Cleveland-Cliffs Inc (CLF) 2011 Q2 法說會逐字稿

My name is Latoya and I'm your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2011 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. At this time I would like to introduce Steve Baisden, Vice President, Investor Relations and Communications.

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. Joining me today are Cliffs' Chairman, President and Chief Executive Officer, Joseph Carrabba, and Executive Vice President, Global 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 this morning. Pricing for iron ore products continues to be near all-time highs, which contributed to another record breaking second quarter for Cliffs. Now that we are well into the summer months we are seeing the typical seasonality in steel pricing and production in both the US and China. However, we continue to believe North American utilization rates will remain in the mid-70s range for the remainder of the year.

Today, 31 of the 39 blast furnaces in North America are running, with additional start-ups announced and slated for the second half of 2011. In China, June steel production was at an annualized rate of approximately 700 million tons. This production increase from 2010 is supported by China's first half 2011 GDP growth of 9.6%.

I believe these data points should be considered when the industry discussions proclaim increased iron ore inventories at Chinese ports signal slowing demand for steel-making raw materials. Also in Asia we have been encouraged by Japan's progress, which has rebounded faster than many had originally expected. Overall, during the quarter we continued down our path of integration and execution.

Our chromite project is moving ahead as planned with pre-feasibility slated to be completed in the second half of 2011. During the quarter, we submitted our project description to the Ontario government. This week the government officially accepted the report, which initiated the critical path to permitting.

Our feasibility study is expected to begin in the latter half of this year and will extend into 2012. The Consolidated Thompson acquisition is closed and we are well on our way to quickly integrating Bloom Lake's operations. I will talk a bit more about Bloom Lake's production ramp up along with updates on our other capital projects within the business segment discussion.

As I am sure you are aware in last night's release, we have reorganized our reportable business segments to now include US Iron Ore, Eastern Canadian Iron Ore, Asia Pacific Iron Ore, and North American Coal.

Turning to our business segment performance for the second quarter, sales volume in US Iron Ore is virtually flat at 5.8 million tons, compared with 5.9 million tons sold in last year's second quarter. This includes approximately 220,000 tons of pellets from our US operations going into the seaborne market. Taking shipping seasonality into consideration, this puts us on track to ship over 1 million tons of pellets from our US operations into the seaborne market.

As we mentioned last quarter, to meet this year's increased demand for iron ore our US Iron Ore mines are running at or near capacity. During the second quarter we produced approximately 6.2 million tons of pellets, a 25% increase over last year.

Now turning to our Eastern Canadian Iron Ore segment, this segment is comprised of our Wabush Mines and the recently acquired Bloom Lake Mine. Sales volume for the quarter was 1.7 million tons, a 122% increase over last year's second quarter. The increase was the result of additional concentrate sales from Bloom Lake.

We have owned Bloom Lake for just 6 weeks and have sold approximately 900,000 tons of concentrate from the mine. Also during the same period we produced 1 million tons of concentrate, well on our way to reaching the 8 million ton annual production rate previously indicated.

During the quarter we also experienced temporary equipment outages at Wabush Mines, which slightly lowered Wabush's production volumes when compared to last year's second quarter. We worked through these temporary challenges and Wabush is back into full production.

Bloom Lake's ramp up to 16 million tons is on track and still slated to be completed in the latter part of 2013. After additional drilling at Bloom Lake Mine was completed, we announced our Phase III expansion to increase production capacity to 24 million tons per year. Although we're in the early stages of planning this expansion, I believe this project has fairly low execution risks as we will be constructing yet another mirror image of the current operations.

In addition to these ramp up projects, we recently completed some dock modifications at Point Noir. These modifications enable us to efficiently load larger cape class shipping vessels carrying about 180,000 tons.

As we have discussed before, transportation is one of the largest synergy components we expect to achieve with the Consolidated Thompson acquisition. Through our integration process, we will continue to make logistics investments to optimize the strategic advantage of our rail and port assets.

Turning to Asia Pacific Iron Ore, second-quarter sales volumes was flat at 2.2 million tons when compared to 2010 second quarter. Due to recent stoppages at the Port of Esperance during the quarter we have reduced our Asia Pacific Iron Ore sales volume expectation to 8.8 million tons from our previous expectation of 9 million tons.

Subsequent to quarter end, the Port of Esperance reached a new enterprise bargaining agreement with the unionized labor force, which we anticipate will bring an end to the work stoppages. We are maintaining our production volume expectation of 9 million tons for the full year 2011.

