Cleveland-Cliffs Inc (CLF) 2011 Q3 法說會逐字稿

Please stand by for realtime transcript. Good morning. My name is Mimi and I will be your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2011 third quarter conference call. All lines are 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. Mr Baisden?

Thank you, Mimi. 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 predicative 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 Web site. 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 Web site and available for replay.

Joining me today are Cliffs' Chairman, President and Chief Executive Officer, Joseph Carrabba, and Executive Vice President Global Administration and Finance, 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. Last night Cliffs reported the strongest quarter in the Company's history. Third quarter results were driven by strong demand for our products throughout 2011. North American blast furnish utilization rates averaged 76% during the quarter, 5% higher than the prior year's comparable year average of 71%. Additionally, the Platts index for iron ore pricing averaged $178 per ton during the quarter, 31% higher than 2010 average third quarter pricing. Both of these factors, coupled with the additional sales from Bloom Lake's operations, drove our exceptional third quarter results. However, we do acknowledge the recent softening of iron ore spot prices. This is not entirely surprising given the immediate macro economic concerns over future growth rates in certain world economies and volatility in virtually all industrial commodities.

As many of you know, since the end of the annual benchmark pricing mechanism, Cliffs has been moving sales agreements to more narrow pricing periods that are closer to the shipping date. We anticipate our industry will continue in this direction, moving away from lagging pricing periods and towards those that are closer to shipping or landing dates. For Cliffs, while lower spot pricing will directly impact results given our exposure to the seaborne market, we expect to run a very profitable business at these iron ore spot prices. Fluctuation in pricing is expected and current reduced spot pricing is still healthy and indicative of a strong global demand. We believe the mega trends underpinning our industry in general remain intact including industrialization of emerging economies which continues to support our growth and expansion initiatives. After the deterioration of benchmark pricing, we have often stated our belief that iron ore will trade within a pricing band affected by certain realtime market conditions and dynamics. Barring any further material deterioration in European or North American economies, we expect 2012's pricing band will remain relatively consistent with 2011's range.

Now turning to the performance of our core business during the quarter, sales volume in US iron ore increased to 7.9 million tons, compared with 6.9 million tons sold in last year's third quarter. This includes approximately 0.5 million tons of pellets from our US operations going into the seaborne market during the quarter. Due to vessel availability and adjustments in customer pellet requirements, we are revising our full year 2011 US iron ore sales volume expectations to 24 million tons, down from our previous expectation of 25 million tons. In 2012 we expect to see steel making utilization rates range between 70% and 75%. Based on this, we expect to produce and sell approximately 23 million tons from our US iron ore business segment next year.

Now turning to eastern Canadian iron ore. Sales volume for the quarter was 3.1 million tons, a 294% increase over last year's third quarter. This increase was a result of approximately 1.8 million tons of concentrate sales from Bloom Lake and increased year-over-year sales volumes at Wabush Mines. During September, Bloom Lake produced at an 8 million-ton rate for 10 consecutive days. Given that, we feel confident in reaching the 8 million-ton annual production rate previously indicated. Despite our ramp up progress at Bloom Lake, we are reducing our full year sales volume expectation in eastern Canadian iron ore to 8 million tons from our previous expectation of 9 million tons. This lower sales volume expectation is partially attributed to pellet availability from Wabush, and partially related to a transition in our marketing strategy to work more directly with end users of the product and less with trading customers in Asia. We have delivered Bloom Lake concentrate to 2 of our Asia-Pacific iron ore customers during the quarter and will continue working with our customers to test trial cargos. We believe this strategic shift will provide increased sales flexibility over the long-term and build stronger relationships among large seaborne customers.

Throughout the integration and optimization process within our eastern Canadian operations, it's our goal to achieve the production reliability and consistency that has been established over time with our US and Asia-Pacific iron ore operations. I am pleased to report that our phase 2 expansion at Bloom Lake is moving ahead as planned. The concentrating facility's exterior framework is complete and in the process of being enclosed. This work is expected to be finalized by year end, enabling interior work at the plant to move forward throughout the winter months. For next year, we expect to produce and sell approximately 12 million tons from our eastern Canadian iron ore segment, comprised of approximately one-third pellets and two-thirds concentrate.

Turning to Asia-Pacific iron ore, third quarter sales volume was nearly flat at 2.4 million tons when compared to 2010's third quarter. For the remainder of 2011, virtually all vessels and orders are booked through the end of November. We are maintaining our sales volume expectation for 2011 at 8.8 million tons. Our Asia-Pacific iron ore expansion to 11 million tons per year is progressing well. All equipment deliveries are complete along with the rail overpass in the town of Esperance.

