Cleveland-Cliffs Inc (CLF) 2013 Q4 法說會逐字稿

Good morning. My name is Ben, and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources' 2013 fourth-quarter conference call.

(Operator Instructions)

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

Thanks, Ben. I'd 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 in Forms 10-K and 10-Q, and news releases filed with the SEC, which are available on our website.

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

We will also discuss our results, excluding certain special items, which is a non-GAAP financial measure. A reconciliation for Regulation G purposes can be found in our earnings release, which is posted on our website at cliffsnaturalresources.com.

Joining me today are: President and Chief Executive Officer, Gary Halverson; Executive Vice President and Chief Financial Officer, Terry Paradie; and Executive Vice President External Affairs and President Global Commercial, Kelly Tompkins. At this time, it is my pleasure to introduce Gary, who will discuss the fourth quarter's results.

Thank you, Jess, and thanks to everyone listening on today's call.

I'm joining Cliffs at a time when strategic direction, financial discipline, and strong decisive leadership needs to be implemented quickly. On my second day on the job, I made the decision to indefinitely suspend the chromite project, and as a result, we are reducing our 2014 chromite spending by $45 million. Also, not only did we put the immediate brakes on capital spending in the last two months of the year, but we are cutting our 2014 capital spending by over 50%.

We've also idled underperforming assets, paid down debts, increased liquidity, and set further cost-reduction targets in our 2014 SG&A and exploration expenses. I know full well the issues that are of most concern to our investors, and I am fully committed to finding the most value-enhancing solutions for shareholders quickly.

My first three months have also given me a good perspective on the opportunities and challenges we face in the near and longer term. I visited all of our sites, and had the chance to see the mines firsthand, review the financial performance of each business unit, and most importantly, meet the talented people running our operations. I think it's pretty important to point out that the vast majority of Cliffs' operations are running quite well.

The full-year costs in both Asia Pacific iron ore and North American coal decreased significantly, and our US iron ore costs remain relatively flat year over year. Another area of cost-cutting success clearly recognized in our results were lower SG&A and exploration expenses. All of this was a good start, but it's not enough. We must be more aggressive in cutting costs, especially amidst the volatile pricing environment.

So, being new to this Organization, I've identified two fundamental changes in the way we conduct business that have already been put in motion and will continue to evolve under my leadership. The first change I believe is a true paradigm shift in the way we apply well-defined financial metrics and discipline to our capital spending and future growth. An aggressive growth agenda has come at the expense of returns to our shareholders. Simply put, this is not an acceptable trade-off.

Fiscal restraint with a focus on cash-flow generation and balance-sheet discipline must guide our decisions. Growth will come in due course, but only after we've demonstrated improved performance with the assets we currently own.

As you saw in our press release earlier this week, we drastically cut our 2014 capital spending budget. In fact, by more than half, to around $400 million. This is largely comprised of sustaining and license-to-operate spending, and approximately $100 million in carryover capital -- cash capital from 2013.

Our first priority for any additional cash generated over and above our capital spending and dividend payments during the year will be to lower our net debt position. We would then evaluate a range of options for the next best use of the capital, all of which must have attractive return rates and drive long-term shareholder value.

The second fundamental change is actually just getting back to basics, which includes improving productivity, reducing costs, and rightsizing our Organization to meet the Business's immediate needs. This begins with the top layer of management. I've recently initiated a reorganization that will de-layer the senior executive team, and provide a direct reporting line from the operations management to me.

I believe this structure will enhance the speed and quality of our decision making, and drive accountability to all levels within the Organization. Additionally, we will continue to streamline the Business's support functions by eliminating duplication, and ensuring our resources are directed to the mines, which is where the true value in our Business is generated.

Moving to economic considerations, all signs are pointing to solid economic growth in the US in 2014. Supported by higher year-over-year motor vehicle production, an uptick in building construction, and other fundamentals, of which is expected to support domestic steel production and the related demand for steel-making raw materials.

As for China, while growth may be moderating, we do anticipate annual GDP growth to remain above 7% in 2014, still a strong rate of development for the world's second-largest economy, and one that remains supportive of the broader commodity demand, including iron ore. Although recent credit tightening measures have constrained growth in the near term, these reforms would support a stable economy and steady demand for steel-making raw materials in the long run.

While the Chinese and US economies are constructive, we do acknowledge that there are multiple factors impacting price volatility that are simply out of our control. What we can control, however, is the manner in which we deploy capital, reduce costs, and improve our overall performance.

