Cleveland-Cliffs Inc (CLF) 2012 Q2 法說會逐字稿

Good morning. My name is Tyrone and I'm your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2012 second-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

At this time I would like to introduce Jessica Moran, Director of Investor Relations. Ms. Moran, please begin.

Thanks, Tyrone. I'd like to welcome everyone to this morning's call.

Before we started let me remind you that certain comments made on today's call will include predicative statements that are intended to be made as forward looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on our website. Today's conference call is also available and being broadcast at cliffsnaturalresources.com. At the conclusion of the call it will be archived on the website and available for replay.

Joining me today are Cliffs Chairman, President, and Chief Executive Officer, Joseph Carrabba; and Executive Vice President, Finance and Administration, and Chief Financial Officer, Laurie Brlas. At this time I'll turn the call over to Joe for his initial remarks.

Thanks, Jess, and thanks to everyone for joining us this morning.

As you're well aware, over the past several years an underlining component of our strategy has been to gain scale by increasing access to the seaborne market. While this increased exposure to seaborne pricing may result in greater pricing volatility for our core assets, we believe it also provides the potential to generate significant value for shareholders. By continuing to build scale and focusing on improving our cash cost profile in Eastern Canada, we believe the decisions we are making today will position our operations for long-term reliability and profitability.

That being said, when compared to the prior-year's period, we have increased our year-to-date global iron ore sales volume by 23%. This was driven by our strategic acquisition of Bloom Lake Mine and our expansion project at Koolyanobbing Mine. The increased volumes within these two assets provided more exposure to seaborne pricing, which decreased 20% from 2011's comparable quarter. The average Platts price for the second quarter was $141 versus $177 per ton in last year's comparable quarter.

Despite the decrease in seaborne pricing, China produced at an annualized rate of approximately 726 million tons of crude steel in June. We believe China's recent slowing growth rate to just under 8% is temporary. With easing inflation, the government has already taken bold steps to bolster growth that we expect to see take hold in the back half of this year. While China's weakening exports to Europe are concerning, steel production remains strong and the country continues to encourage fixed capital investment. China ultimately remains biased toward growth. The continued need to urbanize its large rural population will remain the primary catalyst to accomplish this objective.

In Europe, unfortunately many mills are operating at rates well below capacity, continuing to range between 60% and 70%. While Europe's lower rates have a minimal impact on our iron ore sales volume, it unfavorably impacts the spot pricing for seaborne iron ore products delivered to China. Producers that would traditionally ship to European mills are most likely diverting vessels into the Chinese market. Any uptick in Europe's steel making utilization rates would most likely create tighter supply within the seaborne iron ore market, which would further support iron ore pricing.

Now turning to the performance of our core businesses during the quarter -- US iron ore sales volume was 5.4 million tons, supported by an average North America steel-making utilization rate of 79%, up from 75% in the prior year's comparable quarter. During the quarter, we began our previously-announced planned production curtailment at Empire Mine. We anticipate resuming Empire's production at normal capacity in the fourth quarter.

As you may have seen, Minnesota experienced a significant amount of rainfall this summer, which resulted in severe flooding in several areas. While the flooding has not materially affected our operations to date, we did lose a few days of production at our Northshore Mine. Outside of our operations, the flooding directly impacted some of the rail service providers we use to receive raw materials and deliver finished goods. Since the flooding we have had an ongoing dialogue with the rail service providers, and we continue to assess the impact any additional rainfall and related flooding could have on our operations.

Also during the quarter, one of our US iron ore customers filed for bankruptcy. We have been successful in placing this customer's 2012 nominated tonnage with customers in the Great Lakes and in the seaborne market. For the full year we anticipate selling approximately 1.4 million tons of pellet volume from the lower Great Lakes into the seaborne market. During the quarter we exported nearly 300,000-tons of US pellets through the St. Lawrence Seaway and into the seaborne market.

Eastern Canadian iron ore sales volume for the quarter was 2.4 million tons. This was made up of approximately 1.4 million tons of iron ore concentrate from Bloom Lake and 900,000 tons of pellets from Wabush. During the quarter, we made a strategic decision to begin production of a premium, higher-grade iron ore concentrate product from Bloom Lake. The new product will contain a lower silica level of 4.5%. This compares to the mine's previous concentrate product, which contained a 5.5% silica level. This lower-silica premium grade product is expected to attract new customers outside of China, further diversifying Bloom Lake's customer base. During the quarter we continued to deliver trial cargoes of Bloom Lake's ore to new customers in Japan, South Korea, and Europe.

The process of adjusting the concentrator flow sheet to produce this lower-silica product impacts the overall iron ore recovery rate, which reduces the mine's production volume. The production of this premium product partially contributes to reducing Bloom Lake's overall expected annual production volume to 7.0 million tons from our previous expectation of 8 million tons. Additionally, the lower annualized run rate is expected to increase the mine's operating stability. Ultimately, we believe this new product and revised annual production volume will increase the mine's long-term profitability. We also anticipate producing this type of product from the Phase 2 expansion, and therefore expect production volume of approximately 7.3 million-tons.

