Cleveland-Cliffs Inc (CLF) 2012 Q1 法說會逐字稿

Good morning, my name is Shannon, and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2012 first-quarter conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions) At this time, I would like to introduce Steve Baisden, Vice President Investor Relations and Communications. Mr. Baisden?

Thank you, Shannon. I would like to welcome everyone to this morning's call. Before we get started, let me remind you that certain comments made on today's call will include predictive statements that are intended to be made as forward looking within the Safe Harbor Protections of the Private Securities Litigation Reform Act of 1995. Although the Company believes that it's forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on our website.

Today's conference call is also available and being broadcast at CliffsNaturalResources.com. At the conclusion of the call, it will be archived on the website and available for replay. Joining me today, are Cliffs' Chairman, President and CEO Joseph Carrabba; and Executive Vice President Finance and Administration and Chief Financial Officer Laurie Brlas. At this time, I'll turn the call over to Joe for his initial remarks.

Thanks Steve, and thanks to everyone for joining us this morning. The year-over-year volume increases in all of our business segments led us to achieve a first-quarter global iron ore sales record of 8 million tons. In North America, we continue to experience healthy steel making utilization rates, with first quarter averaging around 78% Conversely many mills in Europe are operating at rates well below capacity, ranging from 60% to 70% with a number of announced permanent idles. Europe's lower rates will have a minimal impact on our iron ore sales volume, and recent announcements suggest stable racing in premium -- in pellet premiums.

We continue to see the Platts' Index pricing for iron ore trading within a pricing band of $142 to $160 per ton. First quarter's average Platts' price was $144 versus $180 per ton in last year's comparable quarter. Despite the year-over-year pricing headwind, we still were reported first-quarter record revenues. Additionally, we anticipate the iron ore spot sales -- spot price to increase throughout the remainder of the year. This is supported by our expectation of China's crude steel production of over 730 million tons.

Although China's January and February crude steel production was lower than expectations, the momentum appears to be gaining. China's annualized steel production increased to 725 million tons in March, with even a higher annualized production suggested in April's early reports. In the coal markets, spot pricing during the quarter was continually under pressure and softer, relative to last year. However, we believe we have experienced the bottom. This will be especially evident if we see continued supply-side shocks, including industrial action or adverse weather in primary production basins. The softer market in the quarter required our global marketing group to seek out new customers in non-traditional markets for our North American coal products.

Although this environment is more challenging, it has created an opportunity to establish relationships with new coal customers in Asia. As you all know, we place significant volumes of iron ore into this region. However, our exported North American Coal products have historically been placed into Europe. That being said, during March and April, we sold 0.5 million tons of met coal to these new customers in Asia. Our ability to swiftly place this volume reflects the quality of our coal products and the benefit of having a global marketing group.

Now, turning to the performance of our core businesses during the quarter. Sales volume of US Iron Ore increased 20%, to 3.4 million tons from 2.8 million tons, primarily driven by vessel timing. The Great Lakes shipping season resumed on March 25. As most of you know, our first-quarter sales volumes are typically the lightest when compared to other quarters. This is due to the winter weather and lock maintenance of our Great Lakes.

Our US Iron Ore mines continue to deliver very consistent volumes, and generating a significant amount of cash for the Company. Eastern Canadian Iron Ore sales volume for the quarter was 1.9 million tons. That was made up of approximately 1.4 million tons of iron ore concentrate from Bloom Lake and 500,000 tons of pellets from Wabush. The year-over-year sales volume decrease at Wabush is attributed to major repair work to stabilize the mine's reduction reliability.

As reported on our last earnings call, during the quarter, we experienced a minor fire at Bloom Lake's concentrating facility. This resulted in production downtime of approximately 10 days. In addition to repairing the damage caused by the fire, we used the downtime to advance planned maintenance, originally slated for the second quarter. By compressing maintenance planned for future quarters, we expect to recover some of the production loss throughout the remainder of the year.

While no personnel were injured during the fire incident, I do regret to say we had a fatality at Bloom Lake earlier this month. We are greatly saddened by this tragedy, and we extend our thoughts and prayers to our employees' families and fellow colleagues. We take our responsibility of providing a safe work environment very seriously, and we are currently investigating the cause of the accident.

At quarter end, we were nearly complete with the design work to re-engineer our tailings management at Bloom Lake. Once a new design is implemented, it is expected to lower our future cash costs and will support our production expansion to 24 million tons per year. By improving ore recovery rates through blending and adjustments to the mine's flow sheet, we have increased Bloom Lake's production reliability. These are just two examples of how Cliffs is bringing its operating experience to bear on improving the long-term capabilities of the mine. We will continue making changes to the mining and processing flow sheets until operations are up to Cliffs' standards. In our experience, a [benefit and gain] in ore, we found that it takes about two years to achieve optimal performance from a concentrator.

