Cleveland-Cliffs Inc (CLF) 2013 Q1 法說會逐字稿

Good morning. My name is Ashley and I'm your conference facilitator today I'd like to welcome everyone to Cliffs Natural Resources 2013 first 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. Miss Moran?

Thanks, Ashley. I would like to welcome everyone to this morning's call. 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 Acts 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 forms -- reports on forms 10-K and 10-Q and new releases filed with the SEC, which are available on our website.

Today's conference call is also available and being broadcast at www.cliffsnaturalresources.com. At the conclusion of the call, it will be archived on our website and available for replay. We will also discuss our results excluding certain special items, which is a non-GAAP financial measure. A reconciliation 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, Joe Carrabba, and Executive Vice President and Chief Financial Officer, Terry Paradie. At this time, I'll turn the call over to Joe for his initial remarks.

Thanks, Jess, and thanks to everyone for joining us this morning. Before I discuss the quarter's results, I would like to take this opportunity to address recent concerns over the long-term sustainability of our US iron ore business. As many of you know, our US iron ore segment has really been the core of Cliffs' global operations. We have been operating on the iron range for well over a century. At year end, we had over 80 million tons of proven and probable reserves in the US alone. We are the pioneers in developing the pelletizing process, which takes low-grade ore and increases the iron content through a complex beneficiation process.

Over the last decade, we have significantly increased our market position, enabling us to become the largest merchant supplier of iron ore pellets to steel mills in the United States. As many of you know, most of the US iron ore volumes sold to customers in North America are under long-term requirements contracts, meaning that if our customers are running their furnaces, they are required to use Cliffs' pellets. A significant amount of our US iron ore volume will be sold under these contracts for the next three and a half years. We acknowledge that over the last two years, new iron ore supply projects have been announced within the Great Lakes.

Naturally, we are monitoring these projects on a regular basis, and we are well aware of the potential competition we could face later this decade. As an owner and operator of low-grade mines, we understand the front-end challenges of building and developing a mine. We also understand the day in and day out planning that is necessary to consistently produce a reliable, high-quality product for our customers. Our US mines are well capitalized, well maintained, and run by the best operators in the business. As a result, our US iron ore cash costs are consistent quarter-over-quarter. This enables us to generate respectable sales margins and price competitively. That being said, we fully intend to protect the long-term volumes in our US iron ore business.

Looking at the North American steel market as a whole, the announced investments in DRI steel production is something that interests us. The EAF market is one we've never meaningly -- meaningfully supplied. However, this dynamic could change as our ability to produce DR grade products is optimized. Last year, we identified two mines that have a reserve base that could support producing DR grade products. At the time we ran a small batch of volume and determined that we were able to meet the required product specs.

Last month at our North Shore mine, we ran a full-scale production test for two weeks. We successfully produced 30,000 tons, achieving the targeted specs of a DR grade pellet. Throughout the remainder of the year, we will continue to test different methods using a variety of ore blends and flow sheets. We are working closely with the companies who manufacture the DRI facilities to conduct performance evaluations of our DR grade pellet samples. While we are optimistic about DRI technology and the long-term impacts it could have for the US steel-making industry, one concerning trend that we continue to see is a surge of steel imports in the US. This is impacting the competitiveness of our customers and we urge Congress to support tax policies that would level the international playing field for steel producers.

Globally, the lack of growth in Europe was offset by increasing steel production from China, which improved pricing for commodities in the first quarter. China's crude steel production continues to be healthy, with first quarter annualized run rates averaging north of 750 million tons. Iron ore inventories at the ports are at multi-year lows, and customer demand for our products is strong. In the US, positive economic indicators are emerging that could drive growth during the second half. Consumer spending has strengthened, the labor markets are trending up, and the housing market is showing signs of recovery. Having a balanced, in-market mix of our products enables us to generate healthy cash flows from our US business and benefit from China's growth.

Now, turning to the performance of the business segments during a question. First quarter sales volume in US iron ore decreased 9% to 3.1 million tons from 3.4 million tons, primary driven by a customer bankruptcy that occurred in May of last year. As many of you know, our first quarter US iron ore sales volumes is typically the lightest when compared to other quarters, due to the annual lock maintenance in the Great Lakes. We are increasing our 2013 sales volume expectation by a 1 million tons to 21 million tons for the full year. The increase is driven by higher iron ore pellet demand from our existing customers in the US. We intend to deliver between 1.5 and 2 million tons of pellets from the Great Lakes into the St. Lawrence Seaway during 2013, which is included in our increased sales volume expectation of 21 million tons. We are maintaining our expected full-year production volume of 20 million tons, with the additional sales volume coming out of our inventory stockpile.