Construction continues on our infrastructure upgrades to increase Asia Pacific Iron Ore's annual production capacity to 11 million tons. Due to our accelerated efforts to complete this project in a timely manner, most of the major construction needed for bridges, rail passing loops, rail yard facilities, and the new J-1 deposit haul road is now expected to be completed by the end of 2011.

Now turning to North American Coal. Primarily as a result of incremental tonnage acquired in the transaction of Iron Ore Energy's coal operations we reported a sales volume increase of 76% versus 2010 second quarter. The incremental contribution from these operations more than offset year-over-year decreases in production volume of Cliff's Pinnacle and Oak Grove Mines.

Construction at Oak Grove Mine is moving along as planned after April's devastating tornado damage to the operations. The overland conveyer system is nearly complete and construction to restore the preparation plant is underway.

Although this weather-related challenge hindered Oak Grove's turnaround, we are looking at the situation as an opportunity to upgrade to prep plant with more sophisticated technology. This will include better gravity flow and spiro equipment which are expected to improve the efficiency.

The tornado damage at Oak Grove Mine has not significantly delayed our portal project, as we anticipate that will be completed and in use by September. Oak Grove's underground operations are fully functional and we expect to stockpile approximately 1.5 million tons of raw coal. This will likely yield over 600,000 tons of clean coal equivalent, some of which we anticipate selling prior to year end.

Turning to Pinnacle Mine, also during the quarter and as previously disclosed, unusual levels of carbon monoxide were detected in the mine. We are working with MSHA and other regulators to get back into long wall production as soon as possible before our current fourth-quarter estimate.

In early August we expect to begin continuous minor development of coal panels that will help improve future production efficiency. Our high-vol met coal and thermal mines required last year from INR Energy continue to achieve record shipping levels out performing our plan for these assets.

Lower War Eagle, one of the growth projects acquired as part of the transaction, is scheduled to commence production in November. In 2012, we expect this mine to contribute over 500,000 tons of high-vol met coal to North American Coal's production volume.

In summary, with the close of Consolidated Thompson, second quarter 2011 marked a key milestone in the Company's history. Although our legacy iron ore operations, which are the cornerstone of our business, performed well, we continue to be challenged by our North American Coal segment. I am, however, steadfast in my belief that we will turn the corner with these operations.

As many of you know we recently hired Dave Webb as our Senior Vice President Global Coal. Dave has already hit the ground running in the first few weeks with Cliffs touring the mines and completing his initial operations assessment. At this time I would like to turn the call over to Laurie for a review of the financial highlights and our outlook for the coming year.

Echoing Joe's comments, the first half of 2011 has been quite eventful. We were pleased with the enthusiastic response and turnout at our recent Analyst and Investor Day in New York and appreciated the opportunity to present our long-term strategy and plans for continuing to deliver shareholder value.

Our reportable segments have been reorganized. We have adjusted our prior-year second quarter and year-to-date results retrospectively to reflect the new business segments. From a financial standpoint the second quarter of 2011 marked our fifth consecutive record-breaking quarter.

Consolidated sales increased to $1.8 billion which is 52% higher than the previous second quarter record of $1.2 billion set last year. Increased prices for iron ore products and sales from our recently acquired Bloom Lake operation contributed to the quarter's outstanding performance.

Sales margin rose 76% to $731 million, compared with $415 million in last year's second quarter. This resulted in operating income reaching $617 million, up 69% from the $366 million posted in the previous year's comparable quarter. Net income improved to $408 million or $2.92 per diluted share, compared with $261 million or $1.92 per diluted share last year.

As a result of our recent equity offering, our weighted average diluted share count increased by 4 million shares from second quarter 2010.

Turning to the business segment results, our US Iron Ore segment turned in a strong performance during the quarter. Average realized prices increased 47% reaching $138 per ton, up from $94 last year. Costs were down slightly, primarily due to lower spending related to various large-scale maintenance projects that were in process during 2010's second quarter.

Higher prices and lower costs compounded to produce a strong sales margin of $441 million or approximately $77 per ton for US Iron Ore. This compares with $180 million in sales margin or $31 per ton last year.

In Eastern Canadian Iron Ore, second-quarter revenues were $298 million compared with $111 million in the second quarter of 2010. This increase was driven by higher year-over-year pricing and the additional incremental tons sold from Bloom Lake. Sales prices averaged $177 a ton up 20% from $147 last year. Cash costs per ton averaged $90, slightly lower than last year's cash cost of $93 per ton.