At Wabush, during the quarter, production was unfavorably impacted due to plant equipment failures triggered by several power outages. As we have discussed in previous quarters, we have a number of sustaining capital projects underway, which are on track for execution in 2012. Upon completion of these projects we would anticipate achieving significantly lower and more consistent cash cost per ton.

Construction of Phase 2 is moving forward as planned. The concentrator structural work and exterior framework is expected to be complete by the end of this month. Installation of the spiral separators began in May and continued through June. Construction of the overland conveyor system, which is designed to connect the pit to the [both] mills and ultimately reduce trucking cost and timing is ongoing. On the logistics front, in Eastern Canada we have completed the cross conveyor system between our adjacent docks at the port of Sept Iles. This infrastructure will provide us the flexibility to load both pellets and concentrate from either dock. We have also reduced train handling unloading times, as well as reduced vessel loading time to approximately 4.5 days.

Turning to Asia Pacific iron ore, second-quarter sales volume was up 39%, achieving an all-time quarterly record of 3.1 million tons. The expansion of the Koolyanobbing complex to 11 million tons is officially complete, and for the second consecutive quarter we are increasing our expected full-year sales volume to 11.6 million-tons. Due to opening new iron ore pits and increased mining activity related to the Koolyanobbing expansion, we had a meaningful amount of low-grade tons available for sale. Our global commercial team was able to successfully place these lower-quality tons to customers in China profitably. We expect to resume shipping our standard-grade products during mid-third quarter.

Now turning to North American coal. Sales volume for the quarter increased 21% to 1.5 million tons from 1.3 million tons in the prior-year second quarter. The refurbishment of Oak Grove's prep plant is complete and both circuits are fully operational. We continue to improve our production volume consistency at our longwall operations, and during the quarter we moved Pinnacle's longwall machine into a new coal panel, as planned. Looking ahead, we have a planned longwall move at Oak Grove slated for the third quarter, and I am pleased to note that all of the development work is complete for that move. During the planned down time for the longwall move we will continue to work down Oak Grove's inventory stockpiles that were accumulated during the rebuild of the Concord prep plant after being hit by a tornado.

In closing, we recognize that the execution of large-scale, meaningful projects brings forth challenges. Despite this, we continue to be very enthusiastic about the potential value these projects are expected to generate. Cliffs has a strong history in delivering large-scale projects. I have full confidence in our management team's experience and the technical competencies of our operators.

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

Thank you, Joe.

Consistent with our new total shareholder return capital allocation strategy, we announced that we've entered into a definitive agreement to sell our 45% economic interest in Sonoma coal in Queensland, Australia. While we still consider metallurgical coal to be a scarce resource with favorable supply/demand dynamics, the mix with this asset was trending more towards thermal coal. In addition, this decision reinforces our focus on expanding core assets that have the potential to generate the most shareholder value over time. As we continue refine our capital allocation strategy, we will continue to evaluate various levers we can pull to improve total TSR.

Turning to the quarter's results -- primarily driven by lower pricing for the commodities we sell, second-quarter 2012 revenues decreased 10% to $1.6 billion. Consolidated sales margin was $449 million, and was unfavorably impacted by lower pricing and increased labor, mining, and maintenance costs. Our second-quarter 2012 net income attributable to Cliffs shareholders was $258 million, or $1.81 per diluted share, versus last year's $409 million, or $2.92 per diluted share. Due to the lower year-to-date average iron ore fines price, we are decreasing our expected 2012 full-year average spot price for seaborne iron ore by $5 per ton, to approximately $145 per ton delivered into China. This iron ore assumption is the price upon which full-year revenue expectations for our iron ore segments is based.

Turning to US iron ore's results -- revenue per ton decreased to $120 from last-year's second-quarter results of $138 per ton, driven by lower pricing for seaborne iron ore and customer mix. Second-quarter cash cost per ton increased from $57 to $63 due to the additional cost recognized related to the full consolidation of Empire Mine, along with increased idle costs. Although the year-over-year sales margin per ton is lower, the US iron ore business segment achieved a gross profit margin of 44% per ton during the quarter. With the segment's year-to-date results in line with the full-year outlook, we are maintaining our full-year 2012 revenue and cash cost per ton expectations of approximately $115 to $120 for revenue and $60 to $65 for cash cost. Also, our sales and production volume expectations for the full year remain unchanged at 23 million tons and 22 million tons, respectively.

In Eastern Canadian iron ore, revenue per ton decreased to $128, down 28% when compared to the prior-year second quarter. This was driven by lower year-over-year seaborne iron ore pricing and sales mix. The current quarter's results included a higher proportion of concentrate sales from Bloom Lake versus last year's comparable period, which included a higher proportion of premium pellet sales.

During the quarter, cash cost per ton increased 20% to $107, due to the higher cost at both Bloom Lake and Wabush. Bloom Lake's increased cash cost per ton was driven by higher labor, tailings management, and logistics costs. At Wabush, the downtime that Joe mentioned resulted in higher maintenance and repair spending. We also experienced increased mining cost. We recognize the second-quarter costs at Bloom Lake and Wabush were higher than expected. At Bloom Lake we continue to utilize contract labor as we move forward in optimizing Phase 1 and execute the expansion at Phase 2.