Turning to Eastern Canadian iron ore, before discussing the quarter's results I think it's important to highlight some management changes we've made within our Eastern Canadian iron ore operations. Dave Blake, who previously had oversight for both US iron ore and Eastern Canadian iron ore will now be exclusively focused on eastern Canada. Under Dave's management, our US iron ore business unit has performed exceptionally well, delivering consistent volumes and cash costs on a quarter-over-quarter basis for several years. Dave is leaving the US iron ore business in the very capable hands of Terry Fedor. Before joining Cliffs two years ago, Terry Fedor had more than 25 years of experience in the steel industry. He possesses the operational knowledge, leadership skills, and distinctive customer insights that are critical to our business. Both Dave and Terry report directly to Laurie Brlas, Executive Vice President, Global Operations.

Eastern Canadian iron ore sales volume for the quarter was relatively flat, over year, at 1.9 million tons. This is comprised of 1.5 million tons of sales volume from Bloom Lake and 400,000 tons from Wabush, a comparable mix for last year's first quarter.

As we've previously discussed, moving forward with Bloom Lakes mine development is a major focus for our Eastern Canadian operating team this year. Optimizing the ore characterization and blend with higher quality crude ore from the West Pit is expected to significantly improve our throughput. At this point, we are still experiencing variability in the mill ore feed. I view this as a real opportunity for us as the West Pit mine development ramps up throughout the year. Over the next few months, we expect to take delivery of seven trucks, two dozers, two shovels and a drill, which will be meaningful additions to our mobile fleet.

Also, we've completed the installation of our truck dispatch system. Once fully optimized, this system is expected to reduce cycle times and improve our productivity. We have not yet restarted the construction of phase 2 concentrator and load-out facility. At this time, phase 2 is about 65% complete. Our plan to resume construction is very probable. However, before making this decision, we will look at a number of factors, including sea-borne iron ore price, mine development progress, and our financial flexibility before making the decision to advance the project to completion.

Also, another factor we will consider is Quebec's newly proposed mining royalty tax. If the proposed royalty model were to be applied in its current form, the economic assumptions supporting our original investment in Bloom Lake could be undermined. This may put further investment decisions at risk. We do not claim the current tax regime is perfect. It may need adjustments, but we do not believe that the proposed changes would have -- but we do believe that the proposed changes would have damaging impacts to the competitiveness of Quebec's iron ore producers and the entire Province's economy.

For the remainder of this year, we are focused on a number of projects, including some of the shared infrastructure and permission-to-operate projects. Our build out of the booster tailings pump house and water treatment plant is nearing completion and is expected to be commissioned this summer. The system will contribute to environmental risk mitigation as well as improve our the cash cost profile. We are gaining traction with customers in our delivered efforts to diversify Bloom Lakes' customer base. During the quarter, we sent product samples of Bloom Lakes' concentrate to several mills in Europe and a trial cargo to Japan. The feedback from customers has been excellent, and we have been successful in signing a handful of long-term contracts.

While customers might be slower to adopt the new concentrate product, we are finding there is a good synergy between high-quality concentrate ores and direct shipping products from Western Australia. In many ways, they are complementary center feeds. With the increasing reality of ore degradation and meaningful lower grade supply additions from western Australia on the horizon, we believe Bloom Lakes concentrate will be well positioned as a niche product with growing demand.

At Wabush, we recognized the operating performance has not been acceptable for several quarters. By June, our pellet commitments to customers will be satisfied. Once this occurs, we intend to idle Wabush's pellet plant at Pointe Noire. In addition, we are simplifying the mine plan and processing flow sheet or shrinking our operating footprint, if you will. Essentially, this will result in less equipment to maintain in a smaller organizational structure. With these changes we expect to achieve sub $100 cash costs by end of year. If this target is not met, our option will be limited and a more permanent solution will be heavily considered.

In light of these announcements and operating adjustments, we have been encouraged by the Scully Mine management's receptivity response to change. That being said, for 2013 we are maintaining our Eastern Canadian iron ore sales and production volumes expectations of 9 to 10 million tons. This is comprised of 6.5 to 7 million tons from Bloom Lake and the remainder from Wabush.

Turning to Asia-Pacific iron ore, first quarter sales volume decreased 17% to 2.3 million tons from 2.8 million tons sold in last year's comparable quarter. The decrease is attributed to vessel timing and the absence of sales volume from our Cockatoo Island operation that ceased production in third quarter of 2012. Looking into the second quarter, we are expecting two approximately 10-day shutdowns of the port, which will impact our second quarter sales tons. We are confident that we will make up the volume in the second half of the year. As such, for the full year, we are maintaining our expected sales and production volumes at 11 million tons.

Our ore grades in Asia Pacific are creating a real challenge to our mine plan. Based on additional drilling performed in the fourth quarter, we have updated our resource models, and we are not showing any real improvements to the longer term ore grades. Throughout this process, we have been in discussion with our customers and we do not expect any negative impacts on volumes in light of this reality. Terry will discuss the impacts this has on our revenue realization expectations later in the call.