We normally don't break down costs by mine, but due to the change in segments and the recent acquisition of CT, it is helpful to understand these results to look at it by mine.

Wabush cash costs increased versus last year due to maintenance and stripping. During the 6 weeks we've owned CT, cash costs averaged $66 as we had a significant number of contractors onsite to complete the construction and to increase production. This is expected to be in the mid-50s by fourth quarter and under $50 per ton by year end.

Also during the quarter, costs were unfavorably impacted by non-cash expenses of approximately $48 million related to the purchase of Consolidated Thompson. This is the inventory step-up in valuation of approximately 1 million tons of Bloom Lake Mine concentrate which was required under purchase accounting. It translates to $29 per ton for this segment.

Turning to the Asia Pacific Iron Ore operations, average revenue per ton in the quarter increased 41% to $173 from last year's $123. Average cash costs per ton was up 56% to $69, compared with $44 last year, due to unfavorable currency exchange rates, higher royalty expense, and accelerated mining costs related to our capacity expansion.

Sales margin per ton increased 53% to $93 from $61 in last year's second quarter. We do hedge against the Australian dollar, which mitigates the impact of currency changes. However, because the hedge is against revenue, it doesn't change the increase in costs which are in Aussie dollars; it just protects the margins.

Turning to North American Coal, average revenue per ton decreased 18% to $119. The decrease was driven by a change in our current product sales mix from 2010. Last year's second-quarter results were comprised exclusively of premium low-vol met coal, which is sold at a much higher selling price.

Cash costs for the quarter increased 18% to $114 per ton. This is primarily driven by the production challenges at Pinnacle and Oak Grove that Joe mentioned earlier. Although this segment was not profitable on a book basis, our year-to-date cash margin is nearly $10 per ton.

Sonoma Coal continued to post positive results in the second quarter. Sales volumes for equity interest was 481,000 tons, which contributed $83 million to Cliffs' revenue and $32 million to consolidated sales margin. Amapa continues to ramp up production and contributed to earnings-per-share during the quarter, generating approximately $8 million in after tax equity income. In addition, production volume for the second quarter was 1.2 million tons.

During the quarter we recorded an $18 million impairment adjustment for our investment in OzQuest which accounts for the equity loss reported in our income statement. This non-cash charge relates to an investment we've held for several years.

Looking to the balance sheet, Cliffs had a busy quarter transitioning our capital structure for the longer term. In June, we priced a 10.3 million share equity offering at $85.63 which netted us just over $850 million. At June 30 we held $238 million in cash and equivalents and long-term debt of $3.9 billion.

During the quarter we produced over $600 million in cash from operations, versus about $170 million last year, an absolutely significant improvement. We're very comfortable with the condition of our balance sheet and overall financial condition, particularly given our cash from operations outlook of $2.6 billion, which is double 2010's record-breaking year. Based on this outlook Cliffs' Board of Directors recently declared a 100% increase to our quarterly cash dividend, which brings our payout more in line with our peers.

Looking ahead to the balance of the year, we'll direct our focus on integrating recently acquired assets and working to bring the ongoing capacity expansions online as expected. Please note that we provided a detailed discussion of our outlook assumptions within last night's press release. We will use as our working assumptions that iron ore pricing for the remainder of 2011 remains flat at the June 30 Platts 62% iron ore spot price of $171 per ton as we provide our expected revenue per ton by segment.

For our US Iron Ore business 2011 sales volume is expected to be 25 million tons; anticipated per-ton revenue is expected to be in the range of $130 to $135. We expect pellet production volume in US Iron Ore to be about 23 million tons in 2011, with average cash costs per ton between $55 and $60. DD&A for the full year is expected to be $3 per ton.

Full-year 2011 sales volume in Eastern Canadian Iron Ore is expected to be approximately 9 million tons, and production volumes are expected to be 8.8 million tons. Revenue is anticipated to be approximately $170 to $175 per ton. Average cash costs per ton is expected to be between $85 and $90. In addition, for full-year 2011 we anticipate non-cash inventory step up costs of approximately $5 to $10 per ton and DD&A of approximately $15 per ton.

We have lowered our Asia Pacific Iron Ore sales volume expectation to 8.8 million tons from 9 million tons due to constraints at the port related to work stoppages.