Considering the challenging labor and equipment markets in western Australia, I am very pleased about the team's success there in completing all required expansion related stripping and other mine prep work. This is enabling project completion ahead of schedule and on budget. As such, we anticipate our 2012 sales and production volumes in Asia-Pacific iron ore to be approximately 11 million tons. The product mix is expected to be similar to prior periods, evenly split between lump and fines.

Now turning to our North American coal segment. As many of you know, production at our low vol met coal mines was largely down during the quarter as a result of our previously disclosed carbon monoxide detected at Pinnacle Mine, along with restoration construction at the Oak Grove Mine. After receiving approval to restart operations, we commenced Pinnacle's long wall machine in early October. At Oak Grove Mine, the prep plan is expected to restart in December with customer shipments to resume in January. Our high vol met coal and thermal mines acquired last year from INR Energy continue to achieve record shipping levels, outperforming our plan for these assets. Near the end of the quarter, production began at Lower War Eagle, which is slightly ahead of schedule. For 2011 we have reduced our sales volume expectation to 4 million tons from our previous expectation of 4.5 million tons. The decrease is related primarily to sales from Oak Grove resuming in January of 2012 rather than our previous estimate of December 2011.

We expect 2012 to be the turn around year for our North American coal business. We anticipate being well positioned for increased volumes and improved profitability. That said, we expect to sell 7.2 million tons and produce 6.6 million tons of coal from this business segment next year. We are approximately 75% of our anticipated 2012 met coal volumes opened for pricing. For the met coal tonnage already priced, we are at approximately $150 per short ton at the mine.

At this time I would like to turn the call over to Laurie for a review of the financial highlights. Laurie?

Thank you, Joe. Following on Joe's comments, our record performance reinforces our strategic growth and diversification efforts. Despite the recent valuation declines for commodities produces in the market, we believe our long-term strategy will continue to add value for shareholders. Our growth profile is pointed at supplying the economically healthiest regions in the world. Our growth is based on organic expansion initiatives and is expected to result in significant cash flow generation in 2011's final quarter and well beyond.

To further support these efforts, during the third quarter we replaced our $600 million revolving credit facility with a new $1.75 billion credit facility that has no meaningfully restrictive debt covenants. This solid capital structure will allow us to advance current projects in our global pipeline and remain opportunistic, while at the same time, returning capital to shareholders. To that end, in the last 18 months, our Board has tripled the annualized cash dividend to more than $1 per share and also authorized a 4 million share repurchase program. During the quarter, we bought 3 million shares at an average price of $74 per share, lowering our current diluted shares outstanding to approximately 143 million.

From a P&L standpoint, the third quarter of 2011 marked our sixth consecutive record breaking quarter. Consolidated sales increased to an all time quarterly record of $2.1 billion, which is 59% higher than the record $1.3 billion in sales set in last year's third quarter. This pushed our revenue for the September 9 month ended period past $5 billion, which exceeds 2010's full year record revenue of $4.6 billion. In addition, our year-to-date September diluted EPS of $10.12 well exceeds 2010's full year diluted EPS of $7.49. Increased prices for iron ore products and sales from our recently acquired Bloom Lake operations contributed to the quarter's stand out performance. Sales margin expanded 81% to $863 million, compared with $477 million in last year's third quarter. This resulted in quarterly operating income of $820 million, more than doubling the $390 million posted in 2010's third quarter. Net income attributable to Cliffs shareholders reached $590 million, or $4.07 per diluted share, exceeding last year's record of $297 million, or $2.18 per diluted share. Included in net income for the quarter is a $17.5 million net of tax non-cash loss from discontinued operations.

Due to our previously settled pricing arbitration and a favorable pricing environment, Cliffs minority partners interest in Empire Mine increased to a positive equity position during the quarter. As a result, Cliffs is now fully consolidating Empire Mine with the partner's interest reflected on the non-controlling interest line item on the P&L. Historically, Cliffs reported Empire Mine as a captive cost entity. The net impact of fully consolidating was an $83 million reduction to earnings attributable to Cliffs shareholders, of which $68 million is related to prior quarter adjustments within 2011. The total adjustment had an impact to the quarter earnings per share of $0.57 per share.

In addition, our third quarter effective income tax rate was 2% as a result of the combined impact of fully consolidating Empire Mine, along with strategic tax planning and certain discreet items. The benefits in the quarter to our tax expense are primarily related to changes in foreign currency, which ultimately impact tax liabilities along with other discrete at the items. As a result, we now expect our full year effective tax rate to be an estimated 18% including discreet items. This is lower than our previous expectation of 26%. I would also point out that during the quarter, we incurred $152 million attributable to non-controlling interest. Approximately $34.5 million of this is related to our minority partners 25% interest in Bloom Lake Mine, with the remaining attributable to the full consolidation of Empire Mine. Non-controlling interest for both mines will be recurring items in our financial statements in future reporting periods.

