Cleveland-Cliffs Inc (CLF) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Cliffs Natural Resources' fourth quarter 2011 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions following at that time. (Operator Instructions)As a reminder, this conference call is being recorded. Now, I'll turn the conference over to Steve Baisden, Vice President of Investor Relations and Communications. Please begin.

Thank you. I'd 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 statement 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 the 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, Finance and Administration, and Chief Financial Officer, Laurie Brlas. At this time, I'll turn the call over to Joe for his initial remarks.

Thanks, Steve, and thanks to everyone for joining us this morning. With the full-year results reported in last night's Press Release, Cliffs continues to achieve record growth by nearly every measuring stick. Looking back on 2011, I'm extremely pleased with the record financial performance our management team accomplished. Particularly in light of the strategic transactions and operational expansions and challenges we faced in the year. In addition to completing the $5 billion acquisition of Consolidated Thompson we also remained on track to complete our 11 million ton per year expansion at the Koolyanobbing complex in Australia on time and within budget. We restored Oak Grove's overland conveyor system and prep plant after severe damage caused by a tornado. We restarted the Pinnacle Mine after shutdown earlier this year and achieved significant lower cash cost per ton. We also achieved the 8 million ton run rate at Bloom Lake Mine and completed approximately 20% of the mine's phase two construction.

I would also point out that excluding Bloom Lake Mine's contribution, Cliffs still has achieved a record breaking financial performance for the year. Our strategy of placing more products into the seaborne market along with successfully increasing our legacy asset seaborne exposure is directly impacting our bottom line results. We believe the world's emerging economies will continue to urbanize, and as a direct result will continue their need to produce record amounts of steel. Specifically, in China, fundamentals of urbanization, household formation, and labor force growth remain strong. We believe monetary policy is likely to ease, and already strong growth by western standards will continue. In China, we anticipate crude steel production to reach 730 million tons in 2012. This 7% increase from 2011, coupled with a steadily improving outlook for the US economy, will continue to support demand for steel-making raw materials. As previously disclosed, we anticipate 2012 average pricing for a seaborne fines product with a 62% iron content to be $150 per ton. We also believe it's likely that any recovery within the European markets could support an even higher average full-year price for iron ore.

Now, turning to the performance of our core businesses during the quarter. US iron ore's fourth quarter and full-year sales volume were 7.8 million tons and 24.2 million tons respectively. The quarter's volume included approximately 700,000 tons of pellets from our US operations going into the seaborne market. On a full-year basis, we placed a total of 1.2 million tons of pellets into this market, more than doubling 2010's full-year seaborne volume from our US operations. During the fourth quarter of 2011, North American steel making utilization rates averaged 74%, approximately 5% higher than 2010's fourth quarter. Despite the fact production in our customers' end products including autos, white goods, heavy machinery, and construction remained below historical levels, today's utilization rate is expected to sustain a healthy demand for our products. We believe this supports our anticipated 2012 North American utilization rate range of 70% to 75%, and our expected 2012 US iron ore sales volume guidance of approximately 23 million tons. This level is essentially flat with last year's volume. Considering we had approximately a million tons of volume recognized in 2011 that we collected cash for in 2010.

In eastern Canadian iron ore, full sales volume reached 7.4 million tons, more than double 2010's full-year sales volume of 3.3 million tons. This increase was driven by the incremental sales volume for Bloom Lake Mine which was acquired in May as part of the Consolidated Thompson acquisition. Eastern Canadian iron ore sales volume for the quarter was 1.9 million tons, which was made up of approximately 1.2 million tons of iron ore concentrate from Bloom Lake and 700,000 tons of pellets from Wabush. Although the segments fourth quarter sales volume was significantly higher than 2010's comparable quarter, frankly I am disappointed with the operational challenges we experienced at Wabush. These challenges, largely driven by equipment failures and the dryer operation at the mine, led to increased downtime resulting in lower production and sales volume out of Wabush Mine. We currently have temporary repairs in place and are studying the long-term solution. In addition, we have made operational leadership changes, putting one of our strongest operators over all of eastern Canada as we look to better coordinate our production there.

At Bloom Lake Mine, our ramp-up to the 16 million tons is on track, and today, construction for phase two is approximately 20% complete. As mentioned in last night's release, we intentionally mined lower grade ore, allowing rationalization of the production needed to meet the fourth quarter shipping schedule. Excluding this, we believe we would have achieved approximately $67 per ton cash cost at Bloom Lake Mine during the quarter. As we work to diversify the mine's customer base, we will continue to adjust production to match the shipping schedule. Ultimately, we believe our commercial strategy to place the ore directly with the mills and away from the trading relationships inherited as part of the acquisition is the right approach. During the quarter we successfully delivered Bloom Lake cargos to new customers in Asia.

