Cleveland-Cliffs Inc (CLF) 2013 Q2 法說會逐字稿

Good morning. My name is Jonathan, and I will be your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources' 2013 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. At this time, I would like to introduce Jessica Moran, Director, Investor Relations. Ms. Moran?

Thanks, Jonathan. 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 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 www.cliffsnaturalresources.com. At the conclusion of the call, it will be archived on the website and available for replay.

Joining me today are -- Cliffs' President and Chief Executive Officer, Joseph Carrabba; Executive Vice President and Chief Financial Officer, Terry Paradie; and Executive Vice President and Chief Administrative Officer, Kelly Tompkins. At this time, I will turn to Joe for his prepared 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 discuss our recent announcement about my retirement as CEO, which will be effective by the end of the fiscal year. Before that, let me begin by thanking Laurie Brlas for her contributions to Cliffs during her seven years of service as CFO, and most recently as President of Global Operations. We wish her well in her future endeavors.

Looking back over my tenure here at Cliffs, I am pleased with the strategic objectives that we have accomplished. When I began here in 2005, we had just begun our transformation from a pure North American iron ore producer to an international mining and natural resources company. We've significantly expanded and diversified our global footprint, product offerings, customer base, and project pipeline.

In addition to these accomplishments, and perhaps most importantly, we have embedded a focus on safety in everything we do. I'm also very proud of the depth and breadth of the management team that we built, as well as the culture and core values that have served Cliffs so well for 166 years.

I know the Board is confident in the executives that make up the newly formed Office of the Chairman, led by our non-executive chair, Jim Kirsch. I look forward to working with all of them over the next few months as our leadership transition takes place. I will continue as CEO for the remainder of the year or until the Board appoints my successor.

At this point, I will introduce Kelly Tompkins who has been recently appointed Executive Vice President and Chief Administrative Officer and is part of the Office of the Chairman. Kelly will discuss the executives that make up the Office of the Chairman, as well as the team's priorities over the next several months. Kelly.

Thank you, Joe. While the Office of the Chairman is new, it is comprised of five very experienced Cliffs executives, as well as our non-executive Chair of the Board, Jim Kirsch. It is also worth noting that in conjunction with Joe's announced retirement, we have separated the roles of CEO and Chairman of the Board. In the coming months, our Board will evaluate whether the separation of these roles should be a permanent change to our corporate governance structure.

Joining Jim and I in the Office of the Chairman will be Terry Paradie, Executive Vice President and Chief Financial Officer; Don Gallagher, Executive Vice President, President of Global Commercial; Cliff Smith, Executive Vice President, Global Operations, who now has responsibility for our US iron ore, Asia Pacific iron ore, and North American coal operations; and Duke Vetor, Executive Vice President, Global Operations Services, who is taking responsibility for Eastern Canadian iron ore. This team possesses a broad range of financial, commercial, operational, and project execution expertise, not to mention deep familiarity with our business, customer base, and culture.

Over the next few months the group's main focus will be to prioritize and work on the most pressing challenges facing the business. Namely stabilizing and lowering the cost of Bloom Lake, determining whether and when to proceed with phase two of Bloom Lake, assessing the long-term viability of Wabush, continuing our progress on reducing SG&A costs, as well as assessing the feasibility work on our chromite project, and the next steps in our early-stage work on producing a DR-grade pellet at our North Shore facility.

In the coming months, we will make these capital allocation recommendations to the Board with the goal of ensuring the new incoming CEO hits the ground running. With that, I will turn the call back over to Joe to discuss the performance of our business segments during the quarter. Joe.

Thanks, Kelly. Globally, the steel-making utilization rate remains strong at 79%, with China's crude steel production continuing to reach record levels. China's year-to-date iron ore import data is up slightly versus 2012's comparable period. Iron ore inventories at the ports and Mills continue to be at multi-year lows. These factors, along with an unseasonably rainy June in parts of Western Australia, supported the iron ore price during the second quarter and well into the current quarter.

Despite the favorable pricing, we recognize China's government is in the process of orchestrating a [manning] slowdown of their economy. This is a risk we continue to monitor, along with the significant amount of iron ore supply expected to materialize later this year.

In the US, the economy remains stable, with most economic indicators pointing to slow and moderate growth. Automotive production and sales are strong, and the construction sector continues to improve. One factor that is working against us in the US is the stronger US dollar. As many of you know, this will likely increase steel imports into the US and mute the demand of domestic steel products.

Europe's economic situation remains dismal, with the consolidation and rationalization of their steel industry a likely event over the next several years.

In US iron ore, second quarter sales volume increased 5% to 5.7 million tons from 5.4 million tons in the year-ago quarter. This was primarily driven by increased demand and higher export sales related to pellet contracts assumed from Cliffs' Wabush mine.

Year-to-date, we have exported approximately 800,000 tons of pellets from the lower Great Lakes into the seaborne market. We have been successful in placing about half of this volume with European customers. With the year-to-date results, we're on track to meet our full year 2013 expectation of exporting between 1.5 to 2 million tons of US iron ore pellets into the seaborne market.