Our revenue per ton has decreased to approximately $160 to $165, which is in line with the lower spot prices since we last provided guidance. Cash costs per ton at Asia Pacific Iron Ore is in line with our previous estimate of $60 to $65. DD&A per ton is expected to be approximately $12 for the full year.

Expected sales volume at our North American Coal segment has been reduced to 4.5 million tons as a result of the production challenges addressed by Joe. We expect to sell approximately 1.4 million tons of high-vol met coal and 1.8 million tons of low-vol met coal with the balance being thermal coal.

Average revenue for the full year is now expected to be $120 to $125 per ton. Cash costs per ton in North American Coal is projected to be between $110 and $115. Full-year DD&A per ton is expected to be approximately $20 per ton.

At Sonoma Coal we're maintaining our sales volume estimate of 1.2 million tons but increasing our production volume to 1.4 million tons. Sonoma's sales mix will be comprised of one-third met coal and two-thirds thermal coal. Full-year 2011 cash costs is expected to be approximately $90 to $95 per ton and full year DD&A per ton is expected to be approximately $14.

From Amapa, we anticipate generating over $35 million in equity income for the full year 2011. Based on our current expectations, we expect to generate about $2.6 billion in cash from operations in 2011.

Our CapEx budget remains unchanged at $1 billion dollars, which is roughly $300 million in sustaining capital and $700 million related to growth capital projects, including spend for our Bloom Lake expansion, Asia Pacific Iron Ore expansion, and bringing on the Lower War Eagle Metallurgical Coal Mine.

We have made considerable progress over the last few years in our quest for expanding and diversifying Cliff's revenue base and product mix. Our current capital projects along with the close of our Consolidated Thompson acquisition will only add to our cash flow generation momentum and financial strength.

We thank our employees and shareholders for their continuing support in the execution of our strategy, and most recently, in seeing our Bloom Lake acquisition to a successful close. Steve, with that, let's open the call for questions now.

Thank you.

Latoya, can you give the instructions for asking a question?

Yes.

Yes. (Operator Instructions)

Brian Yu, Citi. Your line is open.

Thank you. Good morning. Joe, Laurie, cost has been a major theme throughout the earnings season for others besides yourself. Can you touch on that just in terms of iron ore? We calculate about a $4 per ton increase in cost estimates in the current guidance. What's driving that? And then also in the coal side, too, if you could break out the delta between the production, lower production versus just industry wide cost escalation, that would be great.

Let me start with the overall cost inflation and I am sure, again, not only through the theme of the earnings season but also the articles written, it certainly looks like shades of the last mining boom that we had from '04 to '08 where certainly pressures on costs are going to increase. We're not seeing the inflationary piece of that yet as evidenced, particularly in North America. Now, a lot of the North American costs are due to maintenance timing and we had an awful lot of heavy maintenance last year, if you remember the kiln ring we replaced at Tilden and the rotary car dump at Northshore. However, we continue to look for these inflationary pressures, Brian, that come on. To date, the lag time hasn't caught up with us in North America.

If you turn to Australia, you look at the costs that you see at this point in time where they have increased, a lot of that is FX effect that you see coming in at this point in time. There is some effect on inflation in diesel fuels, obviously, with the mines being run on diesel out there. The other big piece of ours is the accelerated stripping that we're involved in as we advance the mines and get the stripping and the ore uncovered as we get into 2011 when we move from '09 to '11. So, it is a generic answer. We think inflation and cost pressures are coming in the back half of the year, but there is a lag time between what we have in inventories and parts that will come through the system. We really can't define that number and we maintain our guidance that you saw with the cost parameters. Laurie, do you have anything you'd add to that?

Yes, on your question on the coal, about $30 per ton is really related to the recent challenges that we've had. You can think about that on the coal side. On the iron ore side, as Joe said, we've certainly been challenged by the current fee in Australia. In North America, we did bring our Consolidated Thompson costs up for the year, probably a little over what we had initially thought. We definitely still see ourselves getting to the guidance number by the end of the year, but we had to do a little bit of work in this first 6 weeks, and that certainly is impacting things. And then the other thing is, it sort of depends a little bit on the point within the ranges that we provide people that where we end up and where you take the assumption is going to actually have a surprisingly large effect on how you think about that.

Okay. And then my second question is just on pricing. You used to provide sensitivities around seaborne price assumptions and I don't think I saw that this time around. Is that something that you can disclose?

Brian, I think really the meaningful sensitivity would be in the US Iron Ore business, I mean, most of our business has moved to a higher correlation with the Platts price outside of the US Iron Ore.

