Cleveland-Cliffs Inc (CLF) 2010 Q3 法說會逐字稿

Good morning. My name is Jovi, and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2010 third-quarter and nine-month 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, Senior Director of Investor Relations and Communications. Mr. Baisden.

Thank you, Jovi. I would like to 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, Finance and Administration, 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. The third quarter was a very productive period at Cliffs, as we continued to successfully execute on a number of fronts. Operationally, we had record volumes from our North American iron ore segment, and we are well on our way to recording record volumes in our Asia-Pacific iron ore operations for the year.

Our numerous capital projects are progressing well, which I will expand on in a moment.

We were also successful in closing on two strategic acquisitions this quarter. As many of you know, we finalized the acquisition of INR Energy's coal operations, as well as Spider Resources during the quarter. This, combined with the Freewest assets acquired earlier this year, gives Cliffs controlling ownership interest in what may be the most attractive chromite deposits in the world.

We also increased our financial flexibility in the quarter with the placement of $1 billion in senior notes. Our announced capital outlays for several infrastructure upgrades at our Asia-Pacific iron ore operations will increase annual production capacity from 9 million tonnes to 11 million tonnes.

And finally, we generated third-quarter records for revenue, operating income, net income and cash flow.

As we enter this year's final quarter, Cliffs is extremely well-positioned, with a variety of a balanced growth [broad] initiatives, a committed and focused management team and a strong financial position.

Starting with Cliffs North American iron ore operations, this business segment turned in a record-breaking quarter, with significantly improved volume and pricing versus last year. The incremental pellet volume we picked up in the acquisition of our former partner's interest at Wabush Mines continues to positively contribute to the segment's performance. In addition to this seaborne volume, given the strong pricing and demand for iron ore pellets, Cliffs also successfully placed additional tonnes from our operations in Minnesota into the seaborne market.

As indicated in the release last night, we are still working through arbitration with two customers to settle final 2010 pricing. This is a result of changes we have seen in the industry's historic benchmark system. These benchmarks had historically been used as factors for determining prices in certain long-term supply agreements. Given the current states that one of these particular arbitrations is in and the uncertainty of the timing of the collectibility in 2010, we have adjusted our reported and expected average revenue per tonne assumption for this business segment. Upon settlement of this arbitration, we expect to recognize the additional revenue for the 2010 sales to this customer.

In our legacy coal operations, all of our capital projects are progressing well, and scheduled to be implemented as anticipated. The new longwall at Pinnacle Mine has been installed and will be ramping up production in November and December. We are enthusiastic about the efficiencies the new longwall will contribute to this business segment.

An example of this is the ability to advance significantly faster through the coal panel compared with the previous longwall, which was installed over 19 years ago.

The upgrades at the Pinnacle Preparation Plant are expected to be finished during the first quarter of 2011. The capital improvement is anticipated to significantly increase clean coal yield on every tonne brought out of the mine.

The progress also continues on the new mineshaft at Oak Grove, with nearly 400 feet of the planned 800-foot excavation as of October 15. We remain on track to complete this mineshaft by next summer.

Taken together, we expect to significantly increase production and lower unit costs at these mines as volumes ramp up. As we have stated a number of times, we will need to continue building scale in our coal operations, and believe growing this business is paramount to optimizing our future results.

Our recent acquisition of INR Energy's coal operations in southern West Virginia was a key milestone for the future growth of this business. Thus far, the integration is going exceptionally well. This transaction is anticipated to add approximately 119 million tonnes to our North American reserve portfolio at a mix of 60% met and 40% thermal.

For 2010, we are reducing our full-year coal North American coal sales volume expectation by 300,000 tonnes. In addition to the previously disclosed bad top encountered at the Pinnacle mine, we have also recently entered into difficult mining conditions at Oak Grove, where we are in a section of the mine requiring fortification of equipment byways. This process slows the movement of equipment, and as a result, impacts production.

As many of you know, all of these issues are common in underground mining, and therefore, items we attempt to incorporate in production forecasts, as we did yesterday in our forward-looking statements. All of this said, as we progress in our mine plans at both Pinnacle and Oak Grove, we expect to encounter less difficult geology, which will improve our production rates.

At Cliffs' Asia-Pacific Iron Ore business segment, we are on track to achieve record-breaking sales volume and margins. Our management team in this geography continues to deliver exceptional results and is continually finding ways to incrementally grow the business. This is illustrated by our plans to increase production to 11 million tonnes in the near future.

Having an exceptional management team in place in this geography is critically important as the demand for natural resources management talent increases in Australia. As export demand for Australia's natural resources increases, we believe our dedicated rail and port facilities provide a competitive advantage. That, and our outstanding management team, will allow us to achieve the increased capacity plans we've set forth.

Also, our customer base in this market tends to be relatively more stable, with higher-end and mid-size mills. This results in a steady demand for our products, which is reflected by our continually increasing volume expectations.

Turning to our chromite project in northern Ontario, we are moving along quite well on many of the fronts. From a human capital perspective, we are in the process of building out our team, including the recent addition of a dedicated First Nations professional, along with other necessary resources needed to advance this project.