We have made significant progress in embedding the cost management processes within the operations that you see reflected every quarter in our US I/O operations. These are targeted at identifying areas where we can eliminate variability to control cost and production. Looking ahead, as we continue to increase the operating stability at both mines, we expect to lower our contract labor spending in addition to realizing significantly higher fixed cost leverage driven by increased sales volume at both Bloom Lake and Wabush. With the cost increases we have experienced year to date at both mines, we are increasing our full-year 2012 cash cost per ton expectation in Eastern Canadian iron ore to approximately $100 to $105 per ton.

However, while you won't see it reflected in the reported quarterly numbers, this does assume we get to our expected cost of $60 to $65 per ton in the last month of 2012, and we will enter 2013 at that level. The team remains confident that goal can be achieved using the techniques and processes that have served us well in our other iron ore operations. Due to the production challenges at both mines and the revised annual production rate at Bloom Lake that Joe described, we have reduced our sales and production volume expectations for Eastern Canadian iron ore. We expect sales of approximately 9.6 million tons and production of 9.2 million tons.

Turning to Asia Pacific iron ore -- second-quarter realized revenue per ton decreased 32% to $118 from last-year's $173 per ton. Again, this was primarily driven by lower seaborne iron ore pricing and sales of the low-grade ore Joe discussed earlier. During the current quarter we sold approximately 430,000 tons of low-grade ore, which negatively impacted our realized price per ton. During July we shipped over 800,000 tons of low-grade ore, which will also impact our realized prices for the third quarter. The remainder of the third quarter's expected sales volume is anticipated to be our standard lump and fines products.

Due to the sales of low-grade product and the reduced expectation for spot pricing, we are decreasing our expected full-year revenue per ton to approximately $120 to $125. This assumes no additional low-grade ore sales beyond the third quarter of the current year. Average cash cost decreased 17% to $57 per ton compared with $59 per ton in the year-ago quarter. The decrease was due to the sales of low-grade ore, which carry a lower weighted average cash cost per ton. Also, lower royalty expenses and a favorable foreign exchange rate, partially offset by increased mining costs, contributed to the lower per-ton cash cost over 2011 second quarter.

Driven by the increased sales of the low-grade iron ore product and the related lower weighted average cost per ton, we are decreasing our expected range for Asia Pacific iron ore's full-year 2012 cash cost to approximately $65 to $70 per ton. We're increasing our sales volume expectation to approximately 11.6 million-tons and maintaining our production volume expectation of approximately 11.1 million-tons.

In our North American coal segment, our revenue per ton was relatively flat at $120. This slight increase when compared to 2011 second quarter was due to a sales mix that was comprised of a higher proportion of premium low-vol met coal, which almost entirely offset the lower year-over-year spot market pricing for all coal products. Also, as reported earlier in the quarter, we placed volumes with new coal customers in Asia, which have a lower realized price due to the additional freight. With all that, we're maintaining our North American coal full-year 2012 revenue per ton expectation of approximately $130 to $135.

We achieved lower cash cost per ton of $111 compared with $114 per ton in the second quarter of 2011. This year-over-year improvement reflected greater fixed cost leverage, driven by increased production volume from our longwall operations. Partially offsetting the improvement during the quarter was a planned longwall move at Pinnacle Mines. We estimate the longwall move negatively impacted cash cost by approximately $9 per ton during the quarter. Primarily driven by the higher proportion of metallurgical coal sales volumes, which carry the higher weighted average cost per ton, we're increasing our full-year 2012 cash cost per ton expectation to approximately $110 to $115.

Costs also continue to be impacted by the higher-cost stockpile tons mined at Oak Grove last year while the prep plant was under construction. For the full year we are maintaining our expected sales volume of approximately 6.9 million tons, comprised of 4.6 million tons of low-vol met and 1.5 million tons of high-vol met coal with thermal coal making up the remainder of the volume.

Now turning to the balance sheet -- at the end of June we held $159 million in cash and equivalents, and our debt stood at $4 billion. This includes the $325 million drawn on our $1.75 billion revolving credit facility. We closed the quarter with ample liquidity of about $1.6 billion. In the second quarter of 2012 we generated $96 million in cash from operations versus $618 million in cash from operations in the second quarter of 2011. Last year's second quarter results include an additional $275 million in 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.

During the quarter we also made our first payment under our meaningfully increased quarterly cash dividend of $0.625 per common share. With more than ample liquidity and a significant cash generation outlook, we're very confident in the sustainability of our impressive dividend rate. Based on our current outlook we would expect to exit the year with no borrowings on our revolver and more than enough cash on the balance sheet to pay a full year of dividends. In addition, we anticipate collecting cash proceeds of approximately AUD141 million upon completion of the Sonoma Coal divestiture, which is expected to close during the fourth quarter of this year.

We're reducing our expected full-year SG&A expense to approximately $300 million, driven by the timing of spending for certain corporate projects and continued focus on reducing Company-wide overhead expenses. We're maintaining our cash outflow expectation of $90 million related to our global exploration group. For our chromite project we expect to spend approximately $75 million in 2012. During May our Board of Directors approved the advancement of the project from the pre-feasibility state of development to feasibility. During the quarter we also announced an agreement in principle with the government of Ontario for key elements of the project, including the development of Provincial infrastructure. We are looking forward to providing additional components of the project's economics, as well as other meaningful project information, at our Analyst and Investor Day next week in Montreal.