Now, turning to coal. Our first quarter sales volume increased 27% to 1.8 million tons from 1.4 million tons last year. During the quarter, we encountered a geological fault at Pinnacle Mine, which meaningfully slowed production for several weeks. Fortunately, we are now passed the fault, and the loss in production volume was offset with increased production from Oak Grove. Oak Grove continues to show exceptional performance across the board. The mine achieves $74 cash cost of production, which we believe to be best in class amongst our fellow peers

I think it's important to highlight that our cash cost profile has continued to trend down, despite the significant increased inspections from state and federal regulatories. In the first quarter alone, we had just over 550 inspectors in our coal mines. With safe production top of mind, we will continue to work with regulators to enhance our safety focus culture. I'm impressed with the team's success, especially in today's challenging regulatory and pricing environment. For 2013, we continue to expect and sell -- to sell and produce approximately 7 million tons, largely comprised of metallurgical coal.

Moving to our chromite project. All our internal evaluations are nearing completion. Resolution of several items, including the definitive agreement with Ontario is necessary before we will be able to conclude our feasibility study. Unfortunately, talks have not yet resumed with the new provincial government and other significant issues remain unresolved. We will not approve any significant investment capital or major construction activity until key elements supporting economic viability are resolved. Our work to build positive relationships with the First Nation communities continue. To date, we have invested over $3 million in various programs that have positively impacted these communities. This is an extraordinary project opportunity that will require the support of First Nations, government, and others to advance beyond the current phase.

In closing, we are headed in the right direction for 2013. I am pleased with the entire organization's effort to focus on reducing costs and executing the plan. With the spring thaw upon us, I'm looking forward to reporting Bloom Lake's progress throughout the remainder of the year. And with that, I'll turn the call over to Terry for his review of the financial highlights. Terry?

Thank you, Joe. Before I jump to the results, I wanted to review some of the recent changes to our capital structure. During the quarter, we successfully completed an equity offering raising a total of $995 million in net proceeds after commissions, discounts, and fees. The offering consisted of two types of securities and the proceeds from both offerings were used to pay down the balance on our outstanding term loan of $847 million. This decision to eliminate the term loan was consistent with our goal of enhancing financial flexibility and de-risking the balance sheet. At quarter end, our total debt stood at $3.4 billion, which included $550 million dawn on our $1.75 billion revolving credit facility.

Also during the quarter and previously discussed, we received unanimous support from our lenders to adjust our debt covenance for the quarterly reporting periods in 2013. The details of the amendment can be found with last night's press release within our Form 10-K. Based on the actions we took during the quarter, both Moody's and S&P improved their outlook to Stable on our investment-grade ratings. Global sea-borne iron ore pricing for 62% Fe [fines] product, a significant driver of our profitability, remained relatively flat, averaging $148 per ton or 3% higher than last year's first quarter.

Consolidated revenues for the first quarter were $1.1 billion, 6% lower than previous year, driven by a 10% decrease in year-over-year iron ore sales volume. Lower sale volumes resulted in a 2% decrease in costs of goods sold to $903 million for the quarter. Net income attributed to common shareholders was $97 million or $0.66 per diluted share compared with net income of $376 million or $2.63 per diluted share in the first quarter of 2012. First quarter 2013 results included an income tax benefit of $6 million. The benefit was driven by our expected full-year income tax effective rate before discrete items of 1%, offset by certain discrete items. Also, the prior year first quarter results included a non-cash deferred tax benefit of $255 million, primarily related to the enactment of Australia's MRRT tax, which was partially offset with certain other discrete tax items.

In February, we adjusted the way we provide our full-year business segment revenue per ton guidance due to pricing volatility we saw last year. We continue to use the same method this quarter of providing revenue sensitivities. We will use the March year-to-date average iron ore price of $148 per ton as a proxy for our full-year average price. It is important for me to stress this is not our internal iron ore price outlook for the year. The sensitivity table is included in the outlook section of last night's earning release.

In US iron ore, revenue per ton increased to $120 from last year's first quarter revenue of $117 per ton. The increase is due to customer mix and favorable provisional price settlements when compared to the first quarter of 2012. Cash cost per ton decreased to $60 from $61 in 2012's first quarter. The year-over-year improvement was primarily driven by lower maintenance costs. Our US iron ore operating teams worked very hard this quarter to manage cash costs, and we're working against higher year-over-year energy and labor costs, which are largely fixed. We are maintaining our 2013 cash cost per ton expectation in US iron ore of $65 to $70.

In Eastern Canadian iron ore, revenue per ton increased to $132 a ton, up 13% when compared to the prior year's first quarter. This was driven by favorable provisional price settlements, 14% lower freight rates, and 3% year-over-year income [from sea-borne] iron ore pricing. During the quarter, Bloom Lakes cash costs decreased 9% to $89 per ton, which was due to lower [trend] shipping costs, reduced [emerge], and lower contractor spending.

Generally speaking, the harsh weather experienced in northern Quebec during the winter months unfavorably impacted our first quarter cash costs. We are maintaining our previously cash cost per ton expectation of -- at Bloom Lake of $85 to $90 per ton for 2013. For the longer term, we expect to continue to target a mid-$60 cash cost range once both phases are completed. With the change in our product offering at Wabush Mine, we expect mines cash cost to average $115 to $120 per ton for the full year. For the entire Eastern Canadian iron ore segment, we expect cash costs to be $95 to $100 in 2013.