During the quarter, we delivered trial cargos of Bloom Lake's ore to a handful of our current Asia Pacific Iron Ore customers based in Japan and Korea. We believe these tests will be successful and result in new, stable customers for Bloom Lake's premium product. Our Eastern Canadian commercial strategy is to establish to direct relationships with multiple mills, similar to our Asia Pacific Iron Ore customer base. We believe investing the time to establish and develop these relationships is ideal for the long-term profitability of the mine.

Candidly, we recognized cash costs of Bloom Lake are higher than expected. While this is not ideal, we have a plan in place to optimally run and expand its operation. Within this plan, we will continue to adjust the Phase One flow sheets until we are satisfied with the product's consistency and production of the reliability. In the shorter-term these adjustments could impact cost, as they did in the first quarter. Despite this, I believe our Phase One cash cost target of $60 per ton is still realistic and achievable. Better yet, we will apply the knowledge we've gained from Phase One to our Phase Two ramp up.

I am also enthusiastic to report our expansion to 16 million tons at Bloom Lake is progressing well. Today, construction of Phase Two is nearly 30% complete, with engineering-related work approximately 80% complete. Additionally, we have secured a rail agreement with the QNS&L to support our expansion to 16 million tons annually. We anticipate finishing the scoping study at Bloom Lake's Phase Three expansion to 24 million tons by the end of the year.

Turning to Asia Pacific Iron Ore, first-quarter sales volumes were up 25 percent. Achieving an all-time quarterly record of 2.8 million tons. With over 1 million tons shipped from Koolyanobbing in March, we are essentially complete with our expansion projects to achieve 11 million tons annually. The construction of all passing loops and rail yard facilities is complete, and we have commissioned the use of new locos and longer trains. Unlike the common trend in our industry, I'm extremely pleased to report this project was finished on time and on budget. We will now focus our efforts on optimizing the operations and blend for the products we market.

As reported in last nights release, we are increasing our Asia Pacific Iron Ore 2012 full-year sales volume expectation by 400,000 tons, to 11.4 million tons. The increase is primarily the result of transitioning to longer trains faster than we had initially participated. This has increased our ability to move additional volumes from the blending facility to our sheds at the port. We will draw down our stockpiles at both the mine and port to achieve our increased sales volume outlook.

Now, turning to North American Coal. I continue to be impressed by the consistent production achieved at our longwall operations, which resulted in our increased sales volume. During the quarter, production volume increased 30% to an all-time quarterly high of 1.8 million tons. Both of our longwall machines are operating well. As a result of the operational success achieved at Pinnacle and Oak Grove, we plan on executing longwall moves earlier than expected.

Due to the increased inventory stockpiles built at both Pinnacle and Oak Grove, the longwall moves are not expected to impact our sales volume outlook. Not only have the operational improvements at both longwall mines increased product availability, but the improvements have also meaningly contributed to a higher profitability due to the product's premium quality along with lower cash costs per ton, which Laurie will describe in more detail.

In closing, as all of you know, our strategy has been, and will continue to be, to sustainably grow this Company. At times, this growth is fraught with challenges that we will have and we will continue to address head-on. We remain very excited about the current contribution and the potential growth at Bloom Lake. Additionally, with the consistency from our US Iron Ore mines, coupled with a major operational expansion project completed in Asia Pacific Iron Ore, and the turnaround progress evident in Coal, I believe 2012 is shaping up to be another promising year for Cliffs. And with that, I'll turn the call to Laurie for her review of financial highlights.

Thank you, Joe. Thanks for everyone, also, for joining us. In addition to the operating performance demonstrated during the quarter, with the announcement of our significantly increased dividend rate and new capital allocation strategy, I believe the first quarter marks a significant milestone in the Company's history. Going forward, we will make capital allocation decisions through a process focused on driving top quartile TSR performance.

As part of this, we intend to strategically shift from M&A-focused growth to organic growth, which includes developing assets within our existing process pipeline. I believe the successful completion of our expansion projects in Asia Pacific Iron Ore, along with our continued turnaround in North American Coal, illustrate an ability to deliver large-scale, complex projects.

Now, turning to the quarter's results. I'm pleased to report first-quarter 2012 revenues improved 7 % to $1.3 billion. Another first-quarter record for Cliffs. The increase was driven by higher sales volumes, partially offset by lower pricing. Consolidated sales margin was $304 million and was unfavorably impacted by higher cost of goods sold rate, including higher mining, maintenance, and transportation costs. I would also point out that last year's first-quarter sales margin included a nonrecurring $179 million favorable impact from negotiated pricing settlements with two of our largest customers.

