Cleveland-Cliffs Inc (CLF) 2012 Q4 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 fourth-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, Investor Relations. Ms. Moran?

Thanks, Mimi.

I'd like to welcome everyone to this morning's call. In addition to announcing our fourth-quarter and full-year 2012 results, last night, we also announced the details of our common and mandatory convertible preferred share offerings. As a result of this announcement and the legal constraints of the process, the prepared remarks and discussion on today's call will be necessarily limited to our 2012 results and 2013 outlook. If you have additional questions related to the filing, I would refer you to the respective supplements related to the offerings filed with the SEC.

Before I turn the call over, let me remind you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the Company believes that 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. We will also discuss our results, excluding certain special items which are non-GAAP financial measure. Our reconciliations for Regulation G purposes can be found in our earnings release, which is posted on our website at cliffsnaturalresources.com. 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, and in light of our offerings announcement, I'd like to start by discussing our Board's recent decision to reduce the dividend. We considered many factors before making this decision, including our commitment to being investment grade, future free cash flow position, and capital requirements related to our growth projects over the next two years.

Additionally, we recognize that Bloom Lake is taking longer to ramp-up than we originally expected. This has directly impacted our profitability in the near-term. While frustrating, these challenges are not unique to Bloom Lake. Sequencing all the necessary steps to bring new projects of this size and scale online is challenging and not atypical in the mining industry. Despite this, Bloom Lake is the future of this Company, and will become the flagship mine for Cliffs. I am confident we have the right management expertise in place and action plan to deliver this asset's long-term growth potential.

Due to the volatile pricing we experienced in the second half of 2012, we have taken deliberate steps to mitigate risk and manage through this volatility, including the temporary production curtailment and slowdown of expansion activities within certain mines in North America, disposing of our Sonoma and Amapa non-core assets, reducing 2013's expected SG&A and expiration expenses, and reducing our quarterly cash dividend rate by 76%. We took all of these measures in order to ensure we maintain our growth trajectory while preserving financial flexibility and operating in a manner consistent with our investment-grade profile.

While we expect pricing volatility in the near-term, we continue to believe the underlying growth fundamentals in emerging economies are intact. In 2012, China imported approximately 745 million tons of iron ore, an increase of 9%, or over 50 million more tons than 2011. I would point out that this growth rate is more than our total Company sales volume in one year.

We believe that the highest year-over-year imports, coupled with declining iron ore stockpiles at the Chinese ports will support healthy iron ore pricing. We also expect to see mid-single-digit increases in China's crude steel production over the next few years. For the US we anticipate modest growth in 2013. We have seen a recent uptick in the North American steel-making utilization rate, which is currently running at 75%.

Now, turning to the performance of our business segments for the quarter. US Iron Ore's fourth-quarter and full-year sales volumes were 6.2 million tons and 21.6 million tons, respectively. During the full year, we successfully placed approximately 1.2 million tons of pellets from the lower Great Lakes into the seaborne market via the St. Lawrence Seaway.

Sales volumes for both the quarter and full year decreased primarily due to lower demand for pellets in the Great Lakes. As part of our deliberate steps in managing our production volume to meet market demand, earlier last month we idled two of the smaller, less efficient pellet production lines at North Shore Mine. Should we see an improvement for US pellet demand, we can resume production at this mine fairly easily.

Similar to last year's production plan, we expect to idle our Empire Mine beginning in the second quarter and throughout the summer months. We anticipate resuming Empire's production in the early fourth quarter, depending on our partners' needs. I am happy to report that during the fourth quarter, we were able to successfully produce DR-grade pellets at two of our US Iron Ore facilities. As DRI becomes more of a reality in the EAF market, we are putting the wheels in motion to capitalize on this new opportunity. For our US Iron Ore business, we expect our 2013 sales and production volumes to be approximately 20 million tons.

Moving to our Eastern Canadian Iron Ore Segment, full-year sales volume was 8.9 million tons, 21% higher than last year, primarily due to the May 2011 timing of the Bloom Lake acquisition. Our full-year sales volume results were lower than our previous expectation, primarily due to the timing of vessel shipments and the advancement of planned maintenance on Bloom Lake's concentrator. This maintenance, which was pulled forward from January resulted in six days of unplanned downtime, which negatively impacted volumes by approximately 120,000 tons during the quarter. Despite the maintenance activities, Bloom Lake's fourth-quarter sales volume was 1.4 million tons.

As we have previously discussed, determining a mine's ore characterization is key in capturing in the long-term profitability of an asset. Over the last year we have been mainly blending ore from two working faces on Bloom Lake's ore body. During December, we successfully introduced the West Pit Ore to our previous ore blend in a meaningful way. This contributed to our production volume record of 600,000 tons in the month of December, which would equate to over 7 million tons on an annualized basis.