We expect a full-year effective tax rate of approximately 2%, which includes the impact from the Australian MRRT and other discrete items. Excluding these discrete items, our effective tax rate would be about 22% for the full year. Due to the requirements of US GAAP we recorded a significant noncash benefit from MRRT last quarter. In future years, we estimate MRRT will increase our overall effective rate by three percentage points.

We're maintaining our full-year CapEx budget of about $1 billion, comprised of approximately $300 million in sustaining capital and $700 million in growth and productivity improvement capital. We anticipate generating $1.3 billion in cash from operations after adjusting for all the updates within our reporting segments this quarter.

And with that, Jess, I think we're ready to open the call for questions.

Tyrone, that concludes our prepared remarks. Please open the lines to begin the question-and-answer session.

Thank you. (Operator Instructions) The first question is from Sal Tharani of Goldman Sachs. Your line is open.

Thank you very much. Good morning.

Good morning, Sal.

Good morning, Sal.

I'm looking at your coal forecast for the full year and it's -- as compared to where the global prices are it's been -- it's getting higher than what you have achieved for the last couple of quarters and I was just wondering how confident you are in getting to this level of $110 to $115 versus for the first couple of quarters you've been taking -- getting $104 in the face of falling coking coal prices around the world?

Yes, we actually have more low-ball coal coming online in the back half of the year so we had a higher percentage of thermal in the first part of the year and we also have a significant amount of our coal already committed and priced, so we're pretty confident about our pricing level for the coal business.

How far out do you have sold the coal? Is it all spot or do you sell some out in the future?

No, we're -- it's mainly contained within a calendar year, Sal. You know how the coal business works with different contracts coming on at different increments of year. If memory serves me correct, we're about 75% committed for the year since we've got about 25% open on the spot market, and that would be a pretty typical year for us. We have very little committed into 2013. I think some thermal committed into 2013 and that would be about it.

Okay, great. Thank you very much.

Thank you. Our next question come is from Arun Viswanathan of Longbow Research. Your line is open.

Hello, guys, thanks for taking my question.

Sure.

Good morning.

I want to delve a little bit deeper into the Canadian cash cost. I know you guys have taken a lot of questions on this over prior quarters, but maybe you can just help me understand how you get from $98 million in the first quarter down to $91 million in the second quarter at Bloom Lake. I understand maybe that was just a fire, $8 a ton off. How do we get to $60 to $65? I think we deserve a little bit more delineation of maybe how much of that is fixed cost leverage, how much of that is to switch to contract labor, and maybe you can just put it in some buckets for us.

Yes, let me -- I'll happy to do that. Taking a step back on this mine, it's a brand new mine, as you know.

Right.

And really had a long look and considering also the market conditions that came with it, this mine started off with an average on the marketing side of a silica spec of 4.5% to 5.5% when it started a year ago and the market was in a much tighter condition. We were pushing that upper limit. And really where the market is now, it requires a 4.5% silica to really get into the -- to penetrate the markets that other iron ores are in right now and to replace it. So that was the first thing was the market look that we took back and we moved this mine back to a 4.5% silica, which is really a premium product in the market, if you think about it, on a silica basis. With that, the cost will come down from several different very large components. There is a new sequencing in the mine, particularly going to the western side, as we develop this mine and get more drill holes in it. There's less magnetite as we go west and that will improve recoveries as it goes through and give us a better ore blend to go into the mill and improve it there.

On the tailing side is the other big bucket. When Consolidated Thompson started up it was a minimal expense type of look for them and it was heavily dependent on contractors to truck a lot of the tailings into a very small tailings pond. As we look at the larger growth of this business and expand -- think about expansion even beyond phase 2, when you do things like tailings pond management we're actually taking a step back and looking at the future and developing a tailings pond that can take additional tons. When we put that in later in this year and get the piping and the pumping that goes into the tailings ponds in, we'll eliminate all that labor and those contracts and trucks that are now trucking the material through. It'll also give us a much better and more comfortable environmental experience, as well as managing water and tailings in the region that goes with that.

The third big component is down at the dock. As you've heard reported by me earlier this morning, that's going very well. The cross conveyors are in. We're getting the ability to load both ships and we're -- we've got the ability now. We've moved that shipping from nine days to about 4.5 days and we're getting rid of the one of the two transloaders I think around the end of August or September, as well, so that'll lower our shipping cost that come in as well. And then if you will, as Bloom Lake phase 2 winds down later in the year and towards the start up in the first quarter, that confluence of contractors and that crossover of contractors and camp costs will go down. And while we try and separate them as best we can, there's always an intermingling of contractors and all of that overhead that goes with it. So those are the big buckets that they come in and guys have plans to move forward but we're going to take the pain up front for the next few quarters and we're not going to rush this mine. It's a long-lived asset, it's got the potential to produce a high-quality premium product but there is a plan on the cost reduction, it's just not a wish and a hope, if you will.