One last macro point that I would like to highlight is the growing quality premium that has begun to emerge for higher-grade iron ore products such as Bloom Lake's concentrate, as well as pellets and lump products. A few factors are driving this premium differential, including China's increased pressure on emission reductions for industrial manufacturing, including steel production, and signs of recovery in Europe's steel-making utilization rate. While we have not baked the full impact of these higher premiums into our full-year revenue realization assumptions, we are encouraged to see this trend in the marketplace.

Now turning to the performance of our business segments during the quarter. In US iron ore, fourth-quarter sales volume of 6.2 million tons was relatively flat compared to the year-ago quarter, and included 650,000 tons of export sales to European and Asian customers. For the full year, we sold 21.3 million tons versus 21.6 million tons in 2012. Also, 2013's higher-than-expected iron ore price enabled us to export a record 2.4 million tons from the US into the seaborne market.

For the full year of 2014, we are maintaining our expected US IO sales and production volumes of 22 to 23 million tons, which includes selling roughly 1 million tons of pellets into the seaborne market. For the first quarter of 2014, we expect slightly lower volumes due to the extremely cold weather that has hit the Midwest over the past month. At this point, we expect these shipments will be made up in the year's subsequent quarters.

Turning to eastern Canadian iron ore. Before I touch on the quarter's results, I would like to add some further context to our Bloom Lake announcement earlier this week. We have cut the project's 2014 capital budget to largely include what's required from a sustaining and license-to-operate standpoint. By adjusting our tailings and water management strategy, utilizing different vendors, and by spreading the spending over more years, we have been able to lower the capital deployed for tailings and water management in 2014.

We will continue to operate the first phase, given the current pricing environment. We will not spend capital for the sake of increasing volume growth. Maximizing our free cash flow and reducing net debt is our first priority.

Bloom Lake is an ore body well suited for a global market that increasingly values quality. However, it also requires time and capital to be properly developed, built out, and operated to its full potential. Accordingly, we will only spend the minimum required capital until we develop the path that extracts the highest value from Bloom Lake for our shareholders. We are examining every alternative for this asset, which could include a range of outcomes from strategic partnering to a sale.

I want to be clear that running phase I is not a long-term solution, and if pricing substantially declines for an extended period, we will not rule out idling this operation. In the meantime, I have charged my team to reduce Bloom Lake's capital and operating costs as much as possible.

From an operating expense perspective, I believe improved cash costs at Bloom Lake are achievable. Over the past four months -- extremely cold Winter months, I might add -- Bloom Lake's production volume has averaged over 500,000 tons of concentrate per month. While these volumes are still below the original expectations, and cash costs remain unacceptably high, production volume consistency is a critical step forward.

Turning to Wabush, earlier this week we announced the idling of our Wabush Scully mine. Over the past 24 months, we undertook a number of initiatives at Wabush to lower costs, improve productivity, and increase long-term profitability. Unfortunately, these initiatives did not impact the operation's cost structure enough to justify continuing to run this mine.

We understand this is a very difficult time for our employees and the community impacted by this decision, and we'll do our best to assist them through this transition. We expect to incur approximately $100 million in cash costs related to the Wabush idle in 2014.

For the fourth-quarter results, ECIO sales volumes decreased 6% to 2.2 million tons from 2.3 million tons in the prior year's comparable quarter. This was primarily driven by December's extremely cold weather, which limited the loading of ships at that Pointe Noire port.

On the positive side during the quarter, we loaded and shipped the Chinamax vessel from the port of Sept-Iles to China, the first ship of that size ever loaded in North America. For 2014, we expect to produce and sell 6 to 7 million tons from our ECIO business segment. This is comprised of approximately 500,000 tons from Wabush, and the remainder from Bloom Lake. All expected sales tonnage from this segment is fully committed for the year.

Now, turning to Asia Pacific iron ore, fourth-quarter sales volume increased 5% to 3 million tons from 2.8 million tons in the prior year's comparable quarter, which was driven by the favorable timing of shipments in 2013. Over the past year, we conducted a significant amount of work to identify cost improvement efficiencies in various systems, processes and activities. In 2014, we expect the implementation of these efficiencies will begin to materialize in our results.

While the weaker Australian dollar is favorably impacting our costs, these efficiencies improvements have helped us offset inflation in a number of our inputs, from labor to transportation rates. As we approach the end of the mine's life in 2020, the team will be looking at ways to sustain the product quality, as well as opportunities to offset Australia's inflationary cost pressures. In 2014, we expect to produce and sell 10 to 11 million tons from our APIO business, comprised of approximately 50% lump and 50% fines.