Turning to Asia-Pacific iron ore, revenue decreased 9.5% to $117 per ton from $130 per ton, primarily driven by quarter lag pricing mechanism used by certain customers. Also the lower iron grade Joe discussed earlier in the call unfavorably impacted revenue by approximately $6 per ton during the quarter. We do expect the lower ore grade to impact our realized revenue per ton for the full year. To reflect this, we lowered our full year Asia-Pacific iron ore revenue expectation by $5 per ton. Cash costs slightly increased 2% to $75 per ton compared with $74 per ton in the year-ago quarter. The increase was primarily attributable to higher mining and logistics costs as a result of increased production volumes and inventory stockpile movement due to a build up of inventory in the first quarter. We are maintaining our full-year cash costs expectation for 2013 of $70 to $75 per ton.

In North American coal segment, revenue was $110 per ton down 9% from previous year's results, primarily driven by lower year-over-year spot pricing for met coal. For 2013, we have committed in price approximately 75% of our expected 2013 sales volume at an average price of $110 per short ton at the mine. With the significant portion of our coal volumes committed, we are maintaining our expected revenue to be $110 to $115 per ton. Our cash cost decreased 6% from last year's first quarter to $91 per ton from $97 per ton. Again, a tremendous effort by our operators who delivered lower costs quarter-over-quarter and year-over-year, considering the challenging mining conditions we experienced at Pinnacle Mine. In 2013, we are maintaining our expected cash costs of $95 to $100 per ton.

Turning to cash flow, in the first quarter of 2013, the business used $25 million in cash from operations versus a use of $120 million -- $129 million in the first quarter of 2012. The improvement was driven by favorable working capital, primarily related to receivable and other current assets. At quarter end, we held $287 million in cash and cash equivalents. We are maintaining our full-year CapEx expectation of $800 million to $850 million. Our expected 2013 CapEx includes approximately $300 million of sustaining capital. The remainder is growth and productivity capital, and it's largely related to the investments at Bloom Lake, which will support both phase 1 and 2.

We are also maintaining our expected full-year SG&A expenses of approximately $230 million. In addition, we are maintaining our expected cash outflows, expectation on growth projects of approximately $85 million. This is comprised of approximately $25 million related to exploration and $60 million related to completing the feasibility stage of the development of our chromite project in Ontario, Canada. For the full year, we expect unfavorable working capital adjustments of approximately $250 million and a full-year effective tax rate of approximately 1%.

In summary, our first quarter financial results were solid. Our operators will continue to look for ways to improve our cash cost profile without jeopardizing safety or quality. Our ability to stay operationally and financially flexible during volatile pricing environments is a key factor in our ability to create long-term value for shareholders. With that, Jess, I think we're ready for now questions.

Ashley, that concludes our prepared remarks for the call today. Can you please open the line for questions?

Timna Tanners of Bank of America Merrill Lynch.

Wanted to ask a little bit more about the long-term contract structure that you discussed in terms of the exports for iron ore pellets and longer term options there.

Timna, we don't use a lot of long-term contracts. We do that a spot basis when we do the export of the pellets, and it really just is a decision on margin and where the market is and who is looking for pellets at the time with that. So it's driven on margin and spot basis as we have used this.

I don't see a huge amount of additional opportunity coming out of the Great Lakes. A lot of it is logistics driven. There's just not a lot of shipping capacity for those size of vessels that are currently for charter coming up and down the seaway. And in Quebec City, there's also limitations on where you have to transload. So the $1.5 million to $2 million is a nice piece of business that our commercial group has built over the last couple of years, starting with nothing, and they balance it just in the marketplace.

I think I asked that wrong. I apologize. So you said you send a trial cargo to Japan and were sent to Europe and I confused that with the St. Lawrence Seaway volumes that was really more Eastern Canada and you had mentioned some long-term contracts there.

Yes, we did do a trial contract. We're very bullish on being able to diversify our supply as it comes -- as it goes around the world. It's been a stated goal of ours since the beginning of the project as it goes.

And just as we stated, people are understanding the -- how to use the finer concentrate. They like the chemistry of the higher iron and the low aluminum and phos that goes along with it. When we lowered the silica, while it gave us a lot of operational challenges, it also gave us a good competitive edge as well.

Trials are going very well. They are very cautious as they should be to put products into their mills. But, no, we think we can diversify quite a bit of Bloom Lake's capacity into other markets.

Yes, and we also did sign a couple of contracts with a couple of Chinese customers this quarter that are greater than a year and a couple cargoes a year for the next few years.

Right, so that's based off of a stock market contract basis, I assume, and I was just wondering if there was like a collar or how you structure those to make sure that you can remain profitable in a up-or-down market?

They're primarily spot (on) contracts, yes.

My only other question, if I could, is really about Australia. If you could give us a little bit more color. You talked about some challenges there. I was just trying to understand is that just price, is it also cost, is it temporary, how to think about that?

