Cleveland-Cliffs Inc (CLF) 2013 Q3 法說會逐字稿

Good morning. My name is Mary. I am your conference facilitator for today.

I would like to welcome everyone to Cliffs Natural Resources 2013 third-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

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

Thanks, Mary. 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 Form 10-K and 10-Q and news releases filed with the SEC which are available on our website.

Today's conference call is also available and being broadcast at cliffsnaturalresources.com. At the conclusion of the call it will be archived on the website and available for replay.

Joining me today are Chairman of the Board Jim Kirsch; 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 the call over to Jim to discuss our announcement this morning on hiring Gary Halverson as President and Chief Operating Officer.

Thank you, Jess. And thanks to everyone listening on today's call. I'm very pleased to announce the addition of Gary Halverson to Cliff's Senior Leadership team.

Gary joins Cliffs from Barrick Gold Corporation, the world's largest gold mining company. Gary is a proven leader with over 30 years of mining and operational experience, which includes underground and open pit mining, mineral processing, and most importantly, an execution track record of delivering large-scale projects. His understanding of what drives profitability and returns on capital, coupled with his breadth of experience in developing and operating assets from construction to closure, made him the best candidate to lead our Company. Throughout his career he has led operations in the United States, Canada, and Australia, and possesses deep technical expertise, operational knowledge, and financial acumen. In his previous role at Barrick, Gary led their North American Business Unit, which is comparable to Cliffs in terms of size and complexity.

Gary will be joining Cliffs as President and Chief Operating Officer and will transition to the Chief Executive Officer role over the coming months. Effective upon his arrival, I will assume the role of Executive Chairman of the Board. This structure will allow Gary to focus on the near-term critical operational and financial decisions ahead of us. As Chairman, my role is to provide continuity of leadership and to refine Cliffs' longer-term strategy. Gary will also serve as a director on Cliffs' Board, and all members of Cliffs' executive team will report directly to him.

Over the last three months, Cliffs' management team has worked to identify opportunities, initiatives, and actions to improve the Company's competitiveness. Gary will benefit from a tremendous amount of advanced work that has been completed on that front. Since he won't be starting until mid-November, he will not be joining us on today's call. However, we are looking forward to the mining experience, expertise, and leadership Gary will soon bring to Cliffs.

I will now turn the call over to Kelly and Terry to discuss the quarter's operational results. Kelly?

Thanks, Jim.

During the quarter, our operations achieved lower cost per ton rate, and we reduced exploration and SG&A expenses excluding special items. We've also lowered our expected full-year CapEx spending, which Terry will cover a bit later. We were pleased to see strong and stable iron ore pricing throughout the quarter, meaningfully above the bearish sentiment reflected in the Street's consensus. Although our performance clearly benefited from pricing, our focus on reducing costs contributed substantially to the year-over-year improvement in our financial results.

You will recall on our last earnings call, I noted that the Office of the Chairman's main focus was to prioritize and work on several pressing decisions, including chromite, Wabush, and Bloom Lake. One of the key drivers influencing our decision is our belief in the value and the importance of a strong balance sheet.

Looking ahead regardless of what decisions are taken, we expect to manage our capital spending with discipline to ensure that our current debt profile is maintained or improved. We fully recognize the magnitude of the capital required for Bloom Lake, and acknowledge that the Phase 2 decision has been pending for some time. With Gary Halverson's mining and project execution expertise, coupled with a strong balance sheet mandate, the Board is evaluating this decision on a value-enhancing basis, stress test by multiple pricing scenarios.

On the SG&A front we initiated an enterprise cost reduction program where we are recalibrating our corporate footprint through early retirements as well as a voluntary and involuntary reduction in force. Going forward we will continue to look for ways to take cost out of the organization and minimize our outside services spending. We expect these actions will improve our 2014 SG&A expense outlook versus our 2013 expectation.

Turning to our chromite project, during the quarter, the Mining and Lands Commission of Ontario ruled against our proposal for a north and south all-weather road that crosses unpatented mining claims of other resource companies. This was a disappointing ruling and without prompt government intervention to address this and other critical infrastructure elements vital to the project, it will be difficult to move ahead.

Now turning to our business segment, starting with US iron ore. In US iron ore, third quarter sales volume decreased 4% to 6.3 million tons from 6.6 million tons in the year-ago quarter. This was primarily driven by reduced sales from a force majeure with one customer and the expiration of another customer's contract, all of which was partially offset by increased domestic spot and export sales.

Year to date we've exported 1.8 million tons from the lower Great Lakes into the seaborne market, successfully placing about 50% of this volume with European customers. In recent months, we successfully negotiated and entered into new pellet supply contracts with two of our long-term US iron ore customers. With these agreements we anticipate having additional incremental sales in full-year 2014, and have increased our year-over-year period expected sales volume for US iron ore to between 22 and 23 million tons. With this additional secured volume, we will be restarting idled capacity at our North Shore Mine in Minnesota. Further, we expect to operate our US iron ore facilities at near-capacity utilization rates next year.