As we have previously outlined, once this project is operating, we expect to produce approximately 400,000 tonnes to 800,000 tonnes of ferrochrome. As part of our pre-feasibility study, we are currently considering alternate logistical routes to bring these products to market. In addition, our project description, which is a critical component for initiating the permitting process, is on track to be complete in the first quarter of 2011.

Overall, I am very pleased with the progress achieved this early in the timeline.

With each milestone, our enthusiasm increases. Looking ahead to 2015 and beyond, we expect this business to contribute significantly to Cliffs' cash generation and profitability.

In closing, our demand outlook remains healthy, and we have not deviated from our strategic plan, despite recent market cycles. Instead, our team has responded to the industry's challenges and has taken advantage of the volatility to advance our objectives.

We remain dedicated to growing our business and increasing the Company's exposure to other steelmaking raw materials and the growth markets around the globe. Acquisitions such as the recent INR transaction afford additional opportunities for mineral and geographic diversification, with increased exposure to the seaborne markets.

At this time, I will turn the call over to Laurie for a review of our financial highlights.

Thank you, Joe. We reported record revenues, operating income, net income, diluted EPS and free cash flow, in addition to making significant progress on future growth projects. The records we generated for the third quarter were the result of improved pricing, increased volumes and better sales margin across all of our business segments.

Consolidated revenue more than doubled to $1.3 billion, compared with $666 million in last year's third quarter. Consolidated sales margin improved dramatically to $477 million for the quarter, up more than 400% from the $103 million reported for the third quarter last year.

Operating income reached $389 million, up from $81 million last year, and net income improved to $297 million, or $2.18 per diluted share, up from $59 million, or $0.45 per diluted share, in the year-ago period.

Sales volume at our North American Iron Ore operations increased 37% to 7.6 million tonnes from 5.6 million tonnes last year. Average revenue per tonne rose to $105, up 34% compared with $78 in the third quarter of 2009.

On the cost front, lower year-over-year energy-related costs and a continued focus on cost control partially offset increased maintenance costs and additional costs related to our acquisition of Wabush Mines. This resulted in a 7% increase in cost per tonne to $67.

Sales margin per tonne increased 137% to $38 from $16 last year.

The revenue per tonne reported for the third quarter and nine months excludes the impact of the price increase related to one of the arbitrations, as the timing of the outcome is unknown at this point in the 2010 calendar year. When that particular arbitration settles, we expect to recognize the additional revenue, based on the outcome.

Turning to the coal business, in North America, sales volume for the quarter increased 185% to 977,000 tonnes from 343,000 tonnes in the prior year's quarter. Average revenue per tonne improved 26% to $118 compared with $97 last year. Realized cost per tonne declined slightly to $136 from $142.

During the quarter, adverse geology had a negative impact on our cost per tonne and resulted in lower fixed cost leverage. We also reported increased costs due to the inventory step-up related to the acquisition of INR Energy's coal operations.

The adverse geology encountered at the Pinnacle complex resulted in the acceleration of depreciation of the legacy longwall machine. Excluding these one-time items, costs would have been $117 per tonne.

DD&A was just over $20 per tonne, and cash costs were $108 during the quarter, benefiting from INR's lower average cash cost per tonne. As Joe indicated earlier, we expect much lower unit costs at this business in future periods, with the majority of the improvement coming from our legacy coal mines.

At our Asia-Pacific Iron Ore operations, sales volume declined to 2.3 million tonnes from 2.6 million tonnes in the prior year. The decrease was due to the timing of shipments, as last year's shipments had a bit of a spike during the third quarter. As Joe mentioned, our customer base in this part of the world is stable, and we expect to sell out of all of our iron ore products for the fifth consecutive year since owning this operation.

Average revenue per tonne in the quarter was $128, up 104% over last year. Costs increased just 5% over the prior year to $55. The increase is attributed to unfavorable exchange rate variances, partially offset by utilizing lower-cost, long-term inventory stockpiles, along with decreased transportation and processing costs.

The compounding of significantly improved pricing, coupled with only marginally elevated costs, drove sales margins sharply higher. Sales margin per tonne was $73 during the quarter compared with $10 in the comparable quarter of 2009.

As many of you are aware, approximately 80% of our Asia-Pacific Iron Ore sales are to Chinese customers, with the remainder sold to mills in Japan. During the third quarter, pricing for Chinese customers transitioned to a mechanism that closely correlates with spot prices. This is in contrast to the pricing mechanisms that were used in the first half of the year.

As a result, we anticipate future pricing for our Chinese customers will track very closely with seaborne spot prices.

Sonoma Coal and Amapa Project continued to post positive results. During the quarter, Sonoma Coal contributed $56 million in revenue and $22 million to consolidated sales margin. Increased pricing, volumes and lower costs at Amapa resulted in $4.5 million of equity income in the quarter for Cliffs' 30% interest in the project.

In September, we sold $1 billion in investment grade public debt in two $500 million tranches. These include 10-year senior notes with a 4.8% coupon and 30-year senior notes with a 6.25% coupon. A portion of the proceeds was used to pay down all borrowings against our credit facility, and the rest will be used for general corporate purposes.

At September 30, we had nearly $1 billion in cash and equivalents, $1.7 billion in long-term debt and no borrowings on our $600 million revolving credit facility. As a result, we have a long-term debt structure appropriate for a cyclical business such as ours, in addition to having an attractive average weighted cost of debt and significantly enhanced liquidity.