To consistently deliver this level of throughput, we will need to continue our development of the West Pit through 2013. This will require significant amount of overburden removal and pit development work. Currently, we have the equipment and the people in place to advance this development, position us well for the startup of Phase II. As announced in November, we have delayed construction of the concentrator and loadout facility at Phase II's expansion. This was primarily driven by the pricing volatility experienced in the third and fourth quarters of 2012. We are moving forward with projects that will support both phases of Bloom Lake, including the overland conveyor system, in-pit crushing, tailings and water management infrastructure and an ore shed.

Moving forward with these particular projects will enable us to hit the ground running with Phase II's ramp-up. By 2015, we expect to be producing at a 14 million-ton annual rate. Our objective of increasing our customer and geographical diversification for Bloom Lake's product progressed well during the quarter. We continue to target markets in China, Japan South Korea, and Europe.

We found that customers appreciate the chemistry of Bloom Lake's product, with its premium iron content and low impurities. We will continue to work with future customers to promote the benefits of using Bloom Lake's concentrate as a high-grade center-feed product. For 2013, we expect to produce and sell 9 million tons to 10 million tons from our Eastern Canadian Iron Ore business segment. Comprised of approximately 6.5 million tons to 7 million tons from Bloom Lake and the remainder from Wabush.

Turning to Asia-Pacific Iron Ore, fourth-quarter sales volume increased 56% to 2.8 million tons from 1.8 million tons sold in last year's comparable quarter. For the full year we sold a record of 11.7 million tons, increasing our year-over-year sales volume by 36%. Both the quarter and year increases were driven by the successful completion of our Koolyanobbing expansion project. In the fourth quarter, we did not produce or sell any low-grade volumes like we have in previous quarters, but our lump and finds products did contain a slightly lower iron grade versus the mine's historical product.

As we continue to develop the new pits that were opened as part of the expansion project for 2013, we expect to produce and sell our products with a similar iron grade as we saw in the fourth quarter. For 2013, our expected sales and production volumes are 11 million tons, which includes no volume from Cockatoo Island.

Now, turning to North American Coal, our full-year sales volume increased 57% to 6.5 million tons from 4.2 million tons last year. During the quarter, we sold 1.9 million tons, a 94% increase from 2011's comparable quarter. Looking back at 2012, we have significantly improved the production reliability from our mines, setting production volume records twice during the year. The increased production has enabled us to enhance our customer base to include new customers in the US, Europe, and Asia. Also our cash cost continued to improve quarter-over-quarter, making our low-ball met mines lowest quartile cost producer.

I'm also happy to report that last week two of our North American Coal operations were awarded the ISO 14001 certification. The Environmental Management Systems Certification was awarded to Pinnacle and our Logan County coal operations in West Virginia. Also Oak Grove was recently recommended for an ISO 14001 certification. This award internationally recognizes our exceptional environmental practices and our commitment to being a sustainable operator. For 2013, we expect to sell and produce approximately 7 million tons largely comprised of metallurgical coal.

During 2012, we achieved a major project milestone by successfully advancing our Tier One Chromite Project from the pre-feasibility stage of development to feasibility. While most aspects of the project have advanced according to plan, resolution of certain critical elements of the project's future are not solely within our control.

Last May, we signed a term sheet with the province that, among other things, enabled the decision to locate the furnace operation in Ontario. While negotiations and a binding agreement with the government have slowed, and dialogue has been suspended during the provincial government transition, recent conversations with newly-seated Cabinet Minister Gravelle, indicates the province is committed to get a deal done. It is imperative, however, that the right deal is completed for both Cliffs and Ontario, even if it delays our previous project schedule. We remain prepared to resume the discussions with Ontario's new leadership and its position.

For 2013, we expect to spend approximately $60 million to complete the feasibility stage of our development for this project. In light of our stalled dialog with the government, we are evaluating adjustments in our spending rate, which could impact the amount we invest in this project during 2013 and the project's overall schedule. While we remain enthusiastic about this opportunity, we cannot predict how quickly the definitive agreements will be in place, allowing the project to continue. Until the feasibility phase is complete, we will not speculate on the overall project schedule.

In closing, our US mines continue to deliver consistent results. The completion our large-scale capital projects in Asia-Pacific and North American Coal are beginning to show consecutive quarters of record operational achievement. Our management efforts are now entirely focused on Bloom Lake. As I mentioned at the top of the call, this is the future of our Company. Over the next two years we will thoughtfully invest our time and capital in this project.

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

Thank you, Joe.

Before I jump to the results, I want to discuss recent changes in the financial covenants in our term loan and revolving credit facilities. Subsequent to quarter end, we received unanimous support from our lenders to suspend a total funded debt to EBITDA leverage ratio for all the quarterly reporting periods in 2013. Within the amendment, we are temporarily at a total funded debt to total cap covenant and a minimal tangible net worth covenant during such periods.

Although we weren't required to take this step, especially considering today's iron ore pricing of $155 per ton, this proactive measure demonstrates our commitment to maintaining financial flexibility and supporting an investment-grade profile, as we execute Phase II expansion at Bloom Lake. It also reflects the favorable relationships and transparency we have with our banks.