Now turning to North American coal. Due largely to lower domestic demand and export sales, our fourth-quarter sales volume decreased 7% to 1.8 million tons from 1.9 million tons last year. On the operational side, 2013 was a remarkable year for our North American coal team. They achieved record sales and production volumes, and significantly lowered costs across the segment. While meaningful, these achievements have been partially overshadowed by an oversupplied market that has negatively impacted pricing.

Although our cash cost profile enables us to be competitive in North America, we will continue to evaluate the economic implications that lower coal pricing could have on this Business. In the meantime, we are viewing the current pricing situation as an opportunity to increase market share and attract superior talent in what continues to be a war of attrition in the domestic coal market.

Also, last week we brought back a second shift of workers at our Toney Forks thermal coal mine in West Virginia, which will drive slightly higher thermal coal volumes year over year. For 2014, we are increasing our expected production and sales volume to 7 to 8 million tons, comprised of 900,000 tons of thermal coal, with met coal making up the remainder.

Now, before I turn it over to Terry, I have one last item to address. Recently one of our shareholders publicized the recommendation for steps we could take to enhance shareholder value. We welcome open communication with all of our shareholders, and both the Board and management are open-minded to new value-enhancing ideas. In the interest of time allotted for today's earnings call, I would refer you to the detailed press release we issued this morning that addresses our analysis for several of the recommendations we received. We will not take questions regarding this matter during the question-and-answer session on today's call.

And now I'll turn the call over to Terry for his financial review.

Thanks, Gary. I'd like to start off highlighting a few impressive points from 2013, before I jump into the financial details. We achieved full-year adjusted EBITDA of $1.5 billion, our full-year cash from operations more than doubled to $1.1 billion, and we generated $157 million in free cash flow after dividends. We also cut our year-over-year SG&A and exploration expenses by $135 million, or 32%.

Our very strong performance enabled us to repay all borrowings on our revolving credit facility at year end. Also, we exited the year with $2.7 billion of net debt and a debt-to-EBITDA leverage ratio of less than 2 times.

As many of you know, our revolver covenant suspension period ends on March 31, 2014. At that time, we will resume formal remeasurement of our debt-to-EBITDA leverage ratio with a maximum allowable level of 3.5 times. In the near term, we are comfortable with this covenant given our current balance sheet position, our significant lower 2014 capital spending expectation, and additional cost-cutting opportunities on the horizon. Despite this, we will not stop looking for areas to improve our operational and financial performance.

Moving forward, we will still instill a great discipline in our capital allocation process, so that we are well positioned for the future. This starts with an over 50% cut to our 2014 capital spending budget to a range of $375 million to $425 million for the year. This range includes approximately $100 million in year-over-year carryover capital, and $275 million to $325 million in new license-to-operate and sustaining capital. As we generate cash from operations throughout the year, we will look for ways to improve our financial position and deliver value to our shareholders.

Moving on to our results for the quarter, consolidated revenues for the fourth quarter were $1.5 billion, slightly lower than the previous year. This was driven by lower market pricing and sales volume for the metallurgical coal products, partially offset by a 10% increase in seaborne iron ore pricing to an average of $135 per ton. Cost of goods sold decreased by 6% to $1.2 billion, primarily driven by favorable foreign exchange rates, lower costs at Wabush, and lower cost rates in our North American coal business.

Our fourth-quarter 2013 SG&A expenses were $64 million, and included $8 million in severance costs. Excluding severance costs, fourth-quarter SG&A expenses were $56 million, an 18% decrease on a comparable basis year over year.

Fourth-quarter exploration expenses also decreased significantly by 72% to $13 million. The decrease was driven by a cut to drilling and other professional services in our global exploration group, and lower chromite-related spending.

In November, we announced that we are significantly scaling back on our chromite project development work due to the uncertain timeline and risk associated with the infrastructure to bring this project online. With this change to the project's timeline, we took an $81-million goodwill impairment charge related to the chromite project during the quarter.

As reported in our announcement earlier this week, we recorded $183 million in charges related to the idling of our Wabush mine in eastern Canada. These charges were comprised of $155 million non-cash asset impairment charge, which was reflected within the goodwill and long-lived asset impairment line item in our income statement, and a $28-million supplies inventory write-down charge, which was reflected in the quarter's cost of goods sold.

Our miscellaneous net was income this quarter, and has increased to $50 million, and included $45 million in insurance recovery proceeds related to our North American coal mines, and a favorable impact of $28 million related to foreign currency remeasurements. Miscellaneous net also included a penalty of $16 million related to minimum take-or-pay volume commitments with the QNS&L rail line.

Excluding some of the one-off items incurred during the quarter, we reported fourth-quarter 2013 adjusted net income attributable to Cliffs' shareholders of $218 million, or $1.22 per diluted share. This compares to $89 million or $0.63 per diluted share in the fourth quarter of 2012.