During the quarter, we reported discrete tax items with a $255 million net favorable impact. The primary driver was the Australian federal government's recently enacted Minerals Resource Rent Tax, or MRRT. The MRRT includes a provision which requires us to value our business and record a deferred tax asset, which can be used to offset a portion of the calculated MRRT in future years. We expected this to add approximately 3% to 4% to our effective tax rate, for the duration of the life of Koolyanobbing. That effective rate increase would be larger without the partial offset created by this provision.

For the current year, excluding the MRRT income tax benefit and other discrete items, our effective tax rate was approximately 23% during the quarter, comparable to last year's first quarter. Our first-quarter 2012 net income, attributable to US -- or to Cliffs' shareholders was $376 million, or $2.53 per diluted share versus last year's $423 million, or $3.11 per diluted share.

Now, turning to US Iron Ore's results. Excluding the favorable impact on both revenues and cost of goods sold due to the settlement negotiated in the prior year's first quarter, US Iron Ore's revenues per ton decreased slightly to $117, while cash costs increased 20% to $61 per ton. The increase in cash cost was attributable to higher mine-development and labor-related expenses. Despite the increase in cash cost per ton, we still achieved a gross profit margin of over 40%. The highest amongst all of our business segments. With US Iron Ore's strong cash cost performance, we are maintaining our full-year 2012 cash cost expected range of approximately $50 to $55 per ton.

In Eastern Canadian Iron Ore, revenues per ton decreased $116, down 33% when compared to the prior year's first quarter. This was primarily driven by lower year-over-year seaborne iron ore pricing and sales mix. The current quarter included a higher proportion of concentrate sales from Bloom Lake versus last year's comparable period, which was comprised entirely of a premium pellet product. Also keep in mind, that the pricing environment was much stronger last year than it is in 2012.

During the quarter, cash cost per ton decreased 9%, to $104 reflecting Bloom Lake's relatively lower cash cost of $98 per ton. Bloom Lake's first-quarter cash costs include approximately $16 per ton related to the fire and other nonrecurring expenses. Looking ahead, we anticipate realizing significantly improved fixed cost leverage at Bloom Lake, as expected sales volume incrementally increase quarter-over-quarter throughout the remainder of 2012. As a result, we expect to achieve $60 per ton cash cost at Bloom Lake in the latter half of 2012.

Turning to Wabush, the year-over-year increase in cash cost per ton was primarily driven by increased spending related to the repair work completed during the quarter. Higher energy and supply costs over last year's first quarter also contributed to the cost increase. Similar to Bloom Lake, we expect the cash cost per ton to trend lower for the remainder of the year. With the respective cost increases at both mines, we are increasing our full-year 2012 cash cost per ton expectation in Eastern Canadian Iron Ore, by $10 to approximately $80 to $85 per ton.

Turning to Asia Pacific Iron Ore, during the first quarter, we realized a 17% decline in average revenue per ton, to $130, from last year's $156 per ton. Again, this was primarily driven by the lower seaborne iron ore pricing that Joe discussed earlier. Average cash cost increased 31% to $74 per ton, compared with $57 per ton in the year-ago quarter. The increase was attributed to higher mining expense related to the capacity ramp-up and less-favorable exchange rates. We are increasing our anticipated range for Asia Pacific Iron Ore's full-year 2012 cash cost to approximately $70 to $75 per ton. Primarily driving this increase is a new reality of lower ore recovery rates, as we are mining a much different mix of deposits when compared with historical production from Koolyanobbing. We are also seeing a stronger Australian dollar assumption of $1.05.

In our North American Coal segment, our revenues per ton were relatively flat at $122. The slight decline was compared to 2011 first quarter, was primarily due to the softer market pricing for coal products. As a result, we are decreasing our North American Coal full-year 2012 revenue per ton expectation to approximately $130 to $135. This expectation includes approximately 75% of our expected 6 million tons of net coal sales committed and priced at $143 per ton, net back to the mine.

We achieved lower cash costs per ton of $97, compared with $109 per ton in first-quarter 2011. This 11% year-over-year improvement, reflected greater fixed cost leverage driven by increased production volume from our longwall operation. Additionally, we estimate the higher cost tons sold from the crude coal stockpile we developed at Oak Grove throughout last year negatively impacted cash cost by approximately $4 per ton during the quarter. Excluding this, cash costs were approximately $93 per ton.

All of our major capital projects in North American Coal are now complete. These projects are directly impacting the segment's profitability, which was illustrated by first-quarter's results. We are very pleased with the production consistency we are achieving, and as a result, we are maintaining our full-year 2012 cash cost per ton expectation of approximately $105 to $110. Turning to the balance sheet, at the end of March, we held $122 million in cash and equivalents, and long-term debt was $3.6 billion. In the first quarter of 2012, we used $129 million in cash from operations versus generating $107 million in cash from operations in the first-quarter 2011. Last year's first-quarter results did include additional cash receipts related to 2010 pricing settlements. Consistent with prior years, we anticipate generating the majority of our cash from operations in the back half of the year.

