Cleveland-Cliffs Inc (CLF) 2012 Q3 法說會逐字稿

Good morning. My name is Mimi and I'm your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2012 third-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?

Thanks, Mimi. I would like to welcome everyone to this morning's call.

Before we get started, let me remind you that certain comments made on today's call will include predicative statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Form 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 Senior Vice President and Chief Financial Officer, Terry Paradie. At this time, I will turn the call over to Joe for his initial remarks.

Thanks, Jess, and thanks to everyone for joining us this morning. Before I discuss the quarter's results I would like to take the opportunity to acknowledge the executive leadership changes that took place during the quarter.

Effective October 1, Laurie Brlas, our former CFO, assumed the responsibility of President, Global Operations. In her new role, Laurie will be accountable for all mining operations, including development projects in iron ore and ferrochrome. As CFO, Laurie successfully managed and executed several large-scale projects that directly contributed to the Company's success over the past several years. Laurie will bring a focus to cost management and capital allocation as we work towards improving our cash cost position across our portfolio of assets.

Joining me today is Terry Paradie who has been named CFO. Terry has been with Cliffs since 2007 and has served as the Company's Corporate Controller and Chief Accounting Officer for the majority of that time. Over the last eight months, Terry has been working as Assistant General Manager at our Michigan operations. This operations experience has provided Terry with hands-on mine management skills, which I think will be invaluable to him in his new position.

Also as part of the announcement, Steve Raguz was appointed Chief Strategy Officer and Jim Michaud was appointed as Chief HR Officer. Executive team members from global, commercial, business development, and our legal and environmental groups remain unchanged. I believe these changes focus our executive leadership team on the Company's most critical, current, and future of business requirements.

Looking back at the quarter, the lack of major stimulus program in China as well as the ongoing uncertainty in Europe have weighed on global economic growth. This uncertainty contributed to the quarter's volatile pricing environment for the commodities we sell.

We believe the two weeks of sub-$100 iron ore pricing we saw during the quarter was unsustainable. In fact, the Platts Index averaged $113 per ton for the third quarter. While the lower pricing directly impacts the earnings power of the total Company, I would remind you the legacy supply contracts within our US Iron Ore business minimizes the immediate impact of lower pricing. That being said, we remain focused on the Phase II expansion on Bloom Lake, maintaining our current dividend and investment-grade rating through this business cycle.

We are currently in the process of compiling our 2013 business plan. As a component of this process, we review and prioritize the actions we would take to decrease production volumes if needed. This analysis is conducted at all of our mines right down to each production line. Having an action plan in place allows us to be operationally and financially flexible in uncertain markets. I think this was evident in 2008 and 2009 where we took the deliberate steps to respond to the global financial crisis.

While I don't believe we are currently operating in comparable business conditions, I want to remind everyone that we have several options and levers we can pull should the market change. One of those levers is capital spending related to our chromite project. Despite the significant potential this project has for the Company's future, in light of the current iron ore pricing environment, we are reviewing this project's timeline. This includes delaying the major capital spending outlays and could push the production target date beyond 2017.

We still expect to complete the feasibility stage of development and environmental assessment by next year. However, we have decided to shelve our early works plans until feasibility is complete. At that time, we will assess the study's findings, industry conditions, and Cliffs cash position and outlook before deciding to move forward with the project. In the meantime, we will explore the option to take on a partner for the project and we will continue to develop our relationship with the Province of Ontario.

Now turning to the performance of our business segments during the quarter. US Iron Ore sales volume for the quarter was 6.6 million tons compared to 7.0 million tons (sic - see press release "7.9 million tons") sold in last year's third quarter. The decrease was due to a lower demand for iron ore pellets and timing of vessel shipments.

For full-year 2012, we are reducing our expected sales volume by 1 million tons to approximately 22 million tons. This is primarily due to the recent decrease in pricing of seaborne iron ore, which impacts the amount of tons we expect to place into the seaborne market in the second half of the year. Our production volume expectation for the year remains unchanged at approximately 22 million tons.

Subsequent to quarter end, we reached a tentative agreement with the United Steelworkers. The new three-year labor contract covers approximately 2,400 USW represented workers at our Michigan and Minnesota operations. We were pleased to reach an agreement without any production disruption to our operations. Our employees are Cliffs' most valuable resources and we continue to work towards maintaining a strong relationship with the union.

We expect to sell 19 million to 20 million tons from our US Iron Ore operations next year. The lower volume is based on a North American steelmaking utilization rate of approximately 70% for 2013. With a slightly lower expected year-over-year utilization rate, we will take deliberate steps to manage our production volume to meet the market demand.

Eastern Canadian Iron Ore sales volume for the quarter was 2.4 million tons. This was made up of 1.4 million tons of iron ore concentrate from Bloom Lake and 1 million tons of pellets from Wabush. The team has been successful in consistently achieving the new 4.5% silica target for Bloom Lake's concentrate.

During the quarter, we commenced development work on the west pit with the delivery of the third shovel in early August. We expect to achieve the development requirements for this section of the mine by year-end and have been increasing -- increased consistency with the ore grade feed. Bloom Lake's production volume during the quarter increased 16% to 1.4 million tons versus 1.2 million tons in the second quarter.