Before I review the segments' financial performance and outlook, I would remind you that we are providing 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 January year-to-date iron ore price of $128 per ton as a proxy for the full-year average price. It is important for me to stress that this is not our internal outlook on iron ore pricing for the year.

In the US iron ore, revenues per ton increased to $113 from last year's fourth-quarter revenue of $112 per ton. The increase was primarily attributable to higher pricing for one customer due to the reset of their contract base rate. This was partially offset by customer mix, increased sales to seaborne customers, which have lower realized pricing due to higher freight and handling costs, and an unfavorable true-up on hot-rolled steel pricing.

Based on the January year-to-date average iron ore price of $128 per ton, the full-year 2014 revenue-per-ton expectation was $105 to $110 per ton. The year-over-year decrease is driven by a lower iron ore pricing assumption and customer mix.

Our USIO revenue-per-ton sensitivity for every $10 change in iron ore pricing is $2 per ton, and reflects fewer tons exposed to seaborne pricing versus 2013 sales mix. This is driven by a change in one customer contract, and less expected seaborne export tons.

Cash costs per ton for the fourth quarter remained relatively flat, increasing less than $1 to $66 per ton. The quarter's cash costs resulted in approximately $0.50 per ton in severance-related costs. The remainder of the increase was due to lower production volumes and the resulting unfavorable impact on the mine's cost-per-ton rate.

Also, I think it's important to highlight that our full-year 2013 cash cost per ton increased only $0.58 versus 2012 due to exceptional cost controls by our USIO operators and supply chain group. Each year, we are faced with rising energy and labor costs, and the team has done a tremendous job finding ways to offset those increases.

Our 2014 cash-cost-per-ton expectation for US iron ore is $65 to $70, relatively flat with 2013's results. Our expectation includes increased fixed-cost leverage to modestly higher sales volumes, offset by higher maintenance costs.

In eastern Canadian iron ore, revenue per ton increased to $109, up 8% when compared to last year's fourth quarter. The higher per-ton revenue was attributed to 10% year-over-year increase in seaborne iron ore pricing, and higher quality premiums versus the prior year.

During the quarter, Bloom Lake and Wabush mine realized quality premiums of $12 and $8 per ton, respectively. These increases were partially offset by the quarter's product mix, which was comprised of a higher proportion of iron ore concentrate and pellets versus the prior year's fourth quarter, and higher freight rates.

During the quarter, Bloom Lake's cash costs increased 5% to $90 per ton, primarily due to higher mining costs driven by increased year-over-year strip ratios, and additional overburdened removal activities. Cash cost per ton at Wabush mine was $143, down 14% from the year-ago quarter. This was primarily due to the absence of pelletizing costs from the Pointe Noire pellet plant. The decrease was partially offset by previously mentioned Wabush mine supplies inventory write-down of $28 million, or $34 per ton.

Our full-year cash cost expectation for Bloom Lake is $85 to $90 per ton. We also expect to incur approximately $16 million per quarter in rail penalties related to Bloom Lake, which is reported in our miscellaneous net line item in the P&L.

Turning to Asia Pacific iron ore, year-over-year revenues increased 9% to $109 per ton, from $100 per ton in last year's fourth quarter, primarily driven by higher market pricing and lump premiums. The fourth-quarter revenues were unfavorably impacted by a foreign exchange hedging loss of $2 per ton compared to a gain of $2 per ton in the prior year's fourth quarter.

Cash cost per ton decreased 11% to $59 compared with $66 in the year-ago quarter. This was primarily due to favorable foreign exchange rate variances of $7 per ton. Our full-year 2014 APIO cash cost expectation is $60 to $65 per ton, slightly lower than the previous year's cash cost range, primarily due to favorable foreign exchange rate assumptions.

In our North American coal segment, revenue was $90 per ton, down 19% from the previous year results. This was primarily driven by lower market pricing for metallurgical coal products and customer mix.

For the full-year 2014, we have approximately 50% of our sales volume committed at approximately $87 per short ton at the mine. Based on this, we expect 2014 revenues of $85 to $90 per ton. This expectation includes all anticipated 2014 thermal coal sales volume, which will be slightly higher than 2013's volume, as Gary mentioned earlier.

Our North American coal cash costs decreased 13% to $85 from last year's fourth-quarter results of $98 per ton. This was primarily due to a significant lower year-over-year cost rate driven by improved operating efficiencies throughout the year.

For the full year, cash cost decreased $20 per ton, or 19%, to $85 per ton, again, driven by operating efficiencies and improved production volumes, and the resulting favorable impact on the mine's cost-per-ton rate. Our full-year 2014 North American coal cash-cost-per-ton expectation is $85 to $90 per ton.

