Cleveland-Cliffs Inc (CLF) 2011 Q1 法說會逐字稿

Good morning, my name is Kevin and I am your conference facilitator today. I would like to welcome everyone to the Cliffs Natural Resources 2011 first-quarter conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. At this time I will introduce Steve Baisden, Vice President, Investor Relations and Communications. Mr. Baisden?

Thank you, Kevin. 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.

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'll turn the call over to Joe for his initial remarks.

Thanks Steve. And thanks to everyone for joining us this morning.

The strong demand we experienced for our products throughout 2010 has continued into 2011. Global steel production increased approximately 9% from the comparable period in 2010 with Asia experiencing even greater production increases.

Assuming this pace continues, it appears 2011's full year global steel production will match or exceed 2010's record-breaking 1.4 billion tons. In addition, China's GDP grew 9.7% during the first quarter of 2011 from the prior year's period.

While most observers would not expect that these high growth rates would be maintained indefinitely, China's targeted urbanization rate suggests moderate growth can be expected. These data points further support our belief that strong demand for steelmaking raw materials will continue.

Here at Cliffs, we believe continuing to increase our exposure to Asia is crucial for capturing increased prices for the commodities we sell. We have executed a major step in increasing this exposure with our announced intention to acquire Consolidated Thompson Iron Mines Limited.

As previously discussed, Consolidated Thompson is a world-class iron ore producer located in Eastern Canada. As I have said before, this acquisition is a low-risk opportunity to accomplish a number of strategic objectives including building scale by enhancing our global portfolio of assets, diversifying our customer base with increasing exposure to seaborne markets, establishing relationships with new customers in Asia and expanding our global presence.

Upon close, not only would Consolidated Thompson's Bloom Lake operations enhance Cliffs production profile, but Consolidated Thompson's two developmental properties, Lamelee and Pepper Lake, also add to Cliffs potential longer-term growth project pipeline. Turning to our large greenfield chromite project, at this time we are proceeding with our pre-feasibility study which we will plan to finalize later this year. We continue to work with First Nations communities and government officials on key decisions that will make this exciting project a reality.

Now turning to the performance of our core businesses during the quarter. Sales volume in North American Iron Ore decreased 19% to 3.5 million tons from 4.4 million tons in a year ago quarter. As most of you know, our first-quarter sales volumes are typically the lightest when compared to other quarters due to the winter weather and lock maintenance that occurs on the Great Lakes.

In contrast, Cliffs share of production volume increased over 30% from the prior year's comparable quarter. To meet this year's increased demand for iron ore, our North American Iron Ore mines are running at or near capacity.

We've increased our full-year sales volume expectation to 29 million tons from 28 million tons and we anticipate placing approximately 1 million to 2 million tons of pellets from our US operations into the seaborne market in 2011.

I'm pleased to say since we last reported, we resolved all pending arbitrations and litigations with our North American Iron Ore customers. Due to last year's industry shift from historical annual price settlements for seaborne iron ore to shorter-term pricing mechanisms, we adjusted and in some cases renegotiated a portion of our long-term customer supply agreements.

Although this negotiating took time and resulted in delayed 2010 revenue recognition and cash collection, ultimately this change is good for the Company. We have established new commercial terms with our existing customers and we look forward to working with them in supplying quality steelmaking raw materials. With the negotiated settlements complete, we are optimistic our newly established methods for determining price will bring greater clarity to our pricing assumptions going forward.

Now turning to our North American Coal segment. Yesterday we reported that during the evening of April 27, our above-ground operations at Oak Grove Mine were struck by severe weather including a tornado.

We are extremely pleased that all of our employees are accounted for and safe with no known injuries. The severe weather did cause a significant amount damage to the mine's preparation plant and overland conveyor system and this along with overall infrastructure damage in Alabama will impact customer deliveries to the extent to which we are still assessing.

We are in the early stages of this process and will communicate more when we have better visibility, but our first focus is of course safety. For the first quarter's performance, primarily as a result of incremental tonnage acquired in the INR Energy transaction, we reported a sales volume increase of nearly double 2010's first quarter.

Since the mid-2010 acquisition, these assets have operated seamlessly and have exceeded our initial expectations based on year-to-date profitability. Currently we are increasing our headcount in anticipation of the Lower War Eagle startup which is scheduled for the second half of 2011. The Lower War Eagle Mine was a growth project Cliffs acquired with INR's coal operations. The mine is located in West Virginia and produces a high vol met coal.