Now turning to our outlook for the balance of the year, North American Iron Ore sales volume estimates remain unchanged from our prior expectation of 27 million tonnes. We have adjusted our assumption for the implied settlement increases in our contracts to 96% from 90%. This increase reflects what is being realized in the annual pricing agreements between other producers and consumers.

Given this and our expected timing for settlement of the previously mentioned arbitration, we are now estimating 2010 full-year average revenue recognition per tonne in North American Iron Ore to be between $98 and $103, compared to our prior expectation of $107 to $112.

Upon settlement of the arbitration in 2011, we would recognize the resulting additional revenue.

Given our full-year estimate of 27 million tonnes and the less than 19 million tonnes sold through the year's first nine months, you can certainly see we are anticipating a very strong fourth quarter, which is typical for our North American Iron Ore business. We expect similar economic conditions next year, and therefore anticipate our 2011 sales volume from this segment to be approximately 27 million tonnes, consistent with 2010 volumes.

Shifting to coal, our full-year 2010 North American Coal sales volume guidance has been lowered to 3.6 million tonnes from the 3.9 million tonnes previously expected. The resulting loss of fixed-cost leverage increased our unit cost estimate to between $120 and $125 per tonne, up from $115 to $120. Our average revenue per tonne estimate remains unchanged at $115 to $120.

The acquisition of INR Energy's coal operations combined with the expansion efforts at the legacy mines are expected to increase Cliffs' North American coal production to more than 6.5 million tonnes in 2011, with a product mix of approximately 85% met and 15% thermal.

In our Asia-Pacific Iron Ore business, our full-year 2010 sales volume outlook, including contributions from the Cockatoo Island joint venture, has increased to 9 million tonnes. Average revenue per tonne is now expected to be between $115 and $120, up from our previous estimate of $110 to $115. And our cost per tonne estimate remains unchanged at $55 to $60.

Our 2011 sales volume expectation is also 9 million tonnes.

Turning to Sonoma Coal and Amapa, our average revenue per tonne guidance at Sonoma has increased to between $120 and $125 as a result of a more favorable met-thermal mix. However, Cliffs' estimated share production volume has decreased slightly to 1.5 million tonnes from the 1.6 million tonnes we had previously projected.

Our estimate for average per-tonne cost at Sonoma remains unchanged at $80 to $85. At Amapa, we expect the project to be profitable for the full year.

2010 SG&A expenses are now expected to be approximately $200 million, $20 million higher than our prior estimate. This increase is primarily driven by employment-related expenses, along with the acquisition of INR Energy's coal operations, foreign currency exchange rates, as well as additional expenses related to other growth initiatives.

Our full-year tax rate is still anticipated to be approximately 30%, and DD&A is now expected to be $325 million, up from our previous expectation of approximately $300 million. The increase is primarily due to additional DD&A from our recent acquisitions.

Year-to-date, we have generated approximately $630 million in cash from operations, with very strong cash flow expected to occur in the year's final quarter. We have revised our 2010 cash from operations expectation to more than $1.3 billion. Capital expenditures for 2010 are now expected to be $275 million, up from the previous expectation of $250 million.

The increase is related to additional capital for expansion at our acquired INR coal mines, extending the life of the Empire Mine through 2014 and infrastructure upgrades that will support the expanded capacity in Australia.

It continues to be an exciting year for Cliffs and we are looking forward to a very strong year-end performance. With that, Steve, let's open the call for questions.

Thanks, Laurie. Jovi, at this time, if we can go ahead and open up the call queue, that would be great.

(Operator Instructions) Jorge Beristain, Deutsche Bank.

Good morning, everybody. And Laurie, congratulations on your recent award there.

Thank you.

Question is just twofold. One on guidance on the iron ore. Clearly now revenue deferral is hitting you guys, and could you give exactly sort of what dollar amount is being accumulated as deferred revenue at this point, and what that works out to be on a per-tonne basis for the tonnes involved? Because I think it gets diluted when you kind of talk about it over your overall tonnage guidance. But in a nutshell, are we talking about that there is 4 million tonnes, on which every quarter $15 or $20 million -- sorry -- $20 per tonne are being deferred?

Yes. Well, the total is probably around $300 million. And that is primarily -- it is really a back half of the year issue. And it is -- you've got about the right amount of tonnage there in your calculations.

Okay. And for each quarter that goes by, would this be something that we should also expect to start hitting 1Q '11? At what point do you think you are going to get a resolution from the arbiters on this?

Normally, in the first quarter, as you know, we don't ship very much. And quite frankly, a lot of the tonnes that we do ship are stockpile or carryover, if you will. They are still priced at the prior year.

So it would probably affect Q1 a little bit if it hasn't settled, but not materially, because the volumes are lower. In terms of timing, I don't think we have a date yet for the arbitration.

No, we don't, Jorge, yet. The arbitration panel has yet to set a date for this. And as you know, once we get these matters in their hands, that is where it sits. But that is our best estimate, is getting this thing into Q1.