Our very strong fourth-quarter results enabled us to generate $460 million in cash from operations, versus generating $239 million in the fourth quarter of 2012. At year end, we had $336 million in cash and cash equivalents. Also during the quarter, we reduced capital expenditures by 64% to $119 million versus $334 million in the prior year's fourth quarter. This was driven by stronger focus on financial discipline, and reduced spending in eastern Canada. During the quarter, we collected $103 million in cash from equipment loan financing arrangement, which was included in our total long-term debt of $3 billion at year end.

Turning to our 2014 overhead expenses, we are expecting another significant year-over-year decrease of approximately $90 million in our expected full-year 2014 SG&A and exploration expenses. For the year, we anticipate SG&A and exploration expenses of $185 million and $15 million, respectively. These decreases are primarily driven by expected reductions in employee-related expenses, outside services, and legal settlements, as well as meaningful lower spending from our exploration and chromite groups.

In summary, over the last few months we've done a tremendous amount of work to de-layer, reposition, and improve the Company's financial profile. While we're starting to gain traction with the quarter's good results, we still have a lot of work to do. The manner in which we are deploying capital and operating this Company is changing. We will be leaner, more efficient, and prepared for the inevitable volatility in commodity pricing.

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

Ben, can you please prompt the callers for the Q&A?

(Operator Instructions)

Mitesh Thakkar, FBR Capital Markets.

Good job on the quarter.

Thanks, Mitesh.

Can you just talk a little bit about Bloom Lake Phase II and some incremental color in terms of how should we think about tailings CapEx this year and next year? And like you said, if Bloom Lake Phase I doesn't work, how should we think about some of the other options which you might have?

Sure, Mitesh. Based, I think we made it pretty clear that we're not going ahead with Phase II on our own. We've determined that the Phase I with reduced capital spend and focusing on operating costs, performance is where we have to stay right at this point. I think the guys have further work to do in that in the short-term.

But if I look at the longer-term, we're not going to be running Phase I forever either. This is a transition period to look at opportunities from a strategic partnering, and up to and including a sale, just to give the range. It's too early to say what that will turn into for us at this point, but we've had interest from financial partnering from customer interest, and Kelly may add further to that, but overall, the focus here is to reduce and get better performance out of Phase I right now while we look at those strategic options.

On the tailings side, the spend on tailing has been dropped to about $65 million. The main driver for that is the structure in the tailings pond was really focused around a 12 million to 14 million ton annual capacity. I'd change that to focus on what we have right in front of us on Phase I, which is 6 million to 7 million tons. Because of not having as large a basin, that's actually allowing us to run a more minimized capital spend in that.

That doesn't mean that you wouldn't have to spend more money on capital with Phase II, but that's too early right at this point. We're looking just at Phase I and looking at how we can convert this asset into better value for our shareholders.

Great. And you already started cutting a lot of costs. What are some of the other buckets which you are looking at right now? And is there any color you can provide on further reduction in the cost side?

Yes. As we've said, I think the guys have done a great job of obviously reducing SG&A exploration year over year from 2012 across 2013, it dropped $135 million. I've put on the table that we're going to reduce another $90 million for 2014, but I've also, as I mentioned, I'm charging each of my leaders in the regions to look at how they can further reduce costs at each of the mine sites. And I won't get into each of those mine sites, but fair to say we're going to be looking at key performance indicators of cost reductions for those guys, and look at ways that, based in this volatile market we're in, we have to do better, and I'm going to take that on to make that happen.

Just to talk about Bloom Lake for example, one of the things I noticed going up there was, we have an opportunity to get better at blending of our ore, getting better on our overall throughput. We're doing some differential analysis of our blast hole data in our iron units analysis. That's going to help us differentiate and get the best ore product going into the mill and processing that. I think that's going to result in us not only hitting marks but ultimately doing better than that.

The guys are also doing some real good work on some new spiral testing, and I think that will help us on the recovery side. And what's sits below all this is looking at labor productivity and how we can improve that. And that kind of thought process really starts to transfer itself across APIO into the US and their other operations.

Great. Thank you very much, guys and best of luck.

Thank you.

Michael Gambardella, JPMorgan.

Two questions. First, do you have any near-term goals for net debt?

Yes. From a net debt standpoint, what we're looking at is, we're currently at $2.7 billion. From my standpoint I'm looking at increasing our cash balance from where we're at today. I would like to essentially get to double where we're at today, so that will take our net debt down to something like $2.4 billion, and I think that's a decent goal for 2014.