Full-year revenues were $5.9 million (sic - see Press Release "$5.9b"), 11% lower than previous year, driven by a 23% decrease in year-over-year seaborne iron ore pricing. The formula-based long-term contracts in place in our US Iron Ore business provided support from realizing the full impact of lower pricing. Full-year costs increased primarily due to higher labor, mining, and maintenance expenses.

As previously disclosed, we recorded a non-cash impairment charge of approximately $1 billion related to our 2011 acquisition of Consolidated Thompson. The timing of the impairment was related to the delay in Phase II and the result of a normal fourth quarter goodwill impairment testing. The impairment was primarily driven by the project's lower annual volumes and higher capital and operating costs, which I will address later in the call.

Also included in the fourth quarter results were $415 million in non-cash asset impairments related to Amapa and Wabush. The impairments were a result of lower carrying values versus the respective assets' fair values. We also recorded $541 million in non-cash tax valuation allowances related to Australia's MRRT and the Alt Min tax in the US. These valuation allowances were primarily driven by lower long-term pricing assumptions and the related impact on profitability and expected future tax payments. Excluding the non-cash impairment charges, our adjusted net income attributed to Cliffs' shareholders was $493 million or $3.45 per diluted share.

Due to pricing volatility we experienced last year, we are adjusting the way we provide our business segment revenue per ton guidance for 2013. We will use a January year-to-date average iron ore price of $150 per ton as a proxy for the full-year average price. We intend to actualize and update this average each reporting period. This allows us to provide revenue sensitivities for each of our iron businesses. The sensitivity table is included in the outlook section of last night's earnings release.

In US Iron Ore, revenue per ton decreased [sic - see press release] to $112 from last year's fourth quarter revenue of $120 per ton. The decrease is due to lower year-over-year pricing for seaborne iron ore and customer mix. Cash cost per ton decreased to $65 from $66 in 2011's fourth quarter. The year-over-year improvement was primarily driven by lower employment-related expenses. Our 2013 cash cost per ton expectation in US Iron Ore is $65 to $70. This is slightly higher than the 2012's full-year results of $65 per ton, due to lower expected year-over-year sales volume, and resulting unfavorable impact on fixed cost leverage.

In Eastern Canadian Iron Ore Bloom's Lake revenue per ton decreased to $89, down 26% when compared to prior year's fourth quarter. This was driven by lower year-over-year seaborne iron ore pricing and the timing of cargoes to certain customers. During the quarter, Bloom Lake's cash cost increased 16% to $86 per ton which was higher due to increased fuel, contract labor, and maintenance and supply costs. At year-end, Bloom Lake's cash cost were in the low $70-per-ton range, higher than our year-end targeted run rate of $65 per ton.

For the longer term, we continue to target a mid-$60 cash cost range, however, until both Phases are optimally producing at a targeted 14 million-ton run rate, we are increasing our targeted cash cost for Phase I to $70 to $75 per ton. We expect Bloom Lake's cash cost to include approximately $15 per ton of additional expenses related to mine development, stripping, and water management. With that, total cash costs at Bloom Lake are expected to be $85 to $90 per ton for 2013.

Turning to Asia-Pacific Iron Ore. Revenue per ton decreased 23% to $100 per ton from $130 per ton, primarily driven by lower year-over-year seaborne pricing. Also the lower iron grade Joe discussed earlier on the call unfavorably impacted revenue by approximately $7 per ton during the quarter. Cash costs decreased 5% to $66 per ton, compared with $69 per ton in the year-ago quarter. The decrease was primarily attributed to improved volumes and the resulting favorable impact on fixed cost leverage. This was partially offset by increased mining costs. Our cash cost expectation for 2013 is $70 to $75 per ton. This expected range is slightly higher than 2012's cost due to absence of low-grade volumes sold in 2012, which had a lower weighted-average cost.

In our North American Coal segment, revenue was $110 per ton, down 12% from previous year results, primarily driven by lower year-over-year market pricing for both metallurgical and thermal coal. During the quarter, we placed 300,000 tons to customers in Asia. While this enabled us to increase our shipments for the year, it impacted our realized revenue per ton due to additional freight required.

For 2013, we have committed and priced approximately 70% of our expected 2013 sales volume at an average price of $111 per short ton at the mine. For the significant portion of our coal volumes committed, we expect our revenue per ton to be $110 to $115. Our cash costs were relatively flat from last year's fourth quarter at $98 per ton.

In January and early February, we experienced adverse geological conditions at Pinnacle Mine, which we believe have passed. Due to the record production volumes that Pinnacle achieved in the second half of 2012, we have sufficient inventory on hand to fulfill customer orders. We expect these conditions to negatively impact our first quarter cash cost; however, our full-year volumes and cash costs, should not be affected. Should the challenging mine conditions reappear, the development work on the next longwall panel is completed. In 2013, we expect to achieve cash costs of $95 to $100 per ton.