Let me comment on the operational, and then Terry can fill in the facts with the numbers that go with it. From the -- we have got the operations stabilized now at this point, as we talked about when we did our expansion, which was very successful on the project side of hitting the mark on total dollars getting the tonnage that we look like. The complexity of opening up several new pits, while closing -- coming to closure several of our older pits, the modeling was wrong on the geology, and the order decline that you're seeing across Western Australia is also catching up with us and our mines.

While last year it was a surprise, this year we're starting to build it in. So we won't see the condition go back up to, if you will, a 62%, 62.5% Fe. We're going to be in that 59% to 60% range it looks right now, and we will update folks on our product specifications as we get a better handle on it. But we think we have settled the modeling issue that we had and the go forward is the decline in our grade but not slow and steady, if you will, from where we are but maintaining that step-down and change in the grade.

Yes, as a result of that, Timna, that's why we adjusted our pricing forecast by $5 a ton. So you're looking at 1.5 to 2 points of Fe degradation, so it's about $5 to $6 a ton impact.

Michael Gambardella from JPMorgan.

Good morning, Joe, and congratulations on the strong quarter.

Thanks, Mike.

Couple questions. One, on the -- on your Great Lakes iron ore market, what do you think the potential is for increased demand for iron ore from the emergence of DRI? You have the plant down in Louisiana by Nucor, there's another plant that's getting funding right now in Ohio and some others out there. What do you think the potential is for increased demand for iron ore out the Great Lakes for that?

I think as Nucor has led the way, Mike, as you've talked about, I think that's strengthened people's belief in the financial model of the convergence of these DR grades, and I think they've stated publicly what the -- how much they can their lower that go with it. So given that in mind, we're out talking to a lot of different mills within our area of influence, if you will, with shipping out of central Minnesota where the two mines are that we can do that.

I'll come back with a number. We're just now doing our marketing study, if you will, and going to the mills, and see at what stage they are in with that. But it's substantial. We feel at this point in time our goal would be to offset any losses we may incur, and we believe that we can do that in the future if these DR facilities are built.

They are about, as I understand them, the normal module is about 1 million to 1.5 million tons. Most folks like to have that inside of their gate so they can get the advantage of the heat value and those cost advantages that go well. And there are several potentials that are starting to form up for looking at any gaps we may be able to cover, if there are any potential losses in our current iron ore business.

Another question, a lot has been made recently of the transportation costs that you have to go from the Great Lakes through the St. Lawrence out into the Atlantic, somewhere around $30 a ton. And you're doing that and you're making money on those export sales right now. But the same is true in terms of transportation costs coming from the Atlantic into your market into the Great Lakes.

When you look at the expiration of your Great Lakes contracts for iron ore, which are based on formulas that only take in partial consideration the sea-borne price. If you were to go to a sea-borne price in the Great Lakes today, what would that do to your price -- average price for your Great Lakes business?

I don't have a specific number for you, Mike, that goes with it. But I think the gist is, as we look forward, obviously everybody does their net backs off of freight. And from there, we think we would be very competitive and our pricing would put our margin side to fend off the competitors would be greater, not lesser as we look at today's marketplace. We think there's a lot of opportunity here on the upside, and still fending off and being defensive on potential products coming into the marketplace as well.

You look at our low cost of our production at US iron ore, that's a great competitive advantage we have, call it mid-60s, the freight differential of $30. So it gives us an opportunity to price appropriately to our customers to protect our --.

That's right. As you know, we have -- most of our material is through the Great Lakes and again, we have very, very low Great Lakes shipping as well. So we have a huge competitive advantage, and we would exercise as much of that for increased margin, which we think we could get, as well as with the DRI starting to put pressure on that market. We think the future looks pretty good for us.

And, Joe, the -- with your Great Lakes costs -- cash costs, somewhere $65, $70, something like that, that's for pellets. And pellets obviously are priced at a premium to the sea-borne price that everyone talks about. So in general, as these contracts in the Great Lakes expire, even if you were to go to a sea-borne with a little bit of a discount or whatever. Given the transportation costs that competitors would face to get into your market from the Atlantic, you would see your prices going up right now as those contracts roll off, everything else being the same in terms of market pricing.

It absolutely would, Mike. You have got the numbers right. That's exactly how the math would work. Prices would go up.

Brian Yu from Citi.

Joe, on this -- the DR grade pellets, can you give us the sense of what the cost -- if there's incremental costs associated with that besides the three point difference in the Fe content?

We're just not there yet. We ran this trial very successfully. We've done a number of bench scale trials and with that -- but up and North Shore, we ran the 30,000 tons, if you will, just to start getting a sense of that. Do we want to do -- we will go -- as we said, we will continue to trial bulk samples throughout the year with different flow sheets to see what the effect is on the yields that go with it.

But we're really just not there yet. To throw any number out would be way too soon.