Taking this into account, and assuming no year-over-year change in plats and hot band pricing, with these new agreements, our 2014 US iron ore revenue realization will be in line with our current 2013 revenue per ton outlook of $110 to $115. Bottom line -- we have secured two 10-year take-or-pay volume contracts; we get improved fixed-cost leverage, and our customers are guaranteed a reliable supply of high-quality pellets.

For full year 2013, we are maintaining our US iron ore sales volume expectation of 21 million tons, which includes selling approximately 2 million tons of pellets into the seaborne market. We are also maintaining our full-year production volume in US iron ore of approximately 20 million tons.

Now turning to Eastern Canadian iron ore, third quarter sales volume increased 9% to 2.6 million tons from 2.4 million tons in the prior year's comparable quarter. This was primarily driven by higher product sales from Wabush, mainly due to the timing of vessel shipments. Year-over-year sales volume from Bloom Lake was flat at 1.4 million tons. At Bloom Lake during the quarter, we commissioned the in-pit crusher, overland conveyor belt, and ore barn. Over the next few weeks we will be working to ramp up these major pieces of shared infrastructure.

On a mine development front, we are making progress, but we are not where we want, or, frankly, where we need to be. Optimizing the mine plan through stripping and blending strategies is critical to improving Phase 1 production. Much of this work will continue for the remainder of this year and well into 2014. As a result, we anticipate 2014 cash costs to be in line with what we have reported this year. Naturally, we are eager for Gary to start and become quickly acclimated with our mine plan and operational strategy for Bloom Lake, as part of assessing the second phase expansion.

We are narrowing our full-year Eastern Canadian iron ore sales and production volume expectations to 8.5 million to 9 million tons, up slightly from our previous range of 8 million to 9 million tons. This is comprised of 5.5 to 6 million tons from Bloom Lake, and the remainder from Wabush. For 2014, we expect Bloom Lake to produce and sell 5.5 million to 6 million tons from the Phase 1 operation. Even if the board decides to proceed with Phase 2 over the next 1 to 2 months, as a practical matter there would be no additional tons produced in 2014.

As for Wabush, its long-term viability is predicated on achieving a substantially lower cost structure. Although we did see improvement in volumes and costs during the quarter, significant challenges remain as we head into year end. Due to the uncertainty on Wabush's long-term operating plan, we are currently selling Wabush's concentrate product on a spot basis, and thus will not provide any anticipated 2014 sales volume expectations at this time. We do anticipate having clarity for future options for Wabush closer to year end.

Turning to Asia Pacific iron ore, third quarter sales volume decreased 8% to 2.8 million tons from 3 million tons in the prior year's comparable quarter. This was driven by the absence of sales volume from Cliffs' Cockatoo Island operation, which ceased production during the third quarter 2012, as well as the timing of vessel shipments. Our full-year 2013 expected sales and production volume remains unchanged at 11 million tons. In 2014 we expect to sell 10 million to 11 million tons from our Asia Pacific iron ore business comprised of approximately 50% lump and 50% fines iron ore.

Now to coal. Due largely to tough year-over-year comps, our third quarter sales volume decreased 2% to 1.6 million tons from 1.7 million tons last year, driven by lower sales tons at our Oak Grove Mines. You will recall Oak Grove had higher sales volume during last year's third quarter, as we pushed to catch up on customer commitments resulting from the tornado damage and related force majeures last year. Oak grove's decrease was partially offset by higher sales at the Pinnacle and Logan County mines, due to strong production volume.

Production at Pinnacle Mine was exceptional during the quarter. Importantly, we have completed all of our development work in time for Oak Grove's fourth quarter long wall move. During the quarter we experienced good geological conditions which helped the team deliver a solid operating performance and cash cost results, which Terry will cover later on in the call.

For 2013 we are maintaining our sales and production volume expectations of approximately 7 million tons, largely comprised of met coal. In 2014, Cliffs expects to sell approximately 6 million to 7 million tons from its North American coal business. Currently we have a minimal amount of our 2014 met coal volume committed but not priced. Discussions with customers are expected to take place over the next few weeks.

In closing, let me reemphasize that cost cuts are gaining traction, and we're carefully reviewing the major investment decisions before us, especially Bloom Lake's second phase. Securing the longer term sustainability of our core operations through long-term sales contracts and prudent capital allocation decisions is essential. Our focus on improving our cost profile across the organization will not abate, as that is key to our competitiveness in times of volatile pricing, and we expect this effort to continue under Gary's leadership.

So with that, I'll turn the call over to Terry for a review of the financial highlights. Terry?

Thank you, Kelly.

A few impressive highlights to point out before I jump into the financial details. Third quarter operating income nearly tripled; year-to-date cash from operations increased 149%. Year-to-date SG&A expenses are down 17%; and our year to date EBITDA is $1.1 billion. Needless to say, things are moving in the right direction at Cliffs.

Consolidated revenues for third quarter were $1.5 billion, slightly higher than the previous year. This was driven by a 17% increase in seaborne iron ore pricing, to an average of $133 per ton, or 62% FE fines product. Partially offsetting this was lower market pricing for met coal products and a 2% decrease in global iron ore sales volume.