Moving to the balance sheet, in the fourth quarter of 2012, the business generated $239 million in cash from operations, versus $743 million in the fourth quarter of 2011. We also collected $141 million in net cash proceeds related to the previously announced sale of Sonoma Coal. In December, we successfully raised $500 million by issuing senior notes in a public offering with an annual interest rate of 3.95%, maturity date in 2018. We used most of the net proceeds to pay off the $325 million in private placement notes, which were higher cost and maturing in 2013 and 2015. The remainder of the net proceeds were used to pay down a portion of our revolving credit facility and term loan.

At year-end, we held $195 million in cash and cash equivalents and our debt stood at $4.1 billion. We had $325 million drawn on our $1.75 billion revolving credit facility. We are increasing our full-year CapEx expectation to approximately $800 million, $850 million from our preliminary expectation of $700 million to $800 million. The increase of $50 million is related to additional investments that we would characterize as license to operate. Our expected 2013 CapEx includes approximately $300 million of sustaining capital. The remainder is growth and productivity capital and is largely related to the shared infrastructure investments at Bloom Lake, which will support both Phase I and II.

As part of our capital allocation strategy, we have determined that investing Phase II at Bloom Lake is the best use of our anticipated future cash flows. Since taking ownership, we have invested about $730 million in expansion capital related to this project. We expect the remaining capital requirements to be approximately $900 million, which includes the completion and the ramp-up of Phase II's concentrator. We anticipate spending this remaining capital roughly equally over 2013 and 2014. To reiterate Joe's comments, this asset that will be the flagship mine of our portfolio and we believe it is imperative to our Company's future that the proper time and capital is invested.

We are reducing our expected year-over-year SG&A expense by nearly $50 million to approximately $230 million for the full-year 2013. This is driven by continuous focus on reducing company-wide expenses. We are also decreasing our expected exploration spending by more than half when compared to 2012, to approximately $25 million in 2013. We expect 2013 working capital adjustments of approximately $200 million to $250 million and our full-year cash tax rate to be approximately 20% to 25%.

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

Mimi, can you please prompt the questioners in the queue on how to ask a question?

(Operator Instructions)

Mitesh Thakkar, FBR.

Good morning, gentlemen.

Good morning, Mitesh.

My first question is on Bloom Lake. Can you help us understand what has changed between the last quarter and this quarter that you are to increase the guidance range? Just a follow-up on that. If you're spending additional CapEx versus your previous guidance, is that in some way going to help you bring Bloom Lake up a little bit?

Yes, Mitesh. From a cash cost increase from $65 to $70, for 2013, we're looking at $70 to $75 for Bloom Lake with a $15 of additional items related to stripping, opening up the new pit, and continued costs for tailings and water management to get us to the $85 to $90 range for 2013. From a capital standpoint, when were are looking at the preliminary numbers of $700 million to $800 million, was early in our planning process. As we went through the detailed plan through the year-end, we needed to invest additional capital relating to tailings management and water management, and that's what's driving the additional increase in capital.

Okay, so is it fair to say that you will need to spend another $400 million and so in 2014 to get the Phase II and running? Can you also explain us a little bit on the schedule of that?

I can, Mitesh, this is Joe, I can talk about that. The work that's continuing through this year is primarily around the in-pit crushing system, the conveyor belt to the plant and the ore shed, which, again, lowers cost as you might imagine, versus trucking it into the facility as it goes in from there. It is also an expansion of the tailings and water management system that goes with it. We have taken a long-term view, rather than build short-term sells, if you will. To preserve capital, we want to get that footprint out there, particularly, all this is gearing up to get ready for Phase II. So that is where the bulk of the time and the money will be spent this year.

What we did stop was the concentrator and the loadout system from that. The next phase, as we move into the new year in 2014 will be essentially around those two pieces. Really executing mostly on getting the concentrator. The equipment is set, for the most part. The mill is set. When we stopped, we were still setting equipment. We were into the piping and starting some of the wiring to go with it, so we need to complete the final stages of the concentrator, and then build the second loadout system for the rail facility. That will come in the latter half. We could start up Phase II and get going on the ramp-up without the second loadout, but we will build that as the last stage of the construction.

Okay. Great. Thank you guys.

Timna Tanners, Bank of America Merrill Lynch.

Hi, a lot to digest. Just wanted to ask a similar question, but more to the point of what happened in the last time we got an update from you to this time, more, and not in terms of Bloom Lake, but in terms of the decision on, in terms of the capital structure.

As we started looking at 2013 and looking at our balance sheet, we wanted to make sure that with volatile pricing environment, that we had the financial flexibility and the liquidity to get through these cycles. So with pricing and what happened in the third quarter through the fourth quarter to where we are at today, you can see the volatility. So when we looked at our balance sheet and we looked at our growth platform, we said, we need to shore up our balance sheet and, therefore, that's why we're looking at it from a capital standpoint. We went through the amendment process and where we are at today.