As announced during the quarter, we entered into an agreement with Essar Steel Algoma to extend our iron ore pellet sale and purchasing agreement to 2024. The previous agreement was expected to expire in 2016. This agreement includes Essar's minimum volume iron ore pellet purchases from Cliffs beyond 2016 and pricing for 2013 through 2024. We are pleased to continue to supply Essar with high quality products throughout the next decade.

In early April, we executed our planned curtailment at Empire Mine in Michigan. We expect to restart Empire's production during mid-third quarter. At North Shore Mine, we're conducting additional tests on the DR-grade pellets we successfully produced earlier this year. Our next step is to perform industrial scale engineering work to refine our cost estimates to potentially modify North Shore Mine for DR-grade pellet production.

As I mentioned last quarter, our ability to produce DR-grade pellets and potentially enter into a new market is an exciting new development for Cliffs. For full year 2013, we're maintaining our US iron ore sales and production volume expectation of 21 million tons, and 20 million tons, respectively.

Turning to Eastern Canadian iron ore, sales volume decreased 18% to 1.9 million tons from 2.4 million tons in the prior year's comparable quarter. This was comprised of 1.5 million tons of concentrate, and approximately 475,000 tons of iron ore pellets. The year-over-year decrease was primarily driven by lower pellets availability from Wabush Mine.

At Bloom Lake, we continue to experience variability in the ore characterization. This variability drives lower throughput and recovery rates through the mill. As we've previously discussed, adjusting the ore blend to include additional crude ore from the West Pit is expected to improve our operating metrics for the longer term.

At this point, we have not reached the optimal ore blend, primarily due to the availability of equipment and labor onsite. That being said, we expect to conduct additional mining work in the West Pit during the second half of the year versus the first half. As a result, our strip ratio will increase, as well as our cash cost per ton. To reflect this, we are increasing our full year cash cost per ton expectation at Bloom Lake by $5 to $90 to $95.

Also due to the lower throughput and recovery rates we've experienced to date, and in an effort to derisk our forecasts, we're lowering the range of our full year expected sales volume from Bloom Lake by 1 million tons to 5.5 million to 6 million tons.

For the remainder of this year we are focused on a number of projects including some of the shared infrastructure and permission to operate investments. We expect to commission the new [intake] pressure overland conveyor system and ore barn in the next few months. In addition to these projects, we still have a significant amount of work to complete at our tailings facilities.

As disclosed in the outlook and last night's earnings release, we are increasing our full-year 2013 CapEx expectation by approximately $200 million. The increase reflects the additional tailings construction required to be completed this year. Later in the call, Terry will discuss how we intend to finance the additional CapEx required.

The decision to restart the construction of phase two's concentrator and loadout facility is still under review. We are currently evaluating several scenarios to determine the most appropriate plan for this project going forward.

On the marketing front, our customer diversification strategy for Bloom Lake's concentrate continues to gain momentum. During the quarter, we were successful in signing a one-year supply agreement with a Japanese mill. Due to our lower revised forecast for Bloom Lake's full year expected sales volume, we are now fully committed for 2013. We expect to resume our trial cargo shipments to new customers in the beginning of 2014.

At Wabush, we [autoed] the Point Noire pellet plant at the end of June, and we have switched over to processing and marketing a concentrate-only product. Thus far, we have several trial cargoes scheduled for the second half of the year to customers in Europe, Japan, and China.

At the end of June, forest fires burning close to Wabush's operations caused us to temporarily idle production at Scully Mine. During the natural disaster, Cliffs' employees stabilized and protected the mining operation. In addition, the company worked in partnership with Wabush authorities to provide volunteer assistance and heavy equipment to create a firebreak for the town at a safe distance from the fire. There was no damage to our operations and production has resumed.

With our the revised outlook for Bloom Lake, we're decreasing our full year Eastern Canadian iron ore sales and production volume expectations to 8 million to 9 million tons from our previous expectations of 9 million to 10 million tons. This is comprised of 5.5 million to 6 million tons for Bloom Lake, and the remainder from Wabush.

Turning to Asia Pacific iron ore, second quarter sales volume decreased to 3 million tons from 3.1 million tons sold in last year's comparable quarter. The decrease was attributed to the absence of sales volumes from our Cockatoo Island operation that ceased production in the quarter of 2012 -- in the third quarter of 2012.

Sales volumes for the quarter were slightly better than anticipated due to the Port of Esperance only executing one 10-day shutdown, versus our expectation of two 10-day shutdowns during the quarter. We expect the second shutdown to take place later this year. Our full year, 2013 expected sales and production volume remains unchanged at 11 million tons.

Now, turning to coal. Our second-quarter sales volume increased 36% to 2.1 million tons from 1.5 million tons last year. Another record quarter and tremendous performance by our operating and commercial teams. Production at Pinnacle Mine was exceptional during the quarter. In addition to good geological conditions, the team also executed Pinnacle's planned long wall move in seven days, compared to our previous best record. This was a 100% improvement.

