that you are assuming for the rest of the year, I think that boosts full-year sales margin up by about $8 million, but then you quote SG&A expenses up $15 million, primarily related to the Sonoma, to increase Sonoma royalties. So I was just wondering how we should think about that sales margin guidance going up $8 million versus prior guidance and costs going up $15 million?

Well, there is sometimes a disconnect in calculating the SG&A, the volume piece of it that turns into the royalty payment, but they are related.

Okay, all right. Well, thanks. Have a good day.

Ladies and gentlemen, due to time constraints, our final question comes from the line of Michelle Applebaum, Whitfield Market.

Hi, it's Steel Market Intelligence. We like that oxymoron.

Hi, Michelle.

Great quarter and great disclosure. And I have always admired, as a corporation, your ability to handle your customer base in terms of some of the volatility and stresses. You do an amazing job at breaking up rocks, but you also do an amazing marketing job as well. Don, I hope you are listening. And my other question -- my question really is about the new tax regime in Australia. There has been a lot of controversy over it. Can you give us kind of your view of what that does to the pricing equation moving forward?

Yes, and thank you for those kind words. Certainly the super tax was the topic in the first quarter. The Prime Minister, Kevin Rudd, is now out. The new Prime Ministers that is in seems to be a little more levelheaded, understands what that would do to the industry and to Australia being a great exporter of natural resources into the Asian bases and things seem to be getting a little more levelset with that.

Having said that, it will be part of the national debate as elections are called in Australia later this year and into their parliament. Nothing has been settled I think officially that we have read. It will be more sensible, but I think there is no doubt that taxes will go up. We do not have a feel for the percentage and I would love to price that in for you, but we just don't have it at that point in time. Our Australian folks have spent a considerable amount of time in the industry groups talking to the various ministers, even being in the roundtable discussions with the new Prime Minister over there. But we just don't have a feel for those taxes and as soon as we do, I am sure we will all, as an industry, put that report out and try and give you the implications that go with it.

I was curious about the hematite/magnetite issue.

Since there is almost no magnetite down there anyway that is being produced, there are a lot of projects that are around it. It is all around the hematite. That is the production that is going to come forward and be the bulk of the business in the very near and long future in Australia. So I think it is kind of a silly discussion around the magnetite since I don't see a lot of that coming on now or for quite some time.

I guess there are people saying that it is going to inhibit any kind of growth and any type of new entrant, it is a barrier to entry. You think that is a specious argument though?

I do. I think the projects have got so much baggage to carry already (multiple speakers) the price of making magnetite concentrate and with the logistics of having to put rail in and ports. Yes, I think it certainly doesn't help any project, that is for sure. But I wouldn't see where that would impede anything that has got a good IRR.

That is just a final -- final --?

Yes.

The other question I had was more along the lines of what the back and forth with Mike was earlier. I am just wondering, and I was disconnected for part of it. I heard you say that -- I heard you say kind of a defense of annual contracts and at the same time end with we are not going to do those anymore incrementally. And I'm kind of curious about that because isn't there an argument to be made that if a customer gave you a full-year price of X as compared to -- if you could predict with certainty an average of four quarters of X, the full-year stable price would be worth more to you and wouldn't you, with certain customers who don't have a history of either arbitration or reneging, wouldn't those customers be people you would still want to do annual contracts with?

Let me first start with and where you were unplugged with this and just so that I get the right message out there is what I said is we looked at contracts and as they came up. It wasn't about falling off a cliff and going to world price. What I said was we were moving those contracts more heavily weighted, if you will, -- maybe I should use the words heavily weighted -- into the world price. Remember that a third, a third, a third. And again, it takes two to get an agreement, so the customers are moving that way as well.

As far as the second part of your question, I would remind everybody is we are a price taker. We did not put this new contractual pricing in place. It has been very difficult for everybody, for the customers, in my view, as well as the suppliers as they go forward and we would work with our customers for the stability of annual contracts versus spot as well.

So I am not taking anything back from what I said previously. We are going to work with our customers and I suspect the business will be around the world some spot, some annual contracts, some quarterly, some quarterly with a lag of a month and I think that is what it has opened up. It is not going to be black-and-white; it is going to be a little bit of everything and of course, we would negotiate with customers around pricing on annual contracts just as we would on a quarterly pricing mechanism if the two parties so desire. We don't have our feet in the mud on either pricing mechanism.

Okay. I am going to -- because this is like very, very confusing. I am just going to sum up and tell me if I am right or not. What you're saying is you are not moving anyone who has got an annual contract into anything new. What you're doing is, where annual contracts expire, many of them are going to this new global world pricing model, but you are still willing and still planning on having some of those contracts may renew as annual contracts?

Yes, that's fair, Michelle. And actually the movement towards spot or quarterly is far more prevalent out of Australia than it is in North America. We are not really seeing much that is not annual out of North America unless maybe it is a vote out of Wabush or something.

Okay. So what you are seeing -- okay, so North America is likely even where contracts are expiring or you are in -- I don't want to say about arbitration, do I? Even where contracts are expiring, they are likely to be renewed as annual because that has been the trend in North America so far that you are seeing, except from North America into the export market?

That's fair.

I think that is fair, Michelle.

Okay, good. Thanks for the clarity and as a long-term kind of person, I actually think when you have a good credit and a customer who follows the rules on the upside and the downside that I would value that stream on an annual fixed-price basis higher than the volatile stream. I have seen it both ways for a very long time.

Thanks, Michelle.

Thanks.

Thank you.

I would now like to turn the floor back over to management for closing comments.

Christine, thank you very much. On behalf of the entire Cliffs management team, I would like to thank everyone for joining the call today. Both Jessica Moran and I will be around all day to help field some questions that you may have in terms of follow-up. So thanks, everyone, for joining us.

Thank you.

Thanks.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.