Cost of goods sold decreased by 11% to $1.2 billion, primarily driven by lower cost rates across all our business segments. Operating income for the third quarter increased 194% to $224 million. The increase was primarily driven by higher consolidated sales margin and significantly lower exploration expenses. During the quarter we reduced exploration spending on drilling and other professional services as well as scaled back on chromite-related spending.

Our third quarter 2013 SG&A expenses were $71 million and reflected certain special items. These items included a $10 million litigation judgment expense and an $8 million in severance costs related to actions taken to reduce our corporate cost profile. Excluding these special items, third quarter SG&A expenses were $53 million, a 13% decrease when compared to the year-ago quarter.

During the third quarter of 2013 miscellaneous net expense increased to $44 million and included an $18 million related to an oil spill. In early September, approximately 1,300 gallons of bunker oil spilled into the Bay of Sept-Iles from our port in Eastern Canada. Although the cost of the cleanup negatively impacted the quarter results, we have appropriate insurance coverage and have begun working with the insurance carriers on the recovery process.

Miscellaneous net also included a penalty of $16 million related to minimum take-or-pay volume commitments with the QNS&L rail line, as a result of Bloom Lake's delayed expansion. Going forward, we expect to incur QNS&L penalties of roughly $15 million to $20 million per quarter. Unfavorable foreign currency remeasurements of $14 million were included in the quarter's miscellaneous net expense. These items were partially offset by $6 million in proceeds from insurance recoveries.

Third quarter 2013 results included an income tax expense of $66 million versus a benefit of $64 million reported in last year's third quarter. We increased our full-year 2013 income tax effective rate to 13% from our previous expectation of 2% including discrete items. The increase in the expected income tax effective rate was driven by higher full-year taxable income due to increased iron ore pricing and lower costs. As a result of the higher expected full-year tax effective rate, our third quarter's income tax expense included $38 million of expense attributed to the first half of 2013.

Despite a number of unfavorable one-time items incurred during the quarter, we reported third quarter 2013 net income [attributed plus] common shareholders of $104 million, or $0.66 per diluted share. This compares to $85 million, or $0.59 per diluted share in the third quarter of 2012.

Moving on to liquidity and capital structure, in the third quarter of 2013, the Business generated $297 million in cash from operations versus generating $308 million in the third quarter of 2012. At quarter end, we held $299 million in cash and cash equivalents. We invested $241 million in capital expenditures, with a significant portion allocated to the Bloom Lake Mine during the quarter. Also, we paid down our revolving credit facility by $60 million and collected $62 million in cash proceeds from equipment loan financing arrangements. These loans will go towards funding capital equipment in our eastern Canadian iron ore operations.

At quarter end we had $3.3 billion in total debt, including $380 million drawn on the revolving credit facility. We intend on improving our credit profile throughout the remainder of the year by continuing to de-lever the balance sheet through repayments of our revolving borrowing. We also reported depreciation, depletion, and amortization of $153 million during the third quarter of 2013.

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 September year-to-date average iron ore price of $135 per ton as a proxy for our full-year average price. It is important for me to stress that this is not our internal iron ore price outlook for the year.

In US iron ore, revenue per ton increased to $113 from last year's third quarter revenue of $111 per ton. The increase was primarily attributed to increased pricing from one customer due to the reset of a contract base, higher year-over-year market pricing for iron ore, and favorable true-up on the estimated hot roll steel pricing. These increases were partially offset by credits to certain customers, unfavorable customer mix, and increased sales to seaborne customers.

Cash cost per ton decreased to $65 from $68 in the 2012 third quarter. The decrease was primarily driven by the absence of a LIFO inventory adjustment, that unfavorably impacted prior year third quarter results. Lower labor and repair and maintenance costs also contributed to the improved year-over-year cash costs.

During the quarter we also changed the power supply company that we use for our Michigan operation. We expect the strategic move to save us tens of millions of dollars in costs annually, and is a primary example of actions taken to reduce company-wide costs.

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 increased to $110, up 3% when compared to last year's third quarter. The higher per ton revenues were attributed to increased year-over-year seaborne iron ore pricing, partially offset by lag pricing that benefits the last year's third quarter. Also, revenues per ton were unfavorably impact by increased freight rates and the quarter's product mix, which was comprised of a higher proportion of iron ore concentrate versus pellet.

During the quarter, Bloom Lake's cash cost increased 5% to $92 per ton, primarily due to increased mine development and maintenance expenses. For 2013, we are maintaining our cash cost per ton expectation at Bloom Lake of $90 to $95. Cash costs per ton at Wabush Mine was $108, down 18% from a year-ago quarter. This was primarily due to the absence of pelletizing cost from our Pointe Noire pellet plant, favorable foreign exchange variances, and decreased cost rates on saleable inventory and lower cost market adjustments recorded in the second quarter of 2013. We are maintaining our cash cost per ton expectation at Wabush mine of $115 to $120 for 2013.