In addition to increased production volumes in North America coal, the team continues to work on lowering the cost structure. I think it is important to highlight this, especially considering the pricing environment all coal producers are facing today. We recognize our ability to move left on the cost curve will enable us to supply existing and new customers with quality met coal.

That being said, during the second quarter, we were successful in adding new tier-one customers to our order book. These included two customers in Europe and one in South America. Currently, we do not have any met coal volume priced for 2014; however, we are experiencing a strong demand for our products. For 2013, we're maintaining our sales and production volume expectations of approximately 7 million tons, largely comprised of metallurgical coal.

In closing, I am pleased with the quarter's results; as I mentioned in my opening remarks, over the last several years we have been successful in our diversification strategy. It has been a privilege to lead this Company through some of the most challenging and exciting times commodity companies have faced in recent history.

I look forward to working with the Office of the Chairman during the leadership transition period. With that, I will turn the call over to Terry for his review of the financial highlights. Terry.

Thank you, Joe. Consolidated revenues for the second quarter were $1.5 billion, 6% lower than the previous year. This was driven by an 11% decrease in seaborne iron ore pricing to an average of $126 per ton for a 62% Fe fines product. Cost of goods sold increased 7% to $1.2 billion driven by higher sales volumes in North American coal and US iron ore, unfavorable inventory adjustments, and higher idle cost. This was partially offset by lower sales volumes in Eastern Canadian iron ore.

Operating income for the second quarter decreased 28% to $262 million. The decrease was primarily driven by lower consolidated sales margin, partially offset by a significant decrease in year-over-year SG&A and exploration expenses. This was driven by an overall focus on cost management, as well as lower spending on drilling and professional services for certain projects.

A lower operating income was partially offset by a significant increase in miscellaneous net, which was primarily comprised of a $39 million benefit related to foreign exchange re-measurements. There was also a $19 million non-cash gain related to the final transfer of our Cockatoo Island operation, and the purchaser's assumption of certain asset retirement obligation liabilities.

Second quarter 2013 results also included income tax expense of $9 million versus $42 million reported in the previous year's comparable quarter. The decrease was driven by our expected full year 2013 income tax effective tax rate of 2%, which includes discrete items.

Additionally, we recorded a $68 million asset impairment charge related to the write-down of our Amapa investment. We reported second quarter 2013 net income attributed to Cliffs common shareholders of $133 million or 82 per -- $0.82 per diluted share. This compares to $258 million, or $1.81 per diluted share, in the second quarter of 2012.

Moving on to liquidity and capital structure. In the second quarter of 2013, the business generated $414 million in cash from operations, versus generating $96 million in the second quarter of 2012. The improvement was driven by favorable working capital, primarily related to inventory and payables. At the quarter-end we held $263 million in cash and cash equivalents.

Also during the quarter, we paid down $110 million in borrowings from our revolving line of credit, reducing our debt to $3.3 billion. At quarter-end, we had $440 million drawn on our $1.75 billion revolving credit facility. We intend to improve our credit profile through the remainder of the year by continuing to delever the balance sheet through repayments of the revolver borrowings.

Before I review each segment's financial performance and outlook, I would remind you that we provided a full-year business segment revenue per ton guidance and related sensitivities to future iron ore pricing in the outlook section of last night's earnings release. We will use the June year-to-date average iron ore price of $137 per ton as a proxy for our full year average price. It's important for me to stress that this is not our internal iron ore price outlook for the year.

In US iron ore, revenues per ton decreased to $110 from last year's second quarter revenue of $120 per ton. The decrease was due to lower market pricing for iron ore, the year-over-year increase in volume exported to our seaborne customers, which has lower realized pricing due to increased freight costs. Lower year-over-year hot rolled steel pricing also contributed to a decreased realized revenue rate in the second quarter 2013.

Cash cost per ton increased to $68 from $63 in 2012's second quarter. The year-over-year increase was primarily driven by higher costs related to the planned temporary production curtailments at Cliffs' North Shore and Empire Mines, as well as increased energy costs. This was partially offset by lower employment-related expenses and maintenance and supply spending. We are maintaining our 2013 cash cost per ton expectation in US iron ore of $65 to $70 per ton.

In Eastern Canadian iron ore, revenue per ton decreased to $111 million -- $111, down 14% when compared to the prior year's second quarter. This was attributed to 11% year-over-year decrease in seaborne iron ore pricing. Also, due to the lack of pellet availability at Wabush, the segment sales mix was comprised of a higher proportion of iron ore concentrate, which realizes a lower revenue rate due to a lack of pellet premiums. A more favorable freight rate of $26 per ton partially offset the year-over-year decrease in realized revenue per ton.

During the quarter, Bloom Lake's cash cost decreased 4% to $87 per ton, which was due to improved production volumes and a resulting favorable impact on mine cost per ton rates, as well as lower maintenance and contractor spending.

Due to the increased mining costs Joe discussed earlier, we are raising our cash cost per ton expectation at Bloom Lake by $5 to $90 to $95. Cash cost per ton at Wabush mine was $200, up 51% from a year-ago quarter, primarily driven by unfavorable inventory adjustments totaling $55 per ton.