We are maintaining our expected sales volume for all of our reporting segments, with the exception of Asia Pacific Iron Ore, but we are increasing our anticipated sales volume to approximately 11.4 million tons. In addition, we are maintaining our expected 2012 full-year average spot price for seaborne iron ore of approximately $150 per ton, delivered into China, and have narrowed our revenue per ton expectation range for all of our segments. As I mentioned before, we are decreasing our full-year North American Coal revenue per ton expectation to approximately $130 to $135 due to market conditions.

Included within last night's press release, you can find our expectations for all reportable segments along with the outlook from Cliffs' other reported minority interest. We are maintaining our expected full-year SG&A expense of approximately $325 million and our cash outflow expectations of $90 million, related to global exploration.

For our Chromite project, we expect to spend approximately $75 million in 2012. We continue to make significant progress with this project, including constructive discussions with external stakeholders and government regulators. We anticipate advancing this project from the pre-feasibility stage of development to feasibility this summer. We continue to be excited about the quality of the deposit and the value it will generate. As we move into feasibility, we will share portions of the project economics, as well as other significant milestones achieved and expected, as we bring this project to fruition.

We expect a full-year effective tax rate of approximately 5%, which includes the impact from the Australian MRRT. Excluding this, and other discrete tax items, our effective tax rate would be approximately 23% for the full year. We anticipate generating $1.7 billion in cash from operations. Down slightly from our previous expectation of $1.9 billion, primarily due to our outlook adjustments in the full-year business segment. Our revised expectation more than covers our anticipated CapEx of $1 billion for the year and our recently announced 123% increase to the quarterly cash dividend rate, which will result in a total 2012 payout of just over $300 million.

Steady pricing, coupled with project completions in Asia Pacific Iron Ore and Coal, position us to generate significant cash flow in 2012 and beyond. We will continue to look at ways to deploy this capital in a manner that is most impactful for shareholders. As you know, driving top quartile total shareholder return is our main focus in growing the Company. And, with that, Steve, I think are ready to open the call for questions.

Shannon? Could you please prompt the call participants and how to ask a question?

(Operator Instructions)

Brian Yu, Citi.

Great, thank you. You talked about Bloom Lake ramp up, so I have a couple questions related to it. One, are all the repair works completed there, and then two, I think you're expecting about $60 cash cost. Would that reflect a steady state average, or does that still incorporate some startups where the steady state is potentially lower than $60?

I think, on a steady state question, we can actually definitely get into the $50 range moving into next year.

Yes. I think that's right, Brian, and the repairs are complete. It was just the impact of the 10 days that were down. It's not only the repair costs that went to complete the fix, if you will, from the damage that had occurred but also, as you know, the resounding effects that we also get from the loss of the volume that was the impact on the cost.

So, this process of still ramping up the operations --

We are still balancing, as we talk, Brian. Things slow down in the fourth quarter, as we all know, around the globe. We took advantage to really get into some blending schemes, if you will, in our mines. We ran intentionally some low grade through the plant, so we could go ahead and get the mine balanced. But, we are still spending the time on getting the mine plan correct so we can get the blending through this [AG] mill. We don't have multiple mills, as you know, up there.

It's just one mill that goes through, so it takes some time for these low-grade deposits to get the blends right and get the kinks worked out. Once again, let me reiterate, we are very satisfied with the project we bought from Consolidated Thompson. We have not found any fatal flaws, if you will, or even major flows in the flow sheet.

We have found enhancements that we can make, and we will continually to steadily ramp this project up over the next few quarters, and as we said earlier, get it into the quick standard, if you will, so we can stabilize the operation and move forward.

Okay. On Australia, the increase in volumes you mentioned a draw down stockpile, so I was curious if this 11.4 million tons is a one-time type of bump, or is it a sustainable rate that you think you can do in 2013, also?

Probably a little early to make that judgment, but I would say it's a possibility that we can get over 11 million tons. This year we still do have some production from Cockatoo, so that will fall off.

Yes, that about 0.5 tons that will fall off about midyear, the Cockatoo tonnage, Brian, but the mines, if you subtract that, should be the sustainable rate. This is a big transition year, not only from moving to bigger trains and really getting the rhythm down, if you will, of the mines, but we also had to open several pits. Those a pretty small pits there, and we had to develop some new roads. They're also trying to get the new blending schemes down on the mines. So, big transition year in APIO, as well.

Thank you.