Last week we did experience a minor fire in the concentrating facility at Bloom Lake. While there was some structural damage that will be repaired over the next two weeks, I am thankful to report that other than some minor smoke exposure, all of our employees and contract personnel are okay. While we are down for the structural repairs, we will bring forward some maintenance work that was originally planned for the second quarter. We anticipate our first quarter and full-year shipping and sales schedule will remain intact. However, it's too early to assess the Q1 cash cost impact, but we will plan to achieve about $60 per ton for the year.

On the logistics front, we have reduced our vessel load time in eastern Canada from approximately 9 days to about 5 days. This is primarily being driven by increased use of trans loading capacity. We are also on track to have a permanent conveyor system in place between the two docks at [Point in Law] replacing the temporary system currently being used. Also, we are in the process of developing an expanded lay down area for concentrate using our existing yard at Wabush. For 2012, we expect to produce and sell approximately 12 million tons from our eastern Canadian iron ore business segment, which will be comprised of approximately one-third pellets and two-thirds concentrate.

Now, turning to Asia-Pacific iron ore, fourth quarter and full year sales volumes were 1.8 million tons and 8.6 million tons respectively. The year-over-year quarterly decrease resulted from a combination of a planned shutdown at the port related it our expansion project and weather-related timing to two vessels at the year end. Like the other major producers in Australia, we also experienced industrial action within the logistics network which also contributed to the lower year-over-year volumes. Our Asia-Pacific iron ore expansion to 11 million tons per year is nearly complete with only a few items still in process. This project continues to be on time and on budget, a testament to the project execution skills of our operators. As such, we are maintaining our 2012 sales and production volumes in Asia-Pacific iron ore of approximately 11 million tons.

During the fourth quarter, we saw tighter credit conditions for some of our smaller market participants in Asia, fueled by the ongoing European sovereign debt crisis. Recently, we have seen these tighter credit conditions ease, making way for traders and small mills to return to the market. As a result, marketing condition appear to be improving, which is supported by the rebound of iron ore pricing from 2011's fourth quarter lows.

Now, turning to the North American coal segment. I'm very enthused by the strong performance Pinnacle turned in for the quarter. In fact, that we reported profitability in this segment. Sales volume for full-year 2011 reached 4.1 million tons, nearly a million tons more than 2010's full-year volume. Although the segment sales volume for the quarter was nearly flat at about a million tons, I think it's a respectable performance considering we had virtually zero sales contribution from Oak Grove as the mine's prep plant remained down due to the severe weather damage reported in 2011. While we still have proving to do, I believe our turnaround in this business is beginning to gain momentum. Since Pinnacle Mine resumed production in early October, it has achieved production volumes in excess of 200,000 tons for three consecutive months. This meaningful increase has significantly lowered Pinnacle's realized cash cost to approximately $94 per ton during the quarter.

At Oak Grove, we continue to mine our underground operations throughout the quarter. At year end, we had approximately 1.9 million tons of raw coal, or 745,000 tons of clean coal equivalent, on the ground ready to be washed. This represents more than one third of our expected sales volume for Oak Grove in 2012. In addition, the Oak Grove's prep plant construction is complete, and while not fully ramped yet, we have restarted the prep plant and are now currently processing coal. We have completed installation of a new sheer on the long wall and have begun utilizing the mine's new portal. Development work at both our long wall mines is running well ahead and ahead of schedule. In 2012, sales volume is expected to reach 7.2 million tons with production of about 6.6 million tons. As of today, of the 6.1 million tons of Met coal we plan to sell in 2012, we have approximately 60% contracted and priced at an average of $160 net back to the mine or an equivalent of about $225 per metric ton on an at-the-port basis. This includes the low ball and high ball products. I'm enthusiastic with the early success the team has achieved in North American coal, and I look forward to reporting continued improvement within the business segment as the year progresses.

In closing, as you may have seen during the end of 2011, at the beginning of 2012 we made a few announcements to dispose some of our non-core assets. These included the sale of renewaFUEL and the dissolution of our Michigan Iron Nuggets joint venture with Kobe Steel. These two announcements are indicative of our executive leadership team's focus and allocation of resources to areas where we believe we can have the most impact for our shareholders. We have a robust organic project pipeline and a number of operational milestones within reach. Over the next year, our management's focus will be on delivering these projects.

And, with that, I'll turn the call over to Laurie for her review of the financial highlights.

Thank you, Joe. Following on Joe's comments, our record breaking performance for 2011 can be attributed to our long-term focus on diversifying our market participation and enhancing our organic expansion initiative. We expect this consistent strategy to continue yielding impressive financial performance as well as significant cash flow generation moving forward.