Yes, those are all the real operational things that the team up there is very focused on and if you think about it, this year we're going to produce 5.7 million tons and then by next year we will be at that 7.2 for the full year and that's a real -- all these mines have a very heavy fixed cost burden so you're going to get a lot of leverage out of that fixed cost. Half to two-thirds, at least, of this change that we're talking about is the fixed cost leverage, so that comes pretty easily once they start working through all of this. As Joe said, it's a new mine, they've got to get these kinks worked out and be able to consistently produce at 7.2 million tons and take out all of the distractions.

The 7.2 is only what you'll achieve next year so when you say this year is 9.2? I'm not following, so are you --?

The 9.2 is all of Eastern Canada so that includes Wabush and Bloom Lake. Bloom Lake is going to -- we're going to produce 5.7 this year.

Right, okay. And then what about -- just so I'm clear then. So fixed-cost leverage, can you characterize that as maybe $15 a ton and then contract labor's maybe another $10 a ton? How do we get from --?

You're probably -- you're really in the ballpark, yes.

Okay. So then what about further expansion plans? You previously talked about increasing 4 million tons a year, is that still the plan, or --?

It kind of flows along like that. This 7.2 million is phase 1 and Joe talked about phase 2. It's well underway in terms of construction and it does create a bit of a distraction for the people operating phase 1 as this is happening. Phase 2 begins to come online mid next year. Phase 2 will be 7.3 when its at full production so you'll see some impact. Phase 1 will produce 7.2 next year. You'll see some impact, another 3 million tons or so of the beginning of phase 2 next year --

Got you.

-- and then the following year you'll get the full impact of both phase 1 and 2.

This is a long-winded conversation and I apologize for the other listeners to it, but hopefully we're answering the same questions. Also on this, as we announced in our investor day last year, we continue on the scoping study of phase 3 and that's going on very well and we continue with the scoping study with that. And I also want to -- for listeners as well, to make sure -- we are deliberately putting our focus in Canada on Bloom Lake, this is what we've got to get up and get running. We are putting some sustaining work and a lot of engineering study work into Wabush but we are not focusing on Wabush at this point in time. We are putting more of the focus on Eastern Canada and we will address Wabush more head on in 2013.

Okay, thanks. I just have one more question, I'm sorry. Your outlook for $145 on iron ore, we've averaged $142 through the year, maybe you can just help us understand what you're expecting for the back half of the year, how it plays out, the timing of further increases and what's that based on? Thanks.

I'll just go back to our comments on the macroeconomics that we've had through the year. I think June's strong push for steel production in China, I think the second largest month on record, is an indication of where steel production is in China. We still feel very comfortable, as we said, on the macros that there will be stimulus push in the second half and we think as a result of that we'll see improved iron ore pricing coming in the second half of the year.

Okay, thanks.

Thank you. Our next question is from Tony Robson of BMO. Your line is open.

Joe and Laurie, hi. Thank you for the opportunity for asking a few questions.

You bet, Tony.

Thanks for your time. Phase 1 and phase 2 at Bloom Lake, Joe, anything you can do to tweak the capacity of the plant, like additional spirals or something? I understand that the building size is limited, but have you thought about trying to take it back to the rate at 8 and 16 million tons?

Of course we have, Tony, and I think as the guys get into this and they get their metallurgy tweaked I think -- I don't know if you're coming up next week or not but I think you'll see the fine tuning in that plant right now at 7.2 has really come along really come along very, very well with the way the spirals have been balanced and screens and the vacuum tables have been balanced. A lot of the lessons learned are being taken over into phase 2 so they won't be retrofits. I'm sure we'll get the improvements out of that and then we'll go back and retrofit. The building actually has a lot of room in it. I certainly wouldn't have designed one that way but I'm glad to have the room that goes with it, so we've got plenty of room for additional spirals if needed, Tony, as time comes on. I think it's more about the mine blend and getting that really, really nailed down like we do so well in these other low-grade deposits that we manage around the world and it just takes a little time. As we get more drilling information and we move west and find more ore that we can build that mine sequencing plan so that we deliver the right type of ore into the mill. And I think that's where we'll get the bang for the buck and that's just going to take a little while.

Okay, follow-up question if I could, please. Silica coming down from 5.5% to 4.5%, you talked about opening it up to new markets, you thinking more of European and the Middle East markets (inaudible) 4.5 silica products?

We haven't gone to the Middle East yet. Certainly in Europe there's some appreciation for that and discussion are going on there. But particularly in South Korea, a market that we haven't spent any time in hardly at all for us, and in Japan, which we know very well and have an office there, with their thoughts around slag and the cost of slag. Knowing the value and use of their blast furnaces as steel prices remain pretty compressed, a lot of people are starting to pay a lot attention to value of use around their blast furnaces; the heat values, the slag that they lose and those types of things and we need to put a premium product in there to penetrate the markets that we're not into right now.

Okay, final question, please. If hopefully in the months or years ahead the iron ore market tightens up again, any thoughts of going back to a higher silica product increasing your capacity, or is this a permanent change?