We continued our commercial marketing activities for Bloom Lake's product with the objective of increasing our customer and geographical diversification. During the quarter, we successfully delivered trial cargoes of Bloom Lake's ore to new customers in Japan. Additionally, we have test cargo slated for European customers during the fourth quarter. While establishing a quality customer base for Bloom Lake's production product takes time, we are encouraged by the favorable customer feedback related by the quality of Bloom Lake's ore.

On the logistics front in Eastern Canada, as planned, we have completed our modifications to the dock related to our second ship loader. This has eliminated the need for one of the transshipping vessels, allowing us to consistently achieve vessel loading times of less than five days. At Wabush, during the quarter, production was unfavorably impacted due to equipment failures at the concentrator plant.

While we continue to take steps to achieve operational stability at Wabush, in light of the current pricing environment, we are dedicating more of our Management and capital resources toward ramping up Bloom Lake's operations. Because of this, we are decreasing our expected production volume to approximately 8.9 million tons from our previous expectation of 9.2 million tons. As a result, we are lowering our expected full-year sales volume to approximately 9.4 million tons.

We continue to make progress on the construction of Bloom Lake's second phase. The concentrator is 60% complete and we are still on track to commence production during the first half of next year. With the ramp up in commercial marketing progress being made at Bloom Lake, we expect to sell approximately 13 million to 14 million tons from our Eastern Canadian Iron Ore operations in 2013.

Turning to Asia Pacific Iron Ore, third-quarter sales volume increased 28% to 3 million tons from 2.4 million tons sold in last year's comparable quarter. This year-over-year increase is driven by the completion of Koolyanobbing's expansion project, included within the current quarter sales volume is nearly 900,000 tons of low-grade ore. During the quarter, we advanced the strip mining in our new pits that were opened, related to Koolyanobbing's expansion. Due to the geology of the three new pits, we moved significantly more material when compared to previous quarters.

Also earlier this month, we sold the last cargo from our Cockatoo Island joint venture. As previously announced, we entered into an agreement to sell our interest in the mining tenements and certain infrastructure of Cockatoo Island to Pluton Resources. We are maintaining our expected sales volume of 11.6 million tons for 2012. In 2013, we expect to sell 10 million to 11 million tons of Asia Pacific iron ore, which includes no volume from Cockatoo Island.

Now turning to North American Coal. Sales volume for the quarter increased 157% to 1.7 million tons from 646,000 tons in last year's third quarter. The consistent production from our longwall operations continues to demonstrate significant improvements. To that point, Dave Webb and his team have done an outstanding job stabilizing these new mines over the last year.

The ability to significantly lower cash cost during a volatile pricing environment enables us to remain competitive amongst our Central App producers. During the quarter, we also successfully moved Oak Grove longwall into a new coal panel, as planned. Unfortunately, due to the softer pricing conditions, we are lowering our expected full-year sales volume to approximately 6.4 million tons from our previous expectation of 6.9 million tons. For 2013, we expect to sell 6 million to 7 million tons, largely comprised of metallurgical coal.

In closing, we recognize that we are operating in a volatile pricing environment. Looking at the remainder of this year and into next year, we will continue to evaluate the levers we have identified to manage through the cycle. We have already started to pull some of these levers by delaying capital spending for our chromite project and reducing SG&A expenses.

Also, we will not hesitate to take quick and prudent actions to respond to market volatility. This same Management team executed an action plan and delivered results in 2008 and 2009. Since then, we have increased our scale diversification and financial flexibility, which positions us effectively to effectively manage our growth through this volatile pricing environment.

And with that, I will turn the call over to Terry for his review of the financial highlights. Terry?

Thank you, Joe. I appreciate the introduction and your kind remarks and I look forward to being part of the new executive leadership team.

For the third quarter, seaborne pricing for iron ore decreased 36% when compared to prior year's third quarter. This resulted in a 26% decrease in consolidated revenues to $1.5 billion for the quarter. Consolidated sales margins was $198 million and was unfavorably impacted by lower pricing and increased labor, mining, and maintenance costs.

During the quarter, we reported Sonoma's coal's results as a discontinued operation. This was a result of our previously disclosed agreement to sell our economic interest in the operation. We still plan on closing that sale and collecting cash proceeds of AUD141 million in the fourth quarter.

Due to the lower year-to-date average iron ore fines price, we decreased our expected full-year average spot price assumption for seaborne iron ore to approximately $128 per ton delivered into China. This iron ore assumption is the price upon which full-year revenue expectations for our iron ore segments are based.

Turning to US Iron Ore results, revenue per ton decreased to $111 per ton from last year's third-quarter results of $138 per ton. The prior-year results included a favorable impact of $9 per ton related to the full consolidation of Empire. Excluding this adjustment, revenues decreased 14% over prior-year's quarter, primarily driven by lower year-over-year pricing for iron ore and changes in customer mix. Cash cost per ton decreased to $68 from $74 in 2011's third quarter.