Turning to our US iron ore reporting segment, in last night's release for comparison purposes, we included 2 tables as appendixes related to the full consolidation of Empire Mine impact on our US iron ore segment and also on our consolidated income statement. These adjustments had no impact on US iron ore sales margin dollars reported for the quarter. For comparability, it's helpful to look at US iron ore excluding the adjustments for Empire Mine. On this basis, sales volume for the quarter increased 9% to 7.4 million tons from the previous year's third quarter. Revenue per ton was $125, up 24% from the previous year driven by higher pricing and volumes. Cash costs were down to $57 per ton, primarily due to greater fixed cost leverage versus the prior year's quarter. As I mentioned, the adjustments related to Empire Mine had no impact on US iron ore sales margin dollars which increased 82% to $481 million from $264 million last year.

Our eastern Canadian iron ore business generated revenues of $517 million, compared with $124 million in the third quarter of 2010. Sales prices averaged $166 per ton, up about 5% compared with last year's $158 per ton. Impressively, during the third quarter, Bloom Lake contributed approximately $155 million in cash sales margin to the Company's results. Cash costs per ton in the eastern Canadian iron ore segment averaged $87, down 6% from last year's $93 per ton, reflecting lower realized costs related to production at Bloom Lake, partially offset by higher cash costs at Wabush Mines as a result of increased royalty rates, labor costs, shipping, stripping and transportation rates.

Bloom Lake's cash costs were $74 per ton during the quarter, higher than second quarter's cash cost of [$66] per ton. The increase is primarily driven by approximately $14 per ton related to lower production in the quarter, as well as mining costs related to the phase 2 expansion. Although higher, quarter-over-quarter, we anticipate Bloom Lake's cash cost to be approximately $60 per ton by year end. While this is slightly increased from our previous expectation of $55 per ton, we believe the long-term benefits of making the investments today is the most effective way to manage the mine for the future. Wabush Mines cash costs per ton were $106 during the quarter, lower when compared with second quarter's cash cost, primarily due to increased sales and production volumes during the quarter. Also during the quarter, the Company incurred a non-cash non-recurring expense of $11 million associated with the step up of inventory at Bloom Lake.

Turning to the Asia-Pacific iron ore operation, average revenue per ton in the quarter increased 33% to $170 from last year's $128. Average cash cost was up [63% to $58] per ton, compared with $42 per ton last year. This was due to higher royalty expense, accelerated mining cost related to our capacity expansion and unfavorable currency exchange rates. Nonetheless, core ton sales margin continued to expand 25% to $91, up from $73 in last year's comparable quarter.

In our North American coal segment, average revenue per ton was $99 versus $118 last year. This reflects a greater percentage of lower priced high vol and thermal coals year-over-year. Based on the lack of volume from Pinnacle and Oak Grove, we reported an increase in average cash cost per ton to $135 compared with $108 last year. We estimate that approximately $47 per ton of additional cash cost realized in the third quarter were due to the production curtailments.

Looking at the balance sheet, as I mentioned previously, during the quarter, we continued our efforts to transition the Company's capital structure for the longer term. We replaced our $600 million revolving credit facility with a new $1.75 billion facility. We used approximately $250 million of this to pay down a portion of our term loan. At the end of September, we held $545 million in cash and equivalents and long-term debt of $3.9 billion, including the borrowings on our revolver. The Company generated $1.5 billion in cash from operations year-to-date. This is a 145% increase over the comparable 9 month period in 2010. Looking ahead to the balance of the year, we intend to continue integrating recently acquired assets and working to bridge capacity expansion -- to bring capacity expansions online as expected.

For our US iron ore business, as Joe mentioned, we are lowering our full year 2011 sales volume guidance to 24 million tons, down from 25 million tons. This reflects adjustments to customer pellet requirements and shipping vessel availability. Per ton revenue expectations have changed as a result of the full consolidation of Empire Mine, but outside of this, would have remained the same. We now anticipate revenue per ton in the range of $135 to $140. Note, we provided in our press release, a detailed discussion of the assumptions on which this pricing is based. It does include an assumption of $140 per ton for iron ore fines throughout the remainder of 2011.

We expect pellet production volume in US iron ore to be approximately 24 million tons in 2011 with average cash costs per ton between $60 and $65. The increase, again, attributed to the full consolidation of Empire Mines. DD&A is expected to be $4 per ton.