With that, I think by the time we get into the late summer, into the third quarter, we'll have a good handle on which flow sheet we design and how we optimize our costs. But make no mistake, North Shore can make product and in bulk as you saw -- as we discussed here. And we will start working on the optimization of the process now to bring the costs in line. But we will report on that when we have a number we can hang our hat on, if you will, and then stand behind.

From a logistical standpoint, would you be able to service Nucor's facility down in Louisiana and will it be a combination of rail and barge just to keep the cost flow?

I would -- logistics, we would look at the best and cheapest option. Right now, my answer would be, yes, we could put products into Nucor. I know there's a lot of -- or into Louisiana, or in the south.

If you think about it right now, US steel supplies all of their product from central Minnesota into the Fairfield plant have for many, many years. And we supply customers on a continuous basis in Mexico on a rail basis with that. There are customers that compete in the blast furnace markets right now with the same logistics model, and I don't know why this would be any different. And we are certainly looking at options on how to optimize the costs down there.

Sal Tharani of Goldman Sachs.

I wanted to ask you a little bit more on DRI. You mentioned you have identified two mines. Can you tell us which one also besides the North Shore? And if North Shore is the only one you're going to pursue.

Second, what do you think you're going to need in terms of capital equipment to do that? And lastly, this 30,000 ton you have produced, what changes did you make to get that and do you think that the equipment you use is sufficient or you will need more equipment? And also who has tested this DRI in their steel plant?

A lot of questions. And good ones, thank you for opening that up, Sal.

The other mine is the Utac mine, United Taconite mine that sits in central Minnesota, as well. We found North Shore at this point in time to be the low capital cost option. It would certainly take some minimal capital to convert the two furnaces that we ran the facility on.

North Shore has the ability, they have a lot of small furnaces. It's an older facility, so we can isolate two of the furnaces down there that we ran these trials and tests on with that. And it's more of piping and pumping, if you will, and conveyance of material than it is modifying, putting new mills in and extra grinding and flotation capacity that we would have to do up at Utac.

So North Shore right now has a competitive advantage in the two mines from a CapEx standpoint on a preliminary basis. We have just not done enough work yet to know where the operating -- the OpEx is on those two mines.

But, as you know, North Shore also sits with their own shipping facilities right on the shores of Lake Superior, so it has a transportation advantage as well over Utac. But both are competing for the materials. It will be nice to have options on either one of the mines, but as you can see, we are in production or could be, if there was a call for North Shore right now, albeit on a temporary basis til we got it piped up and plumbed in.

But product we have not sold yet at this point in time. We are using a lot of it for samples into the different manufacturers. There's only two, as you know -- I mean, two that we're working with, Midrex and HYL. We want to make sure these products are in the right hands and go through all the appropriate earnest tests with our engineers, and that's all being done now.

On the product side, we've isolated enough of that product that if someone did want to put in a trial shipment of -- so they could isolate it and have a look at it, we've segregated that stockpile. If we don't sell it, then throughout the year we'll just blend it into the rest of the stockpile and sell it off as blast furnace feed. But we are holding that stock pile for a while to see if there's an interest in trial cargos or --.

Just one more thing, is any of the -- how much volume North Shore has? How much you think that can be run into DRI? And also is it any of this volume committed to some furnaces in the US which you may not be able to change over to DRI?

No, we've got enough additional capacity. If you remember, we shut North Shore down, several of those furnace lines, the one we are testing now earlier this year when we lost -- the volume was lost through the bankruptcy and that volume left the US as well. So we have that additional capacity right now if a mill were to start up.

But I think, Sal, the way to think about it is really -- and for everybody is where -- and this is where we want to get. We're way ahead of the curve, if you will toward potential DRI plants to be built. And I would think for them to go through their feasibility studies, they want to know that they have got a product that's close to market and then can work first before they go forward and build a plant.

It's going to take several years through permitting to build these plants, and I think we're well ahead of the curve, if you will, by at least a year for our customers to be -- to feel very safe and very satisfied that they have got a product in place with the right quality they can design into whichever process they would select. But I think we would have plenty of product to start off with -- to start off at least one standard DRI facility.

Jorge Beristain of Deutsche Bank.

My question is just circling back on the Quebec taxation issue, and you mentioned that it may impact your capital decisions there. Could you just quantify if the proposed tax rates, royalties go through as proposed, what kind of a per ton difference that would make in cash flow? That's my first question.

I don't think we have that number in total, but, again, I think in reading the press and talking with the government and everything, Jorge, you're probably more in tune with it than I am. But the initial proposal was a 5% gross royalty. And I think you just apply the math using that is what we would do at this point in time in investment decisions because we don't have a better guide post.

But the government's proposal at this point in time is 5% on gross -- I'm sorry, gross revenue. That would be difficult and a very difficult taxation regime, wherever you compared it across the world at this point in time. So I would use that as the guideline until there's further clarification from the government.

Would the decision to move forward on the phase 2 restart in any way be contingent on resolving the tax situation in Quebec?