Last year's results included an unfavorable impact of $11 per ton due to the additional costs recognized related to the full consolidation of Empire. Excluding this adjustment, cash costs increased 8% year-over-year primarily driven by higher stripping and maintenance costs. The current year's quarter results also include idle costs related Empire's summer shut-down and the impact of lower fixed-cost leverage.

Despite the significantly lower assumption of iron ore pricing, we are maintaining our full-year revenue per ton expectation of $115 to $120. To reiterate Joe's earlier point, our legacy supply contracts continue to minimize the impact of volatile pricing environment. We are also maintaining our cash cost per ton expectation of approximately $60 to $65.

In Eastern Canadian Iron Ore, revenue per ton decreased to $107, down 36% when compared to prior-year's third quarter. This was driven by lower year-over-year seaborne iron ore pricing. During the quarter, cash cost per ton increased 21% to $106 due to higher costs at both Bloom Lake and Wabush.

Bloom Lake's increased cash cost were driven by higher contract, labor, fuel, and maintenance and supply costs. Bloom Lake's cash cost improved by $7 per ton to $88 from $94 reported in the second quarter of 2012. This was primarily driven by increased production through-put rates at the mill. We continue to see Bloom Lake's cash cost per ton at Phase I decrease as the mill's through-put rates improve.

The increased year-over-year cost at Wabush were primarily due to higher labor costs, related to increased maintenance and repair activities. We are decreasing our full-year revenue per ton to $110 to $115 as a result of lower seaborne pricing, however we are maintaining our cash cost per ton expectation of $100 to $105 per ton. Additionally, we continue to expect to exit the year producing at an annualized rate of 7.2 million tons and a mid-$60 cash cost per ton. We anticipate our average fourth-quarter cash cost to be approximately $76 per ton at Bloom Lake.

Moving to Asia Pacific Iron Ore. Third quarter's realized revenue per ton decreased 50% to $85 from last year's $170 per ton. Again, this was primarily driven by lower seaborne pricing and sales of low-grade ore Joe discussed earlier. We do not anticipate shipping low-grade product during the fourth quarter.

Average cash costs increased 13% to $77 per ton compared with $68 per ton in the year-ago quarter. The increase was attributed to higher mining costs, partially offset by lower royalty expenses. Due to the lower expectation for spot pricing, we are decreasing our expected full-year revenue per ton to $100 to $105. Our cash cost per ton expectation remains unchanged from our previous expectation of $65 to $70.

In our North American Coal segment, revenue per ton increased 30% to $129 compared with $99 in 2011's third quarter. The increase was driven by favorable sales mix, which included a higher proportion of premium low-vol met coal sales. While the year-over-year increase was slightly offset with lower spot market pricing, the met coal volume that we committed and priced earlier in the year have favorably impacted our results.

While we expect to see similar impact of fourth-quarter realizations, we are decreasing our full-year revenue expectation to $120 to $125 per ton due to weaker spot pricing for all of our coal products. We achieved lower cash cost per ton of $115 compared with $135 in the third quarter of 2011. This year-over-year improvement reflected greater fixed cost leverage, driven by increased production volumes from our longwall operations. Partially offsetting the improvement was the planned longwall move at Oak Grove during the quarter. Primarily driven by ongoing operating improvements on our longwall mines, we are decreasing our full-year cash cost expectation by $5 to $105 to $110 per ton. As Joe mentioned earlier, the continued production consistency we see is directly impacting cash cost per tons in this business.

Moving to the balance sheet. In the third quarter of 2012, we generated $308 million in cash from operations versus generating $828 million in cash in the third quarter of 2011. At the end of September, we held $36 million in cash and cash equivalents and our debt stood at $3.9 billion. Included in our debt, we had $250 million drawn on our $1.75 billion revolving credit facility, providing us with ample liquidity of approximately $1.5 billion at the quarter-end.

Also subsequent to quarter-end, we were successful in extending the term of our revolving credit facility by one year to October 2017. For the full year, we anticipate generating $600 million in cash from operations after adjusting for all the updates within our reporting segments. We are also maintaining our full-year CapEx budget of approximately $1 billion comprised of approximately $300 million in sustaining capital and $700 million in growth and productivity improvement capital. The growth capital is primarily related to the construction of Bloom Lake Phase II.

We are reducing our expected full-year SG&A expense to approximately $275 million, driven by a continued focus on reducing Company-wide expenses. We are maintaining our cash outflow expectation of $90 million related to global exploration and $75 million related to our chromite project. We expect a full-year effective tax rate benefit of approximately 35%, which includes the impact of Australian MRRT and other discreet items. Excluding MRRT and other discreet items, our effective tax rate would be approximately 8% for the full year.

With that, Jess, I think we are ready to open the call for questions.

Mimi, that concludes our prepared remarks for today's call. Please open the line to begin the question-and-answer session.

Thank you.

(Operator Instructions)

Jorge Bernstein, Deutsche Bank.

I have a lot of questions, but the first one is you are implicitly lowering your 2013 US legacy guidance by about 4 million tons from what was your prior high point of 23 million to potentially the low point of 19 million. And I just wanted to understand, does this imply any idling of a specific mine and if not would this not raise your average unit cost into 2013 because of lower fixed-cost dilution?