Due to the fact these inventory adjustments would have been recognized later this year when the respective inventory was sold, we are maintaining our cash cost per ton expectation at Wabush mine of $115 to $120. For the entire Eastern Canadian iron ore segment, we expect full-year cash costs to be $100 to $105 per ton, up from our previous expectation, primarily driven by Bloom Lake.

Turning to Asia Pacific iron ore, revenue decreased 7% to $109 per ton from $118 per ton, primarily driven by lower market pricing, partially offset by the absence of low-grade tons that we included in the 2012 second quarter.

Cash cost increased 12% to $64 per ton, compared with $57 per ton in the year-ago quarter. The increase was due to the absence of the low-grade tons that were sold in last year's second-quarter, which were produced at a lower cash cost rate. This was partially offset by the absence of costs from Cockatoo Island, which was a higher-cost mine.

Due to favorable foreign exchange rates realized to date, we are lowering our full-year cash cost per ton expectation for 2013 to $65 to $70 per ton from our previous expectation of $70 to $75 per ton.

In the North American coal segment, revenue was $105 per ton, down 13% from previous year results, primarily driven by lower year-over-year spot pricing from metallurgical coal. This was partially offset by favorably-priced annual and carryover contracts, as well as product mix that's comprised of certain higher-quality metallurgical coal products.

Due to the pricing weakness in the metallurgical coal market, we are lowering our expected revenue per ton to $100 to $105 from our previous expectation of $110 to $115 per ton. Our North American coal cash cost decreased 20% from last year's second quarter to $88 from $111 per ton. This quarter cash cost per ton benefited from improved fixed-cost leverage from the increased sales volume, lower maintenance and spending, and employment-related expenses when compared to prior year's quarter.

Even with the lower market pricing for coal, we delivered positive cash margins and positive sales margins, which included $14 per ton of DDA in the quarter. Due to the operating team's outstanding performance, we are lowering our expected full-year cash cost by $5 per ton to $90 to $95. Included in our lower cash cost expectation is a long wall move at Oak Grove Mine scheduled for the end of the third quarter.

Now, turning to our revised full-year CapEx budget. As Joe indicated in his Bloom Lake remarks, we are increasing our 2013 CapEx budget by approximately $200 million to a total of approximately $1 billion for the full year. The increase in spending is primarily related to the additional tailings and water management work required at Bloom Lake. We intend to fund the increase from available liquidity and borrowing arrangements. This will likely include lease financing, which is expected to be at a low interest rate and neutral to our debt leverage profile.

For 2013, our full year effective tax rate is expected to be 2%, and we are maintaining our depreciation, depletion, and amortization expense of approximately $565 million.

Turning to our overhead expenses. We are lowering our expected full-year SG&A expense outlook to approximately $215 million from $230 million, driven by our overall focus on improving the cost structure of the business. We're also lowering our expected exploration expense by $10 million; this is primarily driven by our previously announced delay in the chromite project's environmental assessment activities. Our revised full-year exploration expense is expected to be approximately $75 million. This is comprised of approximately $25 million related to exploration, and $50 million related to the chromite project.

Overall, the business results for the quarter were good, in large part driven by our operating performance. Looking ahead, as part of our initiative to be more financially flexible, we will continue to aggressively focus on ways to reduce our overall cost profile. We have some key decisions to make over the next few months as we work to ensure the incoming CEO can hit the ground running. We look forward to updating you on our progress later this year. With that, Jess, I think we're ready to open the call for questions.

Certainly. (Operator Instructions) Michael Gambardella, JPMorgan Chase & Company.

Good morning. I just want to know -- you've had some good results in the quarter on working capital reductions. How much more do you have in the pipeline?

We have quite a few programs, Mike, just like everybody else has. With that, we're really just beginning on the SG&A. We have a very structured program to go back through and look at not only headquarters, but also look out in the regions as well and see where we can combine some of that work. We are, again, just in the early stages of our SG&A work. We see that we're going to make more strides there.

Exploration, I would think we're pretty much finished for the year. A lot of that is just a wrap-up for the drilling, a lot of the near-mine drilling that we have from there. I think, also, the $50 million that has been slated for the completion of the feasibility study and the optionality of the ferrochromes is pretty much there, but I still think there's some good ways to go with the SG&A.

Hey, Mike, from a working capital standpoint, I think, again, we're going to continue to focus in on reducing our working capital primarily related to the inventory and supply inventories at the sites.

Okay. Last question, can you give us any details on this new Essar contract, the extension beyond 2016?

Sorry, Mike. As much as I know the industry and the analysts are looking for that kind of information, we do hold that confidential with all of our customers. We are delighted with the customer. We're delighted with the extension of the customer, particularly on a contract that we thought would end in 2016. Obviously, we think it is favorable to ourselves. But more importantly, it was fair to both parties, and we continue to deliver a quality product to Essar.

Thanks, Joe.

Thank you. Sal Tharani, Goldman Sachs.