Timna Tanners, Bank of America Merrill Lynch.

Hi, good morning. I know you talked about being able to provide us more information on the pre-feasibility moving to feasibility stage for the chromite business, but I know there's a lot of interest in that topic, and also on the exploration activities. If there's any way you could give us a little further update, please?

Yes, sure, I'd be glad to. We are progressing very close, we think, in the next month or two we will be out of pre-fease going into feasibility. We've had several independent studies done on the engineering concepts and the costs as we bring those into the plus or minus 10% to 15% range, which is the standard to go to feasibility. So, all of that work is progressing very well, and we still have a robust project even with the increased capital that we discussed.

With that, as we go forward, we are having excellent discussions, and we're very close to announcements on agreements with provinces on where we are going to site the smelter and the road and those types of things that will allow us to pin down the feasibility that goes with it.

We have had very good discussions around the world, with numerous potential customers, about the grade and the quality of the product that are coming out. Very good discussions with the external stakeholders, and with the first nations and with the governments and the environmental impact study is moving along. That's all the information I can give you at this point in time. As Laurie said, as soon as we have more information and we're into feasibility, we are going to be happy to provide that because we are very excited about this project.

On our other exploration expenses, Timna, that you asked about, the primary expense is in a couple of areas. One is actually in Australia, continuing to look at new deposits to extend the life of that project, that mine, and also, proving out the reserves. As Joe mentioned, we been very pleased with that we found at Bloom Lake. We think there's going to be more reserves there, but we have to do the exploration and the drilling to prove that out.

And, the third major area is our Decar project in British Columbia. So, those are the three major areas. It's got a variety of small things that our exploration group is looking at, but those are the three major ones.

It's a pretty focused work around the exploration this year. There's not a lot of, outside-the-box type drilling going on or expense.

That makes sense, thank you. If I could, just one more. Conceptually speaking, it's early in the year, and it's hard to know, of course, what the full year is going to look like in terms of iron ore prices and steel prices in the US, but can you give us some idea about the variability if we were, say, to see things in turn and not improve as we are hoping.

And in the US, let's say the price is closer to $650, $700 instead of $700, $750 for hot rolled, used to give us some variability, but can you give us a little bit of idea about what the sensitivity might be on a little lower estimates on both of those variables?

About $10 is probably really not impact our US I/O business too much. It's change in the Platts index because, as you know, that's more longer-term pricing. You are looking at $1 to $2 a ton, maybe. You probably get most of -- if you had a $10 change -- you probably get $8 dollars or so. Most of the $10 would drop through on our other businesses, which are more directly tied to Platte's pricing.

Okay. On the hot rolled changes, with that have a big impact in the US?

The hot rolled price is not going to impact our US pricing a lot.

As you know, we've moved a lot of -- some of our US business to more different contracts, and that's not a big material driver anymore.

Okay, great, thank you.

David MacGregor, Longbow Research.

This is actually Arun Viswanathan on David's line. How are you doing? I guess I just wanted to understand, I mean, last year, when we were in the initial stages of Consolidated Thompson, I think that you guys said that Bloom Lake, at some point, could get down in the $40, $45 ton range on cash cost. Do you still see that happening? As a corollary, what has happened over the last year that cost -- what have you learned through this, and what can we do to prevent some of these mishaps in the future?

We don't see $40 or $45 a ton that we had initially expected when we came out of the mine. We've got a lot of transition to do where we are trading OpEx and CapEx type decisions. More putting capital, such as I talked about, with tailings management systems in place, as we go forward. As we do, we are building not for 16 but for 24. There are a number of decisions that have to go with that. We've just found a lot more cost, particularly in the labor side.

As Eastern Canada and all of Canada ramps up on labor costs that are coming up, and certainly, on a fly-in-fly-out basis, the cost of having all those folks up there and where you have to rotate them out as an expense, that is a little bit higher than we had anticipated before. So, yes, we are settled at $60 for this year. We feel confident in that. And, as Laurie said, getting into the $50s, but we don't see going into the $40, $45 range.

RIght, so then in the next phase, do you expect a similar kind of cost ramp out or how does that play out?

We think its similar. These are three distinct lines. They are all the same geography within hundreds of feet of each other. But they are built as a single trains. They are built distinctive. We don't see a lot of synergies that we would get out of it by combining control rooms or maintenance forces or anything like that. We see similar costs coming down the line.

I'm sorry -- you said it would start out higher at this $90 to $100 ton range?

I think our learning curve will be, certainly, a little bit faster because we will understand the deposit after having worked with it for two years by that point in time. The learning curve will be much faster. But, there is an absolute fixed cost component to all of this. When you first start out, and you're not running at the 8 million ton run rate for the second 8, we will not be leveraging the fixed cost. We will start out higher, but I would expect maybe not quite as high, and I would expect that we would come down more quickly.