Yes, Jorge. Good question. As we go through this, let me first address the volume of the 23 million to the 19 million tons at the very high to where we are at now.

Combination of factors as you can imagine, RG exiting earlier this year took capacity in the blast furnace consumption down. We are seeing imports on the rise, taking steel capacity out of our customers' base, as we go forward.

And with the lower prices, it's not advantageous for us right now to ship out of the Great Lakes, and we are not shipping there to break even. We are actually looking to make money as we do, as we have said in the past -- shipping, exporting out of the Great Lakes is a -- it's a spot business for us. When it's fortuitous for us, we will do it and when it's not, we won't, as it comes forward.

So the volume is a combination of factors plus we see a blast furnace utilization next year of 70%, which is down slightly than the full-year average of this year as we go from there. We are evaluating -- customer nominations continue to come in. They have until next month to finalize nominations for next year. That will balance out the plant mix that we need to figure out with where we go.

And similar to this year, we would look at things like with Empire with the lower volumes and coming close to end of mine life -- do we run it out and shut it down? There are things like that. There are some higher cost lines. The smaller older lines in Northshore, do we idle a few of lines as we come through? Do we take a line down in Hibbing?

As you can see, the flexibility of the operation is there is a number of combinations that we can do. We are analyzing the best way to do that to give the customer mix as we go forward. The reason we haven't done it yet to this point in time is one is we have to get customer nominations in for next year so we can put our plan in place. But more importantly, if you remember, in the fourth quarter, this is our heavy shipping season to get in and we have commitments to get product out and across the Great Lakes before they shut the locks down.

So yes, we have got a lot of combinations that go with that. They are the standard ones that we've used in the past in 2008 and 2009 and it will certainly bring some of our cost up as we lower the tonnage down. It's a heavy fixed-cost business, as you know.

Great. And just my second question, with seaborne prices that we saw in the third quarter of $113 for the benchmark, it does seem broadly speaking that your seaborne exposed operations did not generate a lot of money. How do you intend to deliver profit growth at those seaborne exposed businesses given that the guidance is implying basically flat year-on-year volumes and the pricing environment looks to be flat from here on out?

Well, at Bloom Lake, and I think that's, as we have said in the press release, and as you folks know, that's where the focus has been for the year. That's where it continues to be maintained and focused. We are very pleased with the progress we see at Bloom Lake.

We have opened up the west pit now so that we have three different areas of the mine to blend from. The west pit ore is coming in where we thought it would. It has less magnetite in it, which increases the yield and it's a little coarser as it goes into the mill. So this has just been opened up. We have got a heavy stripping campaign that goes on through the rest of the year with that. But that was one of the big levers we needed to get the volume and the through-put that comes through -- that goes with it.

Our overland conveyer that many of you saw in the construction phase when you were up there with us in July/August is right on track to be finished by year-end. That will reduce our trucking costs that come in from there. As well, our tailings pond is on track, as well as the pumping station versus that expensive contractor haulage that you saw, as well.

So the dock has been completed, as I just discussed in my remarks. That gets rid of the second transloader. And the demurrage is also going away, as well, as we have reduced now loading times to five days.

So all of the things we talked about, Jorge, in the past, as hopefully I can demonstrate we do have a plan. There are specific areas that we are working on that we track and watch as we go forward. And it all seems to be going in a very positive direction. We still expect to exit the year and for December, as we said, not for the quarter, the fourth quarter, but for December on track to hit our mid-$60 range and the 7.2 million ton run rate.

Thanks very much, Joe.

Evan Kurtz, Morgan Stanley.

Just a quick question on taxes first. It seems like you got a nice benefit this quarter on the tax line. And I wanted to figure out if there is any discreet pieces of it we should be aware of and if you can quantify why that happened this quarter and how we should think about tax rates going forward?

Yes. Evan, the big issue here is around our permanent tax benefit items including our percentage depletion in the US business. So those stay pretty consistent from quarter-to-quarter and for the full year. So as you reduce your pre-tax income, which happened with our latest forecast, it has a significant impact on our rate. So what has happened is that our effective rate for the full year will be around 8%. But we do have discreet impact related to our MRRT resource tax that we took during the second-quarter time period.

So from a go-forward standpoint, we don't expect our tax rate to be around the 8% forward rate in 2013. We traditionally have been in that 20% to 25% tax rate and that's where I think it would be going forward. There weren't any specific discreets in the third quarter for this rate. It was just a catch-up for trueing up our tax rate for the quarter.

Okay, got you. And then maybe a question on Wabush. It seems to be losing money. I was wondering, what is the long term plan there for that particular mine? How long do you continue to run a loss there before you make some maybe bigger decisions?

Well I think that's a fair question. And as we have said all the way through this thing, we are at a loss in Wabush. That will continue for the next -- into 2013 for sure.

Our focus has been on Bloom. We have done a capital review to see what it would take to bring Wabush up to standards to get it back on track once again. And in 2013, we will start the operational review to see where that goes and pull all that together with that.