During the quarter, we moved our new long-wall machine at Pinnacle Mine into a new coal panel. As a result, production was down for six weeks during the quarter which resulted in lower sales volume and increased cost.

We believe we are now in a high-quality panel of coal and the longwall plow is running smoothly. We also don't anticipate any additional longwall moves in either legacy mine for the remainder of 2011.

During the quarter, we along with other producers experienced shipping congestion at port facilities in Virginia along with railcar shortages. These constraints are due to the increased international demand for Central Appalachian met coal. As many of you know, the severe flooding in Queensland, Australia has taken significant volumes of supply out of the seaborne market.

In terms of our large capital projects in North American Coal, we are now complete with both projects at Pinnacle Mine and we have excavated all 800 feet of Oak Grove Mine's new portal. It remains to be seen if the severe weather will impact our planned completion of this project in late summer of this year.

With the adverse geology behind us, the significantly higher coal pricing and completion of a majority of our capital projects, we do however anticipate significant improvements in our coal operations not impacted by the severe weather. Turning to Asia Pacific Iron Ore, first-quarter sales volume was nearly flat at 2.2 million tons when compared to 2.1 million tons in 2010's first quarter.

Although quarter-over-quarter sales volume was slightly higher, several significant rainstorms hindered production at Cockatoo Island and to much lesser extent at Koolyanobbing. Despite the rain, Cliffs is maintaining its 2011 expected sales and production volumes of 9 million tons.

Outside of the weather, another emerging challenge we are monitoring is the shortage of skilled labor in Australia. Although our operations are significantly south of the Pilbara where most major mining Australian producers are located, we are competing with many mining companies for skilled labor.

We believe Cliffs has competitive employment incentives in place and a safety track record that makes the Company a safe and great place to work. That said, at this point in time, the shortage of skilled labor will be a major challenge for the industry for the foreseeable future.

Construction has commenced on our infrastructure upgrades at Asia Pacific Iron Ore and we are currently finished with approximately one-third of the project to expand production to 11 million tons annually. In the quarter we performed a fair amount of pre-stripping in advance in preparation for the expansion and we continue to be on schedule for a 2012 completion.

As I mentioned earlier, severe flooding from the destructive tropical cyclones have impacted coal production in Queensland, Australia. While we did not see the disruption that many others in Queensland experienced, our first-quarter sales volume at Sonoma Coal was negatively impacted.

As a result, we've lowered Sonoma Coal's full-year sales volume expectation to 1.2 million tons from 1.6 million tons. Although it does appear some efforts to restore Queensland's infrastructure are progressing, the full extent and timing required to restore production to pre-cyclone levels is unknown.

In summary, the first quarter was exceptionally busy for Cliffs. Looking ahead, our primary focus in 2011 is executing the number of expansion projects we have underway and integrating Consolidated Thompson's operations upon closure of the acquisition. We look forward to keeping you updated on our progress as we continue to execute our long-standing strategy of growing the Company.

At this time, I'd like to turn the call over to Laurie for a review of the financial highlights and our outlook for the coming year. Laurie?

Thank you, Joe. Good morning everyone.

Once again Cliffs achieved another record-breaking financial performance which marks our fourth consecutive record-breaking quarter. Contributing to our significantly increased revenues and operating profit was the negotiated settlement with ArcelorMittal that Joe discussed at the top of the call.

Although we resolved the arbitration subsequent to quarter-end because much of the settlement related to previously shipped volumes, we recognized portions of the settlement in the first quarter. This along with increased pricing across the board resulted in a 63% increase in first-quarter consolidated revenues to a record $1.2 billion, up from $728 million last year.

Sales margin nearly quadrupled to just under $600 million compared with $150 million in 2010's first quarter. Operating income also improved sharply for the year's first quarter increasing to $562 million from $147 million in 2010. Net income improved to $423 million or $3.11 per diluted share compared with $77 million or $0.57 per diluted share last year.

For our performance on a segment basis, in North American Iron Ore reported revenue per ton was $168, a 77% increase from last year's first-quarter results of $95 per ton. Excluding the positive revenue impact from the ArcelorMittal settlement, average revenue in North American Iron Ore rose 29% to $123 per ton driven by increased pricing.