Then, the concentrator, would that have a similar two-year learning curve? Or is that already done with this build out?

I think we would get a steeper ramp up on the curve, as Laurie had said, we are figuring out the mine, if you will, and the blending scheme. Again, its the same plant set up, the same grinding systems, so we should get a much steeper ramp up coming out of this.

Thank you.

Michael Gambardella, JPMorgan.

Good morning guys. A couple questions. One, can you explain what happened at Amapa? Because it seems now -- you had previously forecast about $30 million equity income. Now it's breakeven?

Yes. The first thing is there were some tax reserves that were for local taxes that had been reversed and that is why the first quarter -- and this was unexpected, as you know, we don't manage that mine. That was something we did not anticipate when we gave our original guidance. That resulted in a loss for the quarter. We do expect to be profitable for the balance of the year. With pricing being down, not quite as profitable, but the major impact is the offset here of what happened in the first quarter.

Okay. On Bloom Lake, in terms of the product sales that you have had to date, how is the pricing premium going compared to what you thought?

The pricing premium, Mike, has shrunk, as it has around the world. Right now, and particularly with introduction of the product going to new customers, as you know, we are working with the pricing to get the test cargoes that go in. It's a quality product that continues to move into the marketplace because of its quality, but certainly, the premium is getting lower.

Is there a premium to the Wabush material now?

There is a iron content premium, but there's a discount because it's concentrate versus colored.

Right.

Okay. On the chromite project, are there any possibilities for other major minerals in the deposit that you are looking at right now?

There is. Mike, there is the area, the Ring of Fire, as you know it is called up there, we've -- in the purchases we made of the juniors that we bought out, we've got a lot of extended land. There's a lot of potential up there for copper, nickel. There's been some small finds up there. I don't think anything economically, yet, but certainly with PGMs as well that could come through.

We have not stepped out and gotten into any of the drilling campaigns there yet. We've stayed very focused within the chromite deposit, itself. So, we can do all the info drilling and make sure that we have got that right. In the next year or so, we will start stepping out and looking for other minerals.

Okay. Thanks a lot, Joe.

Sal Tharani, Goldman Sachs.

Joe, on the chromite project, getting back to it, is there a opportunity/possibility to get a joint venture partner who would also be a off take of the product, a lot of big stainless steel/steel companies of the world, who are big buyers of chrome?

Yes, Sal, that's a great question. There are numerous opportunities to do that. We've had conversations around the world. Early stage, if you can imagine. There are opportunities within this deposit because of the size and the quality of it, and it being open pit and in Canada, that we have numerous options that we are exploring at this time.

So, you have been in conversations with all these parties?

We have.

Okay. The next question, if I may, on the Bloom Lake, a couple of things. First, what is your goal into China and Asia as you are starting to say that you are trying to develop some relationships, long term. And in terms of the mix over there you are doing, and different blending, do you see any upside in terms of getting better revenue per ton? By going and doing some better blending over time?

On the first question, we are taking the same philosophy that Portman, which is now our Australia Iron Ore unit, took many years ago, and it's been very successful. We are trying to move the tons around to a lot of quality producers of steel within the area. We don't want to get fixated on two or three very large customers and be beholden to that if the industry, or the company itself, goes down. We are exploring this with numerous customers, as we say, in Japan and Korea, Taiwan, and, as you know, the 17 to 20 customers that we have in China.

That is our strategy is to mix the product with high-quality steel mills as we go through the region and do that. The blend will take the variability. The iron content will not go higher, but the variability on the quality, which the steel makers really like to have as anybody would, is really what we are striving, Sal, with that. Again, when markets weaken slightly, like this, with a quality product and taking the variability out is it allows, if all things are equal on pricing, the high-quality product is going to enter the market. That is what we are striving to do.

Thank you very much.

Jessica Fung, BMO Capital Markets.

Good morning. I wanted to ask Laurie about the MRRT. I guess the value of the asset, and can you give us a general explanation about how that is calculated?

Essentially, a market value of our Australian business unit. So, we did that using our consistent pricing, and there is a lot of factors that go into it, but that's how you start.

So, is that considered the asset allocation that you start with, and then that just gives you credits going forward on a tax?

Yes. That's exactly the way to think about it, Jessica. Our tax rate, I said, would go up 3 or 4 points next year. It would've gone up significantly more if we didn't do this valuation and use it as credits against it.

Okay. Perfect. My second question is on capital allocation. Obviously, you guys are -- have the $1.7 billion in cash flow this year, with the $1 billion in CapEx and in dividends. Going forward, we still forecast quite significant cash flows being generated by you guys. How focused are you on paying down debt versus increasing returns to shareholders, et cetera?