Yes.

But we would estimate for every $10 increase in Platts we would see probably in 2012 an impact of about $4 a ton in our US Iron Ore business.

Great. Thank you.

For the other businesses you can just take -- we provided if it stays flat here is what you get. You can look at what you think is going to happen to Platts over the back half of the year and adjust our number up or down with a pretty direct correlation.

Okay. Appreciate it.

Thank you. Jorge Beristain, Deutsche Bank. Your line is open.

Good morning, I just wanted to clarify a little bit, again, some of the accounting issues related to Bloom Lake. If I understand, is the step-up for the inventory revaluation of $29 per ton, is that included in the new unified Eastern Canadian Iron Ore costs?

It is non-cash. When we give you cash costs we are not including the inventory step-up in that number. The inventory step-up has a very significant effect on this quarter. You will still see a little bit of it come through in Q3 and then that will be gone, but it is all non-cash. It is related to the inventory that was on the ground at the time we purchased the assets.

So the main driver then of the lower sequential costs of Bloom Lake as you highlighted would be the deceleration in the excess labor that you are paying and sort of the start up costs?

Right.

Okay.

Yes, the numbers that I talked about were the cash costs. If you look at the book numbers, you will see a double benefit, because you will see the inventory step-up come off. You will also see the cash costs come down.

Okay. And on your balance sheet, could you just clarify the impact of the equity raise then is included already in your net debt position as of the close of 2Q?

Yes, that's correct, because we paid off the bridge loan in June.

Okay. I was just a little bit surprised though, that your interest expense was a bit higher than expected and perhaps that's because you took the money out a little bit ahead of time, but could you give us any color on what you forecast third quarter normalized interest expense would be? I am not sure if you reflected a full quarter in Q2.

Back to you on that, there is certainly -- there is some noise in terms of fees with the bridge loan and so forth in the second quarter. There is quite a bit of noise on that, so we'll get back to you on exactly the interest number.

Okay. And then maybe just lastly on the coal business, if I understood what you were saying about the $30 sort of extraordinary costs per unit per ton down there, if you kind of strip that out of your most recent $97 -- I am sorry, to $114, and you strip that out of the $114, you subtract the $30. That kind of puts you in the ballpark of the sort of $80 cash costs guidance range that you guys have been talking about for a while. So, it would seem that you're kind of already achieving that this year?

We're getting closer and closer as we go. As we said at Oak Grove I think in the last quarter that we really felt we were turning the corner at Oak Grove before the tornado hit with production results there. Again, we have got the new long wall in and running or will be running once we go through the regulatory process, and the new upgrades, so, yes, we are starting to get into the numbers once we get up and running again at both mines that we projected, Jorge,.

And then sorry, just lastly on equity income. Again, a bit of a negative surprise there on that one-off charge you took and now I understand that Amapa, in fact, did have profitability. And just quickly checking the numbers versus guidance it would seem to imply you're looking for maybe 12 or 13 million per quarter year now of equity income from Amapa in 3Q and 4Q?

Yes.

Would there be any other kind of extraordinary equity losses that could offset that in the second half?

We don't see anything on the horizon, no.

Okay, great. Thanks.

Shneur Gershuni, UBS. Your line is open.

Good morning, everyone. I guess my first questions, some have been asked and answered, but I was wondering if you can sort of walk us through kind of how you expect the sales to play out for the back half of the year. Based on your guidance it seems the second quarter deliveries were kind of light and suggests that the back half is going to be quite a bit higher and so forth. I was wondering if you can sort of walk us through which quarters it is going to hit and what the logistics are involved.

As you know, if you follow our business in North America, you know it is a very seasonal business and it is always back half loaded as far as shipments go. If you look at the back half and the outlook we have given of 25 million tons, you know, we have shipped 11.3 through the first half, it's always a slow first quarter given where the locks are shut down. It is about 14 million tons we have to ship or about 7 million tons for the rest of the year in each quarter. If you look at 2Q of last year, we shipped 7.6 million tons and we've exceeded those rates in numerous quarters in the past, so it is always a heavy shipping back half for us as we get ready for winter once again and back loaded. But again, the shipping numbers that we're looking at are well within the range that we've produced in the past.

Okay. And then if I can shift over to the Canadian operation for a second, it kind of appears that there is clearly a different cost structure between Bloom Lake and the legacy Cliffs assets. The expansion you're taking upon yourselves over the next couple of years, where can we expect those costs to layout? Is it going to be closer to Bloom Lake where you've got costs kind of in the 60s, or is it going to be closer to how Wabush has been playing out as of late?