The settlement with ArcelorMittal also had a favorable impact on cost of goods sold due to a cost-sharing reimbursement related to Cliffs Empire Mine where ArcelorMittal is a 21% minority partner. Reported cost of goods sold per ton decreased 19% to $57 from $70 in the first quarter of 2010.

Excluding the settlement, North American Iron Ore cost per ton was slightly increased over the prior year's first quarter due to increased costs related to labor, maintenance, supplies and energy particularly electricity and diesel fuel. In total, the ArcelorMittal settlement had a $194 million favorable impact to North American Iron Ore's first-quarter reported sales margin.

Although we recognized a portion of the sales margin related to this settlement during the first quarter, the $275 million cash payment was not received until this week and therefore was not reflected in our balance sheet at the end of the first quarter. The balance of the settlement will be recognized later in the year when the remaining tons are shipped.

Now turning to North American Coal, average revenue per ton increased 19% to $124 versus the prior year's revenue of $104 per ton. Our reported average selling price contains a blend of domestic contracts which reset in January and international contracts which reset reset April 1.

As a result, our first-quarter sales volume included a mix of pricing levels among customers with a portion priced at 2011 market prices and a portion primarily for international customers at 2010 pricing. In addition, the first-quarter 2011 sales volume is representative of a more diverse product mix including thermal, high-vol and low-vol metallurgical coal.

As a result of the planned longwall move that Joe discussed earlier, average cost per ton in this segment increased 5% to $126. Overall, this resulted in negative sales margin of $2 per ton, an improvement from last year's $16 per ton sales margin loss.

I would also point out that for the quarter, this business was cash flow positive and trending in the right direction. In our Asia Pacific Iron Ore operations, higher pricing for seaborne iron ore and pricing mechanisms more reflective of spot market resulted in first quarter's average revenue per ton more than doubling $156.

Cost per ton increased 22% which resulted in significantly increased sales margin per ton of $88 when compared to $21 in last year's first quarter. The increased costs were primarily driven by increased royalty expense, higher stripping costs and unfavorable exchange rates.

The increased stripping is in preparation for expansion to 11 million tons next year. Although decreased production due to weather conditions resulted in lower revenue and sales margin during 2011's first quarter, Sonoma Coal continued to post positive results, contributing $35 million to Cliffs revenue and $11 million to consolidated sales margins.

We are also encouraged by the operating improvements occurring at Amapa. Production volume for the quarter was 1.1 million tons and the operations contributed $2.6 million to first quarter's equity income. Keeping in mind that this is an after-tax number as Amapa continues to ramp up, we anticipate it to meaningfully contribute to Cliffs profitability in 2011.

Turning to capital structure and liquidity, at March 31, we held $2.3 billion in cash and equivalents. Our long-term debt stood at $2.4 billion with no borrowings on our $600 million revolver.

Both of these figures include the $700 million ten-year tranche of senior notes closed prior to quarter-end. Another $300 million thirty-year tranche of public debt was closed subsequent to quarter-end and as I already indicated, we received $275 million as a result of our settlement with ArcelorMittal, both of which increased our current cash positions.

These two items would push our cash close to $3 billion. The total amount needed to fund our pending acquisition of Consolidated Thompson is approximately $5 billion.

We would draw on our $1.25 billion term loan and we would expect to use the bridge financing for the remaining piece in the short term. In the longer term, we anticipate replacing the bridge facility by further accessing the capital markets.

Turning to our updated outlook for 2011, we remain optimistic about our prospects to further enhance value through the continued execution of our strategies. When looking at external factors like the global economic environment and the outlook for steelmaking raw materials, particularly in Asia, we are encouraged by the strong demand for our products.

In addition to the favorable supply and demand dynamics in our markets, the shift to more current pricing mechanisms also bodes well for our future performance. For our North American Iron Ore business, we are increasing our anticipated 2011 sales volume expectations to 29 million tons from our previous expectation of 28 million tons.

We are maintaining our per ton revenue outlook of $140 to $145. I'll refer you to last night's press release for a more detailed discussion of the assumptions on which the outlook is based as well as sensitivities to certain factors used in the supply agreements.

We expect production volume in North American Iron Ore to be approximately 27 million tons in 2011 with average cost of goods sold per ton between $65 and $70, $5 of which is DD&A. As Joe indicated, the recent severe weather experienced in Alabama and the extent of the damage both to Cliffs and the infrastructure we depend on makes it difficult to accurately forecast potential business impact at this time.