That's right. Timna, just to add some color. What happened, the actual event that happened was in the third and fourth quarter when prices sunk to below $100 for several weeks with that. And I think for that most of the folks in the iron ore business, that did cause a time for pause and for people to reassess going forward on numerous projects. Where pricing was going to end up, nobody knew, late in the third quarter or the fourth quarter. We did exactly the same. That's when we took pretty immediate action on shutting down Phase II, so we could preserve capital to see where the pricing was going to end up with. And then have a look at our balance sheet.

So you got to think about this balance sheet work that we're doing right now as risk mitigation, not future forecasting of iron ore pricing. We are still bullish on the cycle. We do still think there will be a lot of pricing volatility that we've seen, given this new pricing regime that we are only in the second or third year of. We just want to make sure that balance sheet is in shape to handle another one of these jolts, if it were to occur.

Okay. That is helpful. I wanted to get your perspective. Drilling down a little bit more in Eastern Canada, can you talk to us about Wabush and how you're looking at the future of Wabush and then how you think the discounting of the concentrate might have to continue, so that we can get a perspective on pricing more medium-term?

I think on Wabush we're looking at a number of operating strategies, I think as we've reported back with that. We're starting to hone in on that. As always, it's a trade-up of CapEx versus OpEx that goes with it. I do think when we do look at the new Wabush, if you will, with that, we've got to reduce some CapEx pretty significantly for that facility. We will probably be shrinking the footprint of Wabush. We should have that work completed this quarter and be able to get on with our operating plan and be able to report back. On your reference to the discounted concentrate, I think that goes back to the Bloom Lake, not the Wabush? That's pellets?

Yes.

I think as we continue to move into the new markets, as I discussed in my earlier comments with that, we are continuing to get test trials into the marketplace. We continue to diversify the product and we will use the commercial tools we need, as well into getting all of the product placed including going into the 14 million tons. It will come in a variety of ways to a variety of different customers, where we are at with different stages of negotiation and trial.

Okay. Thanks.

Evan Kurtz, Morgan Stanley.

Hi, good morning. I actually have a bit of a follow-up to that last question. If you look at the Canadian revenue per ton guidance, I was pretty surprised, the discount between that and the seaborne price is unusually wide. Now I know some of that can be explained by higher volumes in Bloom Lake and lower volumes at Wabush. I was wondering if you can actually delineate of that 9 million tons to 10 million tons, what is Wabush versus Bloom Lake? Also what are you assuming for a pellet premium in 2013?

As I said earlier in the script, Evan, if you will, Wabush volume is -- sorry, Bloom Lake volume is 6.5 million tons to 7 million tons, and the remaining is Wabush tonnage that goes with it. I think what you have to apply on the pricing factor off of spot, is the freight. I think that's what you're probably missing. When you're looking at the number and you got the back the freight out of the spot price, depending on where you are shipping to and from around the world.

Okay. And then what are you looking for, for a pellet premium in 2013?

It varies in Asia right now. It is a pretty small premium. It is a $5 to $10 premium from there. In Europe, we track right along with whatever Vale's getting, essentially, as they set the pricing premiums throughout Europe. It is up higher than that, but it tracks with the Vale premium.

Yes, Evan, as you know, we've seen the pellet price as high as $40 during 2010 and then come down even to nil, probably, or close to nil in the back half of last year. It moves all over the place, but we do take kind of an average and bake that into our guidance, as Joe indicated.

Okay. Just one more on Bloom Lake on the cost side. You are running at the 7 million tons annualized rate in December, were you hitting $70 to $75 cash cost then? Or did you actually get down to the $60 to $65 a ton type of numbers that you thought you would at those types of volumes a few months back?

Evan, we were in the low $70s. $70 to $75 price range and we were running at those tons during that period of time. That is why we have reset forward-looking $70 to $75 until we get ramped up to the 14 million ton so we can get that fixed cost leverage from all of the infrastructure to get us down into the $60s.

Yes. I think on the one month of operating range in December that was satisfying us, was, one, our theoretical ore blend of the West Pit and the other two pits did come to fruition. We did see the mill perform and the process perform in the capacity that we needed, and then quality we got out on the other end. Keep in mind that in those costs, though, the in-pit crusher was not running as the overland conveyor was not running with that. We continuing to strip very heavily on the West Pit, and we will through 2013.

The reason that the one-month trial is, we've just got to get ahead of the stripping on the West Pit so we can get a consistent blend for 12 months to go. We are nowhere near that yet. We are making progress, as I said, we got the people, the equipment in place. We just got to get the stripping advanced now to get out ahead of it. The numerous phases you can see to reduce the cost, once we are fully operational in those other areas. But we were very pleased with the mill results off the blend.

Great. That's helpful. I'll turn it over. Thanks.

Think you.

Brian Yu, Citi.

Great. Thanks. Hey Joe, I wanted to follow up to Evan's questions before. With the pricing discount, is this the typical gap that we should expect on a go-forward basis? Can you potentially be between somewhere between $20 to $30? Or is there something else going on in 2013 that we expect that to narrow?