Yes. The costs for Bloom Lake for the additional expansion should be fairly consistent with what we have seen at Bloom Lake to date and what we expect for the current year, so basically, if you look at the total costs for the segment on a per ton basis, that will dilute the higher impact of Wabush, and also Bloom Lake is concentrate, Wabush is pellets. So, there is always going to be a difference between those. The short answer is, I would suggest you think about it as just more tons at the Bloom Lake rate.

And one final question if I may. Kind of your cash flow from operations guidance, I was wondering if you can sort of present to us your kind of assumptions with respect to working capital draw-downs if that's part of the calculation?

Yes. We certainly do. If you look at our production and sales guidance, we expect to bring inventory down pretty significantly by year end, so there is some involvement in that. We really haven't changed our guidance a whole lot since the last time we reported in total cash from operations. We have actually lowered our expectations out of our North American Coal business, added some significant cash generation from Bloom Lake, and the rest of it stayed pretty consistent.

We build quite a bit of inventory in the US Iron Ore segment. We probably have about 6 million tons on the ground. As Joe alluded to, as we sell through quite a bit of tonnage in the second half that, should come down significantly.

So, at this point in time you feel fairly comfortable with that number?

Yes, we do, yes. We actually don't have working capital in total being drawn down at all.

Okay, perfect. Thank you very much.

Thank you. David MacGregor, Longbow Research. Your line is open.

Good morning, everybody. Any middle settlement in this quarter or was that all in the first quarter?

The middle settlement -- it happened in the first quarter and what we included in the first quarter was some retroactive effects that really related to tons that were sold in 2010. We certainly had some tons that the pricing of those tons was impacted by the settlement, but they were tons that were just sold in the quarter and are priced in the quarter, not specifically differentiated by the settlement. In fact, the tons under that will continue to increase, we expect, in terms of the pricing that we get over the next couple of quarters and next year.

Got it. The SG&A, up about 20% in your guidance, a 40 million increase. I guess there is a lot going on in your model this year obviously, but are there some big pieces in there you can really highlight for us to help us understand that increment?

Sure. There is a small piece that would have been the base increase but that's very small. We had significant, as you can imagine, expenses involved in the acquisition of CT; lawyer fees, bank fees, and various types of things like that. Which probably accounts for about $20 million. There is another about $10 million that is related to the Montreal operations, the SG&A that we essentially acquired from CT, so part of that would not recur next year. Part of it is still likely to be recurring next year.

And then, just finally, I wonder if you can just give us a sense of where the spot pellet price would be today? I know the Platts number, everybody refers to is a finds price, but just in terms of the pellet premium and where is that market today? FOB, the Northshore, the Saint Lawrence?

David, you've heard a lot of kind of commentary in the media around the pellet premium shrinking. I think FOB Eastern Canada you'd be looking for pellets around $180 a ton right now.

$180. Can you give us a concentrate price as well?

It is about the same as the Platts price but you'd have to back off the $30 for freight so probably $140, $150, something like that.

Got it. Thank you very much.

Thanks, David.

Thank you. Tony Robson, BMO Capital Markets. Your line is open.

Thank you. Good morning, guys. Good morning, Laurie. A few one-off costs in your results, rather nice, one of them coming up from a previous question was interest at $81 million. I know I heard, Laurie, you said you would come back to us on that. Can you remind us what your weighted average interest rate is for your debt, please?

About 5%.

Okay, that will give us -- obviously strong cash flow you will be paying that down? The debt, will be reduced in quarter by quarter?

We certainly do have the option to pay some of it down. That's the way -- we actually structured the mixture of the term loan and some of the public debt so the term loan we have the opportunity to pay down if we choose to do so with no penalty or anything, so that will be the first piece we look at.

Great, okay, great. The terms of your profit and loss segment you said-- well sorry, your expenses -- sorry, your spending I should say $65 million to $70 million on global exploration. Will you expense that in the P&L or capitalize it?

It is actually a mixture. It depends on the types of investments that the team makes. It has historically been a mix, probably 50% to 60%, 70% of it is expensed, and the rest becomes capitalized or investments on the balance sheet. It just depends on the nature. We kind of give them a budget and don't expect them to do accounting and understand the differences.

Sure, understand. Thank you. Final question for Joe if I may. Thank you for the additional explanation on Wabush being a little low for the quarter.