Good morning. I wanted -- I'm struggling with your CapEx guidance. I thought that when you took the -- postponed the phase two, you reduced it a couple of hundred million dollars, and then now we are back to $1 billion. But we are still talking about phase two concentrator and telling postpone. Is this the additional stuff you found out while you were working on the project that you need to do, even though you have still postponed the concentrator and the tailings for the second phase?

It is a little bit of everything that you talked about, Sal, in there. I think we have been consistent with the conversations that we have had, that as we build the tailings pond and as we expand the stripping and the Western pit, those are all being built and mined for the potential of a phase two expansion. It would be kind of silly to build that at a phase one level and then have to go back and remodify it from there.

On the tailings side and enhancement of the tailings, as you know, we did get some different water management regulations that came in, which increased the expenses of the water management system. But also, this is more just a refinement of our CapEx, of the definitive capital as we continue to get into the property. We felt it was appropriate to go ahead and expand and spend the money this year on that tailings pond, in light of -- if we did have an unusual storm event, in particular, in the spring.

That will allow us and the Board to make the decision in the future, if they choose to, if the market conditions are right, and there is a good IRR on the remaining portion of that capital to go forward. The tailings expansion is more definitive engineering, but it still, irregardless, sets us up for phase two if the Board chooses to approve the decision.

Okay. And the last question; on Wabush, you had mentioned in the past that if Wabush does not break even by the end of this year, you might consider some alternatives. So I was wondering if that is still on the plate, because it does not look like that Wabush cost is getting any better compared to where the iron ore prices are.

Absolutely. We have been consistent with the message through the year. The management team and our workforce up there knows; and by the way, we're all pulling together on this. The target they have is to be below $100 per ton mark in the fourth quarter. With that, as we said, through, we did schedule the -- Point Noire -- we successfully scheduled that down, had a lot of redundant folks that came out of that at Point Noire. We have enough material to go ahead and fulfill our customer contract.

I am very pleased to think that after over 50 years of operating a pellet plant, that our commercial guys in these tough markets are finding a home for this product. You have to remember, this is a relatively low silica. Though it has a bit of a high manganese -- thanks, I always forget that term. But the low silica is finding its way into the marketplace, as well.

I think when you back out the exceptional items that were discussed in the press release last night, we are going to shrink the footprint from six mills to five mills, and the mine footprint, as well. The guys have got a good fighting chance at it, and now, they have got six months to really operate in the method of concentrate-only after the pellet plant has been shut.

Great. Thank you very much.

Mitesh Thakkar from FBR Capital Markets.

Congratulations on the quarter.

Thank you.

Just a question about the Essar contract without getting into specifics. Can you help us understand what would be (technical difficulty) overall on your portfolio for 2014 versus 2013 without any change in iron ore price?

You broke up a little bit. Can you repeat your question, please?

I'm sorry. Without getting into the details of the Essar contract, can you help us? How should we think about 2014 pricing versus 2013 pricing if there is no change in iron ore price?

I do not think we ever commented that there would not be a change in iron ore pricing. With all of our pricing mechanisms throughout all of our contracts, and Essar is no different. It all has unique features on lead and lag. It has got some world pricing components in it. It has got CPI indexes that go in and out. The pricing will continue to move as well as the elements that were within the contract. The pricing will move, and it will move within the designated pieces that move around in that contract.

Yes, Mitesh, as you know, because of the way we have those contracts structured, it makes us less sensitive to volatile price changes during each quarter in a year.

This will not allow that sensitivity to go higher? It will probably be this similar sensitivity?

It should be similar.

Okay. And just one follow-up question. When you think about your Australian cost, obviously, a very good job there. How much of that was currency-related tailwinds, and how much of that was productivity? And how much of this is sustainable? Can we sustain cost at these kinds of levels for the next couple of years? Of course I understand that if iron ore prices go higher, inflation will work into it. But just all else equal.

The currency change in Australia has just occurred, if you will, I would say even within the quarter to see those drop. So there's not a lot of currency fluctuation in this quarter. Certainly, if it holds up, it will have a different effect on the cost that they go to in Australia. We did hit the higher stripping ratios last year that we talked about, that we think we can maintain or even lower. That was a big bump-up in the cost from a year ago.

We think we have also got the grade stabilized now into the 60% to 60.5% FE, as well. And we do not see further decline at this point coming out of the deposits. It will not be the 62.5% that we delivered in the past and I think we discussed that in our previous calls and on our tours with the analysts. But we think we can sustain, within sight of inflation, the costs that you currently see through the remaining life of the mine.

Great. Thank you very much, guys.

Thank you. Brian Yu, Citi.

Congratulations on a good quarter too. Joe, my first question is with the West Pit, you talked about ore variability. Can you elaborate on that a little bit more in terms of, is it access to the West Pit Hematite, or are you seeing variability in that section of it too.

We are seeing a little more variability in that section than we saw. The good news is it is a much more friable core that it goes through. So it crushes very well and the mill throughput works very well with it. But on the other nuances of the chemistry in the iron, it is a little more variable than we had anticipated when we went into it. That is why we need to strip a little more. Even in the West Pit we have to get a couple more faces so that we can blend even the West Pit in with the other two pits.