Sales volume at our eastern Canadian iron ore segment is expected to be approximately 8 million tons, down from our previous expectation of 9 million tons. This is driven by an adjustment to Bloom Lake's current shipping plan and pellet availability at Wabush Mines, as Joe indicated earlier. Average revenue is anticipated to be in the range of approximately $160 to $165 per ton for 2011. Average cash costs per ton for 2011 is expected to be between $90 and $95, slightly higher than the previous guidance. Eastern Canadian iron ore segment DD&A is anticipated to be $16 per ton. In addition, Bloom Lake's non-cash inventory step up expense is expected to be approximately $8 per ton for the year.

In our Asia-Pacific iron ore segment, we are maintaining our expected sales volume of 8.8 million tons and production volume of 9 million tons. Per ton revenue is expected to be $155 to $160. And cash costs per ton between $60 and $65, with approximately $11 of DD&A.

Sales and production estimates for 2011 at our North American coal segment have been reduced to 4 million tons from 4.5 million tons, primarily as a result of adjustments to our sales volume plans from Oak Grove in December. We expect to sell approximately 1.6 million tons of low vol met coal and 1.4 million tons of high vol met coal with the balance being thermal product. Average revenue per ton for the full year is now expected to be in the range of $115 to $120 per ton. Cash costs per ton in North American coal is projected to be between $110 and $115, with approximately $20 of non-cash DD&A.

Cliffs 2011 full year estimate for SG&A expense is approximately $290 million, which includes $35 million related to profit sharing at Sonoma and $25 million in non-recurring acquisition related costs related to the acquisition of Consolidated Thompson. In addition, we anticipate incurring a total of $40 million for exploration activities and approximately $45 million related to our Chromite Project.

Based on our current expectations, we intend to generate approximately $2.2 billion in cash from operations in 2011. Our CapEx budget is being revised down from the previously anticipated $1 billion to approximately $900 million, as a result of timing and slower than anticipated cash outlays for our growth projects which all remain on schedule. And with that, I will turn the floor back over to Joe for a final comment before we begin the Q&A. Joe?

Thanks, Laurie. In closing, we believe management actions during the last several years to broaden Cliffs customer base and the market it serves, as well as amplifying Cliffs exposure to the fastest growing economies in the world are producing lasting value. Our long term philosophy is not over effected by the short term fluctuations in commodity markets. However, we are mindful that we operate in a cyclical business that is subject to our external dynamics. In addition, our operations are more flexible and we are better equipped to respond in a timely manner to varying market conditions than ever before. Further, we believe our financial condition and cost structure position the Company to create value for shareholders at any point during the macro business cycle. Steve, at this point, let's open the call for questions.

Thanks, Joe. Mimi, can we go ahead and queue the listeners on how to ask a question?

(Operator Instructions)

Our first question comes from Jorge Beristain from Deutsche Bank. Your line is open.

Hi, guys, Jorge with Deutsche Bank. Congratulations on the strong headline results, although, obviously, a little complex on the accounting side.

Indeed.

What I wanted to clarify is on the guidance, in North America -- for the US, you are basically pairing back your full year guidance by 1 million tons, but you are also carrying the benefit, I'm assuming, of the 500,000 roughly ton step up from the consolidation of Empire. Would it be correct that you are sort of cutting your second half guidance to closer to 1.5 million tons in the US and should I read into that there is faster than expected weakening in the US steel demand because of that?

There is a little bit of rounding to be clear on that. It's probably a little over 1 million, but it is not as high as 1.5 million.

Okay. And on the Wabush pellet availability, would you not simply be able to ship the concentrate from consolidated -- from Bloom Lake separately in order to keep up the tonnage there? Because you are also pulling back that guidance by 1 million tons.

Jorge, we have the ability to do it. However, as all of these things, we are doing some blending and some testing right now at this point just to see how the pellets perform. This will, obviously, change the quality of the pellet as well with less manganese, but, nevertheless, change the quality. So, we are really not ready to introduce a quality pellet to the marketplace that we can consistently give quality parameters around.

Okay. And then lastly, from an accounting point of view, the consolidation of Empire. One would assume that if it had already been consolidated, that the net cost item for the past two quarters, that there should be no change in the attributable profit from that business because you simply you restated as a revenue and a cost line recognition. What I'm trying to understand is what changed there to trigger the change in profitability and why is it going back now three quarters. Is this because of a recent legal settlement that then allowed you to get retroactive pricing for that mine's contract?

No, it's not a legal settlement at all. It's when we incurred better pricing and it slipped to this kind of treatment. As you will see when we file our Q, there is probably more detail disclosures, but it's a retroactive adjustment that should have been recorded in the second and third quarter.

Okay, thank you.

Thank you. Our next question comes from Brian Yu of Citi. Your line is open.

Thanks. Good morning. My question is a bit of a follow-up on Jorge's.