Looking at the P&L, in the fourth quarter, revenues improved 17% to a record $1.7 billion, helping to accelerate full-year revenues to a record $6.8 billion and topping last year's all-time high of $4.6 billion by more than 45%. Additionally, diluted EPS for the full year 2011 of $11.48 per share was significantly higher than our 2010 diluted EPS of $7.49. This bottom line performance reflected a combination of higher iron ore pricing and meaningful contribution from the Bloom Lake Mine during the year. Continuing with fourth quarter consolidated results, sales margins during the quarter expanded modestly to $496 million from 2010's $483 million. The volume increase was partially offset by higher electricity costs in North America and planned increases in shipping. Operating income declined to $370 million compared to just under $400 million in 2010's final quarter. The decline was primarily driven by a $28 million impairment charge related to the 2010 purchase of I & R Energy's coal operation. Income tax expense increase from $11 million in 2010's final quarter to more than $123 million in 2011's comparable quarter.

During the fourth quarter, our effective tax rate increased to 35% compared with the full-year rate of 19%. This was the result of a re-measurement of our deferred tax liability at Bloom Lake and the recording of a nonrecurring adjustment related to the Quebec mining duty. Conversely, 2010's fourth quarter income tax expense was artificially low as we recorded a tax planning benefit related to Amapa. Primarily due to the tax rate change, fourth quarter net income attributable to Cliffs' shareholders declined to $185 million, or $1.30 per diluted share, compared with last year's $384 million, or $2.82 per diluted share.

Turning to our US iron ore reporting segment, revenue per ton in the quarter was up 21% to $120, driven by the higher year-over-year seaborne iron ore pricing and supply contracts that have more exposure to the seaborne market pricing. The year-over-year increase was partially offset by sales mix as it was heavily weighted to customer contracts with lower sales rates versus seaborne rates. Quarterly cash costs increased 12% to $66 per ton. US iron ore increased cash costs were primarily due to higher supply and maintenance expenses, electricity rates, and stripping activity versus the comparable quarter in 2010. The net result of this was a 34% increase in sales margin per ton from $38 last year to $51 in the current fourth quarter.

Fourth quarter revenue per ton in eastern Canadian iron ore was $124, 18% lower than 2010's fourth quarter. The decrease was primarily driven by sales mix as last year's fourth quarter sales were comprised exclusive of premium pellet product, whereas the sales mix in our most recent quarter included about two-thirds iron ore concentrate products. In addition, with the weaker market for steel making in Europe, we're also seeing a compression of the pellet premium compared with the prior year's fourth quarter. Average cash costs per ton in eastern Canadian iron ore was $102, 9% higher than last year's $94 per ton, reflecting the production challenges at Wabush which Joe addressed earlier in the call. The impact of the equipment failures were approximately $9 per ton in maintenance and repair spending during the quarter, which is included within our cash costs per ton results. Partially offsetting the higher year-over-year cash costs at Wabush were the comparably lower cast costs at Bloom Lake of $75 per ton. This also included the volume-related negative impact of approximately $8 per ton due to the lower production to accommodate the fourth quarter shipping schedule.

Looking ahead to 2012, for the eastern Canadian iron ore segment, as part of our integration of the Bloom Lake Mine, we will re-engineer our tailings management plans for the longer term. This new design will take into account our current scoping study which anticipates increase in the mines' production capacity to 24 million tons per year. We anticipate the impact of this work on the mines' cash cost per ton will be about $4.50 in 2012, which is included in our eastern Canadian iron ore cash cost guidance of $70 to $75 per ton. Nevertheless, assuming our 2012 average seaborne iron ore expectation of $150 per ton, we would anticipate the Bloom Lake Mine to contribute over $500 million in cash margin to Cliffs' expected results in 2012. In Asia-Pacific iron ore in the quarter, we saw a slight decline in average revenue per ton to $130 from last year's $135 as average spot pricing for 62% iron content product declined by about 11% compared with last year. Average cash costs were up 34% to $69 per ton compared with $52 per ton last year. This was due to the development of multiple pits, the strong Australian dollar, and lower fixed cost leverage.

While we recognize that there was a significant year-over-year increase in our reported full-year cash cost per ton at our Asia-Pacific iron ore operation, we expect a much more moderate increase in 2012. Our outlook of $65 to $70 per ton assumes we achieve 11 million tons in sales volume and a US-to-Australian dollar exchange rate of $1.03 for 2012. In our North American coal segment, average revenue per ton improved to $125 versus $113 last year. This reflects a greater proportion of higher priced, low vol net coal year over year, including significantly increased sales and production volume from Pinnacle Mine. The lower cash cost per ton of $94 achieved at Pinnacle during the quarter helped lower average cash costs in the segment to $98 compared with $118 last year. An improvement of 17%. Combined with the higher pricing, this resulted in positive sales margin, reversing the trend of negative sales margin we've experienced.