In the meantime, through year-end, we do have customer commitments for the volume. And we will keep those commitments as we go forward. We will have to make some decisions in next year but it will be into the second quarter before we are ready to make the final decisions on where we go with Wabush, both from the positive -- do we spend money and get it back on track?

There is a number of different options. Do we shut pelletizing down and run concentrate only? Or do we do more drastic measures? Those things are all on the table. We are working through all of those, but through year-end we do have customer commitments and we will maintain them.

Okay. Thanks, guys. Very helpful. I will turn it over.

Timna Tanners, Bank of America.

Yes, hello. Good morning. Couple of questions, if I could.

Sure.

All right, so I wanted to just clarify on the cost side that the Asian cost pressures were indeed one-time, Bloom Lake is on schedule, and US had some extraneous issues that aren't getting fixed. Is that a fair characterization? The Asian ones were the ones that surprised us?

Let me go into a little more depth. I think I've explained Bloom Lake, Timna, already, where we think we are on track at this point.

On Asia Pacific, in the expansion in Koolyanobbing, what we also had to do were open up three new pits. These are not large mining areas in Australia that we have. They are more fashioned to short-term gold mining pits, if you could think of them in that nature.

When we got into those pits, the assumptions that we had placed in the geological model that we had seen in the last set of pits that we opened did not hold up. The siliceous cap, if you will, extended further than we thought it would. Hence we had a lot of low-grade material that we moved, lowering the price of the product into Asia Pacific in the third quarter. And we had to ramp our stripping up tremendously, obviously because we didn't get the amount of ore up that we thought.

What you will see in 2013 is not a cost effect of that magnitude but cost will go up in Australia as these mines do continue to have higher stripping ratios with that. But it was dramatic. We are back on track on the grade within APIO and we expect to hit our grades in the fourth quarter of next year going forward. But the stripping will go up. I don't have the magnitude for you today, but this was an extraneous event in the third quarter.

Got it. Okay, thank you. So my other two questions.

One about met coal -- the loss in the quarter happened despite the fact that the benchmark price didn't really roll over at least until the fourth quarter, and I know it's hard to make long-term decisions on short-term price moves. But other companies are saying it could be until the second quarter until the recovery happens and that's in that product. Can you give us any thoughts about what your plans might be there and how quickly you could respond on the met coal side?

Well, again we continue to evaluate that. While there was a loss, it was very close to a break-even at this point in time, as we went forward. We are continuing to build customer confidence in our ability to deliver, something we haven't done in the last few years. Again, if we can operate at these rates at a break even in this business, we will continue to do so.

As you know, it's really important that we do that right now as US coal contracts are under negotiation right now until December 31. Then going into Europe in the first quarter of next year we want to make sure that we have the ability to supply if those contracts come forward and the market does turn. So that's the analysis I'd give you on this business.

Timna, I'd like to add, year-to-date, the cash margin of the coal business is over $70 million and we are expecting cash margin for a full year of $100 million out of this business. So it's -- from a GAAP standpoint, it's just about break even, but from a cash margin it's contributing pretty good for us.

Okay. If I could get a final one in, just on the DRI seedstock that we've discussed in the past. If you could give us an update on your progress there? It could be an interesting volume upside eventually given new course plans?

Yes, it certainly could. We continue to investigate in a very heavy fashion, if you will, into some pretty deep metallurgical testing, particularly at our UTAC mine. Right now, that seems be the one most favorable for DRI potential product to come out of there.

We are looking at that mine right now in a lot of depth. We have got a project team dedicated to it and we should get some result from the metallurgy and the cost analysis of it probably later this year. So we are -- something that we are very excited about and we are pursuing heavily but we have got to get the science in place first and make sure we can produce the product but we are pursuing that with a project team.

Okay. Thanks so much.

Nathan Littlewood, Credit Suisse.

Good morning, guys, and thank you very much for the opportunity. Just couple of questions about the US sales number for next year in particular. That 19 million to 20 million tons is a lot lower than we'd expected and I suspect others as well.

You did mention the 70% utilization assumption in the US but could you talk a little bit about some of the other macro assumptions behind that, like the iron ore price. And if we, for example, saw a better utilization and a better iron ore price, what is the risk for that forecast? How high or low could it get each way?

Well, as one of the earlier folks on the call said, you can see this business, it bounces from 23 million tons seems to be about the high, Nathan, and the ability in the best of times within the US steel manufacturer's capacity to produce that goes with it. And in the low times of 2008 and 2009 and draconian times, we were at about 17 million tons for that year. So that will give you a macro range, if you will. We don't think we are anywhere near the 17 million tons.

The 19 million to 20 million, as we look at that, and the 70% range of utilization as we go through and do our math and our economists continue to look at macro, it's as you know, the steel industry in the US is really only being driven by two factors at this point in time, which is auto sales, which are projected to go up once again in the US, but most of those sales you have to really dive into the numbers. It's also really coming from cars being imported from Japan and Europe. So while it's good news on car sales, you have to dive into those numbers to see how much it affects the steel.