For the entire Eastern Canadian iron ore segment we are maintaining full-year cash cost expectation of $100 to $105 per ton. Turning to Asia Pacific iron ore, revenue increased 28% to $109 per ton from $85 per ton, primarily driven by higher market pricing and the absence of low-grade tons that were sold in prior year's third quarter at a significantly lower price. Revenues per ton for the third quarter of 2013 were impacted by a foreign exchange hedging loss of $3 per ton. Cash cost decreased 22% to $59 per ton compared with $77 per ton in the year-ago quarter. This was due to a favorable foreign exchange rate variances of $8 per ton and lower mining costs due to less waste movement in the third quarter of 2013 compared to last year's third quarter.

Also contributing to the decrease was the absence of cost from Cliffs' Cockatoo Island operation, which was a higher cost mine and included in prior year's third quarter results. We are maintaining our full-year Asia Pacific iron ore cash cost per ton expectation for 2013 of $65 to 70 per ton.

In our North American coal segment, revenue was $99 per ton, down 23% from the previous year result. This was primarily driven by lower market pricing for met coal products and customer mix. The decrease in market pricing was partially offset by favorably priced annual and carry-over contracts.

For full-year 2013 we have approximately 90% of our sales volume committed and we expect revenue of $100 to $105 per ton. Our North American coal cash costs decreased 34% from last year's quarter to $76 from $115 per ton. This was primarily due to improved production volumes and resulting favorable impact on the main's cost per ton rate.

Specifically at Pinnacle Mine, we had record quarter where we produced 1 million tons of coal and achieved the cash cost per ton in the mid-$50s. Lower maintenance and contractor spending also contributed to the improved year-over-year costs. Driven by our operating team's exceptional year-to-date performance, we are again lowering our expected full-year cash costs by $5 per ton to $85 to $90, which includes a long wall move during the fourth quarter.

Looking at our CapEx, we are decreasing our expectation by $50 million to approximately $950 million, driven by lower spending in Eastern Canada. While our decision on Bloom Lake's second phase is pending, we intend to minimize our capital spending as much as possible. Also, we expect full-year 2014 capital expense to be significantly lower than our 2013 guidance.

Turning to our overhead expenses, we are maintaining the our full-year SG&A expense expectation of approximately $215 million, which excludes severance-related costs. We anticipate severance-related costs to be approximately $12 million for the full year, of which $8 million was incurred during the third quarter. As Kelly mentioned earlier, we expect our SG&A expenses to be sustainably lower in 2014. We are lowering our 2013 exploration expenses by $10 million to $65 million for the full year. This is comprised of approximately $15 million related to exploration and $50 million related to our chromite project.

Overall we had a great quarter. We are making the right decisions and taking the necessary steps to increase our competitiveness, enhance our balance sheet strength. We're all enthusiastic about Gary joining the Cliffs team and we welcome his mining expertise and his leadership experience. I'm excited for the opportunity to work with Gary over the coming months to refine our capital allocation strategy, and we look forward to him leading the year-end conference call.

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

Mary, can you please open the lines for questions?

(Operator Instructions) Our first question comes from Michael Gambardella from JP Morgan. Your line is open.

Thank you. Congratulations on your third quarterly earnings beat this year, and the good work on the costs particularly up at Bloom Lake and coal this quarter. My question is, up at Bloom Lake, in terms of the pricing for the quarter, seemed a bit weaker. Are you still discounting any pricing out of Bloom Lake for trial orders with potential new customers?

No, I don't think we're having a lot of discounts when you trial new orders, what we have really is, we're managing is the freight costs that are going over to China that's having an impact on our realized price. That's really the main driver of pricing, as well as the mix of pellet price premium. We have a higher mix of concentrate versus pellets this quarter versus last year.

And then on the Chromite Project, if you can't get this approval on this all-weather road, north-south road what are the options for what to do with the Chromite Project?

Yes, Mike this is Kelly. We've got a couple of near-term options, one of which is we file an appeal, but we also recognize that that's going to take time to work through. So we'll be discussing with the Board at the upcoming meeting, not only what this ruling means to the overall project, but as well the uncertainty of some of the other infrastructure elements, and we'll move forward based on those inputs. But most importantly, we've lowered the expense profile of the project. Not only the result of the land ruling, but just to overall lower our expenses as part of the exploration and chromite-related spend, and we'll continue to do that.

Okay. Thanks a lot, guys. Congratulations again on the quarter.

Thank you.

Thank you. Our next question comes from Sal Tharani from Goldman Sachs. Your line is open.

Thank you. Good morning.

Good morning.

I just wanted to understand the status on Empire Mine, you said next year you will most likely be running at full-utilization rate. What rate is Empire Mine running, and how long of life is left in that mine?

The Empire Mine's life is expected to end at the end of 2014. Historically that mine could do up to 3 million to 4 million tons a year, and for next year we're obviously working through the nomination with our customers. That's built into our guidance for US iron ore of 22 million to 23 million for next year.

Also, in the US, you have one more customer with whom you have a contract, most of it expiring over next couple of years. I was wondering if there are discussions going on, on that front as well to get into longer term, or extend into longer term contract.