In 2012, we expect Pinnacle's impressive cash cost per ton performance will continue to help drive down average costs in the segment. However, partially offsetting this will be sales from inventory at Oak Grove that carry higher costs. As you know, a significant amount of our 2012 Oak Grove sales will be from the stockpile that we have built, and those tons carry a fairly high cost due to the fact that they were produced when we were running at reduced volumes. We quantified this at approximately $5 per ton for the year. Taking all of this into account, we anticipate North American coal's 2012 cash cost per ton range to be $105 to $110.

Turning to the balance sheet, at the end of December, we held approximately $0.5 billion in cash and equivalents and had total long-term debt of $3.6 billion with no borrowings drawn on our $1.75 billion revolver. We generated an all-time high of $2.3 billion in cash from operations for the year, up 73% from the record $1.3 billion reported in 2010. We continue to be focused on maintaining our investment-grade rating and enhanced our capital structure in 2011 with new debt and equity offerings. In addition, during the year we also doubled the quarterly cash dividend rate.

For 2012, we're maintaining our business segment expectations that were disclosed in the January 26, Press Release. In addition to these, we anticipate 2012 full-year SG&A expense is to be approximately $325 million, reflecting increased growth-related corporate initiatives. These include investments in staffing for enterprise-wide systems, for HR, finance, environmental, and other areas that will support our anticipated growth and regulatory compliance. Additional cash outflows expected to be incurred in 2012 include approximately $90 million for exploration and $75 million for our Chromite project. Our exploration spend is focused in a few primary areas. It includes drilling programs in western Australia and around our Bloom Lake, Lenalee, and Tefler deposits in eastern Canada which could ultimately expand our existing operations in these regions. It also includes scoping work on the Decar Project in British Columbia.

The spend in Chromite will include outflow for feasibility studies including engineering, geo-technical and product testing, mine site operations including drilling, environmental baseline monitoring, and sustainability activities, including first nation support. We expect a full-year effective tax rate of approximately 25%, and 2012 DD&A to be about $620 million. Based on current expectations, we anticipate generating approximately $1.9 billion in cash from operations in 2012. We are also maintaining our previously disclosed CapEx budget of $1 billion, comprised of approximately $700 million of growth and productivity related capital, and $300 million of sustaining capital.

Looking forward in 2012 and beyond, I'm very comfortable with our financial flexibility and position including our prospects for cash generation and the opportunities that will present for funding organic growth projects and possibilities for returning cash to shareholders. With that, Steve, I think we're ready to open the call for questions.

Tyrone, can you please queue the participants on how to ask a question?

Thank you, sir.

(Operator Instructions)

Kuni Chen, CRT Capital Group.

Hi, good morning, everybody.

Good morning, Tony.

Hey, I guess, just on Wabush, can you talk about how you expect that to run in the first quarter, for the first half here? And, to what extent you're still struggling through some of the operational issues? Your cost guidance for the year in eastern Canada doesn't seem to bake in any unusual items related to Wabush. I just wanted to get your sense on how to reconcile your comments that there's still some issues going on there, but it doesn't seem to be reflected in your formal guidance.

I think it is, Kuni, reflected in. This wasn't a catastrophic failure. This has just been some deterioration of maintenance particularly around the dryer right now. As I said, the guys have done a good job debottlenecking the other maintenance problems as they work towards the dryer.

We do have all six mills running now, which it's been a while since we've seen that. But, we did have some structure that slumped, if you will, into the concrete. They've had to raise that temporarily and have to do the structural repairs around that dryer to get it going.

It will not be a quick fix. And, I think, particularly with the weather in Wabush when it comes to the repairs slowing down, it will be a slow slog through the first half to get Wabush back up and going. But, I do think it's baked into the numbers.

Okay. And then, just s a quick followup, can you give us some color on what you've been seeing out of Australia over the last couple of weeks? Things appear somewhat slow right now due to high iron ore stockpiles in China. Just want to see what you guys are seeing on the ground. And, if it jives with a slower market right now, or if things are starting to pick back up.

I was just in Perth last week reviewing the operations, and actually went through the shipping schedule while I was down there with them. We've got a very healthy shipping schedule in the first quarter. I mean, the guys have to work a little harder to place the tonnage. There's no question about that.

The market has slowed somewhat with the credit tightening that we all experienced through the fourth quarter and into this quarter, as well. Stockpiles, as we watch very closely, not only in the ports, but I think just as important we look at our customers' stockpiles, we don't see those growing. They're pretty low given the credit tightness that they've had to experience.

And, we do see a normal seasonal fluctuation, if you will, at the ports with the build always going into the Chinese New Year and then the steel industry picking up after the New Year. I do have to say it's a bit sluggish picking up after the New Year. But, we still anticipate our customers to come on a little stronger in the latter half of the year, if you will, as we watch the credit loosen up.