Prior to this event, we expected 2011 North American Coal sales and production volumes of approximately 6.5 million tons comprised of 1 million tons of thermal coal, 1.5 million tons of high-vol met coal and 4 million tons of low-vol met coal.

With the natural disaster in Alabama, we are not providing an updated sales volume, production volume, revenue per ton or cost per ton outlook at this time. Once we are complete with our assessment and have additional information, we will communicate it.

At our Asia Pacific Iron Ore operations, sales and production guidance remains unchanged at 9 million tons. As you will recall, our previous outlook in this business segment was driven by an assumption that held the Platts Index flat at $187 for 2011.

Since providing that outlook, the Platts Iron Ore Index has dipped to as low as $165 in the first quarter and recently back up to about $180 per ton. Given this dip in the first quarter and a lower current Platts spot price included within our revenue per ton assumptions, we are decreasing our revenue per ton outlook to $165 to $170.

This outlook assumes among other variables a Platts spot price at April 15, 2011 of $181 continues to hold for the remainder of the year. Cost per ton is expected to average between 70 and $75 with approximately $12 of DD&A.

Currently we are anticipating 2011 SG&A costs of approximately $200 million. In addition, we expect to spend approximately $50 million to $55 million related to our global exploration activities and approximately $40 million for our chromite project.

Based on our current outlook, we expect to generate approximately $2.6 billion in cash from operations. We anticipate 2011 capital expenditures of approximately $700 million comprised of about $300 million in sustaining capital and $400 million in growth and expansion projects.

In closing, over the years, the growth and diversity of our geographic revenue base across our business has enabled us to capture today's pricing for the commodities we sell. As we look ahead, we believe our capital projects and progress along with our pending acquisition of Consolidated Thompson will only strengthen Cliffs earnings power. To execute this, we're grateful for the hard work demonstrated by all of our employees and the continued support we receive from our shareholders.

Steve, we are ready to open the call for questions.

Kevin, could you please provide all of the listeners instructions for how to ask a question?

(Operator Instructions) Brian Yu, Citigroup.

Just what the additional million tons of guidance in North American Iron Ore, can you elaborate on if that -- you're seeing that incremental demand coming from international or domestic customers?

It's primarily coming domestically, Brian, as the blast furnace utilizations are now in the mid-70%, I think as you've heard of, most of the calls from the steel industry, they're looking at -- their outlook is pretty bright for the second quarter or brighter than it has been in the past and it's being driven domestically.

Okay, and then on the metallurgical coal side, I know you're not updating your guidance, but can you give us a sense of where your open position is these days? And of those coal yet to be priced, is it low-vol and are those associated more with Oak Grove than say Pinnacle?

Brian, a lot of things will change with the tornado and the tragedy down in Alabama at this point in time. As you know there will be workouts with customers with the force majeure in place.

So I think we're just going to have to hold on that one. I'm sorry about that and that will be the answer for all the coal questions today until we get a further assessment and as soon as as we have the information, we will be happy to provide it.

David MacGregor, Longbow Research.

The negotiated settlement, what's the impact on second-quarter revenues?

We don't -- as you know, we don't give quarter by quarter revenue. The settlement was in our full-year numbers and it was expected, so it really gets to our full-year number holding as it was.

You were saying that the balance would be amortized over the remaining shipments for the balance of the year. I presume that's somewhat uniformly distributed across the remaining three quarters?

It's based on when those tons ship and those tons will be priced at that price.

Joe, I realize there's a limit on what you can say about the coal business right now, but how big is your stockpile at Oak Grove?

I don't really know what the inventory position is right now, David. But there is no power down there right now from Alabama Power.

It's difficult to ship as well.

It's kind of inconsequential at this point in time until we get power restored from Alabama Power. We really can't electrify anything to have a look at anything. But I don't have the number in front of me of the stockpile, David.

And then just not so much with respect to the Oak Grove situation today, but just a question on the overall North American Coal business. You have completed two of the projects at Pinnacle, you've still got the shaft you're working on at Oak Grove.

Presumably at some point we start to see volume ramp in that segment. Can you give us some sense of what the incremental profit ought to be as volume shifts? I'm just trying to get a sense of what the operating leverage here is of earnings to an increase in volume?