Yes, I think, Brian, the thing to consider is, as we are establishing our strategic customer base for blends, we don't have a one pricing mechanism like in our Australian business that we may -- it's a more narrow pricing mechanism with how we price the cargoes. At Bloom Lake, since we're trying develop this customer base, there are different pricing mechanisms. So you may sell a cargo at a certain price, or you may take an average, and that kind of skews the differential between the benchmark and our realized pricing. But I would expect that to narrow as we continue to establish our customer base through our efforts throughout the year.

Okay. And then, with the Canadian operations, and that sounds is an area where you're trying to essentially, get more established in marketplace. And then, in Australia, I think, Joe, you mentioned that has a lower Fe content on a go-forward basis. Rather than the $10 to $15 discount we've seen historically, that proportion where we should expect this widening to persist for the foreseeable future?

Yes. As we open up the pit, Brian, in Australia, we are seeing a lower Fe grade than our traditional product that we have seen. As we develop those pits, that could change. It is dependent on the geology that we are mining through. The big differential, again, is going to be Freight. It's usually about $11 between Esperance, the Port of Esperance in North China, but you will see in the immediate quarters, a little bit of discount, just like we saw fourth quarter because of the grade differential. That has the opportunity to become less if the geology were to be more favorable.

That's right.

We will just have to see.

All right. Quickly, on the Bloom Lake cash cost. You incurred about $15 per ton, in incremental cost. Would you expect that $15 to get absorbed into the Phase II operations once that ramps up? Or is there a certain amount of that that's going to be an ongoing expense even after Phase II ramps?

We expect that to get fully absorbed as we go up to the 14 million tons. And with the additional improvements that I have discussed previously in getting a lot of the pre-strip out of the way, so that we can get back to a normal stripping rate throughout the mine, as well, and get our tailings and water established. We expect that to be absorbed and go away with the improvements we're putting in place, Brian.

Great. Thank you.

Sal Tharani, Goldman Sachs.

Thank you. Joe, there has been, clearly, some change in the strategy of the Company. You've been saying for the past several months that you would sacrifice growth over dividend, but now obviously you're looking at growth as the main driver. And also you are diluting the shareholders to protect your debt rating and balance sheet. I was just wondering, are you preparing, just in case we get a similar situation as we had late last year and iron ore fell to $85, $90? Is that what is in the back of your mind?

Certainly the uncertainty in both the macros of the economies of the world, Sal, as well as the pricing volatility, as I said earlier, has really caused us, as well as many of the mining companies around the world, to take pause, to look at this risk, which is a very high one on the downside. A company of our size, a quarter of two of this type of price spiking really upsets the balance sheet and all of the ratings that we need to go with it. So, yes, it has forced us to change our position on the dividend. At the same time, you can see the bullishness we have of the market going forward, and of Bloom Lake to do what we need to do to get restarted, so we can get Phase II in. We think this is going to be very beneficial in the future for the shareholders and for the Company as we go forward. We are very excited and feel very confident we can place this material into the market as we go forward. Unfortunately, we are taking a half of a step back, but we think we're going to be more than a full step forward when we get our growth up and running and get that 14 million tons placed in '15.

Okay. I have one more question on the US operation. You had mentioned that you expect modest growth in the US in 2013, but utilization rate you're assuming is 70% versus US Land at 75%, above 75% in 2012, so it should be higher this year. I'm wondering what are you factoring in for 70% utilization rate? Along with that, any comments on how do the latest news at Essar Minnesota has a contract with [Arsenal Metal] for a 14.5 million-ton pallet for the next ten years impacts your sales to the Company or your volume going forward?

Sure. Let me comment on the modest growth, if you will, to start with. It is, as you know, in the US steel industry, it's still strongly underpinned with auto sales with projections going into '13, that once again, is a very strong projection in auto sales, once a gain. It is the drilling and all the pipe, and equipment that's related to the shale gas that's going on. Those are the two underpinnings of the steel industry right now that goes with it. We're seeing modest improvement in construction rates within the US, as well, that can only help off of this number from there. But the big gap that the steel industry is grappling with right now is because the economies in Europe are down, China has slowed and has over-capacity, there's been a tremendous import surge within the US from numerous countries around the world, putting a lot of steel into this industry. So the gap that people are looking for as to why isn't the steel industry healthier as the metrics move forward in the US economy, it's all about import surge right now. We are really taking it on the chin as an industry on those imports that we are seeing flood into the industry.

As far as the recent announcement of the contracts, as you know, Empire has been coming off-line and is coming to the end of life at 2014. That has been an expected outcome for quite some time that we have been working with, with our partner, as well. So the end of life is coming, the pellets are going off the market, if you will, from there. It is also our highest cost mine that is going away as well. As you can imagine, at the end of life when things get deeper and start slowing down from there. With Essar Algoma, as you know, we do have contracts for 100% supply through 2016, and we continue to use that. We are obviously quite aware, and have been for some time, of them building their own capacity from that.