We will continue to apply a balanced philosophy around that, Jessica. We do think that -- we said numerous times our investment-grade rating is very important to us, so I think paying down some of our debt would be prudent. You continue to see the board look at the dividends as they have done over the last year and continue to look for opportunities to return it to the shareholders, as well.

Okay, great. Thank you very much.

Shneur Gershuni, UBS.

Good morning. My first question, I guess, is about your guidance with respect to the US. I understand that a lot of it has to do with pricing of iron ore, and so forth, as well as some of the legacy contract indexes. In your prepared remarks, you talk about the capacity utilization for the US steel complex at about 75 percent. It's been running quite a bit above that, at this point, right now.

I'm trying to understand, are you baking in a bit of conservatism into it? Is it really a function of your pushing out your tons that you can anyway, so it doesn't really matter if it goes higher, or is it a reflection of some of the maintenance that we've been hearing about from some of the other steel mills and you are expecting utilization to tick down in the back half of the year? I wonder if you could give us some color with respect to that.

We really don't have much additional tonnage to sell. From a volume standpoint, that is where our guidance comes from. If that's what we've got. Our contracts are fairly will set, so increases in capacity utilization is not likely to impact pricing in the United States.

We are very pleased, obviously, as we all our, to see the steel industry starting to rebound back to get those healthy utilization in the high 70s and low 80s as reported last week. That bodes well for the industry. We do, we do have nominations, early in the year, that can be adjusted in the first half of the year by the steel industry. All of the known planned maintenance work is all baked into those nominations, as you can imagine, the way we have to plan and the steel mills have to plan.

We don't see anything lagging in the second half of the year. As you know, we are always on a slow start on the first year with the seasonality with the locks being closed until the end of the first quarter. We see those gains coming on. As Laurie said, I need to continue to reiterate we are sold out this year going forward, so its not conservatism, that is just the position we are in.

Great. My follow-up question, I was wondering if you can talk about the US Iron Ore cost performance. You saw a nice step down; it was a surprisingly good cost number, and so forth. If you can you give us some color on what is driving this, and will this trend continue as things get rolling again? Is any of this related to Empire, and so forth?

We reported $51, which is as you noted, on the low end of our expectation. We still expect to be within that range. It's the early part of the year, and many things happen in this industry, so I don't think we want to put a finer point to it than to say we are very comfortable that we will be staying within it. Empire is one of our higher-cost mines, and in the future, as it cycles off, most likely that could impact our profit in the future.

We're seeing the same inflationary pressures just about in every area of the business that you can imagine, going through. We do get a little bit of an offset from the natural gas, which is very nice, but we also have a lot of increased pressure on the electrical power pricing, as well, that goes with it that kind offsets things.

The increased diesel fuel certainly isn't helping things. It's not as dramatic as other mines, as most of our mines are electrified, if you will, with the shovels and the drills. It's just the trucks and the ancillary equipment. We are seeing the inflationary pressures of the mining business.

Great. Thank you very much.

Nathan Littlewood, Credit Suisse.

Good morning, guys, and thank you for the call. I've got a few questions about Bloom Lake, and also, a clarification on MRRT. The first thing on Bloom Lake, the pricing of $116, I suspect that's a lot lower than what most people on this call were looking for. If we start with a Platts price of about $144, I think you said, and then you take off say $30 a ton freight, you get an FOB price for index finds of about $115, $116.

There should be premium for the grade, and there should be another premium for the pellets at Wabush. I was wonder if you could give us a bit more color on why it was so low?

Well, as we talked about with the grade, those premiums are shrinking as the market has tightened up with that. And, the other thing that I explained earlier on the call was as we put these trial cargoes in, obviously there's some negotiation to get the first trial cargoes in, as well. So, you would anticipate that at any time you're trying to get an entry point going in from there.

We've also seen the pellets premiums shrink, as well, around the world. Particularly, those pellets that might be going into Asia, which are always the first that are cut off when the market tightens. Our sales folks have been able to continue to supplies those as they come through the Wabush pipeline.

Okay. It looks as though a customer-placement discount is entirely offsetting any grade or quality premium, and also the pellet premium, for the time being. How long do think it would take for that customer-placement discount to start eroding?

We haven't changed our assumptions for the full year. All of this was built into our plan. We've still got a expectation of $142,$145 revenue per ton for the full year. This was part of the plan that our marketing team had in place.

Okay. On the tonnage, you mentioned there was 10 days downtime due to the fire. 10 over 365 is 2.7% of the year, but the production volume is down 10%. I was just wonder if you can help us close the gap between 2.7% and 10%?