It will certainly be a big proponent of it. Again, with all of the uncertainty that is sitting around the world with all the other factors, no matter what commodity business you're in, that has to be resolved first in my mind before you could make the viable economic decision for the long term.

Could you also quantify where you are in the process with the Ontario government? You said there's obviously been a change of government, but is this a back to square one in terms of dealing with them on issues of road and energy subsidies? Or do you think that you're able to keep a lot of the work that was done under the prior administration? Just trying to get a sense as to how realistic the chromite project is under the previously stated timelines given the change in the government.

We've had a -- as you know, we had a term sheet that we announced with the government, the predecessor in May of 2012. We've worked with them very diligently, and let me just say and very cooperatively with the government to get the definitive agreement nailed down. Just we didn't get it done on either side prior to the change of government. I think there was a lot of goodwill on both sides to try to get there, and we just couldn't reach that.

I think with the new provincial government, as cabinet shifts are made and people get settled back into their seats, it's just a restart from priorities, I think. It's in no way that we've seen at this point in time a backing away from the term sheet, but it's getting the definitive agreements in place with a new group of cabinet ministers, if you will. But I would say, both from the First Nation's perspective, from the Ontario government, again, we're in negotiation phases, but people want this project to go forward.

We just got a lag right now while the government gets reorganized. But they seem to have been still very positive on this project. And it's not a restart, but it certainly is a lag in time. Again, I don't have a sense of the time either until the government is ready to reengage once they go through their changes.

And if I could squeeze one last one in. Where are you with the excess premiums on the Bloom Lake product? Since startup, you have not been able to really affect those higher percentage Fe premiums.

Are you making headway with clients? The market, obviously, for pellets has come back. Can you talk to that a bit in terms of is that really a 2014 normalization of the extra premiums you should be getting?

I think it will be more of 2014. As we've talked about, our first goal is to make sure the product introduction is there. Concentrate, as we've talked about, is a new product, particularly in Asia of this high grade type of chemistry, but finer to go into center blends. It's taken a lot of work -- mutual work between the steel companies and our technical folks to start introducing these blends at the appropriate weight so that they can see the value in use.

As always, you discount when you go into these markets. Again, we've been successful on the product, technical manuals are being developed as it goes forward. And I think in 2014, once we get our customer diversification in place, we can start getting back to the normal premium amounts you would look on, Fe above 62%.

Mark Parr of KeyBanc Capital Markets.

It's Jason Brocious in for Mark Parr. I was just wondering if you could just give a few details around the 1% effective tax rate? I think you guys have been typically in the low to mid-20%s in the past.

I think it probably needs to step back a little bit. Back in February I think, we didn't really have any guidance on the effective tack rate, but we did say on the call that we had a cash tax rate, somewhere between 20%, 25%. In reality, we have a couple of permanent tax benefit items like percentage depletion. As well as we have some income that's not taxed in certain foreign jurisdictions that we get a benefit from a rate standpoint. Those stay pretty flat during a period of time.

So when we increased our forecast for the additional tons, obviously our pretax income is going up. So the fact is is that we actually had a planned benefit -- tax benefit back in February. Now we have raised that because our income's going higher, our tax rate is going up to that 1%. So from a cash tax standpoint, we said 20% to 25%, I think you're going to have to add around 5 points to that number to get somewhere where our cash tax rate will be now.

And I just wanted to clarify on the -- I'll dig into it more on my own, but the Quebec mining tax proposal, 5% of gross revenue, that's not going to take into account at all the profitability of the mines being taxed?

No, not at the initial proposal. That's the concerning piece of this.

And just on the comments you made about provisional pricing impacting the realizations in Eastern Canada, typically most of that business is priced on a spot. Can you explain where the provisional factor came in?

Yes. What happens is we have different contracts with different customers, but when we load the ships, that's when we will recognize the revenue. But we have to estimate the time that it takes to get to the ports in China, which is when the price gets settled. So as we were estimating shipments in the fourth quarter, when they actually got there and the price was realized, we were a little bit conservative in our estimates. And reality is that prices came in higher for the quarter and also drove higher pricing there.

What's the typical shipment time for -- from Eastern Canada over to a northern Chinese port?

It can go anywhere from high of 30 to 45 days. So some contracts are based on when the boat leaves the dock, and other contracts are based on an average of a discharge in China. That's where you're getting this provisional pricing coming into play.

So in a market like we saw in 4Q, that can be quite a factor.

That's right.

Aldo Mazzaferro of Macquarie.

Two quick questions to follow up. On the comment you made about the better pellet demand driving the US iron ore, can you say whether those are mini mill customers for DRI or is it that integrated producers?

It's all integrated producers. We don't sell anything into the mini mills at this point in time.

A question on the tax rate again, I think you just answered a lot of the question I had. But I guess in simple terms, how did you end up with a $43 million or $46 million deferred tax charge in the cash flow statement if you didn't have any tax accruals in the income statement?

What you have there is I think the cash flow has an income, it's a benefit that's going through and that's why the rate is in accounting you have a deferred portion of your tax expense as well as a current portion. What you're seeing is cash flow is the deferred portion benefit, which is non-cash.