And then I think I heard you made a comment about an unfavorable adjustment on prices, US iron ore prices due to steel pricing, and I'd like you to explain that because steel pricing was up almost 25% in the second half of 2013.

From what we have is we have a sensitivity to our hot-band pricing and that is based on an average over a period of time, and so we just had some financial true ups of that during the quarter. There's nothing really to do with steel pricing. It's more of our arrangement with our customer.

I thought you had a comment that you had an unfavorable steel pricing true up.

Hot-band steel price true up on our contracted rate with one of our customers. That impacted our revenue rate.

Was that just a change in the contract?

It was a change in estimate from our standpoint.

Okay.

There's nothing to do with steel prices.

All right. Thank you.

No problem.

Brian Yu, Citi.

Congrats on the quarter. My question is going back to Bloom Lake, I know you had touched on some of this already but I wanted to get a better sense just on the cost side, Gary if we borrow a term from your prior background, you've got all-in sustaining costs at Bloom Lake that's around $110, realized price at $128, benchmark gets you $100. So what do you see in terms of maybe lowering the overburden removal rate or do you see strip ratios improving? Anything along those lines that could maybe help the cost structure a bit more besides the blending of ore and other operational stuff?

Thanks, Brian. Our target of $85 to $90 a ton, we were, if you look at our earlier comments on unit costs, they were down around the mid-$70s on that. A lot of that was to do with the trans stripper installation which never actually materialized in that. And that was a big portion of it.

In terms of -- the other thing that's a slight increase in the operating cost is along with minimizing that capital, we do have some material placement that costs a bit more to, on an operating cost basis to get that into the various tailings basins that we currently have. In the strip ratio side, as I'm talking about blending, I guess that's an all-encompassing piece that I'm talking about. It does take into account that opportunity of making sure that we are pulling the ore from the right areas.

We currently mine from three different pits and they have different characteristics that give us the right feed to the mill and that mixture needs to be optimized more. Ultimately, the plan that we have currently would be a strip ratio is already baked into that plan. There could be some minor adjustments to that, but that's going to be based on optimizing how we can get the maximum tonnage through that plant, which I think is the biggest unit value decrease we can see.

But Gary has challenged the team to go further and look at other opportunities throughout the year to hopefully be able to reduce costs further, Brian, so yes, that will be a focus for 2014.

Does that answer the question, Brian?

Looks like Brian has disconnected his phone line. Timna Tanners, Bank of America Merrill Lynch.

I thought one of the most compelling arguments in Gary's opening remarks was really about the strength of the Chinese market for pellets and the exports. And I was surprised about the comment that there was fewer exports expected into 2014. So can you talk a little bit about the export market and what might change that or what's going on there?

Maybe I'll turn that over to Kelly to answer.

Timna, we had over 2 million tons of export out of our USIO business last year, as you'll recall, and our guidance this year has it closer in the range of 1 million tons. And on those export tons, we will see some pickup from the pellet premium, but it's going to have a relatively muted impact as you might imagine on the overall USIO portfolio because of the other contractual arrangements we have with the balance of customers in that business. But we'll continue to be opportunistic with those optional export tons.

We also -- we continue to look very hard and expect to, at an appropriate time, to be a player in the DR grade pellet market. And so those export tons could also play into that equation as we look at our DR strategy going forward.

Timna, I'd like to add to that. I think overall it's really good things happening here in the US. We've seen with the two contracts we extended the summer we're having additional incremental tons here in our natural business unit at USIO. Therefore we're stating on the freight costs from the export tons moving to China, so net net this is because of better ton movement in our domestic market here in the United States.

Okay, that makes sense. Thanks. And the other question if I could, can you characterize the opportunities you might be looking at in the coal market and talk to us a little bit more, I know it's a small segment, but the outlook there was kind of muted with the costs and the revenues looking fairly similar. How are you looking at that business and what's the environment like for the potential options you'd be looking at?

As I said, Timna, the coal side and sector on the positive side over the last two years, the guys have done a wonderful job of reducing our costs by over 40%, in fact 19% for 2013, and then we've been chased down on the pricing side swallowing up that differential.

That being said though, we're actually in a, I think in a fairly good position not generating the revenue side but there's, in that domestic marketplace, we're into that lower quartile, and as I said, this is a bit of an attrition war going on of seeing what's going to happen on it. And I think there's tremendous upside potential on this.

I'm challenging the guys with continuing to push more. We're getting a good return on the thermal side and that's increased somewhat, so we're trying to balance that. But it's fair to say from an economic standpoint, we're going to continue to look at that sector quarter over quarter, look at where the pricing's going to go, and react accordingly into the market to make sure that we don't lose money on this proposition.