With your reduction in North American shipments, it doesn't seem, from our standpoint, that there is that big of a change in blast furnace production. I was wondering if you could comment on with the weakness in the spot pricing, has that eliminated some of these opportunistic exports out of the Great Lakes? And then also there has been other companies out there on the steel side talking about magnetation. Is that in any way entering into your projections for next year?

That is a lot of questions, Brian. I will try to answer them as best I can.

In North America, if you can think about the blast furnace ranges, that is what we spend most of our time on -- on predictions and where the industry is right now. It has been fluctuating between 70% and 75%, 76%. We are at the lower end of that range of 70%. If you think about where we came in, in 2011 at 70%, it build up to 76%.

We do n0t have any knowledge right now of blast furnaces being idled like they were in '09. To our knowledge, we have had some of the blast furnaces of our customers, the maintenance has been pulled forward with that. So, a lot of it is around the shipping and the timing. And, of course, the customers have to think about going into the winter and where their winter lower lake inventories go with it. That is a difficult one to answer other than -- I think we stated, as we went through the script, that we are still within the bounds of blast furnace utilization and don't have any knowledge of blast furnaces being idled at this point in time.

We have read the reports, obviously, and the press releases around magnetation and are aware of it. We don't see the impacts in 2012 and, quite frankly, really haven't dug down into it to analyze it that far. We don't think that is any impact on the business in 2012.

And what about some of the opportunistic exports that you talked about earlier in the year. Have you dialed back some of those assumptions for next year?

We haven't really gotten into the assumptions that far for next year. We started out pretty modest this year. This was our first year of really getting into the export market.

Certainly if the rates continue with where they are, the spot prices, that will put a squeeze on it. The exports -- but we haven't dialed that number back that far at this point in time.

We also had -- if we go back to the beginning of 2011, we had between 500,000 and 1 million tons that were carry over tons from 2010. So, we are projecting fairly flat 2012 over 2011. So, we are not really projecting a decline.

All right. Thank you.

Thank you. Our next question comes from Shneur Gershuni of UBS.

To follow-up on the 2012 guidance questions, you talk about a utilization range of 70% to 75%, yet you have a very specific guidance with respect to your volumes. I was wondering if you can tell us the sensitivity around it? Should we just be thinking the middle of the blast furnace range? Any kind of color as to how you arrive at the number with respect to the ranges you put out.

As you can imagine, it's a lot of calculations by a lot of people that go through a blast furnace by blast furnace type of calculation along with building in the maintenance planning that goes with it. If you think about it in totality, the difference between 0.5 million and 1 million tons, a lot of it sometimes can be inventory adjustments that come with going into the winter season versus the spring and coming out of it as well. But, ending up the year at 70%, looking at the GDP numbers yesterday, we think it's only up side going into 2012 with the low range of the utilization.

We, obviously, pick a point to guide to in terms of volumes, but assume that we would vary a little bit around that. We wouldn't expect everyone to assume we would be exactly on point.

Right.

So, this is somewhat conservative? I understand your comments.

Well, we think given the marketplace with where it is, yes I would think it would be somewhat conservative.

And a follow-up question with respect to the Canadian costs, they continue to appear to be challenging and so forth. You have the big expansion coming as we move forward. Can you give us some color as to, not specific outlook for 2012 cost items, but where the trends are, where the hiccups are and how they are going to be solved and so forth?

Sure. We took some -- I think it was in Laurie's section, we took some very deliberate steps this quarter as some ships have moved around and a little bit of volume has slacked up there. This mine is still in ramp up phase as I said. We are very encouraged by hitting the 8 million-ton mark with that, but at the same time, we are still adjusting some spirals and some balances there and we are also adjusting the mine plant and putting better ore feeds.

Again, we think that is some of the synergies and a lot of the value that we bring to the mine from the great job that Consolidated Thompson did when they built the mine. We are just starting to smooth the edges off, if you will. We do anticipate the cost to come down. Those learnings that we are getting right now, we are incorporating into the design of the new plant that comes on and we expect we can stabilize these costs down into the $60 range that Laurie talked about.

Final question if I may, you mentioned that you have been active on the buy back during the quarter. Is the plan to complete the plant itself or do you plan to use it more on an opportunistic basis?

We will continue to monitor the market. Obviously, we are in blackout at this point in time and can't predict exactly what we will do. I think our behavior in the past would probably be indicative of how we would expect to act in the future.

Okay. Great, thank you very much, guys.

Thanks.

Thank you. Our next question comes from Timna Tanners of B of A Merrill Lynch.