Well I think if you look at our previous guidance and take out the first-quarter numbers, you can back into the last three quarters of the year, and that would get you what the leverage would have been. As Joe has said, we'll probably need to do some modifications but we don't know what that is at this point in time.

What do you expect in the way of an end-of-year run rate?

For the coal business?

Yes.

Again, given what happened yesterday or on the 27th on Wednesday, David, we don't have any numbers like that at all that we can give at this point in time until we get our assessment of Oak Grove done.

Okay, last question just on the Asian iron ore, your cost came in 67 and change on the quarter. Your guidance is $70, $75. The difference -- you're obviously expecting some inflation in your cost over the balance of the year, is that the labor situation you referred to or is there something else?

There is some inflation in labor. Most of it, David, is coming from the pre-stripping we're doing into 2012 and there's an FX effect as well that goes with it. The inflationary piece is just kind of starting to kick off in Australia with the labor shortages and I'm sure incentive packages will go up within the Australian labor market. The impact comes more on that at this point in time.

Okay, great, thanks a lot and good luck.

David Conney, FBR.

A lot of my questions have been asked, but where do you stand on finding a new head of North American Coal operations?

We have been using an executive search firm. We have got a number of candidates for the position that we are working through as it stands and we hope to close that out and announce something in the second quarter.

Second quarter, that's great. And I know that you are not going to talk too much about the forecast, but maybe just sort of looking out into maybe 2012, assuming that nothing flows into 2012 and production is restored well before then and you don't have any contracts that are pushed into next year, can you give us a sense of what your open position is for next year this way, stay away from sort of this year?

In 2012, there is no pricing commitments for any of the tons and there are 2 million tons of volume commitments but they are unpriced at this point in time. So we're essentially open for 2012.

That's great. Can you also give us an update on your chromite operations? What's sort of going on? It looks like you raised CapEx a little bit for it. Are you accelerating it?

I'm trying to push it is always. We're always aggressive from that initial date. I'm not ready to pull it back yet, but I've put a challenge in front of the project team to see if they can start pulling it forward a little bit.

I mean I think the other things that are important with it is we have got most of the engineering team has been built out. It's well established in Toronto working with SNC-Lavalin. The pre-feasibility work is going on very well.

They have done a lot of different optionality around a pre-feasibility. We are going to spend as much time as we need to in pre-feasibility so that when we go into the feasibility stage, it will be just that much cleaner.

Negotiations and discussions and outreaches into both the First Nations communities as well as the surrounding communities that will be affected has been ongoing. There's been numerous meetings and discussions with all of those folks. And as you know, we have been looking for different areas within Canada where we could potentially cite the furnace for the ferrochrome and that work is ongoing as well.

So all going to plan, early days. No surprises at this point in time. The chromite deposits are holding up as we drill more holes. And everything that we first thought about those deposits is coming to fruition.

Great, thank you.

Jorge Beristain, Deutsche Bank.

My question is related to the cost side. Obviously, the first quarter was impacted by that $15 credit from the Mattel settlement.

I was wondering if you could sort of address what's happening with cost pressure in the US. You're looking -- I think you did excluding the Mattel benefit $72 of cash cost for pellets.

The rest of your guidance is 67.5, so I would assume a declining cost for the rest of the year. But could you talk a little bit about how higher volumes could impact the rest of the year in terms of spreading our unit cost and as well your gas situation in the US?

Let me talk in general and then I'll turn it over to Laurie and see if she has any remarks to go with it. But in general within inflation, I mean what the impacts that we are seeing here -- we do have a labor agreement that -- with the US steel workers for most of our operations in North America.

So that is set and built into the cost. So we don't get at the inflation that you would see like in Australia on labor.

On energy, there were some rulings last year for higher energy prices that came in both in Michigan and in Minnesota. Again, those have been baked into the numbers, Jorge. None of these are surprises is what I'm giving you but that's where costs are -- why they moved but they're baked in as well.

Natural gas continues to hold as you know which is a big -- about a third of our energy pie that goes with it. And obviously diesel fuel is going up like it's affecting everybody in the marketplace.

As I've always said and many times, we are not a huge consumer of diesel fuel. A lot of our pits are electrified from the shovels and the drills.

We're about 30 million gallons I think or so in North America of diesel fuel. While there is some impact, we're getting some nice offsets from natural gas. But obviously pressure is coming on. We do expect in the latter half we're going to see more inflation around the world that goes with it.