Timna, just from the commercial side, we are gaining some very good traction with a much more diverse customer base that we see this year versus last year. And also seeing a little bit of diversifications from the geographic standpoint.

Our tons to Asia are relatively flat year over year as a percentage of placing the tons by region, but we've seen and expect a pretty nice uptick in our mix in our European market, and we're making some inroads in South America. So as Gary said, this is really a bit of a tale of two cities, if we can get a little tailwind on pricing, with some good customer traction that we already have, coupled with a very outstanding cost position, we're feeling very good overall about the met coal business.

Okay. Thank you.

Tony Rizzuto, Cowen and Company.

It's good to see some steps in the right direction.

Thank you, Tony.

I've got several questions here. One is with regard to Bloom Lake, what level of interest have you guys been receiving as you engage with WISCO and other Chinese parties?

Tony, this is Kelly. We have continued a very good relationship with WISCO. We have, as I think you know, a long-term commercial relationship with WISCO and they are also still a partner in the mine. Late this year WISCO did determine to contribute a portion of their equity back into the partnership so their percentage ownership interest is down from 25% to about 17%. But we are in active dialogue with them about our strategic options for this asset.

And we've also, just with the inroads we've made in other Asian markets, who have a very strong appetite for this Bloom Lake product, some of these current and prospective customers could be potential partners down the road.

But again we've got a range of things we will look at, and, again, there's a real validation of the quality of this ore body and the marketplace. And we're seeing, as you're seeing I'm sure, in the market, this growing spread in terms of FE quality premium that Bloom Lake plays into as well.

Absolutely. Thanks, Kelly for that. Question on Australia if I may.

Can you elaborate, I think Gary mentioned efficiency gains in Australia, and it sounded as if they had been enough to offset the inflation. But I was wondering if you could elaborate on a little bit more. And also is it possible to increase the mine life in Australia beyond 2020?

Thanks, Tony. Just to talk about some of the improvements that the guys have done there, again, I said this before, again, it's blending of ore.

One of the things that we need to do and we've initiated now is getting a better stockpile mix. We mine from a number of different pits across a 25-mile length. And it's important for us to get that proper blend to the customers, and so we've initiated a much more rigid stockpile mix blending campaign.

And then our ability to move that material, and you've seen some of the increase in tonnage that we've seen, which is really driven behind the ability to meet a limited line availability down the rail line to the port. And so we've actually got that measured down into hours of efficiency to get that loaded up and on its way.

One of the other things that the guys have put in place, some of these pits are getting into lower levels below the water table. And we have a washing system we've put in that's working well to actually lower chloride and contaminant levels and impurities.

And I guess the other big one, I keep mentioning it is, labor productivity. When I went over there I looked at this as a large mine site, but when we took over the Portman assets, we had an infrastructure, which was larger and we're dealing with a single mine. So we're going to continue to make some labor productivity improvements at that site. And stay tuned. There's more to come.

In terms of long-term, production, we have identified within that 2020 plan about a year's extension already with our current blending facilities that we have. And we're looking at adjacent and properties in the neighborhood that we can add to that as well. They're not going to fundamentally double it, but I think there's more to be added there, Tony.

Sounds positive. My final question is how are you guys dealing with the severe weather at your US and Eastern Canadian operations? I know you've been a master in iron ore industries in general.

It's been --

In weather but can you give us an update on how severe it's been and the kind of effects we should be thinking about?

Yes, it's been fairly nasty. If I just look at Minnesota, Michigan and they're used to minus 40, but they've been dealing with some minus 40 weather for a number of weeks. They can handle it, but it does affect the efficiencies of how we operate and a lot of it with the moving of materials, so we've seen the worst of it. It's already over now. And as I've said, we've still got the material moving through.

We've run into a couple problems of some of the concentrate freezing. Mainly seen up in Wabush concentrate for example. So that does get unlocked as we get into the warmer months to make it more efficient.

So the guys are used to it, but not this extension of it. So it's put a bit of a pressure point on Q1, but since we've got the material out the back door, it's just a matter of getting it through in subsequent quarters, so we've got the capability for it.

And as you know that our Q1 US iron ore sales are typically seasonally light when you compare them to the other quarter, so there will probably be another little impact there from the weather, but we expect to make it back in the second half of the year.

Thank you very much.

Thanks, Tony.

Curt Woodworth, Nomura.

First question is just on capital expenditures. Going forward I know you had some deferral CapEx that's going to hit this year, so I'm wondering where do you see CapEx trending into 2015? And then also on the take or pay, I think you've got $30 million at Wabush and still $60 million to $70 million at Bloom Lake. Do you see any opportunity to minimize those penalties going forward?