I wanted to follow up -- you made some comments about the iron ore price, which of course, has corrected sharply recently, your view being that if things stay where they are in terms of US, European outlook then you would expect iron ore prices to trade in a range next year. Can you give us any color from what you are seeing in Asia maybe now that you have a little closer relationship there on what supports your view of a recovery from here?

Yes, Timna. We have always had a -- with our Asia-Pacific iron ore, even before us, many of the consistent players from the Portman days, we have traded in directly with customers for a number of years now in Asia, not only just with eastern Canada.

The credit squeeze is certainly tightening up the market, as you know, right now with the steel production and then on to the customers. I think there has always been a belief within the industry that there is also a floor -- a natural floor that Chinese production will come off. We seem to be testing that floor right now and we will see from there.

I think the balance would be more of Chinese production coming off if, indeed, the industry is correct and their assumptions on the floor pricing -- the floor cost rather for the Chinese producers. And that is where it would be made up in the first half of the year for sure. And if credit were to ease a little bit in China, that may give it some momentum in the second half of the year.

Okay. Great.

And I guess I wanted to follow-up, taking a step back if we could on the coal business. This has been an area that you have talked about a lot over the years in terms of go, no go decision. Clearly, you have a new person in the role to move forward. Can you guide us to how you are thinking about the business strategically and what kind of parameters you are looking for next year to decide how to proceed in the business?

Sure, I would be happy to, Timna. Talked about that very openly with everybody on the call and many of the investors as we should be talking about it.

We did hire David Webb, a long experienced coal executive. We are very pleased to have Dave on board and some of the changes he is making already.

We got hit with two events this year that didn't allow us to properly evaluate the two legacy coal mines that we've got. As you know, the tornado, which comes up in late December. So, shipments come in January now instead of December. We have to get that mine up and running and give Dave and his gang a chance to see where that is and also that new shaft that we've talked about will be in production as well. So, we should get something from there.

Over at Pinnacle, again, obviously, we got hit with the carbon monoxide that kept us down for well over 100 days. The ramp up is going very nicely. The longwall and the associated systems are performing very well with that. So, we have got some encouragement. But 2012 should be a clean year for us with all of the three projects that we have talked about in the past being in place with where they are and we will have to make some serious calls on that.

One thing I would like to highlight as well, by no means is this a defense for the legacy coal mines, but our INR assets that we purchased a year ago are performing very well and above the plans that we had and we are quite pleased with them. We have to get the whole business in place now.

That's very fair. Thanks a lot.

Sure.

Thank you. Our next question comes from Arun Viswanathan from Susquehanna. Your line is open.

Great, thanks for taking my question. Can you give us a little bit more detail on what you see on the cost side on eastern Canadian iron ore and in the US?

It seems like costs have been trending a little bit higher. What do you expect for both Bloom Lake and Wabush over the next several quarters? Where do you think we can get on a steady state on costs, cash costs?

Well, I think if you will, just to repeat myself on eastern Canada, on the Bloom Lake, I think I gave that explanation thoroughly that we still thought that we would be in the $60 range as we get there. But we are shaking the mine down and we have taken, again, as things have been a little bit slow, we are deliberately taking some actions to improve the process going into 2012. So, we are quite comfortable there, both in terms of hitting the 8 million tons and where we think the cost will be.

Wabush, we think the cost will maintain and will rise slightly higher with labor costs as they always go up year in and year out. These are union contracts at Wabush so they are built into the projections. We do not see a dramatic drop or rise in Wabush and it's sustained at about that level of cost for quite some time with inflation in it.

In the US, again, there is some inflationary pressure that is coming on, I think, as most of the mining companies have reported with it. We don't see it as dramatic in North America right now as we are seeing in probably Australia and Asia-Pacific, but costs are definitely on the rise just as they have been in the past with high commodity prices and volumes.

Since royalties are a fair component of cash costs, it's usually a good thing when it goes up from that perspective because that means pricing has gone up.

We did demonstrate, also, a lot of cost discipline in this quarter. If you look at that and if you can take the exceptional items out, pretty outstanding to watch the costs flat to slightly down for the quarter.

And then just to confirm, so, on the last call I think that you did provide some pricing outlook for 2012 and, so, given the volatility, you have pulled away from that? Is that a fair assumption and you would revisit that as we progress through the year?

We didn't provide any guidance for 2012. I think we've said all along that the spot price we do expect will trade in a band and we are seeing it trade in the band. As Joe said, we are kind of at the floor and we have seen some of the higher points earlier this year. But that is what we said on this call and we wouldn't have said anything more specific than that in the prior call for 2012.

Okay. Thanks.

Thank you.

Our next question comes from Kuni Chen of CRT Capital Group. Your line is open.

Just first off on North America, obviously, a lot of your customers are moving to backward integrate here. What is your view sort of looking out three or four years and your strategy in North America and how you can maintain your share?