The other is the drilling and the pipe that goes along with the natural gas finds within the US but there is also a lot of heavy imports of pipe coming into the US right now to dampen that market somewhat. We don't see 2013 -- housing starts moving there in a positive direction, but not in a particularly high fashion and we don't see any infrastructure construction coming along right now, as well, with the funding that's coming out of Washington, D.C. So if you put those factors, all together, it's pretty much in line with what we are seeing in the back half of this year from the macros to support that 19 million to 20 million tons. And then the other factors, if you drill down into it, that I just gave to one of the other callers that came with it, that's affecting the volumes in the US right now for us.

Okay. Thanks, Joe. That makes sense. The next question was just about cash.

If I understand correctly, you have still got about $600 million that you need to spend at Bloom Lake for 2013. I was just wondering if you could talk about what the ROI and iron ore price hurdles are that you need to justify the deployment of that cash? Falling on for that, can you also talk about how that CapEx deployment at Bloom Lake would rank relative to the dividend payment if you had to prioritize one or the other? And thirdly, would you be willing to draw down on the revolver in order to continue paying a dividend?

Nathan, let me cover the ROI, I don't -- we don't have that level of detail. What I'd like to offer up today, at today's spot price of $120 and ultimately we think with the cash costs somewhere in the mid-$60s. You look at -- we would expect a net back price of over $100 a ton on those tons with the cost of, say, mid-$60s, you can do the math. That's $35, $40 margin. So I think if you look at the pay back period over a period of time on that investment it's a pretty quick pay back period.

I would just -- even with the math, Nathan, look where we are at, it's 60% completion for the concentrator right now. We are down into the fine detail into the piping and setting the equipment at this point in time. So you will see that move at about 10% a month right now. It rapidly comes to a close with that to shut that project down right now. Can be done, that's a lever we do have, but every day we go forward, obviously, it's less and less effective that goes with it.

That's also the future of the Company, to get into that. We would draw into the revolver if we needed to finish Bloom. With that, obviously that's a discussion that we will have with the Board in our next upcoming meeting. But Bloom is the future of the Company. It does provide the sales and, as Terry just explained, the cash margin with that, and we need to very effectively drive through that as we can. So it is our number one priority as we continue on.

Okay. And would you be willing to draw on the revolver to pay the dividend?

I think that will be a balanced discussion that we will have with the Board in the upcoming weeks that go with it. So I will refer -- unfortunately, I'm going to have to refer that one, that's a Board decision. I don't mean to dodge the question. I apologize for that but I don't want to preempt my Board either and we will have that conversation in the upcoming month.

Okay. Thanks very much, guys. I will leave it to the next caller.

Michael Gambardella, JP Morgan.

Just a follow-up on a previous question about this DRI iron ore that you could ship from UTAC, wouldn't that be pretty costly to get all the way around to Louisiana?

Yes, it certainly would and that wouldn't be in our plans, Mike. The math just doesn't work on that. But there are the work that our marketing folks have done. There are numerous outlets for DRI that sits within a adequate shipping range of Minnesota as well.

Okay, so that would be new facilities or would that be something like sending it to Steel Dynamics which you have sold the property to already?

We would look at a variety of existing facilities within the shipping range of Minnesota.

Okay. And then on the last call that you had on the second quarter call, you said you expected to ship about 1.4 million tons of iron ore out of the Great Lakes. I think you had done 300,000 in the second quarter. I'm assuming that's going to be -- how much was that in the third quarter and is that going to be zero in the fourth?

Yes, what we have done in the third quarter is maybe around 500,000 tons and because of the pricing environment we actually have some available to ship but we are not comfortable shipping it at this price.

Yes, at this point in time, Mike, where the pricing is, we don't see anything in the fourth quarter. But prices are moderately and slowly rising. If we get the opportunity with that, we do have product staged in Quebec City, already sitting there to ship if we can get favorable pricing on it, obviously we will take advantage of that in the fourth quarter.

And what type of pricing do you need in the (inaudible) market?

We need to be north of where we are today. Not substantially but north of today's pricing.

And then just last question, on Amapa, you had a pretty big spike in the losses there in the third quarter. Could you give us some feel for what is the game plan for Amapa.

Yes, let me give you the game plan, then I will have Terry explain the losses with that. Anglo is conducting a sales process that we have agreed to. They are working through that process right now with prospective buyers around the world as that goes through. That process will continue probably through year-end to see if we have any conclusions or not from there but there is an active sale process on Amapa moving forward. And Terry, you might want to comment on the cost?

Yes, from the quarter standpoint we had a $14 million loss related to Amapa. $4 million really related to the pricing environment on the shipments we've had but we also had a settlement -- Amapa had a settlement with one of their logistics suppliers that they have been in dispute with over the last couple of years and that was about $10 million this quarter that has come through.

And then you are looking for another $5 million in losses in the fourth quarter?

I think that's not unreasonable to think.

Yes. I think that's right. And that's nothing extraneous, again. That's a pricing issue with the lower (inaudible) products.

Okay. And then final, final question on Wabush. Now you've always said Wabush is a high-cost facility because of labor. Is that an issue with the number of employees up there? Or is that a unit cost labor issue?