All right, fair enough. Thanks.

Michael Gambardella, JPMorgan.

Good morning, Joe and Laurie.

Good morning, Mike.

Have a question on the Chromite project. I think you've put in about $300 million to $400 million to purchase the property and then some more additional funds, $75 million this year you're saying. But, when you -- I thought when you initially purchased the properties, the estimated capital cost to develop the property was about $1 billion, or less than $1 billion.

Most recently, I think you're around $3 billion now. Maybe even higher with the roads. Can you comment on that? And, the -- is there change in the scope of the project, inflation on the cost? What's change so dramatically? Mike, I think you are -- number one is, you are correct. Initially we did go out with $1 billion price tag for this project. We are in about the $3.3 billion range. I think what's really happened is, one, the sharpening of the estimate as we go through pre-feasibility, and we are not through pre-feasibility.

So, we expect to cross that line in May/June. We're going to stay in pre-feas as long as we need to. And, get the appropriate work done to try and get this thing framed up so we'll have an even better number on that. But, as you know, when you come out with these numbers, initially they've got a wide plus or minus 30% or 40% on either side.

So, one is the sharpening of the estimate. I think the second thing certainly is the transportation. And, the road has gotten more expensive in this segment than we expected. But, everything else is falling in line with that.

The original estimate didn't include any road or transportation. It was the original building that we talked about, Mike.

Yes, it did not. I will say this, Mike, just to go on for a little bit on the Ferrochrome. While we're engaged right now with the government in Ontario, we've got very strong support to work through the project both from the environmental panel review that we're going through right now, as well as the structure on the transportation. And, those conversations are going on right now, but they're very positive.

All right. But I mean, your initial take on, your internal take on, the returns on this project on a $1 billion cost versus $3 billion-plus cost must have changed dramatically. I mean, is this still a viable project?

Yes. Sure, Mike. They definitely have changed. But, at this point it is absolutely still a viable project with a return that exceeds our cost of capital. And, at every phase along the way, we will continue to evaluate that.

I would point out, too, that the original project scope was just built around about 600,000 tons of Ferrochrome. We've also added about 1 billion tons of Chrome concentrate to the design of the volume that we'll do. So, the economics around the project have changed somewhat, too.

Yes.

Okay. Will you be releasing any more details on that?

Probably not until summer when we finish pre-feasibility. We really -- because the numbers are still so imprecise and moving, we don't want to go into that kind of detail at this point in time. I would guess sometime in the summer we would be ready to do that. But, rest assured we do continue to evaluate the returns. And, it is still above our cost to capital based on everything we understand at this point.

We're still very excited about it, Mike, to add to this business unit. And, we look forward to releasing more information to everyone once we get through the pre-feasibility and can pin the numbers down.

Okay. Thank you.

Thanks.

Timna Tanners, Bank of America

My question is along the same lines. I wanted to ask to the extent that you're also increasing the amount that you're spending on exploration? And, should we also conclude that that's a -- organic growth is really where you're steering your efforts? And, also on cash use, we noticed that you bought back more shares in the quarter. Can you talk about general cash use allocation?

Let me take the exploration question first, and then Laurie will do the cash and the capital structure. On the exploration, we're definitely spending more. We are -- we have spent a lot of time and effort and money, as you know, to grow the company through M&A.

Now that we've done that, it's not that we'll be completely finished with M&A if the right opportunity comes up. But, we are turning more into a project execution phase of this business as well as the defined areas that we have now in the labrador trough that comes with Consolidated Thompson. Comes out in Australia as we continue to look to try and expand our Australian assets.

And, in the Ring of Fire, where we've only concentrated so far, only on the Ferrochrome which is the right thing to do. But, we have a lot of claims and a lot of land out there with additional potential of other minerals on that. Yes, we've paid the price on the M&A, and now we're executing the organic piece of the exploration.

And then, turning to your question on cash units. And, we did complete the stock buyback, as I'm sure you remember, our Board authorized a stock repurchase in August. And, we really looked at that as somewhat of an offset to the equity offering. We had committed to keep the equity offering as low as possible. It exceeded our expectations in terms of execution and also the exercise of the greenshoe, so we obtained more cash through that than we originally expected.

So, we embarked on the stock buyback to somewhat mitigate that and minimize the dilution to our shareholders. And, we completed that early in the fourth quarter. And now, as we look at our cash use with all the cash we're going to generate throughout the balance of the quarter, our objectives haven't changed. We will still continue to look at growth.

But, as Joe said, we think it will probably be more likely focused on organic growth in the near term. And then, we'll continue to look at the dividend, as I said, we doubled the dividend in the last year. And, I think our Board will continue to look at that as a means to return cash to our shareholders.