Well, I think our view is, if you will, it's a normal reaction to a high priced commodity and people are looking to vertically integrate within the steel industry right now. That has pretty much been proven all the way through and that is where things are going right now. It's, obviously, concerning.

With that, we have some ideas on where we can place our pellets within North America as we go across with this. And, I think also just as you watched us on-ramp ups as well, I think you have to watch the timing on the ramp ups and the construction as well of the new facilities that are being discussed and being built in the marketplace as well. So, certainly concerning, it's a few years out and a lot of things happen between now and then. And we will be working on strategies to place the pellets in North America and outside of North America between now and then.

I think there is a limit to how much backward integration we expect will happen in the US. Some of our customers who have focused on backward integration are probably more likely to be looking to replace their seaborne tonnage and ship into Europe and other places that they have blast furnaces, as opposed to replace us in the US.

Right, okay. Fair enough. And then just remind me again on coal, obviously, you need to get the mines back up and running and see what the new team can do here. But, are we still looking at a business that is going to produce 9 million to 10 million tons as you look out one to two years.

We said we are going to stabilize at 7.2 for next year then we will take a look from there, Kuni. Yes. We have said the 9 million to 10 million. But I think given the operating problems that we have had at this point in time and, again, allowing David Webb to get his feet into this thing, we will come back out with a new projection sometime next year on future years of coal production.

So, the 7 million tons is more of -- a bit of conservatism as you look to get those mines ramped back up, not really an indication of where the market might be? Is that the right way to think about that?

I would say 7 million is our projection for 2012. We are not really comfortable projecting beyond 2012 in terms of volumes at this point in time. It's not a market concern, I think that's what you are getting at. It's not a concern there. It's making sure that we are confident in our production capabilities.

Okay, great, thanks a lot.

Thank you. Our next question comes from Mitesh Thakkar of FBR Company. Your line is open.

So, I saw you lowered your CapEx number a little bit and it's mostly related to the adjustments. So, maybe you have to have a catch up next year. Can you give us a sense on, outside of Canada and Australia in terms of emerging exploration and chromite, how are you looking at the CapEx right now and maybe provide an update on the Chromite Project and bottoming issues and stuff?

We don't look at that adjustment as a major delay or anything like that, as we said. It's really cash timing.

In terms of next year, we haven't finalized our capital plan. I think we would expect probably in the neighborhood of $300 million in sustaining capital. On top of that, we will have some capital to finish up our projects, but we will report that, our exact expectation next year.

Do you want to comment on the project?

Ferrochrome continues to move through pre feasibility at a good pace. The guys are pinning down their final options right now. It's going through a lot of reviews that we talk about and we will come out with a new capital number and OpEx as well, probably sometime in the late first or early second quarter once we come out of pre feasibility and get these numbers pinned down.

There is a lot of moving parts between where we are going to sight the furnaces depending on electrical contracts that we are in negotiations with right now. And the transportation quarter that is best for this project and which one we select to use. All of those are going on.

The government is -- continues to be very encouraging. We are working very well with them within partnership. Our environmental permitting process and baseline work continues on at a positive face and we are working with all of the first nations groups that are affected within the area and starting to work on MOU's within the various groups of folks up there.

So, it's all progressing. It's typical pre feasibility. At this point in time, the deposit continues to look very good. The smelting test that we have run, the pilot test in South Africa came out very well. All the signs continue to be very he encouraging.

Great, great. And are you -- one final question on North American -- US iron ore, is there a way to provide a [sensitivity] on the moment on iron ore prices?

Yes, Mitesh, we have taken a look at it for 2011. Given where we are at in our order book and what we have already sold, we think for every $10 change in the spot price you would see an impact to our revenue per ton guidance of about $2.

Okay, perfect. Great. Thank you, guys. Thank you very much.

Thank you. Our next question comes from David MacGregor of Longbow Research. Your line is open

This is actually Joe Krawczak sitting in for David. Most of our questions have already been answered. Just a couple of quick follow-ups here.

Are you satisfied with the Amapa operations in Brazil? Now that it looks like it's achieved a steady state, is there a phase two in the pipeline?

I don't know if I'm ever satisfied with any operation, but in Amapa, I think Anglo has, to their credit, they operate it, they have settled the mine down quite well. I think it's operating in the parameters it's going to continue to operate in with the production splits between the DRI and the blast furnace grades, and the center grades and all the other grades that come out of that mine as well. They have really achieved an excellent safety record up there and they have a good environmental record. So, I think Anglo has done a nice job settling this mine down and, again, the pricing, taking it into profitability with that.