I think it's more of a unit cost issue. And really, Mike, as it goes into it, I don't want to put this on the employees or the labor cost that goes with it. It is shared. That facility for many, many years was run under a different philosophy. Its capital spending is desperately behind. And the problems we continue to run into are heavy maintenance cost in many of the major components that sit within that concentrator for the most part.

So it's a combination of everything and as I said earlier to one of the earlier callers, we are taking our time to look at it. We don't like the losses. We'd like to be more aggressive on it but the staff and everybody is focused on Bloom first.

It's a de minimis amount of material that we are working with and the losses we are taking. We have taken that path and that's been a deliberate choice by Management but we are working through the capital spend to see what it will take to get that plant back up on its feet, if it's worth doing economically, and we are doing the operational look at it in a deep dive in the first quarter. And we will see where the numbers come out and where the market is.

Thanks, Joe.

Brian Yu, Citi.

Thanks. Good morning. Joe, with these export tons where you guys dialed back your expectations, I imagine some of that is because of the collapse in the pellet premiums, too. Can you just give us a sense of where that stands today?

And then also it looks like Vale on their call today has been saying that with their pellet capacity shutting in that they are expecting premiums to get back up to $35, $40 per ton. If we do assume no change in Aldex, would that rise and the pellet premium by itself be sufficient to allow you start exporting more tons again?

Brian, that's a difficult question to answer. You have been privileged to listen to the Vale call today. Obviously, we have been a little focused here today with where we have been. If you'll give us a chance to do the analysis on that I think Jess can come back offline with you but I can't comment on Vale's call this morning and project premiums on pellets.

But where you are seeing pellets premiums today, is it in the $15 to $20? So let's say they do go up $20 a ton, would that type of increase be sufficient to make those export tons economic?

Yes, they would be -- if we could get that type of premium on the pellets that you've described from the Vale call, that would make those pellets exportable.

Okay. And then if we assume Aldex stays at takes at $115 to $120, would this year's spend on both exploration -- or how should we view the spending on exploration and the chrome project in 2013? Are they likely remain constant or up or down?

They will be down, just like everything. The first thing that always goes is exploration and R&D, for many mining company that goes with it. Again, we are in our planning session now. Exploration will go down in 2013. I don't have a number for you in the planning session we are in at this point in time.

And as I discussed earlier on the call, we are not putting any early capital spending out on chrome so that number will go down as well. That may push the project out a year into 2017. We do want to finish feasibility, which will come in this summer, which is primarily around the engineering that will continue on and getting the environmental assessment done with that.

We need to get this to a bankable feasibility study. So one we can finish our agreements with the government and with the First Nations. And secondly, if we do choose to take a partner on in a number of different arrangements, we have got to have a document that the valuation of that property can be done on appropriately. So the spend will be primarily just around the finishing up the feasibility. We will not do any preliminary or early capital outlays that we had planned on doing in the past.

Okay. Thank you.

Sal Tharani, Goldman Sachs.

A couple of questions. First, the Bloom Lake cash costs which you are still expecting mid-$60s exiting December of this year. I was just wondering how should we think about when Phase II comes in, it probably will most likely start at a higher cost or the blended cost will be higher. Bloom Lake until that thing ramps up for another six to nine month?

Yes, indeed. Sal, that's our expectation. You're right on it that even though while it should be a better experience on the start up of Phase II, these concentrators is one thing that we are learning the hard way from Amapa, as well as Phase I here, is they do have a lot of nuances and they are difficult to do that. So we see the cost in the first half of starting up Bloom in line with the cost we have today. With that and then the blended rate would be the Phase I getting down into the mid-$60 rate.

Okay, great. And then the next question, you mentioned you have lot of levers to pull and you have already decided to postpone the chrome project. I was wondering how far you will go in order to defend the dividends or the balance sheet? Is Phase III of Bloom Lake or even divesting some of the larger operations, Canada, Australia, or coal? Are these all on the table in your consideration?

They absolutely are, yes. It's a balanced view, when you take one of those, we could do some very deliberate changes right now and shut down Bloom Lake like we talked about earlier before. But we feel like that's the future of the Company and we need to finish at this time. So in all of these conversations that go on, it's complex and it takes in a number of factors including the future of the Company.

We do not see the future of the iron ore business as gloom and doom. We don't see, and while China in a slowdown right now, we are still very optimistic on Chinese steel production and demand. We do think we will see a stimulus after the Chinese New Year next year and our customers are reflecting those thoughts as well. So we still see bright future going forward for our products, Sal, and we have just to work through the next period of time in a volatile commodity cycle that commodities go through.

And then also one more thing, in Canada, there is news in the press that ArcelorMittal may be trying to sell either all or a portion of their business which is close to where you guys are. Is there any synergy for you to think of getting into a portion or taking a portion of that ore asset?

At this point in time we are focused strictly on Bloom Lake Phase II, getting that built and on Phase I, getting the cost down and a good quality product consistently out to the product. Sal, even if we were, we wouldn't comment on those types of activities within the Company.