Sure.

Can we assume a normal run rate at about 5 to 5.5 million tons a year?

I think we're around 5 million tons, Tony, would be a more accurate number. They did work through their problems of the quarter and they're back up and running and moving forward, so I think 5 would be more accurate.

Okay, and that again for 2012.

Yes.

Great, thank you.

Timna Tanners, Bank of America. Your line is open.

Good morning. Wanted to just touch base with you. I think we've talked about the costs in the North American market, and on the Asia Pacific side you talked about more cost pressure into the second half of the year. Full year guidance only went up $1 per ton and the second quarter was pretty -- was steeper. Just wondering if I am missing something that was one-off in the second quarter or if there is risk for more cost pressure further into the second half?

As I said, Timna, there is probably a lag effect. I mean, everybody is very concerned about inflationary pressures in the mining business right now, which in an up cycle is to be expected. We haven't seen them to date at this point in time as they come forward. We continue to look for that. Our procurement team has a lot of our expenses going forward locked in. Our wage rates are locked in for the most part for the balance of the year as well. So, we do -- we're very concerned about cost pressures in the second half, but we don't have anything to report at this point in time.

Okay. Makes more sense. All right, thanks. I know you talked about this on your Investor Day, but I wanted to hear a little bit more. You upped the amount of exploration expense. Can you talk a little bit more about any progress or insights or where you are kind of focused on right now?

Well, we're focusing mainly in, we have got several areas in Canada that we're focusing on in that part of the world, and we have got some focus down in South America at this point in time in some of our regional areas. We haven't stepped out really beyond the areas that we have discussed in the past. We're not in Africa doing an exploration or anything of that nature. Exploration opportunity comes and goes as the deals flow in and out, so that's where the numbers are coming from.

Okay, and then one last one if I could. On the stock piled coal, just trying to get a sense of what prices those might sell at. Are you committed to selling at the contracted price or at a price prevailing when you were first expected to have shipped those tons or can you offer those more on a price that may be prevailing by the time you can ship them? So, in a rising coal price environment can you get the increase or not, I guess is the question.

Timna, generally speaking for the Force Majeure tonnage, it is, it will be repriced at whatever the prevailing market price is. We do have some obligation to supply coal under some of the contracts at the previous rate, but for the lion's share of it, it would get repriced.

Okay, thanks so much.

Thanks.

Thank you. Michael Gambardella, JP Morgan. Your line is open.

Hello, can you hear me? I have a question on your release, the chart where you have 2011 outlook summary. On the cost side, the cash cost side under Eastern Canadian Iron Ore.

Yes?

Do you refer to Eastern Canadian Iron Ore as Wabush and Bloom?

Yes, the two added together, yes.

Right. So, I am trying to figure out how you go from -- how you get up to $85 to $90 per ton cash costs for 2011 when Wabush and Bloom in terms of volumes are about 50/50.

Right.

That's correct.

And Bloom, you're saying that since you have owned it, it is about -- the cash costs around $66 a ton, and in the fourth quarter Bloom, you are going to see cash costs in the mid-50s, and you've just said that Wabush cash costs were $90 a ton.

They were $93 last year. Because you can -- last year's segment was only Wabush, and they were up this year from what they were last year. You're going down the right path. Wabush cash costs are pretty high.

Your Wabush cash costs, what is the increase from the $90?

$80 to $85 that is half--

I mean, you must have cash costs up near around $140, then.

You're right, it is about half and half Wabash and Bloom Lake. The number we provided is essentially the average of the two, and we said that Bloom Lake is about $65.

How could Wabash cash costs go from $90 to $140 or $145? That's what I don't understand.

Part of it is probably currency related, Mike. The Canadian dollar strengthening. Part of it --

Not that much.

Right, well, portions of it. Part of it is increased stripping costs and maintenance costs at Wabush, and there are probably some other things in there that I can follow up with you on after the call.

Okay. But you're -- on the Bloom side, you are confident you are going to see costs go down below the mid-50s beyond this year?

This is our full year guidance, yes, we're going to see them go down to the mid-50s. We're going to end the year looking at around $50. I think you are probably looking at Wabush being in there at about $110. It is not quite as high as you are thinking. It is probably $115 or so.

Right, right.

Okay. So then as you ramp up Bloom, obviously, you will take down that Iron Ore, that Eastern Canadian Iron Ore cash cost component.

Yes.