We're working our way through it. We're giving ourselves as much optionality in those pits with open faces for blending. As we run into it. We're still learning through all of the modeling and now putting it through the mill as to which characteristics work best.

Okay. Is it fair to assume that you've been told that you get this ore variability under control or resolved, is all of that phase two? Is the concentrator -- is it unlikely to proceed?

No. I would not say that at all. I would think, again, our teams are very confident they are going to get this ore variability under control. That is what we do. These ore grades in this pit are no more complex than the pits we have in Michigan or Minnesota. Or certainly the blending challenges we have in Western Australia, if you've ever seen that operation. It just takes some time to work out.

I think more of the phase two type of decision will be more on the market place and where we think it is. Where we think future pricing will be when we do the outlook. And then the overall IRR that is left with the sub-capital left on the project. I would put it lesser on the pit, and I would put it more on the external environment in the marketplace.

Okay. That is helpful. Thanks.

Timna Tanners, Bank of America.

Hi. Thank you. I know it's been a long week, and maybe these are dense questions. But I just wanted to know in terms of the additional CapEx; how much, if any, additional volume might come from that, and how much is left to decide on phase two for the completion of the project? How much is up in the air?

As we said, Timna, this won't increase any additional volumes this year on the outlook that we just gave where we lowered the volume that goes with it; we think that is the right place to be. We do not anticipate an uptick obviously, or we would have changed the outlook. Again, it is more of getting that stripping well ahead of us on the cash side so that we can get the variability out of the mine that goes with it from there.

I think in round numbers, the finishing of the concentrator and the loadout are around $450 million or so, to finish that segment up, if, again, we decide to go forward with the completion of phase two.

As a follow-up, Terry in his final comments was making the point that there is a lot of decisions to come in the couple months. I was wondering if you could describe for us what those balls are that are up in the air, and how to think about the decisions? Will they be primarily about the market view and about priorities?

I know, again, with the change of management, they will not be decisions of the current management team. But what are those balls in the air and what do you think will be the deciding factors?

I think certainly the market, we all continue to assess that as we need to and make sure we have different operating plans and contingency plans in place if pricing is to go into consensus, where the analysts are that are putting the reports out that go with it. Balls in the air; certainly phase two, as you just mentioned. From there, the Wabush decision, based on the operating strategy and the implementation that goes with it.

We certainly have the ferrochrome decisions after we finish feasibility, and once we work through our governmental issues with both road funding and power supply that goes with that, and getting the MOU that goes with it.

On the upside of it is certainly the DR-type of work that we continue to talk about, about North Shore. We continue to be in early-stage conversations with a number of potential folks to supply for DR. If that continues on with the natural gas, I think those are some decisions that we will need -- hopefully need to make on the very upside, on the DR production in the -- for the remaining part of this year.

Okay. Thank you.

Evan Kurtz, Morgan Stanley.

Hi. Good morning everyone. I just wanted to get some color on how currency might have helped you out in Australia this quarter. If you could break that out as far as cost declines. And just maybe an update on your hedging position for the Australian Dollar.

The way we are looking at it, for the quarter and year-to-date, essentially maybe there was a couple of dollar benefit in the cost structure. The way I would look at it going forward, from a hedging standpoint, is we do have an active hedging policy where we will take a certain portion of our cost and hedge the currency.

But from a sensitivity standpoint, I look at it, in our plan going forward, we essentially have the currency for Australian Dollars and US Dollars at parity. So any sort of percentage change off of that sensitivity would be probably $0.50 to $0.75 on a per ton basis, going forward for the rest of the year.

Great. That is helpful. Thanks. And then maybe just a question on CapEx. I know you probably are not ready to give 2014 guidance, but just talk about some of the big moving pieces to think about for next year, CapEx. With this incremental $200 million being spent at Bloom Lake this year on tailings, is that the entire cost of the tailings project, or is some of that going to bleed into next year? And maybe some of the other pieces there?

It will continue to bleed in the sustaining capital portion of Bloom Lake. We will probably run it about $200 million a year, and that will probably be over a time period of the next five years. I would suspect sustaining capital will probably run more in the $500 million range in the future, when you put that $200 million into what we typically run in a sustaining capital range and area that goes from there.

The big kicker on the rest of the capital outside of sustaining is really around phase two. We do not have any other expansion plans at this point in time. The early indicators on North Shore, if we were to go into a DRI conversion, number one is the building of a DRI facility would be several years out before we would even think about spending the capital. There's no reason to convert in 2014, I wouldn't think.

It would be a nice thing to do if we could, but the capital is pretty de minimis that we see right now at North Shore. So, not a lot of growth capital out there other than the opportunity in phase two if that were to come over the top of the sustaining capital.

Thanks for taking my question.

Curt Woodworth, Nomura.