Yes, I think you have really summed it up pretty well. In the first quarter, volumes were a little bit lower, so as you know, that does impact price or the cost a little bit. And I think that with the field pressures is what is really driving the cost.

So the volume I guess, Jorge, maybe to put it -- the little bit of volume increase, the 1 million tons that we put in, may help offset some of the inflation that comes in the latter half of the year.

Okay, and does your unit cost guidance already include -- because you talked about potentially offshoring 2 million tons of North American-based capacity through the export market this year. Is that already grossed up for the associated domestic shipping cost to get that to international markets?

It is, it was put in the plan, in our internal business plan, Jorge, and yes it is baked into the numbers.

So, given you have had recent settlements with a lot of your clients, would there be some upside to the revenue and cost numbers if instead you chose to leave those tons in the domestic US and Canadian markets?

I don't think so. Both our cost and revenue per ton numbers are really already -- they are a blend. And the profitability, the settlement doesn't necessarily change the profitability. It absolutely removes the uncertainty which is a very good thing. But I don't think that that would really change the numbers.

Garrett Nelson, BB&T Capital Markets.

Good morning everyone. First, I know what Consolidated Thompson has said about the production ramp at Bloom Lake, but can you comment on those growth plans?

I mean is a 16 million ton run rate by second half of 2013 reasonable? And what might the production ramp look like between now and then?

You know, we haven't closed a deal yet, Garrett, and I'd prefer not to comment on Consolidated Thompson at this point in time. We'll give you our view as soon as we close the deal.

But I think given the situation of not being in the close and being close to a close, I'd prefer to pass on that and we will give as much information as we can as soon as we close.

Sure, understood. And then secondly, the the Platts Index is up about $4 to $5 a ton in the last couple of days on the apparent resurgence in Chinese spot buying.

We are seeing the same pickup on the seaborne coking ciak side over the last few days. Are you seeing the same pickup in Asian demand this week? Any color on that would be great.

We really don't see it in a day to day or week to week basis if you will. There's so many factors in that Platts spot market.

When you read all of the material that's been coming in on the Indian situation and those spot producers that sit over there, I can tell you we are essentially in a sold-out position at 9 million tons with Asia Pacific Iron Ore. We are shipping as many tons as possible as we can coming out of both our domestic mines and out of Wabush out of Eastern Canada at this point in time. So we don't really experience the day-to-day fluctuations.

Okay, that's great. Thanks very much.

Paul Massoud, Stifel Nicolaus.

I apologize, I had to step away for a minute, so if you have already covered these questions, I do apologize. But real quick just more of a verification. The cost guidance -- the revenue and cost guidance out of North America, those both include the settlement impact. Is that correct?

Yes, that is correct.

And then secondly, just sort of looking over at Asia Pacific, there has been some talk of potential spot pricing on freight rates coming down this year as some of these Chinamaxes start to show up in the market. Do you anticipate seeing a decrease in transport costs as the year goes on?

Well, I read the same article you did yesterday and again, it would make sense, shipping is like everything else, it is supply and demand. So you would expect as Chinamaxes come on and displace the other vessels in the marketplace that we would see a lowering of freight.

Would you guys see the benefit of that or would it be purely on the seller side? I mean would you be able to (multiple speakers)

(multiple speakers) well it would come mainly on the seller side, but what we get is we are more competitive as the freight comes in and it's -- our material coming out of eastern side of the US and Canada just becomes more beneficial.

Tom Molnar, Sandler Capital.

Just a quick question, clarification. I think I know the answer but obviously the realization prices in North America Iron Ore you maintained but relative to last quarter sort of you ramped up the expectations you see in terms of what is built into there in terms of utilization and US steel pricing. So I'm assuming -- is the negative offset to those positive ramps that kept everything the same the sort of lower-than-expected initial payment for Mittal?

No, when you look at the mix changes from quarter to quarter as well, that has something to do with it. There's just so many different factors that go into it, I don't think we could point to any one specific factor that gets us there.

So there wasn't one big offset which we should pay attention that those other two factors on the positive side had to counteract?

No.

Okay, fair enough. Good luck steering this big ship.

Oh yeah, thanks.

Tim Hayes, Davenport & Co.

The first question, regarding the 1 million to 2 million tons of seaborne iron ore out of the Great Lakes area, what was that number last year?

It was less than 0.5 million tons, around 400,000 tons I think.