That's right, Mike, yes. Again, in the second quarter Wabush did have its struggles in the second quarter. It is unfortunate that in our first reporting and breakout that Wabush went the other way. They worked through some pretty big maintenance problems that they had up there in the second quarter and we do anticipate them getting back on track for the rest of the year.

Okay. All right. Thanks.

Thanks, Mike.

Thank you. Mitesh Thakkar, FBR and Company. Your line is open.

Good morning, everybody. Can you talk a little bit about just the end market demand which you are seeing also domestically and a little bit in on the Chinese side. If you look at the spot prices of where the finds are on the oil side and Asia seems pretty strong. So, can you talk a little bit more about the US guys, what you are seeing from them?

Sure. In the US again, we still, through our guidance what we look at is blast furnace utilizations. We planned the year in the mid-70s and we still see that and maintain that outlook as we go forward in the US industry. We now have 31 of the 39 blast furnaces in North America that are up and running. The L furnace has been blowing back in over at Sparrow's Point as you know under the new ownership. So we still maintain, not an uptick in North America, but we see steady as she goes in the second half of the year with blast furnace capacity.

In China as you see, the projections coming off are 700 million tons, another increase again this year in steel capacity and prices are being maintained, if you will, rather strong through the summer, so we still see China running at a very strong rate, and we see Japan starting to come back into the market once again as they are really starting to accelerate in that country with bringing manufacturing plants back on play. It bodes well for some strength in Japan in the latter half of the year.

And are you seeing any, in your discussion with your domestic customer, are you seeing any intention from them to kind of defer a little bit into the fourth quarter or something like that?

There is always quarter to quarter activity. There is always maintenance shuts that make sense to the customers to move them up or move them back. We have got the normal noise and seasonality, if you will, that comes with that, but nothing dramatic to report in today's call.

Okay. Great. And one final question. You're generating very solid operating cash flow. I know you know a couple quarters down the lane you will be starting to look at options. Is paying down debt a better option at this point as what you feel or expanding, maybe look at some assets outside or something like that?

We continue as we've said all year. We're going to integrate and execute this year, and that's the track that we're taking. If you look at the growth profile that we showed during Analyst Day of just the organic work we have in place, we really don't have a need to go external at this point in time. Paying off the debt is always something that the financial folks will take into consideration. Looking at all the external environment of the world as it stands right now, we're going to keep a healthy balance sheet as we go forward given the volatility of the world economy as it stands. Basically it is integrate and execute this year.

Thank you. Paul Massoud, Stifel Nicolaus. Your line is open.

Good morning. That 1.8 million tons of low-vol met, how much of that has already been sold this year and how much are you modeling for the fourth quarter? Is it safe to assume there is a significant portion that's expected to be sold in the fourth?

Yes. I mean, we would only have --

Most of it is already sold.

Most of it is already sold?

Yes.

Okay. And then --

Paul, if you consider that we're anticipating only starting up Pinnacle in the fourth quarter and we don't anticipate washing any coal at Oak Grove until December, most of those sales have already occurred.

Are you still expecting, I think at the Analyst Day you had said you were expecting about 5 million tons of low vol next year. Is that still the case?

Yes.

That's right.

That's right, Paul.

Okay. And then just thinking about the seaborne US Iron Ore sales that you had, the 220,000 tons in the second quarter, can you give us a sense of where that went globally? Did it all go into Asia or did you see some go into Europe, for example? Where exactly was that sold?

It all went into Asia.

It all went into Asia.

Yes.

Right now it is $30 a ton to ship it out there?

That's right.

Okay, all right, I appreciate it.

Thank you.

Thank you.

Thank you. Garrett Nelson, BB&T Capital Markets. Your line is open.

Good morning, everyone. My Iron Ore related questions have been answered, but on the coal business you're expecting production to out pace shipments by about 900,000 tons this year. Can we assume that delta is all Oak Grove, low-vol met?

Yes, that's almost where it all is. We will ship everything else we make from the small production we're getting from the development work down at Pinnacle, we have got the small CM sections that are running down there, and everything will be shipped minus the raw coal that's on the ground at Oak Grove.

Got it. That's all I had. Thanks very much.

(Operator Instructions)

Latoya, if there is no further questions we can go ahead and wrap up the call. I would like to thank everyone for joining us today on behalf of the entire Cliffs management team, we appreciate your interest in the Company. Both Jessica Moran, and I will be available for the rest of the day if you have follow-up questions. Feel free to give us a call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Thank you.