Hi. Good morning everyone. I just had a question more on the Bloom Lake cash cost progression. Joe, I know that earlier in this year, you had talked about -- about a $15 per ton headwind from stripping, water management, and some other activities. It seems like part of the ability to get that headwind down was leveraging phase two.

So I guess my question is, if you keep it at the current 7 million ton target, what do you think the normal headwind or cash cost estimate should look like going forward into the next year?

Curt, I think we've talked in the past with a 7 million-ton just phase one that we would be looking at a range of $70 to $75 cash cost. I think with what we're looking at now, we're probably going to have to increase that a little bit probably to the mid-$70s versus the $70 to $75, based on what we expect from a performance standpoint in that mill.

But that would only be, Terry, if we were at lower volumes. But today's volume is at like 6 million tons, so $70 to $75 is still intact (multiple speakers).

6 million to 7 million tons.

So no change from that, Curt.

In terms of taking the cost guidance up right now versus what you think is going to happen next year, what are the kind of moving pieces that would get you down to that $75 level for next year.

The biggest part was, again, we have increased the stripping once again just to get further ahead of it, so that is the moving piece to bring it down. I mean, the guys continue to manage the contractors better and get those moving parts out of the way. The overland conveyor, the ore barn and the [intake] crusher, when that comes on in the very last part of the year, it will cut down on trucking and cut some haulage cost down as it comes from there.

And again, even with this tailings facility, we will do a lot more pumping and be more efficient than we will with trucking. So there are two or three pieces that will fundamentally bring that down. And of course when we get rid of the excess stripping, go to a normal strip rate, that will combine also to bring the cost per ton down.

And then are there any other additional costs for either phase two or other issues that would cause the aggregate number to be higher than that for the Bloom Lake segment next year?

None that we see. I mean the concentrator is about a 65% completion rate. The loadout is identical to the one that is on phase one. It does not have to be put in sequence to start the concentrator up. It can be blended in as it ramps up from there. And the new ship loader is intact to come on in 2014 as well, which will lower demurrage, as we can improve our -- both the weight of what we can put on the vessel, as well as our loading times.

There might be just some spikes in cash cost in particular quarters just related to ramp up, volume. Obviously, the first quarter you start, you're not producing at your targeted run rate of 1.8 million tons a quarter. There could be a little spike related to that.

Yes, and I think also the strip ratio -- stripping ratio is going to be higher than life of mine next year. It's going to roll into next year for a period, as well.

Okay. What is the expectation around getting to the targeted volume level -- timeline?

Well, again, we are looking at evaluating that, the ramp-up of phase two. We will let you guys know in a future quarter as we look through those strategic priorities right now.

Okay. Thanks a lot.

Thank you. Jason Brocious, KeyBanc Capital Markets.

Good morning, guys. I was just -- I just wanted a little clarity around the sustaining CapEx comment you made, Joe. So that's -- regardless of any decision to go forward on phase two, it is now expected that sustaining capital would be at the $500 million level?

I think that is a range for 2014. Again, as the previous caller asked, again, we are just beginning our planning into the New Year with that, and that number will get refined, as well. I would not just check it off, if you will.

I'm trying to give you as sensible a range as I possibly can. Obviously the management team is going to work everything within their power to continue to lower even sustaining capital, but if you want a benchmark to start with, that is what I would use. There will be a lot of discussion between now and year-end before the Board signs off and finalizes our capital plan. But that is a good range that you could use to get started with.

Okay. All right. Any update that you can give on the -- I know last quarter you talked about a proposed extraction tax in Quebec. I was wondering if you can give any update on that.

Yes, that extraction, call it Quebec mining tax, it's been implemented but it has not been enacted yet. But we think the impact to us is going to be pretty minimal. Clearly immaterial to us going forward based on how we understand it is going to work.

It is no longer a 5% off revenue-type arrangement?

No. It is a percentage off of your profits at the mine. So you get to deduct your expenses, depreciation; essentially becomes a pretty de minimis tax for us.

And just a couple modeling questions, too. Could you give us just the cost of freight from Eastern Canada to China during the quarter, and then also to Europe just to get a handle on what those levels were?

The cost to China was around $26 bucks. To Europe, it was --

Probably in a range of $12 to $15.

$12 to $15, yes.

Where does that compare to last year at this time? Or Q2 2012?

Last year, it was around $28 -- I think it was $28 bucks. I think our 12-month trailing, Jason, is -- in Eastern Canada to China, North China, is around $28, $29.

Yes, it was kind of like that $30 -- was kind of what I recall.

Okay. And then to Europe, it is generally stable at $12 to $15 over time?

Yes. It is pretty stable to Europe.

Great. Thank you very much, guys.

Luke MacFarlane from Macquarie.

I was just wondering, can you talk about the level of contract labor that you have got at Bloom Lake currently, and then how that will change in the second half as you wrap up these additional works?

I'm sorry. I do not have numbers for you, Luke. As they go forward from there, I can tell you, again, when we made the decision to delay, Bloom Lake, obviously, we pulled a lot of those contractors out, and we continue to bring more of our own workforce in to do the different parts of the work, as you would in any new facility. But I do not have any numbers for you.