Yes, Sal, we are in discussions constantly with our customers, and certainly recognize the importance of that particular customer. So the short answer is, yes, we're in discussions. And it's really part of our overall USIO strategy, which is a very holistic approach to secure our leading position in the marketplace with long-term agreements that we think over time, notwithstanding the normal ups and downs of pricing, lock in, secure volume, give us greater fixed cost leverage, and really, again, are key to preserving that leading market franchise. So that customer you're referring to is absolutely a key part of that building block strategy.

Great. Thank you very much.

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

Can you move on to the next caller, please?

Our next question comes from the line of Mark Parr from Keybanc. Your line is open.

Mary, the caller is not coming through.

One moment, please. Brian, your line is open.

Great, thanks. Can you hear me?

Yes, we can hear you now, Brian.

Great. Could you comment on the 2014 US iron ore cost outlook with North Shore which I believe is a little bit higher cost mine, but then you've also got the fixed cost leverage.

From a cost perspective, we're probably looking at something not too dissimilar from where we are this year. Again, we're in the preliminary stages of setting our budget for next year. I think there will be some opportunities to reduce our costs, but we'll continue to focus on things that we have control over. The one thing that was good is from a power rate standpoint, we're going to see some benefits from our Michigan operations with the recent contract that we just executed.

Got it. And what's the export tonnage baked into that 22 million to 23 million ton assumption?

I think we're still pulling some preliminary numbers on that but I think it would be 1.5 million to 2 million tons for the year, but we'll finalize and disclose that more in our next conference call.

Got it. Great. Congrats on the quarter.

Thanks, Brian.

Thank you. Our next question comes from Timna Tanners from Bank of America. Your line is open.

Good morning, everyone.

Good morning.

So I just wanted to drill down, maybe I'm the only one confused on Bloom Lake Phase 2 and what it all means, but on the one hand you're saying that CapEx guidance is lower into next year. But does that mean that if Bloom Lake Phase 2 doesn't go ahead, or either way? And then there was a lot of talk last quarter about the call about the tailings cost, I just wanted to know if you have any updated information on that, if I have missed it.

Then just a little bit more, if you could, on the take or pay. What makes it 15 versus 20 per quarter? Are there any options around that? Should we expect to continue until the second phase starts up? Along the same line, Bloom Lake Phase 1 I thought was 7.4 million tons. Just confused around the guidance on that.

Timna, we'll try to hit your four-part multiple question, but maybe start with the last one first. We guided, as you will recall on the last quarter, 5.5 million to 6 million tons. Yes, we had earlier guided to 7 million, but this is all part of our focus on really stabilizing and optimizing the mine. And as I said in my opening comments, Phase 1 is not there yet. And so we're continuing to work on that, hence the constant volume outlook, as opposed to anything higher at this point.

In terms of next year's CapEx, even if we were to proceed with Phase 2, and have the Phase 2 CapEx impact 2014, it would-- we would still be looking at an overall lower CapEx number than 2013. Now, we're not in a position to give you definitive guidance on 2014, but that lower than 2013 does contemplate either or with Phase 2. Obviously it will be lower if we didn't go forward with Phase 2.

From a tailing standpoint, I think we said something about a couple hundred million dollars for next year. The team is working hard on reducing that number. Again, from a capital standpoint we want to continue to focus on reducing capital across the board, and obviously tailings is a big piece of that.

I think from a Phase 2, just from a capital standpoint going forward, we want to schedule this capital and spend this capital to ensure that we have -- maintain the strength in the balance sheet that we have now with the cash balances and keep our debt profile to where it kind of is now in the range we're at today. That's critical point of view that we have as an organization going forward.

I think the fourth question, not necessarily in that order, was on the QNS&L penalty, and as we referenced in our comments and in the release, It's all volume driven. So to the extent that we're operating at volumes that we guided to for next year, you should assume a quarterly penalty impact of around $16 million. So it's all about volume and not absorbing that full take or pay commitment.

And that will go on through the delay of phase 2?

Right.

Okay. Thank you very much.

Yep.

Thank you. Our next question comes from Mitesh Thakker from FBR Capital. Your line is open.

Good morning, everybody.

Good morning.

And congratulations on the quarter. Just a few clarifying questions. One is, under 2014 US iron ore volume guidance you mentioned about 55% is seaborne linked which is roughly 12 million tons, and about 2 million tons of export tonnage. Of the remaining 2 million tons is there any tonnage which is like 100% linked to spot price, or something like that, which doesn't have any other contract movements?

Yes, there are definitely. Some of our contracts would reference either the [valid] price settlement or the [flash] pricing settlement.

Is it possible for you to disclose that, or you are still in the preliminary phase, you would like to wait?

We're comfortable with the current disclosures.

Okay. Just on the CapEx question, if we -- my understanding was, that the maintenance CapEx is about $300 million, and then $200 million related to tailings management. The Bloom Lake Phase 2 CapEx which was spending, I think, was mentioned as $450 million before. Can you just provide an update? I know the $450 million could move here or there depending on what you do with Phase 2. Is it possible for you to kind of give us an update on those numbers?