There is not a phase two to that mine. We think the resource is limited. And also with what we would have to do with other capital for port and rail for an expansion, it just doesn't make sense to us given the parameters of the mine.

So, it is what it is. It's profitable. It takes very little management time on our end to do it and Anglo is doing a nice job up there managing it.

Okay. Great, thanks. One more quick follow-up.

How much coal is stockpiled at Oak Grove? Can you give us some details?

600,000 clean tons.

By year end that's what we expect.

Expecting that by year end on the ground at Oak Grove.

Okay. Great. That's all I've got, guys. Thanks a lot.

Okay.

Thank you. Our next question comes from Jessica Fung with BMO Capital Markets.

Two quick questions please. I know it doesn't really affect your margins, the consolidation of Empire Mine, but if iron ore prices go down, is it possible for you guys to have to sort of deconsolidate it?

No, that would not be the case. It would reduce, obviously, the profitability of the mine and it would reduce the amount of the minority interest that comes out at the bottom, but we would not deconsolidate it.

Okay Great. A little point on the chromite assets. For your pre fees, are you guys including studies on logistics in there like building a road or possibly rail?

Yes, we absolutely are. Jessica, that is going to be a vital part of the project, whether it's road or rail and again which quarter we pick to come out with it. It will also be a very expensive part of this project.

Right.

But a vital part that has to be included in the CapEx and we have to -- the project will have to carry the load during the first phase to get started. It will be an expensive piece of the CapEx.

Great. Thank you very much.

Thank you. Our next question comes from Mark Parr of KeyBanc. Your line is open.

Congratulations on the results.

Thank you.

Thank you.

I had a -- this is kind of an off the wall question. If you are looking at -- in the mining process where you have -- I believe the ore goes through a grinding phase, where the big grinding balls before you go through a concentration.

Right.

Can you give me some sort of a rough idea what the costs or what percentage of the capital is associated with the grinding side of a concentrator operation?

I can't off the tip of my tongue. I'm sorry, Mark.

I'm shocked you don't have that answer, Joe.

Sorry. We will be glad to follow-up with you though, Mark.

I had another question if I could. You talked, I think -- Laurie, you may have said this earlier about your sense of 2012 iron ore pricing kind of staying in the same range as 2011.

Yes.

I guess I'm curious how you are thinking about that in terms of this pretty dramatic pull back. We have seen the spot ocean borne number go below $120 this week and 58% FE is closer to 100. Those are -- just in the last three weeks there has been meaningful pull back. And then in conjunction with the reduction in the volume out of Bloom Lake, I think that production is predominantly going to China if I'm not mistaken.

That's correct.

Are we on the front end of some real uncertainty related to Chinese consumption and the Chinese economy? How do you reconcile that in the context of your commentary about pricing remaining in the same range in 2012 as we've had this year?

Mark, I would put it this way. Dramatic as the drop is, the rise up to well above $175 earlier this year came just as quick, just as big a surprise. While everybody gets euphoric and happy on the rise on the high side, we didn't remodel our business based on $175 as we wouldn't on $120.

I think the discussion on China and the slow down of China has been going on for almost two years. So, I don't think this should be any surprise either to anybody because the predictions and the economists have written volumes about this as well.

So, if you take the high and the low out of this thing and the fact that we do think Chinese production will come off at a certain point when the prices go down. And also put the tightness of the credit in China right now so that iron ore producers going to stockpiles are going to get squeezed like everybody else with that. We think there is still a big whole in there for the iron ore business as it stands today with that, and to trade within a range for the mills to be profitable.

Okay. I appreciate the extra color. Pardon my being nervous.

That's okay.

Good luck on the fourth quarter.

Thank you very much.

Thanks.

Our next question is from Tim Hayes of Davenport & Company.

I missed the numbers on the coal. Was there pricing for 2012 coal tonnage that has been priced?

Tim, we said that we have 75% of our 2012 production still available for pricing. That -- that we already have priced is about an average of -- this is just for the metallurgical coal, it is about an average of $150 a short ton at the mine.

And the miscellaneous income on the P&L, what accounted for that?

That is primarily currency for some of our monetary assets. It's between the Aussie dollar and the US dollar.

So, the currency was a benefit there and also a benefit on the tax rate?

That's correct.

Okay. All right. Thank you.

Mimi, why don't we take one more question and then wrap up the call.

Okay. Our final question comes from Garrett Nelson of BB&T Capital. Your line is open.

My questions have already been answered. Thank you.

Great, that makes it easy. We appreciate everyone's interest on the call today. I will be available and Jessica will be available for the rest of the day, so if you have follow-up questions, please don't hesitate to give us a call. Thanks a lot.

Thank you all.

Thanks.

This concludes today's conference. You may all now disconnect.