And the increase, is that coming sort of spread out over all the mines or could that be more from more swing -- higher costs mines this year?

It's a variety of materials that are coming out that we're taking advantage of the upper Great Lakes that come out of it. It's spotted all over the place where we could make the cargoes up and what the specifications for the Asian customers are. So it's kind of all of over the map.

(multiple speakers) it's not that big a ton, it's over 29 million tons. So you're only talking a few shipments at the end of the day.

And the costs in our US mines aren't materially different.

Yes.

On the settlement, kind of was curious why you weren't able to book all that -- well I should say the amount that was booked, was that mostly due to a specific arbitration case and the rest that hasn't been booked due to another arbitration case? Is that the way to think about it?

No, the way to think about it is this is actually setting the price for specific tons and the piece that we have already booked for tons that have already shipped, they happened to ship last year. The piece that we have not yet recorded is for tons that still haven't shipped.

So we can't recognize revenue because we haven't shipped the tons yet. So that factors into the price for those tons.

I guess then what was brought there would be -- at least a portion of that would be volume that was shipped in Q1 but that would be a minor part of the total?

Right it's primarily 2010 volume.

And then in terms of the shipping constraints of coal out of Virginia, does that mean you shipped less coal or exported less coal in Q1 than you did a year ago? Or is it just being restrained? And what is the outlook for some exports of coal out of Virginia?

It's actually more of the industry and where it backs up to us. We're not a large -- we export very little coal out of Virginia. Actually most of our exports come out of the Mobile area.

But what it is is more of the systemic backup across all of the rail lines and the lack of railcars to supply all of our other customers domestically. So it's not so much us on the export side going out. It's all of the coal going out and tying up all the railcars as these ports get congested.

Then last -- real quick, what is the cost of freight iron ore out of Eastern Canada to China these days?

Maybe $30, $40 a ton.

Yes, $30 to $40. We're all looking at each other. It changes pretty dramatically.

We don't spend a lot of time on it here because we sell FOB out of Wabush and the customer wants to take the freight. But I think that would be the range of the freight rates at this point in time.

Tim, I can follow up with you after the call and get you a current quote on that.

Was Sconce, Morgan Stanley.

I was wondering, could you elaborate on the final settlement with Algoma specifically with regard to 2011 pricing, how pricing will be set going forward and any change to volumes?

There is no change to volumes and it's really under the original contract that the pricing still stays. That settlement was related to 2010 as well and it was all recognized in 2010. We just collected the cash in 2011.

So a 2011 price has not been set?

For Algoma, it has been set.

Yes.

Was that an annual price or -- and fixed?

Yes, we're not going to go into the specific details of any customer contract but in the release that we issued, we did indicate that we determined pricing for 2011 with Algoma.

And does that price then effectively set a potential benchmark for the industry?

No, I've don't think so. We rely on very specific direction within all of the contracts and they're all a little bit different as to how we arrive at an annual benchmark price or an annual world price, and Algoma's price settlement would not be one of them.

And I guess asking a question a different way, was the settlement a net positive vis-a-vis your guidance for Q4 for pricing?

I would say so.

Yes, I think it was.

Sanil Daptardar, Centennial Investments.

You talked about the steel production, you expect 2011 overall steel production to be at 1.4 billion tons. Is that the right number and same as what it was in 2010?

Yes, so I think what I said was it looks like if you look at the first-quarter results of the steel numbers that we gather out of the same public sources that everybody else does that we could -- if they stay on that pace, we could exceed last year's annual rate of 1.4 billion tons.

But does it imply that going forward steel production might be decelerating from the first-quarter growth number of plus 9%?

No, I'm not implying anything nor am I making a forecast on the rest of the year on world steel at all. I think what we're doing is taking the first quarter, what we're trying to do is -- the discussion is really around it's been a very strong first quarter in the steel industry and the outlook in the second quarter looks just as strong. But for the rest of year to predict world steel production, we're not in a position to do that.

On the Australian iron ore side, you talked about 9 million tons for the entire year and you also spoke about shortage of skilled labor in Australia. Now this 9 million tons can be still produced -- mined with the labor you have?

That is the guidance we've just given, yes.

Yes, we are comfortable with that.

This is not new for Western Australia. We experienced the same thing in the periods of 06 through 08 and everybody did anticipate it coming up and we think we have put the appropriate measures in place and hiring practices and at times even overhiring to account for the attrition to come in place. So, yes, we maintain our guidance at 9 million tons.