Okay. And then, maybe Joe, you want to field this question. But on the coal business, I did some backward working on the updated guidance. It would appear that you are still looking for about a $150 cash cost at your legacy coal mines in the fourth quarter as well, which would be very similar to what you did in the third quarter. And the reason I am concerned about this is that the third quarter did carry a lot of discontinuity in the costs, and I would've expected the new longwall machine at Pinnacle to start to lower the cost.

So is that what is going on quarter-on-quarter, or am I misreading the guidance?

Well, you are pretty much spot on on quarter-on-quarter. As always, these new systems -- this is a $90 million to $100 million system; it is a pretty sophisticated piece of equipment, as you know. And the startup of this will take some time as the ramp-up.

It is in place. It is cutting coal. They are working through some normal startup issues around some bumps and computer programming, which is, again, nothing that we are concerned about; it's just the normal startup. And I think we did discuss in the last quarter as well that we had several longwall moves to make. And it's more about the moves in the longwall in the quarter, and particularly in December, into the big panel, than it is the startup of the longwall.

So no, it is more of the same. And while I would like to push these big projects forward quicker, we are going to take it slow and steady on the ramp-up and get it right.

Great. And sorry, I don't want to monopolize the Q&A, but just last question. Do you have any sense of any kind of annualized guidance for cash costs for the coal business in 2011?

Not at this time.

We're not really ready to go there yet.

Okay, thank you.

Michael Gambardella, JPMorgan Chase.

A question about your comment about iron ore exports out of the Great Lakes. Can you give us any idea what kind of volumes those were?

You know, today, Mike, this is a business we are really starting to look at and get pretty interested in. When you look at the demand and the price of pellets and the shipping rates going across -- particularly into Asia 00 this is starting to look like a pretty nice business.

We are in the 100,000 to 200,000 tonnes at this point in time, going up out of the seaway. And we think we can ramp up into the 1 million to 2 million tonnes. Again, not a game changer as a company, but certainly a nice outlet for pellets, that once you turn people loose and they start thinking about this and see the outlet, it is -- good management teams find different ways to do innovative things. So we are pretty excited about that change.

So the fines price, the spot price for fines over in China is $150. What do you have for pellets? What is the seaborne price?

The seaborne price today would probably be about $150 a tonne, but that would be at the port. So you would have to do a freight normalization between a fines price -- you know, that spot price you see for fines is delivered in China.

Right, right, but what is the pellet price?

A pellet price delivered into China?

Yes.

(multiple speakers) have to tack on the freight to get it from Eastern Canada to China.

We don't have (technical difficulty) hand, Mike, with that.

I'm just trying to understand. Because I always thought that the transportation costs -- maybe I'm wrong -- but I thought the transportation costs from like -- to move it from the Great Lakes just to the Atlantic Ocean, to basically go through the seaways, about $50 a tonne. Is that too high?

I think you are getting in the realm. By the time you do your transfers in and out of the port and all that, it is about $50. And then if you look at the margin differentials, still even with that versus some of our lower-priced -- lower-margin, I should say, contracts, you know, the business starts looking attractive.

So I think you have to look at it -- we look at it on a customer-by-customer basis, a contract-by-contract basis. And we do have some leverage on some of these lower contracts.

And then one last question, just on the arbitration issue. Could you explain why the arbitration is taking so long, given all the public announcements of the seaborne pellet price in Eastern Canada?

One is if go through a normal arbitration, the deposition time that it takes, the preparation of the attorneys, the agreement and setting of the arbitration panel, all these take time to put in place, Mike, and do that.

And I think in all of these, where one side of the arbitration might like to move quicker, there are certainly advantages for the other side of the arbitration to move slower.

Right. But this is something you feel very confident at the end of the day should definitely go your way, in terms of the final conclusion on price.

If we had any other feelings, we wouldn't be going to arbitration. It is never good to go to arbitration with a customer. And obviously, if we felt there was a settlement that was appropriate, that is the direction we would be heading in. No, we feel that the contract -- we have the rights under the contract that is being arbitrated and we are pushing forward.

Okay. Thanks a lot, Joe.

David MacGregor, Longbow Research.

Just a few questions with respect to the 2011 outlook. First of all, the INR acquisition was going to contribute how much in terms of total tonnage again? Was that about 3 million tonnes?

David, we weren't going to break out going forward the -- we are going to give the mix between met and thermal, but we are not going to break out by mine. I mean, we did talk about in 2010 2.6 million from the legacy mines, but going forward, we are going to give guidance for the entire segment.

I guess where my concern is, you are talking about 6.5 million tonnes for next year. About 1 million of that would be thermal, which would put you at about 5.5 of met. And if we assume that maybe 2 of that met would be INR, it would suggest that the legacy coal operations in the United States are going to produce about 3.5 million tonnes of met, which is pretty much where we are now. And I think the expectation was that 2011, with the capital programs in place, you would get up closer to maybe 4.5 to 5.

So is my math correct here? Are we falling a little behind where we originally thought we might be next year in legacy North American coal production?

David, I think your math is pretty much hitting in there where it should be. I think, again, what we talked about was a run rate of 5 million tonnes in 2011. As we just discussed, the prep plant does not come online until the first quarter of 2011. So that won't be a full year run, but we will get most of it.