Yes, I think you are in the ballpark from a sustaining capital standpoint as well as the tailings capital. So $500 million sounds in the ballpark from a Phase 2 standpoint. Again, as I mentioned a little bit earlier, depending on our decision, we will execute to ensure that we keep our strength and balance sheet. So we'll manage our cost, manage our cash outflows so we can essentially pay for this if we move ahead forward with our current balance sheet profile.

I would just add, the $450 million, which is really the construction related CapEx to finish, is still a good estimate, but, obviously, if that decision is pushed out there could be an inflation impact on moving that number up. But as we said, I think on prior calls, a substantial amount of the work and the equipment and what needs to be done is well in hand. So there's pretty good visibility and predictability on that number, except to the extent it gets pushed out in time, and again, inflation could impact it.

Thank you very much guys and good luck.

Thank you.

Thank you. Our next question comes from Tony Rizzuto from Cowen and Company. Your line is open.

Thank you very much. Hi, folks. Good to see movement in the right direction. I was very pleased to see the cash cost improvements in US, Asia Pacific, and North American coal. It was much better than we were looking for. I guess I'm a bit surprised, though that the full-year cash cost guidance is maintained. I know there's a lot of moving parts here. Are you expecting fourth quarter costs to increase, or is it just maybe a bit of conservatism on your part?

Yes, I think, Tony, we're looking at our costs, to continue focus on cost control and reducing our costs in the fourth quarter. So I think there's some up side to the cost profile, both from the USIO and APIO standpoint.

if I could, just a little bit update on Bloom Lake with regard to the strip ratio profile, and you indicated that you've now commissioned the in-pit crush convey -- and the overland conveyor, and what impact is that likely to have on costs there specifically?

I think the impact of those are going to actually make us more efficient, and improve our cost profile. From a stripping standpoint, as Kelly mentioned in some of his opening remarks, we continue to -- we need to improve what we're doing now, get more tons out. We're starting to get the right utilization of our mobile equipment and our haul profiles, from a tonnage standpoint, are increasing. But we still to have focus in on opening up these pits and reducing our costs and getting our costs down further and enhancing the performance of Bloom Lake Phase 1, and that's what we're focused on for next year.

Thank you very much.

You're welcome.

Thank you. Our next question comes from Mark Parr from Keybanc. Your line is open.

Thanks very much. Good morning.

Good morning, good to have you back.

(laughs) The first time I was talking to some kind of empty space. I don't know what that was. (laughs)

(laughs) We didn't take it personally, so go ahead.

Well, thanks. I wanted to see if there was any chance about re-energizing, re-engaging Empire. I know there was kind of a development opportunity, perhaps, that might have been very expensive. I don't know if that's even on the table right now. And then also, and, again, I missed part of the prepared comments, but from a CapEx perspective is there anything that you have allocated at this point as far as production of DR-grade pellets?

Mark, this is Kelly.

Long time no hear, man.

Yes, exactly. Good to hear you and see you.

Cliffs is a long ways from where we used to get together.

We did, and we'll talk about that off-line. But, anyway, in terms of the overall CapEx guidance does not really contemplate any capital at this point allocated to DR. As we've talked before, we've done testing at our North Shore facility and feel comfortable and confident that we can produce a low-silica DR-grade pellet. But until we see the evolution of a customer, there's no point in allocating capital to that at this point in time. More importantly, we're bringing up the two North Shore furnaces just because of our overall core USAO volumes, increase expectation for next year.

And related to Empire, you're right, Mark. In 2008, I think it was July, we announced an extension of that life. And then as the market collapsed we pulled back on those plans. But the thing to note there is, we've got a partner in Empire so the decision to extend the life would be a much more complicated decision, it's not a sole decision. Certainly, we've considered it, but I think our plans right now are for it to reach its end of life in 2014.

We have to assume that is the base case, Mark, and that's the current outlook.

Okay. Thanks, guys. Good luck.

Hey, Mark, we understand that you may be retiring here at the end of this week. So I just want to congratulate you and thank you for your very objective coverage over the years.

Thank you for the nice thoughts. It's truly been a pleasure to have been able to be part of the saga that is Cliffs Natural Resources, and I really would wish you all the best and look forward to some really good things in the upcoming years.

Thank you.

Thanks, Mark. Same to you.

Thank you. Our next question comes from Luke McFarlane from Macquarie. Your line is open.

What I was interested in is your coal business mainly. Looking into 2014, how many -- do you have any sort of percentages of how many of your contracts are priced on annual contracts? And how you think that will change between 2013 and 2014?

The way to think about it, we normally would export about half of the volume in US iron ore, sorry, to North American coal, to the export market, and that's typically on a Japanese fiscal year, so that's on a lagging kind of mechanism. Right now as Kelly mentioned we don't have anything priced. We do have some tons committed. Usually, we would have about, I don't know, 60% to 70% of our volume committed in price by the first quarter, or maybe April time frame.