Okay, that's helpful. If I could ask one more. We just want to understand the assumptions in your guidance. So, the utili -- we understand the HRC prices makes sense. That's not too far from where it is today.

And, the forecast for iron ore makes sense. But, the one that surprised us was the blast utilization number because that's actually well below where the current operating rates are. Is there any logic or explanation that you can help us with for why -- how to think about that?

I think it's just an annualized rate, Timna. As we look at this and you look at blast furnace schedules of repairs that go in, which we work close with our customers with, we just see that as an annualized rate going in.

We hope we're wrong and you're right, and the blast furnace utilization stays higher. That's only good. But, I think there are some blast furnace outages planned for later this year.

Got you. All right. Thank you.

Mitesh Thakkar, Friedman Billings.

Good morning, everybody.

Good morning, Mitesh.

My first question is just on the Chromite product following up from Mike. What are some of the key milestones? I know one is the feasibility study. But, how should we think about timeline and the schedule over the next year or two?

We are working forward in the environmental review. That is always the longest and most critical path when it comes to any of these projects, Mitesh. That is on target right now to meet our goals of a late 2015, early 2016 startup of that.

Again, as I said, the road and the transportation route, we've settled on the North/South route versus the East/West route. And, we're in conversations with the government on how that -- what that looks like from a structural, a funding standpoint from there. And, we're still into furnace selection sites, as well, which works around the electrical usage.

That's the highest cost to the furnaces over there. They're very power intensive, and we're in conversations with the governments on those, as well. I think those are the three highlights you can look for to watch the progress of this project over the next year or two.

Okay, great. And, to follow up on the eastern Canadian Bloom Lake operations. it looks like if you annualized the Bloom Lake sales this quarter, it ran at about 4.8 million tons rate.

And, you mentioned that you had district production for some shipping schedules and those kind of things. Can you not run all in and sell the rest of the pallets on the spot market? Sorry, concentrate on the spot market? Instead of taking back production?

I'm not sure I understand the question.

Well, we can certainly -- the issue is finding new customers, and it takes our commercial team a little bit of time. As we've talked about, we are looking to increase the number of customers that we have that take the Bloom Lake concentrate as opposed to being focused on just one or two. It is consistent with our overall diversification strategy. And, we all tend to forget that we've only owned this property for seven months.

So, it will takes some time to work through that. And, we did ship some cargos to some new customers. So, as we grow those relationships with them, in the future, I think if the original customers that Consolidated Thompson had are not as interested in product, we will have a larger array of customers to choose from. But, just have to go through that trial, both process, and work through it with them.

Great. So, it's just finding suitable customers for it, right?

Yes.

Okay. Great. Thank you, very much.

Sal Tharani, Goldman Sachs.

Thank you, good morning.

Good morning, Sal.

The charges or costs related to Chromite project of $75 million, is that something should be considered that will be expensed over the next several years every year, or is it just a one time?

Well, that's the amount that we will expense in 2012. And, I would think that there will be a similar, and perhaps higher, number in 2013. We haven't concluded that process. And, by the summer when we finish the pre-feasibility, we'll have a lot more detail. But, there will be spending, both expense, and we'll get into capital in another couple of years when we start building the mine. But, there will be expense to operate the mine site and so forth every year.

Okay, great. And, do you have the number for the Sonoma cost for the year, cash cost? You gave $80 for the fourth quarter, I know.

Sal, I'll get it to you after the call.

Okay. I just was wondering why the cost is going up so much from fourth quarter to the yearly guidance of $110 considering that your volume is actually going to be up in that mine. Is there something happening over there?

There's more stripping. It's a consistent theme throughout Australia with these smaller mines. The strip ratio's going up.

Okay. Great. Thank you, very much.

Tony Robson, BMO capital markets.

Good morning, guys. Thank you, for your time on the call.

Sure.

Good morning, Tony.

Hi, two questions, please. First one maybe to Laurie. $1 billion dollars of total spend this year is a reasonable sum of number. Of the $700 million in project CapEx, can you give us a bit more of a breakout of that, please, what is it going to?

Yes. Most of it's going to be for eastern Canada to complete that part of the mine. And then, there's a bit still, the 11 million tons in Australia that is ramping up. And then, we have some for lower War Eagle, our Met coal mine that's coming on in West Virginia. Those are probably the three largest items in there.

The majority, Tony, would be the ramp-up in eastern Canada from $8 million to $16 million.

Great. Thank you. Actually, that leads me to my second question. Given that, terms of the ramp-up schedule for stage two, last we hear it's about 20%, 25% complete, given that stage one took a reasonable amount of time, admittedly a lot of that was not under your ownership, how should we be thinking about how long it will take stage two to get to full capacity, please, going forward?