We just actually feel that that is an important factor for everyone who follows the industry to understand that dynamic because it probably will influence the ability of others to bring their projects online.

Okay, and just a clarification on the cost of freight. (inaudible) $30 to $40 per ton from exporting from Canada to China right?

Yes, that's right.

And the same goes for iron ore too?

Freight rates are very volatile, so I would encourage you to look at the various public sources on freight rates. Typically that's where they have trended at over recent times.

Okay, just last question on the bridge financing which you intend to do in the short term. You talked about (inaudible) by accessing the capital markets. Is that the same (inaudible) $3 billion that you would be accessing? Because you still have $3 billion of cash on your books and you might be generating by $1.9 billion in free cash flow. So is there a need to access the capital markets?

The bridge will be about $1 billion roughly that we would draw on that because we have about close to $3 billion of cash right now in the term loan we draw. So we would draw roughly around $1 billion on the bridge loan.

And as you know, the bridge loan is not designed to be a long-term instrument. It's a short-term instrument, so we would need to replace that.

We would look to replace it depending on market conditions relatively soon. We don't have an exact specific time in mind yet, but it's not something that we would want to hold onto for a long time.

It would not be equity financing, it would be more kind of a loan -- term loans or converts or something?

No, I did not say that. We have said since we did the acquisition of CT that it's very likely that we will do some equity financing.

The way we manage the Company and the balance sheet is very important to us and we don't put it at risk. We have an investment grade rating and that is indicative of the way we think about our Company.

Rob Davis, PSAM.

I know you can't talk too specifically on the Consolidated Thompson acquisition but I was just curious if you could enlighten us as to I guess a last remaining approval. I believe you need -- and its status. I believe you need approval from China and I was just curious when you might might expect that and where that stands?

Rob, you're right. That is the last remaining piece of this thing. It is working its way through the bureaucracy as we are told, like in any other government with that, and we're looking for the appropriate signatures if that comes through.

Prediction of timing on working an approval like that through any government is really difficult to say. But we think everything is in place and we are monitoring it closely and we are all waiting for that day to come. But I can't give you a prediction on the timing.

It sounds like I guess from your perspective you're just waiting for signatures, there's nothing really nothing more on your side to do.

We haven't heard anything that leads us to believe there's any kind of concern or problem.

We've had no negative declarations around this approval process as it goes forward.

Brian Yu, Citigroup.

Just a follow-up. Joe, it looks like ArcelorMittal has gone to a quarterly pricing early in the week. AK Steel said they're trying to do the same thing. Can you give us a sense of what portion of your seaborne index contracts have gone to a quarterly?

Well the seaborne is again for us in Asia Pacific, that's all in -- I'm going to not use quarterly pricing because it is adjusted to the spot price off the Platts Index and we have a variety just I think like many other people do of those types of things from thirty-day, quarterly.

But it is really all trending more in Australia and in Asia to the five-day spot with the various mechanisms that go around it. Most of the Wabush production that's now coming out of there is on the same basis. Consolidated Thompson works off of those mechanisms as well.

They tend to be about a monthly pricing.

About a monthly pricing that goes as well. So there is a lot of trending towards that Platts spot price.

Our customers in Japan are quarterly generally, so we have a mix of everything that you can imagine. Within our US business, there's not much of that yet.

Yes, that's right.

But it sounded like ArcelorMittal is moving to a quarterly and they're 40% yield (multiple speakers)

For this particular contract, as you know, we have several contracts with ArcelorMittal and this particular settlement and agreement was only with one of the contracts.

Right.

Garrett Nelson, BB&T Capital Markets.

A quick follow-up. What was Q1 CapEx?

Q1 CapEx is --

Hold on one second, we'll get you the number.

$70 million is what we're coming up with.

About $70 million.

But let me caution you on that one as to I guess like every mining company but particularly ours with the weather as well, we always get off to a very slow start on CapEx. So I wouldn't use that as a projection over four quarters, I would stay with our guidance of the $700 million.

$700 million, okay. Thank you.

I'm not showing any further questions at this time.

Great, well thank you, everyone, for joining us on the call today. I'll be available for the rest the day for follow-up questions.

We look forward to continuing to report on the progress of the Company and providing further updates in the future. Thanks.

Ladies and gentlemen, that does conclude today's presentation, you may now disconnect.