Yes. Sure. As I said, again, earlier on the call, in the fourth quarter, I don't think they immediately shifted the mine from the lower-grade ores we were running on 12/31 at midnight. We continued to bleed the mine in and to experiment in the first quarter to get our blending right. So, I think, you have got to take that into account as part of the first quarter as they dropped the rates back up and got the blending schemes in place.

Also, keep in mind that the guidance that we gave is for all of Eastern Canada, so it would take into account Wabush as well as Bloom Lake.

Okay. On the Bloom Lake cash cost, I'm just trying to understand how you'd get to the $60 a ton longer term. If we take out the impact of the fire, then that would suggest that the Bloom Lake cash cost went from $98 down to $82 a ton, because you said there was $16 a ton due to the fire.

If you multiply that by 1.4 million tons and you'd come up with $115 million costs for the quarter, you multiply that by 4, you get $460 million operating costs for that operation at an annualized rate of 5.6 million tons per annum. If we said that the cost base was entirely fixed, so the $460 million doesn't change, and just divide that by 8, then you get $58 per ton, which is roughly --

Rather than bogging the call down with algebraic gymnastics, [Laughter] Maybe I can follow up with you after the call. I will tell you --

It is a significant volume impact, and Steve can walk you through the details afterwards. You are headed in the right direction. It is primarily volume. There are some still improvements, Joe talked about some of the work that's being done, so you've got the one-time things need to go away, you need to get the volume up and then there are some improvements that we need to make. It's really those three buckets. Steve can walk you through the details.

For everyone on the call, the volume impact we think is worth about $12 per ton on a cash cost basis.

I guess the intent of the question is to ask on a dollar million basis, what are the potential improvements that you see being realized over the next little while because --

I'll have to dig into it and follow-up with you offline. I don't know what the dollar million amount is. I would say, in the second quarter, we would see cash costs coming down into the $70 range and then progressive improvement in the second half of the year.

If I could finish up with a clarification on MRRT? Am I right in saying that you use the market value message for MRRT because they are some option there?

There are options, and we have selected the market volume method, yes.

If you generated a tax credit, does that mean that the market value is lower than the previous book value for these assets?

No, it means it's higher.

Okay. Why are we seeing the MRRT adjustment now? I didn't think it came into effect until first of July.

The law was enacted in March, which essentially creates this for us that we need to record it as part of the quarter. There has been some things, like in the US, the Medicare Part B, there are some other things that have happen in the past where a law changes. Most people think of a tax when I owe it, but this changes a value on our balance sheet as of the end of March.

Okay, got it. Thank you very much guys, appreciate the opportunity.

Jorge Beristain, Deutsche Bank.

My question was related to Vale in their announcement of what bringing down the pellet premium last week. I think they went from $35 to $32, but they switched back to an annual premium-setting mechanism. I was wondering if that would have any affect on your US pellet pricing formula, and if I on going forward basis, if you are disconnecting from the international pellet a premium that Vale is charging versus what you have negotiated in the US in your recent contract?

Jorge, We read the same thing in publications I'm sure everyone on the call or the market has read, as well. We have not seen the statements directly from Vale. Nor have we been able to validate that versus the publication. That is step one in this.

We'd like to see the validation from Vale that, indeed, this is the deal that they've struck me what they've done. We would certainly strive then, if that is true, since they are the market leader, is that is where we would strive to put the pellet premium in place in our business in the spot business we have around the world with that.

We don't know if that applies to 100% of their customers or what geographies. Our contracts, as our commercial has gone through working them, they take into account various different factors in pellet premiums and publications. So, we are early days in trying to understand if it has an impact. I don't think its going to change our guidance expectations really at all.

I don't think so.

Would it be fair to say, though, your current pellet premium in North America, from what I recall, I thought it was mentioned on a conference call one or two quarters ago, that you worked out it was a $15 pelletizing premium in the US? If this turns out to be true, and Vale is now publishing a new international benchmark, if you will, north of $30, does that give you guys any upside, opening in your contract? Are your contracts set up to allow for this eventuality of a re-establishment, if you will, of an international pellet benchmark after it had disappeared for the past two years?

Jorge, they are all good questions. Again, I think this announcement came out two or three days ago. Again, one, and hasn't been validated by us any way as what's in the market from that Vale, so that is step one. Step two is I wish I had answers and I don't with a two or three day announcement in publications.

Our guys, as you know, our contracts are very complex. We have to work through all of those with this new change of philosophy, if you will, for pellet premium back to and annual pricing, if that's correct. We have got to dig into the contracts and see where they are at. I don't have any answers for you, today.

Okay. Thanks guys.

Shannon, with the hour approaching being up, why don't we go ahead and end the call. Jessica Moran and I will be available for any of those participants that have additional questions throughout the day. Please feel free to reach out to us. Thanks everyone for attending today's call.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.