I think that's a great question. There's been a lot of changes that we've made to phase two that was based on learnings in phase one. I think we've done a lot of correction going into this. And, I would expect the ramp-up to be a much shorter timeframe from the learnings we've had and the operator experience that we now have with that ore body.

I think also, Tony, in the fourth quarter when we did slow down production in the mine to match the sales that we had, we're also really taking advantage to experiment, if you will, with the different blends and blending schedules that we have out of that mine with the ore types that will make the ramp-up that much smoother when we get into phase two. I would expect it to come down considerably.

Can I pin you, Joe, can I pin you down to a tighter time on that, or you prefer to keep it open at this stage?

Ask me next quarter, and I'll have the answer, Tony. I just don't have it today and I don't want to speculate on it without talking to the operators.

Okay, I appreciate it. Thank you, guys.

Sure.

David MacGregor, Longbow Research.

Yes, good morning, everyone.

Good morning, David.

Just a couple questions. First of all, where is the pellet premium today? You said it was under pressure. And, is that just weakness in Europe, or are there other factors to think about there?

It's a moving target. Nothing is published when it comes in with it. A lot of it is with the change that we've had recently with the pricing. And, this change from the lag pricing on the quarterly basis to the spot prices to the almost landed prices. It's just all over the map right now with that. So, it would be hard to give you a generic number. A lot of it is negotiation on a customer-by-customer basis.

But, I would say Europe has a lot to do with it because in China, they don't generally use pellets. So, the US and Europe are the primary markets for pellets. So, you've got a pretty significant percentage of that market under a bit of pressure.

In the past, David, we've seen it in the 40s. And, as Joe said, it's the point of negotiation now.

Yes. If you can't give us a level, can you at least give us a sense of how much it has changed? You said it's coming down, and I'm trying to get a sense of the Delta.

No, we really can't at this point in time with the sensitivity around customer negotiation.

Secondly, just on the coal business. Can you just talk about the development work you've done there. And, I know that during the production curtailments and the outages you continued to develop and develop panels specifically, I guess. What extent should we expect lower cash cost as a result of that? How much cost pull-forward, in other words, has occurred there?

I don't think I would think of that as a cost pull-forward. I would think of that as stabilizing our costs. It's what we need to do to achieve the long-term, consistent cash cost targets that we've had. You have to be ahead in your development in order to maintain consistent production. That's how I would think about that.

Yes. I think that's right, David. This is all a combination. Particularly at Pinnacle, if you will, of the new long wall getting up and getting ramped up. It's a big, complex piece of equipment. It's running very well now.

We're in a more stable part of the mine at this point in time. When we did have that down time last year, that significant down time with the CO2 problems that we had, we spent a lot of time putting new beltways in and a lot of maintenance. As you know, we've got new management there, as well. And, that's allowed the -- we were allowed to go ahead and develop while the long wall was down.

so, that got us significantly in great shape from there. Same thing at Oak Grove. While we were decoupled, if you will, we could really concentrate on the mining. I think the guys had a great year in mining down at Oak Grove with the 1.9 million tons that they did. And, they got their development back in balance, as well.

Last question, if I could, just on a clarification. Laurie, I think you said $5 per ton impact at Oak Grove as a consequence of moving -- from selling off the stockpile to selling out of production. Can you just elaborate on that number a little bit? You mentioned that as the change to the annual average. But, how do we think about the ongoing cost of production at Oak Grove once that stockpile's done on a run rate basis?

Well, certainly it will come down, and the way -- what I wanted to make sure that you could think about is our costs in 2012 will be $5 higher because of the pull-forward of the product that was produced under a higher cost scenario. So, it will be artificially impacted.

So, our ongoing cost of production in 2012 will be about $5 less than what we ultimately report. So, if nothing else changes going into 2013, you would just see a $5 drop from that.

So, you've got the new sheer head, you've got the new shaft going in there, you've got a new prep plant, plus you're going to have more scale. I would have thought that would have contributed to more than $5.

And, it very well may. We'll work that out through the year. But, the higher cost product that we've got stockpiled now versus what we're running at in the early part of the year, that's the number we'd see.

Okay. Thanks, very much.

Yes.

Brian Yu, Citi.

Great. Thanks. Good morning, Joe, Laurie, Steve.

Good morning, Brian.

My first question is on Bloom Lake. I just want to make sure I understand the cost structure there. Joe, I think you said that at Bloom Lake cash cost was about $60. Then, Laurie mentioned that the reengineering, the tailings, would add $4 or $5 per ton. Is it safe to assume that that $5 cash cost on a go-forward basis of around $55? And then, what would that look like once phase two comes on line, without trying to make assumptions about the Canadian dollar, where it stands today?