Yes, Luke, but I can tell you though, that we're actually very focused in on a number of contracts, what they're working on, to continue to make sure they're working efficiently and effectively. We have taken real dollars out of the cost profile as a result of that improved process, if you will.

Sure. But in general, you obviously expect that to go up in the back half? I know you do not have a specific number, but you think it will increase as opposed to being able to bring your own people in?

No. I don't think outside of our guidance -- I think it will stay right within the guidance and what we gave with the increase in the guidance at Bloom.

Sure. And then just another question. On your coal business, are you exporting any of that, and if so, how much, and what percentage of met and high-vol are you exporting?

Generally, rule of thumb, we export about 50-50. 50% domestically, and for the most part we stay in the Atlantic basin. Europe is the biggest export market. We do do a little bit to South America. But our primary export market is Europe. I do not think we have done any boats to China this year.

We did a couple last year, but none to China this year. It is just not favorable for us. We are able to sell in our domestic market. Again, the mix on the high-vol, we just do not have that much of it. I could not give you percentages of high-vol to low-vol, but I would expect most of the tonnage, because Oak Grove is all, almost all, exported and low-vol, the majority of the material would be low-vol going into the export market.

All right. And then lastly, if I can, what sort of impact would the abolishment of the Australian natural resources tax down there do for your Australian operation?

It's been very little impact to us so far. I can tell you that we have had very little MRRT tax paid this year or even accrued from that standpoint; a couple million dollars at the most. With the opening value of that, we have quite a few allowances that we do think we -- we do not expect to pay any of that tax in the near term.

Okay. Great. Thanks.

Thank you. Jorge Beristain, Deutsche Bank.

Sorry, I joined a bit late. But my question, Joe, is if you could give us guidance as to the 2014 volume outlook for the US legacy operations. We are aware of some potential mine shutdowns. And I just wanted to know if you can give us a ballpark, if we're looking at 2 million tons of attrition into 2014?

We are just not there yet. We have not given any guidance Jorge, unfortunately. Sorry about that. But as nominations come in, which is much later in the year, partnership meetings take place. There is a design formula that goes with 2014, and we are just not prepared to give the guidance yet.

Okay. But the Empire Mine, when is that slated to close?

It is slated at the end of 2014, so it will have another production year next year. Again, as you know, our partner in that, the minority partner is ArcelorMittal. So we will work through the remaining life of that mine on scheduling the tonnage just like we did this year.

We said we expect to restart Empire the middle of this quarter, and probably run it through the year. If their demand keeps up, we will just keep it running. In this last year of going into the production, we will have to work with the scheduling of it with Arcelor.

Okay. And just in terms of a top-level question, how should we think about your portfolio management going forward. You have had some nonperforming assets such as in the coal business for some time, and clearly you have a high net debt load now. What is the thought process at the Board in terms of how Cliffs is going to look going forward? Do they want to maintain the current portfolio that you have of coal and iron ore, or is there some thought process to streamline the Company back to your core iron ore competencies.

I think we're constantly -- and in conjunction with the Board -- management is constantly looking at scenarios based on the future of the marketplace and what it looks like, and where pricing estimates go with, as well as operating parameters go in, as you know. I do not think anything is off of the table. We try and keep a very open mind to run this Company in the most effective way possibly we can for the shareholders as it goes forward.

But I do not think there is anything that has been cast in stone. And I do not think that anybody wants to roll us back to just a North American iron ore operation either, Jorge. But we're constantly looking at our operations and the future as well to see what is the appropriate thing to do.

Great. Thanks, Joe.

Jonathan, It looks like we have time for one last question.

Certainly. Tony Rizzuto, Cowen and Company.

Hi, everybody. Just a couple of questions. Thanks so much for all the color today. I just want to find out where your strip ratios are today and where are they likely to be in 2014, and what are your targeted levels at Bloom Lake. And then I have a follow-up question, too.

I can take you through that detail offline, Tony.

Thanks, Jessica. All right. Off-line?

Yes.

All right. Thanks for that. Then the other question I had is that Quebec mining tax, is there a sliding scale? Typically, these taxes do have some variable nature relative to the commodity price. Is that part of that too?

Yes. It is a little bit. There is actually -- there is two calculations you do, and I will not get into the detail. We can get into the detail off-line. But there are two calculations that you take the greater of. And it is based on your profits at the mine, which will be impacted by pricing of course.

Like all of these taxes, Tony, none of them are simple. There is some complicated language in the computations that Terry is talking about, and since we're just into it and it has not been quite implemented yet. We're still working through those details. I'm sure Jess will be happy to give you the color around that, as well.

All right. I just wanted to -- I think on the stripping -- you guys have previously talked about that the higher stripping has added pretty significantly to your costs. I think the number you have used in the past, I think maybe, has been about $10 to $15 a ton. Is that correct?

That is correct, yes.

Okay, all right. Thanks very much.

Okay. Thanks.

Thank you everybody for joining us for today's call. As always, I will be available throughout the day for any follow-up questions that you may have.

Thank you.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.