Yes, usually what happens right now, is the domestic coal producers -- or coal users will start negotiating today, lock those contracts in, and then the international stuff is through the first quarter. So by the time we get to the second quarter call, we have a pretty good idea of what the commitments are.

I noticed that your coal production this quarter was quite a lot higher than your sales. That something to do with timing or is that more the fact that you sort of ramped your production to lower cash costs as much as could you, I suppose?

It's a high fixed cost business, and our Pinnacle Mine actually did very well, and this quarter they had a record, as I mentioned on some of the comments, and that's exactly it. And our expectation is we'll be able to move these tons during the rest of the year.

Thanks.

thank you. Our next question comes from Paul Massoud from Stifel Nicolaus. Your line is open.

Good morning. Thanks for taking my question. I've just got a couple of questions on Bloom Lake, then maybe a follow-up on coal. First on Bloom Lake, the 5 million to 6 million guidance that you put out there, originally Bloom Lake, at least Phase 1, was supposed to hit 65% 66% Fe content. Is that still the target, and how much of the tonnage reduction has to do with hitting that mark? And if that is the case are you still seeing a percentage premium on that product?

A, we are still getting a premium. It's a high quality Fe product. I think what you are referring to earlier in our ramp-up of Phase 1, reaching the silica spec, that had a bit of an impact on volume, but that's not really the driver right now. Our largest off-take customer, Wisco, is extremely pleased with the quality and the consistency of the product. And while the Phase 1 is indeed below the nameplate capacity at this point, it's back to focusing on stabilizing and optimizing that. There's no point in trying to ramp up the volume if we don't have the blending and all the development work where it should be.

Are you still targeting $65 cash cost?

Long-term, absolutely. That will require to us bring on Phase 2.

Okay. And then as far as the transport costs that you had indicated might have had an impact, or had an impact on what your ultimate realized price was, how much of that is between the mine and the port? And there a potential for some optimization there?

It's normally $30 to $40 a ton. For the coal business? Is that what you're referring to?

No, this is for Bloom Lake.

Right now the current freight rates from eastern Canada to China, is $37 a ton. We've seen them spike in the fourth quarter which will impact our realizations. In the current quarter and the third quarter 2013 they were about $30 per ton. That was baked into our realizations. So that could impact us slightly but they have been moving down.

Your comment, I think, was around also from the mine to the port. We have a contract with QNS&L for a minimum standpoint at a set rate that we're locked into. It's a matter of us getting the tons to the port and shipped.

The rate's there, just the volume's not there.

Understood. And then finally, on the coal business, just a follow-up to Luke's question, you said you really didn't have anything priced. I'm assuming that's just on the met coal side. For the thermal coal do you have contracts priced?

It's minimal. Our thermal coal business is probably, maybe half a million tons a year so the majority of it is met coal.

That's all. Thank you.

Thank you. Our next question comes from Garrett Nelson from BB&T Capital Markets. Your line is open.

Thanks for taking my question. Congratulations on another strong quarter.

Thanks.

Have you considered transactions that can bring in cash to fund Bloom Lake Phase 2, such as monetizing non-core assets, bringing in JV partners at some of the operations, or even divesting some of your pelletizing or processing facilities? Have you thought about that, and would that make sense?

Let me -- it's Kelly, I think the way to answer that, as we framed it earlier in our comments, is two key components. We've talked a lot about Phase 1 and getting that optimized, but the other key point of criteria is our balance sheet and our debt profile. And so we've got to de-risk the capital, so there could be a lot of different options on the table. We do have an existing partner in the mine, but that -- maintaining our current debt profile and protecting the strength of our balance sheet will go into that. So to the extent there are options that could help de-risk the capital we'll look at a lot of different things.

Okay, great. Then on the coal side, volume guidance of 6 million to 7 million tons next year, that's a little bit of a step down from this year if you use the midpoint of that range. Are you planning on running Pinnacle and Oak Grove at full capacity and then maybe taking down some of the high vol and thermal mines?

I think our guidance is pretty consist to what we've guided this year so I think there's not been any real changes to be honest with you.

Thank you.

Could be a timing from your midpoint calculation. Just timing, expectation is same as last year for 2014.

Right. And then on the commitment side, how many tons do you currently have commitment priced for 2014 for coal?

We just covered that in a prior question. It's too early at this point. We would just be in the early stages of discussions in terms of 2014 commitments as we go into the year end, and typically those start to come together in the first quarter.

Sorry about that. I joined late.

Do you have follow-up? I didn't catch that. Okay.

Thank you. Our next question comes from Evan Kurtz from Morgan Stanley. Your line is open.

Good morning. Thanks for taking my question.

Sure.

I just want to make sure I heard you right at the beginning of the call. I think you said that North American pellet realizations would be roughly kind of flat in the 110 to 115 range next year. Assuming flat year on year CFR iron ore prices and hot rolled. If that's correct, we've heard recently from both AK and SR, have kind of perpetuated up, that they've renegotiated contracts, and they seem to be fairly happy that pricing might come down for them. What are some of the offsets to that if you're able to keep pricing flat?