I think, Tony, that's the beauty, one, of this mine as we get to understand it is we've got the ability to tweak this mine as the guys get to understand it and they're showing right now that they've [come up] a whole percentage point on silica. And I think what we really haven't got ourselves totally involved in with yet -- we've been so focused on Bloom Lake -- is we also have the ability to do the blending over at Wabush and while it's got a high manganese that people also point out, its got a 2.6% silica, as well. So there's also other optionality and other product optionalities that we have wide open for us right now as the market presents itself and its needs.

Great. Thanks, guys, for your time.

Thank you.

Thank you. Our next question is from Shneur Gershuni of UBS. Your line is open.

Hi, good morning, guys.

Good morning.

Just had a question. I don't want to rehash the whole Canadian costing again so I just wanted to talk about the other project in Canada that you're doing, the feasibility study with respect to chrome. Market conditions are not ideal at this point right now, there's a lot of global uncertainties and so forth. I was wondering if you can talk about flexibility assuming the feasibility study comes through and says you should go forward with, your flexibility in being able to delay this project or delay the CapEx with respect to the project and if you can prioritize it with respect to go or no go on the project relative to debt pay down versus your dividend strategy as well, too?

I'll take the first part of it. We have total flexibility at this point in time. It is a feasibility engineering study that we're moving forward on at this point in time. For a long asset, once again, like this even through feasibility studies and clear into if you made the final decision to go with project construction and in that it's several years out still and the market, I'm sure, will change once again, and you've got to have the robust business case in these mines that can ride out the lows. I don't think you make a snap decision because things are low right now, or the opposite case that things, if they were high, that you'd would make it. You've got to have a good position with this mine, which it is, on the cost curve. It's in the very low end of the cost curve and when you've got that you've got a lot of strength to continue your thinking and go forward. But we do have total flexibility and no final decisions have been made on whether this project goes forward or not until we come out of feasibility sometime next year.

And absolutely we would prioritize the dividend first. If the market were such that pricing did not allow us to generate enough cash to do both the project and the dividend, the dividend would come first and we will continue to keep our balance sheet at the investment grade profile that it is right now. Both of those would come ahead of investing in that project.

Great. And a follow-up question to Sal's comments about your low-ball met coal you said that you'd mostly contracted out. There's been a lot of chatter in the Atlantic basin about taking discounts and so forth relative to benchmark, are you seeing any of that or is that really just happening in the mid-grade and lower-grade met coals?

I think more of the higher-grade balls, the high-ball As and Bs, I think there's more of that. But let me be clear, too, on the low-ball. There's always chatter in the market, that's why we have sales people that are negotiating with customers and in a tough environment in the Atlantic basin right now negotiations continue. I don't spend my day on the day to day of it, but sure, they're negotiating pretty hard right now all sides. But I don't think -- other than the high balls I don't think it's any more unusual than what we would normally see in the low-balls.

Okay, and one final follow-up question. With respect to your per ton guidance with respect to how you think about the Chinese market and production and so forth, there's potentially -- let's say there's a risk that the stimulus plan that you're thinking about shifts to Q1 or Q2 of next year, how much downside do you see in your number if that was to be the case?

Oh, I don't know that I have a number in the top of my head, but I think you can do the calculations pretty well. And I guess the only thing I would leave you with is, obviously we all have to make projections out on what we see and where we think things will be, but we also do scenario planning for this business, as well, and we've got those plans if things are to go down or up. But particularly on the downward side we do the risk analysis and do the scenario planning, but I don't have a number for you.

Yes, we certainly did that before we announced the dividend increase and given that we've got half the year under our belt already, and we're pretty confident about the Chinese floor in pricing and I think you're going to start to see some of that production come off any time now with the pricing -- the spot pricing dropped to where it is. So, could there be a $10 a ton potential? I suppose there could be but I don't see it being anything more than that.

No, I think we've all got our eyes wide open on this thing but, again, we do have the fundamental beliefs of the what the industry [espouted] and the pricing does seem to reflect, though relatively recent on the [PLAX] index, that the Chinese floor seems to be pretty solid.

Great, thank you very much, guys.

Sure.

Thank you. Our next question is from Jorge Beristain of Deutsche Bank. Your line is open.

Hi, good morning, guys. Sorry if I missed some questions earlier as I was multitasking on a few calls. But my first question, if it hasn't been asked already, could you, Joe, update us on the future of the North American coal business? You set yourselves a goal about a year-and-a-half ago in January 2011, I believe, saying that by year-end 2011 that it would be up or out for the coal business. You have divested the Australian coal assets now. Should we read anything into that? Are you satisfied with the coal performance, or can we read anything into the fact that the coal business has not yet really delivered up to its results, that the clock is ticking there?

Well, the coal business -- let me just be straight forward as I always am -- the coal business has not delivered up to its expected results, obviously, with that. However, what we did say -- and you're absolutely right, Jorge -- is we did change our timeline a bit when we were hit by the tornado. The three projects that we talked about have been executed and executed very well and I think that's where you see the stability on our cash costs coming in on these longwall mines as they are now. It's unfortunate that on the market side that those winds shifted, or these mines would be in very good shape from a financial performance at this point in time. Nevertheless, we get paid to look at the shifting sands and if the market were to stay depressed we've got to continue to look at all of our assets, just like Sonoma and all the rest of our assets, and evaluate the coal business on the long term.