But I think more importantly, down at Oak Grove, that shaft doesn't come in until about midsummer, midyear. So we are only going to get four or five months, maybe six months of full utilization out of that shaft in that. So I think that is probably the gap that you are missing.

Okay. Is the coal shaft at Oak Grove, is that coming along maybe a little more slowly than originally thought?

No, actually, it is going very well. It is an 800-foot shaft. We are at 400 feet right now and right on schedule. The guys, they pour the collar -- they stay about within 100 foot of the digging and the excavating from there. And, knock on wood, we haven't hit any water yet all the way through this thing, so it is progressing quite well.

Okay. Also, 2011, I guess the original plan had been to get your cash costs in North America below $80. Is that still a good expectation for us?

You know, I am not going to comment on the cash cost today. As we continue, we are just refining budgets and all that, but we are still very bullish on our business and where we are heading with it. We still feel very confident with the plans that we have in place to move this business forward. And as we've discussed with many of you online and off-line about the advantages of the three projects that we've outlined to you, they are pretty easy projects that you can see where cash costs should go in the right direction for us.

At Portman, we talked about getting it to 11 million tonnes with the benefit of the capital program; you're guiding to about 9 million tonnes for next year. What is the timing on the ramp of this incremental 2 million tonnes?

It will take most of 2010 just to do the basic work to get --

2011.

To get it in, and 2011 is when you will see the results.

You'll -- probably '12 or '13 when we get the production happening.

2012 or 2013?

Yes.

Right.

Okay. And then just closer to where we are today, the INR, what is the impact on fourth-quarter profitability?

In terms of -- David, are you talking about the --

Just wondering if INR is accretive in 4Q.

I don't know what it is off the top of my head, but we can talk about it off-line.

Okay. And then finally, Joe, if you could just talk about the balance sheet and your willingness to make large-scale acquisitions at this point. How far are you prepared to go in terms of taking financial leverage? And just talk about the thoughts of -- there was a rumor moving through the market, I guess a week or two ago, about you maybe having an interest in Massey. Can you just talk about large-scale acquisitions and your willingness to progress in that direction?

Sure. Let me start with I don't comment on rumors that are in the market, number one.

But David, again, as we've said in the script, as we continue to talk about, and I think as you see in the results today, with all the records we announced, going forward this year and as we continue to separate ourselves as a diversified mining company from the steel industry in the US, and our profitability and our growth plans, we still continue down the growth path. We are very excited and pleased with our organic growth that we've discussed today, with the Empire pushback, to move that to 2014, and also with Australia moving up by 2 million tonnes in the coal business.

So those are all strictly execution type of items that are well within our domain. And if we execute appropriately on these three projects alone, you are going to see some significant growth out of Cliffs just within our own domain.

On the M&A side, you know, that is a tricky side of the business, as it is right now. You see there is certainly a push forward in acquisitions, as they continue on in all sectors, from the gold and potash and copper sector that goes in with it. We would continue to do appropriate acquisitions, as I think we have in the past, in the areas that we've talked about with expansion properties.

But again, I think we've held our nerve very well through these and we've been opportunistic with where we've gone. From a size standpoint, certainly, we would like to scale up in size from what we've done previously, in the $500 million to $1 billion range, and we would certainly like to move that up. But at the same time, not damage the conservative balance sheet approach that we've used and continue to use, and it has been very successful for us for many years. So a big deal is as hard to do as several small deals. So -- but they are also very rare.

Okay. I appreciate that color. Could you just talk about the extent to which you would be prepared to go on financial leverage?

No, I don't have that.

I mean, we are very happy that we have our investment grade rating, and that is very important to us. And I don't think that you would see us put ourselves in a position to jeopardize that investment grade rating.

It would have to be extraordinary, David, to move past that.

Okay. Thanks for addressing all those points. Thank you very much.

Brian Yu, Citigroup.

Thanks, good morning, and congrats on some of the progress you've made in those contracts. First off, Joe, as you ramp up on your coal operations and experience some of these operational issues that are being felt industrywide, does this alter your view on how much you are willing to pay for assets going forward?

I think you certainly have to put the risk factors in, Brian, going forward with the regulatory concerns and constraints that we have at this point in time within the US. And also I think you have to keep a pretty close eye on the slowness of the domestic market for these end products as they come through.

On the other hand, as these resources dry up, the prices on the supply side can only go one way. And if that is a year or three years or five years, that is always the crystal ball analysis that needs to come. But I can assure you at this point in time, I think like everybody in the industry we are building in a little more risk profile and being a little more conservative on volumes as we go forward.

And it is just a fact of life that it is going to get a little more expensive in the coal industry and volumes aren't going to come out the way they used to, given the pressures of the industry.

And is there like a limit of like how -- if you were to buy a certain set of assets, how much thermal coal exposure you are willing to take on for the met assets that you actually want?

I don't know that we've got a prescribed limit. Each deal would be a different deal. As you know, we are still focused on met coal primarily. But I would think if you did a big acquisition, you are going to take on a healthy dose of thermal as well. There aren't many assets that stand alone with that.

So I don't know that there is a prescribed number, but we are certainly not pushing to be in the thermal business, Bryan. But it can certainly be as a fact behind the met coal purchases.

Then if I could have just one last one. We've seen a lot of North American steel producers guide to lower shipments for 4Q. Have you had any kind of discussions with your customers about curtailing your operating rates?