Well, the main offset, of course, is we're managing our costs, and we've alluded to the full-year impact of the new power deal that we have. But I think the more important thing to keep in mind on this is, we're looking at our USAO business on a very holistic basis, on a long-term basis. It's the annuity business for Cliffs. Our primary objective at this point, has been to secure long-term agreements. We've secured agreements that have a positive impact on volume for 2014. You alluded to the comparability of pricing that we expect to see in 2014. Bringing on North Shore gets us further fixed-cost leverage.

We're not focused on any one or two particular contracts. It's really looking at the overall business. And from our standpoint, we're very pleased with these -- both these contracts and hope we can lock in some other long-term ones as well.

Got you. And then just one -- maybe one more on Bloom Lake. I think you said on the last call, that you're opening up several faces in the pit to try to work on the sequencing issues between the magnetite and the hematite mill feed problem. I wonder if there's any sort of update there. Did you learn anything new or get any closer to solving that issue?

From an operational standpoint, we need to focus in on opening these pits and get the right stockpiles, the right blends to be able to feed the first mill, phase one, get better yields out of that mill. But from a standpoint of, it's really around the mine blend at this point in time. I think the concentrator is operating as expected, when you bring volatile sort of mixes into it, you are going to have a mixed performance. But right now I think the team is doing a good job of getting the maximum yield out of the mill.

This is an area, too, where we really look forward to Gary coming on board and having an opportunity with this, the extensive operating background and experience, particularly in Canada, that he has. We think he will be able to take a real objective, critical look at what we're doing, and see areas for improvement. So that's another key factor.

Got you. Maybe just one last one quickly on coal if I could. I know a bunch of questions have been asked on pricing already for 2014. But if you look at the 10-K, I think you said last year that did you about two-thirds on the export market and one-third domestic contracts. Is that still a pretty good number that we should think about going forward?

I think historically we are probably more of a 50/50 blend for domestic and international, and I think that's sort of what we're thinking for 2014 as well.

Great. That's really helpful. Thanks a lot, guys.

Thank you. Our next question comes from Harry Mateer from Barclays. Your line is open.

Hi, guys. Thanks. Couple questions. First, so when you say you want to maintain your current debt profile should we take that to mean that will you not finance a potential gap between operating cash flow and CapEx with that?

I think we have to deal with the situation as it occurs. We have some seasonality in our business in the first quarter with the Great Lakes being closed, but our ideal goal is to essentially fund our CapEx through operating cash flow. That's essentially -- that's our goal going forward.

Okay. And then if the -- let's say, Phase 2 goes ahead. I guess, what I'm trying to get at, what you mean when you say maintain current debt profiles. Is that maintaining like a debt to EBITDA ratio, or keeping your debt balance flat, or improving it?

I think it's a combination. We look at all the metrics. Of course, pricing a definite impact on our debt to EBITDA ratio. As you know, in the first quarter next year, holiday from debt-to-covenant standpoint expires. We'll have to manage through that, but ultimately we'd like to keep our debt closer to the $3 billion mark.

In terms of maintenance CapEx, is there any sense you can give us for how that breaks down across the businesses?

We'll provide some more outlook on that in the next call.

I think the key message was, our CapEx would expect to be lower but we're not at the point to get granular about our guidance for 2014.

In terms of the revenue per ton guidance for next year in US iron ore, you indicated you're kind of expecting relatively in-line number for 2014 relative to 2013. Can you just walk through the mechanics of that a little bit more? Given my understanding that on the contracts you guys just signed, there were some price concessions there?

Ultimately it's about the mix and volume overall. Again, as I said earlier, we're not looking at our USIO business let alone our price guidance for 2014 through the lens of two customers. We're looking at it through the entire business and the portfolio of customers that we have, and there's obviously a mix there depending on nomination. So it's a very holistic view to get to us to that guidance.

Okay. Thanks very much.

You're welcome.

Thank you, this concludes our Q&A session for today. I would like to turn the conference back to Mr. Jim Kirsch for closing remarks.

Thank you Mary. Just a couple of quick comments. We should be all about, and what we are all about, is improving and optimizing shareholder returns. In our mind, we do that through a better and more efficient allocation of our capital and improved cost profile, and ultimately better sales margins which should lead to those enhanced returns. And as I think about the third quarter, which the guys have done a nice job of profiling for you, I call a good start. We've gotten a great start to improving those returns.

A couple of other key accomplishments, obviously, Gary Halverson is on board. He starts November 18. However, the onboarding process has already begun. I'm looking forward to his skill set, and particularly his financial acumen and leadership, helping us achieve our goals of improved returns. Cost reductions, again, a good start. Continuous improvement, some other activities we've got going will enable us to continue to improve there. We've made good steps in predicting the US franchise. We've looked at that very holistically, and we like where we're going in that direction.

And then finally, to focus and re-centering ourselves in terms of our capital allocation and returns, and focus on Bloom in terms of its improvement and moving forward. So, again, third quarter is a good start. Our expectations are to enhance that and report that back to you in due course. And I appreciate and thank you for taking the time to join us on the call this morning. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.