We are still, like everybody else, bullish on met coal. I don't think the macros have changed. We don't see on the supply side any of the good hard coking coal that our low-ball mines produce out of West Virginia and out of Alabama. They're still heavily sought after to blend off the lower-grade met coals, if you will, and I think as we watch -- it's all about Europe right now as far as the coal business in the Atlantic basin and we'll just have to watch the run rate of Europe, but certainly all assets are under scrutiny in this business for Cliffs at all times.

But I definitely would not Sonoma sale to our North American coal business. Sonoma is pretty small, not controlled by us, not a really long life, trending more towards thermal coal, so that was a decision based on that particular asset. I would not correlate the two and Joe's comments are absolutely correct.

Yes, let me reinforce that. Yes, thank you, Laurie. We thought we get some synergies and grow a coal platform in Australia. We have not been able to do that, we think the assets are very highly priced, as you've seen evidenced by the last few coal sales. This has been a great partnership, the mine's only got five to seven years left. It does not have any growth potential in it with the way the geology of the coal mine is and it's a good time for us to exit on a nice little isolated asset that's performed very well.

Okay. My second question, just following up on the chromite, is how should we think about the funding for that project conceptually? Currently you're at an EBITDA run rate of about $2 billion for this year, net debts at about $4 billion and the chromite project has a $3 billion price tag. Should we be thinking about as about a third debt, a third equity, a third supplier financing, or do you believe you need to bring in a partner at this point in order to make a go of that project?

It's really still early days. We're considering all of the options that we have available. A partner could be an option, depending what pricing does over the next couple of years. Keep in mind that that outflow of $3 billion does not happen for a couple of years so we're probably all going to experience quite a few pricing cycles for iron ore and that'll have an impact on how we think about financing that project. So a lot of options still open as we move forward on that one.

Yes, that's right, Jorge, and I would say right now, along with everything we're moving along with, the engineering and everything as well and then environmental permitting, the two focus points right now and the hurdles to get over is our -- and to work with are, one is we're working towards MOUs, which will lead then to the impact benefit agreements of the First Nations Group and our folks are working hard to get those MOUs established in the First Nations Groups up there. And second is the focus on the ability to use the route that we selected for the north/south corridor to put the road in as we go through and that's going through its judicial process right now. Those are the two focal points that we're looking at and focusing on. And Laurie and her team is saying very early days are exploring the options along with the commercial team, including partners and/or suppliers -- or customers -- potential customers, rather, to come in to this. But early days, but obviously we're putting some thought to it.

Okay, thank you.

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

This is actually John Sullivan filling in for Brian. I just had a question, it's a bit of a follow up on what you guys talked about before. I wondered if you could comment a bit on how you think about the dividend in various iron ore benchmark pricing scenarios?

As I said a couple of times, we really pressure tested it and believe that we can sustain this dividend under quite a few variations of pricing scenarios. There are lot of things that -- levers that we can pull as an organization. You may remember in 2008, 2009 we were generating cash and so we can pull those levers if we need to and this was a commitment that we made to our shareholders that we would put above pretty much anything else.

That's right. And I think you've to take -- 2012 is a big transition year for us, particularly with the new assets at Bloom Lake, and as soon as we get those costs and get that operation stabilized in phase 2, the construction piece coming over that, I think you can see very clearly there's plenty of room for the dividend. And, again, I will continue, as Laurie will, to reassure everybody we didn't put this dividend on to take it off the table if things got tough. We've done it under a lot of different scenarios and we continue to maintain that we can support that dividend.

Great, thanks a lot.

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

Hi, good day, everybody.

Hi, Kuni.

Just to follow up on Bloom Lake, as you move from the high silica to low silica product, can you talk a bit about how complicated that process is and what your learning curve may look like?

Well, we're there. The guys actually were able -- once we gave them a target on the silica, instead of working between a 1% range and we settled in on a target where they wanted to, the guys were able to come up to it very well and very quickly and I think that's a credit to just the way the mill has been -- the whole metallurgical process within the concentrator has been built and how it can be fine tuned and the technical skills of the people that we have. Again, as I reiterated on the -- earlier, and I know it's a hard concept to come up with, this is really all about blending in the mine, that's where it all starts. You have very, very little -- you've got fine tuning control in a concentrator, but you've really got to get -- what you present to the mill is the way you're going to keep your recoveries up no matter the grade is. So that's the part that's lacking and we're -- again, we're just getting more and more drill data and we do have a lot of folks, as you can imagine, out of the US iron ore with those blending expertises. That's what we do on all of our low-grade mines within the United States and they're testing a number of different metallurgical grades and theories as they go forward just to nail this down and it just takes some time and more knowledge of the mine. So it's think about the mine, not about the concentrator.

Okay, got you, that's helpful. On phase 2, I think last quarter you said you were about 30% along, can you just update us there?

Again, the engineers are still working through it. We're going to have a more defined number, if you will, on the S-curve probably later in August as we go forward and I just don't have a number to give you with that. It would not be accurate but we do believe we're on time and we're on schedule as we go right now. But I'm sorry, I don't have a S-curve number to report to you.

So we'll still be -- we'll be starting off the first half of next year.