Okay. Thank you very much.

Mark Parr, KeyBanc.

I'm just looking for a point of clarification about Asia Pacific pricing guidance. You talked about $100 to $105 a metric ton and that implies I think the fourth quarter pricing of somewhere around $80 a metric ton based on the volume guidance. And I just -- maybe I don't have the math right but if you could just reiterate what you said or maybe give some more color on that?

Yes, Mark. I can try to cover that. Today, with a price of say $115 from a Platts standpoint, with the freight rates moving from a dry to a wet ton as a well as some of the ore grade, we are below 62% Platts, we are closer to that $90 versus the $80. I think the $80 is a little low, what you are quoting, are coming into your calculations.

Okay. So you said you won't be shipping any low grade ore. So is that -- and so that is correct, is that right?

That's correct.

Okay. All right. Thank you.

Shneur Gershuni, Macquarie (sic).

A lot of the questions I had were asked and answered. But I was wondering if we can spend a couple of minutes on the US realization this past quarter. They seem to be a little bit -- they moved a lot more than the guided sensitivities in the past. Is that somewhat related to the fact that you booked higher revenue at the beginning of the year and there is a catch up within the contract as you think about the full-year average delivered price or is there some change in sensitivity that we are not aware of?

No, I think that's exactly right. I think as the year moves along, those prices are long-term set prices based on an average Platts rate, a lot of them are over a period of time, so as you move further closer to the year-end, those sensitivities become less impactful.

We begin to true up as well.

Right.

Okay. And so if pricing let's say took a dive again in the fourth quarter, I'm not saying to $120 but everything changes again then there potentially could be another catch-up? Or you've caught yourself up to where--?

I think we are caught up to where we are at now. Our guidance that we've provided is pretty solid at this point.

We are so far into the year, there's less and less sensitivity to pricing volatility in the last few months of the year to change our guidance.

Okay, and then two small items. You'd mentioned you review the strategic opportunities with respect to Wabush, fixing it or selling the product as concentrate or possibly closing it. What would be the cost savings of you spending the capital of trying to fix the issues in terms of being able to convert into pellets and so forth?

I'm sorry, I don't have those numbers today. We are still working through it.

And then finally, you still remain committed to the mid-$60s exit rate for Bloom Lake. There was some progress this quarter, but -- and I guess it's not linear as to how you got there. But how much is dependent on -- where are you in terms of your progress, in terms of you had laid out $18 improvement on the volume side as well as what you are doing with the contractors and so forth. What boxes have we ticked off in terms of getting toward that exit rate?

Well, as I'd said earlier, in that we've ticked off the logistics side of the business with the second transhipment going and demurrage starting to leave and go out. The west pit is just starting to come on, the development of that pit that we discussed that will, one, get us a better ore blend going into the mill which will raise the through-put rates that go forward. We just saw the beginning of that. We just had our first production shot in the last six weeks or so that went through.

We see rates from 1.2 million to 1.4 million quarter-to-quarter but that's not the real story as well. We are having a good month this month and we continue to see the productivity as we drive toward that 1.8 million tons per quarter rate, if you will, from there. Talked about the other aspects going on of correcting the tailings pond, getting the pumping system in place versus all of the haulage that we do right now with contractors and the conveyer belt on its way to eliminate the truck haulage going into the ore sheds.

So those are the big features that we've discussed in the past. Those are the ones that we are tracking and the guys are on progress in each one of those areas.

Great. Thank you very much.

Aldo Mazzaferro, Macquarie.

A question on the new labor contract. Is there a -- can you give us a little bit of information on what the hourly rate may change to in the US Iron Ore mines?

While we have a tentative agreement, it's not ratified, so I apologize but I am not going to be able to have any conversations on that until we have ratification of the agreement. My apologies and we will be glad to talk about it after the ratification.

All right, great. And then on the issue about the dividend again, is -- the Board has made a very strong statement about the sustainability being very important to you. And I'm wondering, do you think they would really refuse in the short-term to fund it out of the credit line if it came down to that? It appears you are going to be fine in the fourth quarter, at least that's my view on the cash flow versus the dividend, but as you get into first and second, when you draw the working capital lines, you are going to be borrowing on the credit line.

I'm wondering whether you might just take another $90 million on the credit line and do the dividend. Or what do you think? Is it a 50%/50% proposition to you or do you think there is more substance behind it on the Board's level.

I think a CEO speculating on Board moves is highly risky to the CEO is what I think. Listen, the Board has always been supportive in what Management has focused on. It is their decision, as you know. We have laid out hopefully today in very clear terms what we are focused on. But those really are Board conversations that go along with optionality around pricing that all of you are working on, thinking about today where the debt is, as well as the progress of our projects which gives the growth in the future of this Company. So all of that will be wrapped up with the Board with that and we will work through it from there. But with it, the focus continues from Management on those three areas.

Okay. Thanks very much. Appreciate it.

Thank you.

Mimi, we've reached the top of the hour. In respect of everyone's time, we will end our call today. As always, I will be available after and this afternoon to have any follow-up questions with anyone.

Thank you all very much.

Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.