Yes, I don't think I would imply that you take Joe's $60 and that includes the $55. We got that -- that's an increase to that $60.

Yes. Brian, we're at $60 for the year. That's where we think we'll -- what we'll achieve. I think it's probably a little too early to speculate where that number goes once Bloom phase two gets done.

When we get phase two -- yes, we're not ready to --.

But, we think we can achieve $60 for the year. We achieved $67 in the quarter, in the fourth quarter if you eliminate the lower volume impact from adjusting the production to the actual shipping schedule. So, we weren't building up inventory.

Would that $60 include the cost that Laurie mentioned about reengineering the tailings?

Yes, yes, it does. Yes.

Okay. And then, the second one I have is just on [omaside] it looks like it's doing a little bit better now. Can you give us an update on what's happening there and maybe what strategic plans, if that's changed in any way.

Yes, it's stable. I think Anglo's doing a good job operating it at the current levels they have. They certainly have a great focus, particularly on safety, when it comes to that, and that's really the underpinning of the whole organization. The deposits and money it makes, again, I think as I've reiterated many times, it's a stagnant assets for us.

We don't have the management control or the input that we'd like to give with it. And again, we're working through that with Anglo as we did last year as well, as we speak. But, it's stable, and we're looking at the asset right now.

Okay. Thank you.

Thanks, Brian.

Wes Sconce, Morgan Stanley.

Hi, guys.

Hi, Wes.

This one's for Joe. When you look at valuations today for Met coal assets, would you say your bias is to get bigger in coal or are you still waiting to see how 2012 shapes out as your existing operations get back up to full speed?

I think, Wes, first, we've got some proving to do, as we said earlier today in our conversations with it. We're comfortable with the large projects we've talked about through the last year. We had a big setback in Oak Grove with the tornado in April. But, as things go, we're going to come out pretty well with that with a pretty modernized prep plant which we think will get a little more efficient as it comes out with.

As the year goes on, if our improvement and stabilization, we get it embedded and all that, then yes, of course, as we've said, we've always looked at this as the platform for growth, for additional Met coal. We still think Met coal is one of the better minerals to be in. We've got a couple of quarters of work to do first before we would think about anything like that.

Thanks. And, just a followup on US iron ore. Could you remind us again what the sensitivity is for the US pellet prices for changes in Iodex and HRC?

Yes. So, for the two seaborne businesses in eastern Canada and Australia, we're really at a 1 to 1 correlation. So, a $10 change in the spot price average for the year would probably equate to about a $10 change in our revenue per ton. In the North American iron ore business, the sensitivity is more about $4 for every $10 change.

And, that's for your pellets?

That's right. For the US iron ore business, that's right.

Great. Thanks a lot, guys.

Thank you.

Thank you.

Tyrone, as we're approaching the top of the hour, we'll take one more question and then we'll wrap up the call.

Garrett Nelson, BB&T capital markets.

Hi, good morning, everyone.

Good morning, Garrett.

At Wabush, the equipment and operational issues have been a drag on cash costs and margins for the eastern Canadian segment the last few quarters which is, unfortunately, skewing some pretty good results at Bloom Lake. Is Wabush a mine you might consider idling until the issues are fixed?

No, we wouldn't. We still -- with what the purchase price we made with the partners a couple years ago, this is still be one of our better investments of all time, if you will. As some mines go through, Wabush is a pretty old property, as it will, it was managed, previously where there wasn't a lot of capital that went in.

And, we knew that going into it. And, we just got to work through the issues. But, we've got to take care of our customers. There is demand for the pellets, and it is seaborne. And, we'll continue to work through it for the next few quarters.

Okay. And then, just switching over to coal, what capacity rate is new Oak Grove prep plant currently running at? And, when do you expect it to hit full capacity if it's not already there?

Yes. We're currently only running one of the wash circuits at the preparation plant. We think by the beginning of the second quarter we'll -- there's two circuits there. We'll run both circuits, and we'll also move into operation a fine coal recovery circuit. So, we've got a lot of capacity left to ramp-up to in the prep plant at Oak Grove.

And then, if you could just repeat the 2012 coal commitments?

You know what --.

60% of our coal was committed, and that is the high ball and the low ball, all the Met coal. So, it's 60% commitment.

And, that was at $165 short ton at the mine. So, if you were to -- if you look at it on a PHP equivalent basis, you'd be looking at about $225.

Right. So, that excludes the 1 million or so tons of thermal coal?

That's right. Yes.

That's right.

Okay. Thanks, very much.

Thanks.

Thanks, Garrett. Thanks, everyone, for joining us on today's call. Certainly if you have followup questions, we'll be -- our Investor Relations team will be available for the rest of the day. You can certainly reach out to us. Again, we appreciate your interest and look forward to sharing our results in the future.

Thank you.

Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.