Right, but those deferred -- oh, that's the benefit. I get it. $46 million is the deferred benefit.

Yes. It's [a city] and income but it's non-cash deduction in the cash flow statement.

Tony Rizzuto of Cowen Securities.

My question -- one of my questions is to follow up on the Eastern Canada price realization. And it seems that your realization was higher than your guidance seemed to imply. I understand a portion of it is the provisional pricing. So when we look ahead, should we expect that to be more closely in line with the guidance that you guys have put out there?

No, I think that those events depends on the volatility on a quarter end when we're estimating pricing for those ultimate deliveries. I think it's just facts and circumstances this time through.

Tony, I think you'll just get a whole mix of leave and lag, if you will, and you have got to put customer mix in there as well and vessel timing that goes in on the shipments. It will move around, I'd say, quite a bit, but I don't think the variation will be all that huge, unless there's a huge pricing event one way or the other and vessel timing happens to coincide with it. So that would be a difficult one to put your finger on.

And just also with regard to Eastern Canada. So as you are gaining more traction with customers there, and it sounds like you are -- they are utilizing more of your material and it is a work in process, initially, you break into the market and you're getting a little bit of a discount there. More of that impact, we should begin to see that as more of the premiums begin to flow in? That's more of a 2014 thing?

Yes, we're still doing a lot of trials and a lot of tests that go with that. Again, as I said, it is appropriate for a steel mill. They just don't take any product, as you would expect, and we are targeting some very important customers that are very high-class customers, if you will, that quality is extremely important to them. This is a very slow, if you will, but methodical, technical steps that you go through, and it will be a 2014 event as we step through it, but we think it's well worth it to get the right customer base diversified.

Shifting to the US for a second, the sustainability of the first quarter level, your guidance seems to imply that costs will rise, obviously year-on-year. Your costs were down a little, you talked about lower maintenance a little bit, but I'm wondering are you guys seeing some lower cost pressures? We're seeing other mining companies talking about that. Are you seeing this as well, and specifically, if you are, in which areas? And I've got a follow up on that as well.

I think as a general statement, as the heat of the mining business, the events slow down, as always expected, we do start seeing some pricing. Contractor availability becomes more competitive in the space, your bidding processes can become more competitive in that. I would say, in generally, we're starting to see a little easing of that, those pressures that come with it. But to be specific of where the big downside cost reductions have come in, I don't think there's any that would pop into mind or shows up in the line items that we look at in more detail here.

And I think another thing is for the cost for the quarter is we are experiencing higher energy and labor costs. But we also had a couple -- from a timing estimate, a couple major repairs that happened in the first quarter of 2012 and it's just a timing thing. So we're leaving our guidance to $65 to $70 because it's timing of majors. But the team's done a nice job of really managing the costs, in light of the inflationary environment they're seeing on the energy and labor side.

My final question, just to think about your ore grades there at the US operations and haulage profiles, all that as we think about the remaining quarters in 2013 and going into 2014, 2015. How is that likely to change? Any meaningful way?

No, grades are stable as they have been for many years in these mines as they go forward. Of course, as in any mine, as spaces advance, the haul distances get a little longer each year. They never get any shorter, Tony, as they go with it, but nothing dramatic. We are not opening new pits or new mines, or going to new areas that would have a substantial change to haulage distances and affect costs going into 2014.

Just overall, would it be safe to say that your cost guidance is maybe on the side of conservatism, given what we saw in the first quarter and maybe given some of the comments here today, a little bit more sustainable?

No, if we thought they were, we would change our guidance, as I think we've always tried to stay transparent with everybody. Again, as we smooth the maintenance curves as we go out. In the first quarter we worked very hard at matching costs with revenues as they come in. It's a slow quarter for us as always with the locks being shut down.

And, quite frankly too, if you can -- if you don't have to do a lot of this maintenance in the first quarter, with the weather and the severe temperatures we've seen this year, everybody is just that much more productive. We would maintain our guidance.

Ashley, we'll take one more caller.

Steve Bristol of RBC Capital Markets.

Thanks, and congrats on the strong quarter. I just had a question on preferred dividends. I saw that you had some preferred dividends coming through the income statement, but on the mandatory converts you weren't supposed to have a dividend until May 1. I'm just wondering what that dividend represents and where it would show up in the cash flow.

It's accrued in the balance sheet because from a calculation for an EPS standpoint, we have to accrue for that and back that out to calculate net income available to common shareholders of Cliffs. It's accrued, it hasn't been paid, but it's sitting in the accrued liabilities.

Why was the declared dividend of $0.34 less than the 7%?

Because we raised the equity in the middle of the quarter and February 21 was the close date.

Pro rated

Pro rated.

So that declaration isn't for the entire second quarter? That's just for the first quarter portion?

That's right.

Yes.

Thanks everyone for joining us for today's call. I'll be available for the rest of the day if you have any follow-up questions. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great --.