We'll be starting up the first half of next year, there's no question about that.

All right, thanks.

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

Good morning, everybody.

Good morning, Mitesh.

Just a quick question on Amapa project. What is your [target] and have you looked at monetizing that just like what you did at Sonoma?

We certainly have. As we've discussed in other -- in previous calls and we're still at the same place. We're the 30% minority partner with Anglo being the lead partner with that. Discussions as they get closer to Minas-Rio are starting to take place around what we do with the asset and the potential sale of the asset. We're in a good spot on that. We have tag along rights as well as rights of first refusal to go with it and if the potential of looking at that asset as far as a sale goes we will work with Anglo to move forward with that. Again, it's in the same category for us as it is with Sonoma. It's a small, isolated asset with little upside for us. We thought we were going to build out platform in Brazil, we thought this was a stepping stone; that hasn't occurred. We've moved our office out of Rio de Janeiro and over to Santiago and shut that down so it's another isolated asset that we would be open to a sales on.

Great. Thank you very much, guys.

Thank you. Our next question is from Tim Hayes of Davenport & Company. Your line is open.

Good morning.

Good morning.

Two questions. First, the cash flow guidance of $1.3 billion, do you have a estimate of how much will be from working capital?

How much will be from working capital of the -- I think it's not a huge percentage. It's not that we're getting all that from -- that's mostly from EBITDA.

Okay. And on the higher grade ore from Bloom Lake, how much of -- what's the price differential for that new grade or better grade versus the lower grade?

The high-grade product from Bloom Lake, we get paid on iron content so we'll get an additional amount for the iron content that we get paid for. The bigger issue for us is it that really becomes more of an attractive product to Asia outside of China or Europe and because of the freight we make more money in Europe. Just generally you will get the premiums for higher-grade iron content outside of China that you won't get in China, so that's really where the value comes to us from those types of things.

That's right. I think sometimes there's a thought that all iron ore is created equal and actually when you go to blast furnaces and get into the technical discussions with it, they really have to figure out how to blend it and how to use these different products. So you've got to think about this as a different market technique that we go into, not just selling bulk iron ore to traders, if you will. We're really trying to specifically get into the right mills that actually understand a higher quality product and get the value and use so that they can pay us for the iron ore premium. So we're really getting our trial cargo set with our target customers in there and then we'll work on the premiums. But there is a premium associated with the higher iron content.

And, Tim, we just checked quickly and actually working capital's negative so it's really operations that are generating the cash.

Okay, thank you.

Thank you. Our next question is from Steve Bristo of RBC. Your line is open.

Yes, thanks. Just regarding this higher iron content concentrate, is the iron content actually increasing? I believe it was 66% before.

Well, if the silica goes down the iron has to go up with that. Not to be glib but that's how the balance works. Yes, it'll be about a -- it was at a 66% at 5.5%. I think most of the illustrations were done on the 4.5%, the typical, not the range of the specification. So, yes, that iron ore will be in the 66% range.

So it wasn't 66% and 5.5% before?

It was and it wasn't. The final specification of the product was varying between 4.5% and 5.5% as it went from there so there was -- when it was 4.5% it was 66% and then it would move from 5.5%, obviously, when it went from there. So what we're trying to get here is consistency in our quality, not getting that bouncing all over the place.

Okay. Now, at the end of the third expansion they were talking about a headline production number of 24 million tons [per annum] 8 million for each phase. Now that you're doing this higher content, you have 7.2 in phase 1, 7.3 in phase 2, what would be the overall rate you're looking at with all three expansions, assuming --?

It would be 21.8 million for the overall rate if phase 3 went ahead for the overall expansion.

Okay. And cash costs you're talking about them now coming down to a target of around $60, $65 million Bloom Lake by the end of the year --

Yes.

Is that what you're looking at for long-run stable cost now at Bloom Lake after all three phases are done or once you're stabilized?

Yes, I think that would be a fair assumption.

Okay. And then lastly on Wabush, you said you're not really going to be focused on that this year as much as Bloom Lake so we can expect these costs to remain high, at like $125 a ton range going into 2013, as well?

I think there will be minimal impact on the cost. Yes, I think they're going to stay up in the range. Again, we're putting some sustaining capital in there trying to brace up the maintenance in a number of different areas that we've talked about, but we also need to put in -- we're also doing some full engineering studies. Wabush is a pretty tired asset and there's going to have to be some significant capital in there to really get it to a sustaining production and cost mode, so I don't want to have anybody think any differently. And until we can really focus and get the studies in from the engineers those costs will remain high for the rest of the year.

Yes, you might see something come down $5 to $10 next year if things are working well, but the type of improvements that we are committing to at Bloom Lake we are not going to commit to that level of improvement at Wabush until we get Bloom Lake and then we turn our focus to Wabush.

That's right. And again, just like the quality in Bloom Lake we're not comfortable with how sporadic the cost per ton as well at Wabush. It's a surprise to us in our planning and everybody else so, yes, you can expect relatively high costs for the rest of the year.

All right, that's it for me. Thank you.

Thanks everybody for joining us on today's call. As always I'll be available throughout the day to answer any follow-up questions that you may have. Thanks, guys.

Thank you all.

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