We have set contracts with floors and limits in them, and we continue to use those contracts to our advantage in these slower points and times. And we don't see, while the steel industry in the US certainly you can read the numbers it is slowing, we are very confident about our volumes going through for the end of the year.

Thank you.

Tony Robson, BMO Capital Markets.

Good morning. Thank you to taking my question. Two questions, if I may, one on the arbitration and one on coal.

Firstly with the arbitration, how sort of compulsory or final is that arbitration process should you win and Arcelor lose? Can they resort -- go back to the courts and keep this thing tied up for potentially years to come, or is that a compulsory outcome on both parties?

It is a binding arbitration, and to date, we've had disputes and arbitrations with different customers and with the same customers, and both sides have always honored the binding arbitration so far, Tony.

Okay, great. Do I understand still that you are in a price dispute also with Essar that is still ongoing?

We are.

Yes, we are.

Yes.

It has not been finalized yet.

Okay, so that will also get settled likely in 2011?

That one, we think there is a good chance we will settle before 2010 is out.

Okay, great. Secondly on the coal, and a follow-up, Joe, to your comments about issues the industry is facing and so on. But I was a little surprised by expecting the 2011 figures and so I was expecting higher.

If you look beyond 2011, say, 2012 to '15 or '16 or something, what do you -- and take into account potential fault impacts or longwall moves, et cetera -- what do you think you can produce in your North American coal operations? (multiple speakers) year in, year out?

I couldn't give you a number, Tony, to go out that far at this point in time. I think a lot of it -- and I think one of the reasons -- while we could do the engineering and the mining calculations and give you a number, I think the biggest hesitation we would have at this point in time is future regulatory pressures that seem to continue to come on.

So whatever engineering number or mining number I may give you, I don't know how to put a dampening factor on the regulatory pressures of this. So I would be very reluctant to do that, until this environment settles down.

Okay. Let's rephrase my question, if I may. You talked about that the 6.5 million tonnes for next year takes an impact of basically an increase throughout the year, hitting a higher run rate. Would, on that basis, 2012 be higher than 2011 (multiple speakers)?

Yes.

Yes, it will.

Absolutely.

Absolutely.

And could I squeeze out a number from you?

(Laughter)

Probably not, but I thought I would try.

Yes. No, I don't think you can, Tony.

Not today, Tony. We would -- just not prepared to do it, both as our projects are progressing and we move that forward; and also, as you know, on our INR assets, we are extremely pleased with getting off the runway with those and a new set of assets.

As you know, we are commissioning a brand-new mine down there as well. So we would like to give that a little more time before we come out with a more complete report.

Okay. And very finally, CapEx for chrome for next year, I assumed that will be fairly minimal?

Fairly minimal, yes. $15 million to $25 million, maybe $30 million. Again, I hope it is more rather than less, because that means progress is starting to take place. But we will be getting into -- we hope to get out of prefeasibility by year-end or first quarter and move into the feasibility stage of the studies that go on. And we hope to start defining the process, as we talked about, so that we can submit the first stages of the environmental permitting.

We have done all of the baseline -- we are doing all the baseline work and will have 12 months' of baseline work required, along with a definition of the process. Hopefully we can get into the formal application of the environmental permitting.

Great. Thank you. No further questions.

Mitesh Thakkar, FBR Capital Markets.

Let me focus on 2011 for a while. What kind of domestic steel capacity utilization are you assuming for your 2011 27 million tonnes guidance in North America?

Probably in the 70% range, that we've seen for a significant portion of this year, somewhere in that range.

We are in line with the steel industry and with the customers. We think it is more of the same, as Laurie said, in the high 60s, low 70s.

Good. So I know you guys are (inaudible) kind of interest from the steelmakers at the end of the year. Has that process started, though, as yet? How much (multiple speakers)?

Our nominations and so forth?

Yes, nominations. I'm sorry -- I didn't remember that word. Sorry.

The discussion has started, but I don't think that there is anything that has definitively been settled at all.

In all of our contracts, they are all scheduled within - per the contract. So they are not really discussions. I mean, we get formal nominations at certain parts of the year. I think that first one is around the first of November. And there are several other points in the contract that things get finalized. But it isn't a negotiation or discussion; it is a formal declaration of nominated tonnes.

So would it be fair to assume that after the first round, which happens in November, for nominations [and stuff], is there any sort of negotiation that takes place after that, or is it just whatever they say, they say?

They can adjust -- as Joe said, there are different points throughout the year where they can adjust their nomination. But the range of adjustment narrows as the year goes on.

Right. And again, these aren't negotiations. These are boundaries set and guidelines by the contract as to where the adjustments can fall in or out of. It is a very proscribed process.

Exactly. And of this 27 million tonnes, how much do you think is -- you have like a minimum take-or-pay kind of arrangement which you think should happen?

I don't have that number at the tip of my tongue.

I can follow up with you.

We are not really looking at that as being a significant issue in 2011.

One of the other points I think is important to keep in mind is that there will be additional seaborne tonnage (multiple speakers).

Yes, Wabush, yes.

As opposed to this year.