Other alternatives that we are looking at, as the competitive forces do come in, and we don't ignore them. We have to work with what we've got, is we are certainly looking at expansions into the DRI business, as I commented. We are pretty enthusiastic that two of our facilities, through test runs and trials and scoping studies, have the ability to produce DRI pellets. With that, we continue on with our engineering studies, so we'll be in place if a DRI facility is to be built in the Midwest region of the area as alternatives. We continue to grow, as you can see, our export market for pellets out of the lower Great Lakes. We do have some options as we go from there.

On the opportunistic side, if the new plant that was in the press release yesterday doesn't come up by '14, it certainly gives us the opportunity to sell additional pellets in that market as it comes up with it. We are a good supplier. We give a premium quality, that is well established with freight lines that go in to our customers with that. And we have a good cost base to compete in this marketplace as well. We are very bullish on the future of the US with a number of alternatives our way. And the Empire shutdown and the loss of those pellets comes as no surprise to us.

Thank you. That was very helpful.

Kuni Chen, CRT Capital Group.

Hi, just a quick follow-up on Eastern Canada. As you continue the pre-stripping in the West Pit, is that fairly consistent throughout the year? Or is that a bit, perhaps, more heavily weighted in the first half and then you start to see some benefits later on in the year as that slows down?

Kuni, we've committed to the full-year so it is consistent throughout the year.

Okay. What has changed overall in the plan there? It seemed like more of a nearer-term thing that that stripping would come to an end by the end of 2012, and then you would start to see more of the benefits going forward. I guess, what changed as far as the stripping plan?

I think it's the mix of the ore blend. It is now about one-third, one-third, one-third out of the three pits that come with it. So when we re-balance the mine plan, when it came with that, we had to add the additional stripping on the West Pit as the blend increased from there. We also took a step back and we decided in 2013 to, as we stabilize Phase I, as we aren't have all the construction folks on site and all activity on site, we took a pause with that, particularly in the stripping and in the water management and tailings, and decided to get all that in shape for Phase II. Not to be in a panic, if you will, when Phase II came on and have to do another catch-up phase of the stripping.

Just to add to Joe's points there, Kuni, just to clarify. We just opened up the West Pit. We just took delivery of the equipment to move all of the glacial till and what have you, to open up the pit in late August, early September. It wasn't until December that we started to put some of the ore, in a meaningful way, from the West Pit through the concentrator at that ideal blend that Joe was talking about. So as we move forward throughout 2013, we will continue to do that development work on the West Pit, which is kind of an ongoing thing here. To ideally get that one third, one third, one third mix consistently throughout next year. We will slowly get better throughout the year and that will help us achieve the volumes that we are targeting.

Okay. All right. Good enough. I will turn it over.

Aldo Mazzaferro, Macquarie.

Thank you and good morning. I had a question on the DR pellets that you are developing. Could you give us an idea which divisions you might be shipping from and what the premium pricing of those DR pellets may be, relative to the average as you laid out in your guidance?

Well, it would be North America. The two mines would be the UTAC Mine in Minnesota and the North Shore Mine, although they look more favorable in the processing and the left sell weight recoveries there. The better weight recoveries we get through the separation and the loss of the silica as it came through.

Premium pricing, this is theoretically a new market in the US. It is a new developing technology that is coming on. While it is used all over the world, it is not used in the US, and we haven't really developed any pricing. We're just developing plans, right now, as you can see, to get through the engineering phase. Make sure we have the product in place, know what our cost base is as we go out, so as potential customers come to the door, we can start those conversations. But we don't have any mindset yet on premiums.

Great. From a chemistry point of view, it includes a higher degree of the purifiers, is that the difference?

It's really how fine you have to grind the materials and what your weight losses are on your recovery to remove the silica. To get down to about a 2% silica is the general definition for a DR grade pellet. With that, and it is just a recovery curve that you have to look at and how much it costs you as you go down the recovery curve and the weight loss.

Thanks. My second question, you commented there was a timing issue on some of the shipments in the Great Lakes. Could you describe that in a little bit more detail. Was it the water levels that caused it the delay? Or was it some other issue?

No, I think it's just we recognize revenue with our customers. When we loaded ships at the end of the month and when cash and title changes hands, so it was just a timing issue around year-end.

Yes, we're not suffering. The water is down in the Great Lakes. We have dealt with that before. We just load the vessels a little bit lighter in the Great Lakes. This isn't anything, although, if you're thinking about the Mississippi River and what's going on down there, that we are not in a crisis mode in the Great Lakes in any stretch of the imagination. As you know, or if you don't know, over here in late January, by law, the Corps of Engineers does shut the locks down for the shipping season for maintenance and the ice that comes on. They restart in late March. First-quarter shipping timements are always getting that last boat out and the first boat in, is always a little tricky and dependent on the weather.

And, Joe, can I ask you a little philosophical question? You talked about your concern about a possibility of the drop-off in the pricing in iron ore, but at the same time we're seeing China look pretty good. I think the North America and the European markets have gotten about as weak as their going to get. If those things hold together, do you see any other factors, such as possibly increased supply out of China? Do you see any other factors that would really cause you to worry about the pricing?