Yes, definitely. And my second question is, you mentioned to a gentleman before me that, you know, you still think of hitting 5 million tonne run rate at the end of 2011 for your North American coal business. Is that what I heard correctly, or --? So basically, your expectations for the coal business, where you want to see it in 2011, hasn't really changed, right?

No, that's right. Yes. The ramp-up of the two mines with the project in them, excluding INR, we're still looking at a run rate of 5 million tonnes by the end of 2011.

All right. And my last question is on Freewest Resources. Can you talk a little bit about the alternate logistical routes you mentioned? I mean, it is almost like -- I would say almost a year since you acquired Freewest Resources. How are you feeling about this acquisition right now than what you were feeling when you made that acquisition? Is it getting better, or is it getting okay?

I think it is -- I think we are very bullish. The ore reserve that we continue to drill out and continue to drill towards a measured reserve, if you will, continues to perform very well. We've had no surprises in the ore body or the drilling as we bring the spacing in.

The metallurgical testing that is being done by outside laboratories continues to confirm the ratios of iron to chrome and the lump define, if you will, which is very defining in this business as you go from there.

The transportation work, where initially we had started with the only option was a railroad, a very expensive rail going down, it looks like there could be some options around potentially even trucking to some different areas and some different roads.

So the study teams are starting to do their trade-off analysis of the different options. And as always, several options at the early stages are starting to come on. We continue to get high support from the government for this project, for the jobs that come in.

And again, I think with the gentleman that we've hired that is well-skilled in that area of working with First Nations, we continue to progress those projects, those talks as well.

So no, we are comfortable. We feel like we are getting the lay of the land. We are getting the team in place, which, given the environment for people right now in the mining business, which is a pretty hot area to be in, we think we are getting a good, solid team in place in Canada than know Canada, and we've taken our time with that and we are really starting to fill that team out.

All right. And any progress on like a JV or that is still a long way to go before you make that call?

We haven't started any work with JVs, and that would be a long way off, if there was one at all.

All right. Sounds good. Thank you very much. That's all my questions.

Mark Parr, Keybanc.

I had a couple questions, if I could. Do you have a sense of the magnitude of expected longwall moves in '11 versus what you have experienced in 2010? Or could you talk about scheduled longwall moves in the first half of next year?

Yes, we have a schedule, and it's laid out obviously in mine plan, Mark, for several years again. Sorry I don't have the detail around the mine plants. Again, in December, we have the big longwall move for the new machine. It is just finishing a panel up right now in the development, so we should be very good going into the first of the year.

And I believe the Oak Grove group is also going to finish up this year. So we should be good going into the first half of the year and get past our major longwall moves in both mines.

Okay, that's helpful. Second, this is just kind of a curious -- and I would be interested in your thoughts here. You know, we've seen Chinese steel production come in as the August and September -- actually really, even going back to July, things have started to tail off a bit. And the iron ore price that has been unfolding here, the spot price from India into China has actually been increasing as Chinese production has been coming down.

And you indicated in your comments about Australian pricing moving higher than your previous update. I'm just curious, you think the Chinese are actually just building inventory here from a seasonal perspective, or is there really something good going on with demand in China or the Chinese supply -- Chinese internal supply weakening, or are they shutting down mines in China? What is your take on this apparent divergence between steel production and iron ore pricing?

I think we always get asked that question around Chinese inventory builds and the seasonality of it. We don't see that at all. Who in their right mind, to start with, would build inventory at $148 a tonne of delivered iron ore into China right now? It is not like they are catching a low point.

And the way these contracts will now roll over, it is not like you would be anticipating a price increase in 2011, like through the old standard benchmark negotiations. So you would stockpile. So that is just a rollover.

We also have -- our office in Beijing weekly looks at inventories and stocks and supplies. And again, we don't see anything significant in that area at all.

As we said, we look to be sold out again for the fifth straight year since owning Portman, the assets of Asia-Pacific Iron Ore. The businesses we are in, while the steel industry in China, as I think all steel industries are struggling with raw material costs, they do seem to be staying above water. And they are able to put their products out into the marketplace to continue with the expansion of China.

So we don't see it in inventories. Yes, the Chinese steel producers, at least our customers, are being squeezed with raw materials pricing. But they also -- we think in our value and use models, they are still making a modest profit as well. So we are quite comfortable with the pricing and with where the steel industry is, and we don't see inventory builds going on.

Okay. Would you buy into the thought process that as China shifts their production from older, inefficient mills to the more efficient newer mills on the coast, that the need for higher-quality iron ore inputs is actually increasing?

I would. I think that goes with anything, any emerging country and any quality that comes out of an emerging market. We are seeing -- again, I think that is -- when you see some of the -- I'll say pretty crazy things that you see now of shipping products around the world like this, the degradation of the quality aspects in the Pilbara continue to bother the steel industry in Asia with that. And with that, they continue to look for higher-quality iron ore reserves and suppliers to help offset some of this degradation.

In a big, sophisticated mill, where they want to get into higher-quality products and not import those products, they are certainly going to need higher quality standards in their raw material inputs.

Okay, just one last question. Again, on this your discussion about looking into export material out of the Great Lakes, arguably into the Asian market, I know there were some -- there was a little discussion. Do you have any sense -- can you give us any quantification on what the logistics costs are to move material from Marquette to Shanghai?

You know what? We'll give you a better look at that. We did want to highlight this as an emerging portion of our business, not a total shift of our business. As we get into this and get these nailed down, it is a little premature until we get contracts in place and get a couple of quarters under our belt.

But as you can imagine, they are significant as they go in. But again, when you back that freight up to FOB Duluth or Marquette or wherever, and you look at margins against some of our contracts and the performance of them, there is still a higher margin to be made there, believe it or not. And as we pursue this business, we will give more clarity around it.

Okay. All right. Well, look, thanks very much, and good luck on the progress going forward.

Wes Sconce, Morgan Stanley.

I was wondering if you could discuss your longer-term outlook for North American Iron Ore volumes as your legacy contracts with Algoma and ArcelorMittal roll off.

I think the contracts, if you will, are one thing to deal with as far as demand goes. If this is the bottom, if you will, in the steel industry right now that we are seeing, any uplift in the economy at all -- and again, we are not talking about a spike here -- is certainly going to bode well for the future volumes of iron ore that goes with it. And I think those are kind of irrelevant around the contracts. They are kind of two separate issues.

We really, as we've grown the company and diversified, we aren't as -- we don't need to be as tied to the contracts in those types of commitments. We can afford to move with the marketplace.

Thanks. And as a follow-up, you mentioned your expectations to ramp up pellet exports from the Great Lakes to about 1 million to 2 million tonnes. Is there a potential upside to this over time, and what would be required to get there in terms of infrastructure, boats, rail capacity, et cetera?

Too early of days. I mean, this is -- the capacities that I kind of quoted are very aspirational at this point in time. The sales teams have been given some goals. That is about where they think things are right now with what they could do, given the limitations of current transportation systems within the Lakes and the ports that sit in Northern Canada or in Eastern Canada with that.

Where you can build on this business, really, Wes, will depend on how successful we are. If we can get some longer-term contracts coming out of Asia for these products, that would allow us to put some capital into the transportation system. So early days with it, but we think pretty exciting, at least to have some outlets and some different options out of the Great Lakes with these prices. And we will continue to refine that.

Thanks for taking my questions.

Paul Massoud, Stifel Nicolaus.

I guess just thinking about coal M&A, possibly bolt-on transactions, when you look at properties, assuming you are out there looking at properties, is there a region that you prefer? Are you thinking about mainly domestic properties? Are you looking at possibly another, say, Sonoma type transaction? Where would your preference be?

Australia.

Do you have any for sale?

Maybe I should rephrase that, then. Where are opportunities showing themselves to be the most apparent?

Hardly anywhere.

It is a lot of work to find the opportunities where the value matches our expectations. And as we've talked frequently, there really are limited met coal basins. And our first screen is to say we want it to be primarily met. We're not going to end up with 100% met, but we do want to look for the met coal. So there are absolutely limited basins. And we explore all of those basins to see what we can find.

And we have our exploration team looking in areas like near Sonoma, because that may be an easier entree than to find an operating coal mine in Australia, because as we were alluding to, it is just -- it is very difficult to get your hands on something in Australia, although we would love to.

And I think, Paul, as some of the reports I've read, that valuations are done on the prices paid for these assets over gross tonnes, I think the analysis really has to be prices paid over permitted tonnes, particularly in the United States. And I think that calculation has to be taken into a factor at this point in time. I don't think one can assume buying tonnes in the ground in the US that are unpermitted will ever be mined at this point in time.

Does whether or not certain assets -- assuming they are operating in the States, does the issue of whether or not they are unionized play into the properties that you look at or (multiple speakers)?

Not at all. We are primarily unionized and have been in the United States, and our iron ore works, our two legacy minds are unionized. And we work well with the unions. And we've worked within union bounds for -- well, almost for the history of this company. So no, that is not a concern for us.

It is more of logistics, where can that product go? Can you export some of it? And it always goes back to rocks in the ground, if you will, but reserves, and now, particularly in the US, go back to permitted reserves.

And then maybe switching gears a little bit, just thinking about your Australian iron ore production, can you talk a little bit about the quality that you are producing out of Koolyanobbing and Cockatoo Island? And then possibly a little bit -- possibly putting a number around the premium that you are seeing, if any, for your higher-quality production?

Sure. In our Windarling assets and the assets that we have primarily out of the southeast, if you will, those are pretty much in line with what you are seeing out of Pilbara. It is still a 62% product. As the Aussies would say, it is pretty average when it comes to false aluminum and silica. So we are pretty much in line with the Pilbara when it comes to quality.

The Cockatoo material is some of the highest quality material in the world. That is the good news. The bad news is there is just very little of it.

And we are in line with pricing right now, getting the premium that you see quoted of $6.00 a tonne per point over -- everything over 62% at this point in time. And we have many, many eager customers for that type of product to help offset the declining grades in the Pilbara.

Thanks a lot.

Jovi, we are currently at the top of the hour, so we are going to go ahead and end today's call in respect of everyone's time.

Both Jessica Moran and I will be around all day to help field additional questions. So if you have some follow-ups, please don't hesitate to contact us. Thanks, everyone, for joining us on today's call, and we look forward to continuing to update you on our progress.

Thank you.

Thanks.

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