No, not really. I think it's more of the cautious nature and the conservatism of, if you will, this group. Although, Cliffs is 165 years old. We have survived wars and droughts and depressions and everything else. I think that's why we've done it, is to keep things pretty conservative. The tail winds for pricing is actually pretty good right now, going into the Chinese New Year, as you know, we've got 52-week loads of stocks in the ports in China. The new government has been placed in China. The soft landing last year has been achieved. As you know, there's talk in all the newspapers about government stimulus, potentially coming in the spring after the Chinese New Year. And the absence of the Indian ore exports right now, and the problems they're having in India.

There's a lot of good news in the marketplace, too, for indicators of pricing going forward. But if you look at the last two years, and I would suggest only the last two years, and the trends that go with it, we also, at times, see a trailing off in the second half of pricing for whatever reason, in each of those years. There is some cautious nature there, but there's also some very good tail winds and good factors going forward to suggest the other side of the argument.

Great. Thanks very much for your comments.

Sure.

Tony Rizzuto, Dahlman Rose.

Thanks for taking my question. I've got a question about, if you look generally over the next couple years, Joe, and think about some of your mines. Obviously in Australia, I believe you've got a relatively short mine life at your operations there. US, obviously you've got older mines. I heard the comment earlier about ore grades, that they might pick up in Australia, but generally, I'm seeing a lot of ore degradation around the world, physically, in Australia, Brazil, elsewhere. I wonder if you can talk a little bit about how you see those ore grades and stripping ratios on a more normalized basis changing over the medium term?

Well, for our facility in Australia, we started out in 2005 when we purchased Portman at a 9-year mine life at 4 million tons. It is now 2012 and we have a 9-year mine life at 11 million tons. So the guys have done a good job. We do spend a considerable amount of time and money in near-mine geology. As you know, these are very small pits out where we are at in Australia. It's not like the big deposits of the Pilbara and we've done a pretty good job on maintaining our ore rates against our depletion rates when it comes from there.

The ore grades out there, though, nevertheless, like every place else, are beginning to decline and degrade in Fe quality slowly. But they are, as we open new pits and get into less favorable geology in some of the different areas. The strip ratios, we have kind of hit the high for us, right now. We took a big step up over the last two years with that. Our strip rates are pretty well solid right now with where they are, but that's where the costs have jumped up on us in Australia, is the dramatic increase in strip rates. We have worked our way through that and we will continue along at those extremely high strip rates.

As you say, while the one side is negative of declining ore grades and higher stripping rates and higher costs across Australia and Brazil, the positive of that comes back over to Eastern Canada, which can supply the chemistry, if you will now, with these superior chemical grades, to really supplement and sweeten, if you will, these ores that are degrading. We think we've got the best blend going around the world to go into our customers within Asia. And we provide a blending stock of what you are seeing throughout the world, as well as the very high-quality products that are coming out of Canada.

When we think about Bloom Lake and the transition, obviously you've got the higher pre-stripping costs and your development expenses now. Is '14, I mean when you bring that Phase II on by 2015, and I think it was an earlier question about, are we going to see some carry-over effects in 2014, do you expect that a good portion of that will dissipate in 2014 calendar? Or how do you see that playing out?

Yes. I think a good portion of it will. Again, we won't start the concentrator up until mid-year, if you will. And on that ramp-up, we won't see the full production tonnage of the next 7 million tons, but we will see a good portion of it. And then the second half, after the concentrator starts up in '14, you will start seeing the costs come down as the costs get absorbed with the new concentrator.

Okay. And I see that Canadian National Railway has put a pause on a build a new rail line. I know you guys, you did fund part of the feasibility study there. Is that going to have any impact on what you are doing at Bloom Lake?

No. We've got all of our rail and port contracts secured through the QNS&L. So we're good to go through Phase II, as far as volumes go, down the rail. The Canadian National Railroad just gives us a very good option that we felt was worth exploring, to see if they could get enough volume and it made economic sense to put in a new public rail system.

Okay. And just a follow-up on the DR. I know you've been getting a few questions on that. I know it is relatively early, as you guys are now producing the material, but I heard you mention about finer grinding. Is there some type of guidance that you can give us about the additional costs required to get down to that type of metallurgy chemistry to try to reduce the silica? What is the additional cost required in doing so?

Tony, it's just a little too early. We've run these through some plant trials by maneuvering some different product streams and things like that, and segregation. That is what the scoping study is about right now. It is just a little too early to give you some definitive numbers. Let me just say that the CapEx and the OpEx looks favorable to move forward with this project. As our testing continues to prove out everything that we've seen, preliminarily. If it didn't in the scoping study, we would've stopped. It's too soon to give a number yet.

All right. Fair enough. Thank you very much.

Sure.

To be respectful of everyone's time today, that concludes our prepared remarks. I will be available throughout the rest of the day to answer any final questions. You can please give me a call or e-mail me. That would be great. Thanks a lot.

Thank you all very much.

Thank you.

Thank you. Ladies and Gentlemen, that concludes our conference for today. You may all disconnect and have a wonderful day.