Yes. I'll start just with the bigger picture of where we're at on capital spend. It's too early to say into 2015, but we're focused in on return value to shareholders and our focus right now, other than sustainability expenditure and what we need for license to operate, that's really ruling the day for where we're at in today's market.

We are in pretty good shape from how we've looked at equipment purchases in the past and capital allocations, so we're in good shape there as we go forward. But with that, I think it's too early to predict too much beyond 2014 and what we're doing. Terry will probably have more to add there.

Yes, I think it's just important for us from a capital discipline standpoint. I think for our first priority, as we've mentioned earlier is, to increase our cash balances and we like to get to especially probably double where we're at today.

Then going forward we've got to look at the returns on these projects. And we've got to compare them to our cost of equity. And if we don't have a substantial improvement from a cost of equity standpoint on these projects, then we've got to look at other options. I think those other options is returning cash back to the hands of the shareholders, it's a focus and priority going forward.

And maybe Kelly can comment on the QNS&L.

Yes. I think you, and everyone on the call, is well aware of our -- the challenges with our QNS&L take or pay up at Bloom Lake. That will be one of the key elements as we continue to evaluate the strategic alternatives for that assets. But right now the best thing we can do is put tons across in Phase I and that will have some mitigating effect on that penalty. But clearly it's going to be a big factor in terms of our longer-term options for Bloom Lake.

Okay. And just a last question if I may, one of the strategic options being discussed is the MLP opportunity, and I know you guys said that the last several months you have been evaluating that, so I was just wondering if you could provide some details or highlights from the outcome of what you've been looking at there?

Yes, thanks, Curt. The MLP we've been looking at for a little while now, a few months. And we're looking at its structurability for our USIO business and it's still got more work to do around it. We're not in the position to really provide anything definitive at this point.

As you know, it certainly lends itself well to the energy industry and there has been some forays into the pure mining side. But where we're at in our volatility, and there's complications on the tax side, we've just got to look at all those aspects and make sure that we fully understand that before we would entertain going down that road.

Yes, I think in the meantime though we just need to stay focused in on capital allocation, leaning the organization up, and lowering our costs overall, so that's where we're focused today on.

Great. Thank you.

Sal Tharani, Goldman Sachs.

Welcome aboard, Gary.

Thank you.

Looks like you have your work cut out for you.

I just wanted to reconcile something which we are hearing from your -- some of your buyers of US iron ore. One of them this morning on an earnings call is that they are expecting a significant discount in iron ore prices based on the new contracts which you've signed recently. When I just do a crude math of what iron ore price index was last year to the ratio of what you actually got or realized, and I use the same math in this year, $128 and what you have said you're going to be -- the range you gave midpoint, it doesn't make -- it's almost the same ratio.

I was just wondering, that number, which throwing out $25 to $30 a ton of discount year over year per ton, does it -- it backs out half of the money you made last year in some case, and I'm wondering what should we -- how should we think about it?

Sal, it's Kelly. This seems to be a bit of a replay from discussion we had in the third quarter, first of all, our contract with this particular customer is just part of our overall USIO portfolio. And that particular contract, which again we value as a key long-term contract for the stability and overall fixed cost leverage opportunities it offers for our USIO business, but that pricing on that contract is baked into our guidance overall.

And for us to try to comment on whatever math this customer's doing it wouldn't make a whole lot of sense. We value the customer, it's a good customer, we like the contract and like what it brings to our portfolio, and it's baked into our guidance.

Okay. The other thing is the WISCO contract for iron ore, how is that set up? What portion of Phase I they're taking out, they're taking the whole Phase I? And would there be -- are they also entitled to Phase II, and of course that could be part of your strategic decision if you want to sell it, that contract will be rolled over to the new buyer?

Yes. So WISCO has a right around 3.5 million, 3.7 million ton commitment for the Phase I for Bloom Lake. They have no firm commitment for Phase II volume. It's certainly, if we were to bring on Phase II at some point, is part of the strategic alternatives, so WISCO would be a potential customer, but they have no lock on that volume. So they're really -- it's, they're in there for 3.7 million tons as part of Phase I and we have an outstanding commercial relationship with WISCO and they've been a very key partner in terms of marketing and technical based opportunities with other Chinese center market customers as well.

Yes, and Sal, that contract with WISCO is a market-based contract as well.

Yes.

Okay, great. And one just quick housekeeping question, I'm looking at your reconciliation, non-GAAP reconciliation where you have $1.22. And I see that you have adjusted for several things.

I was wondering, what would be the -- because of tax that you saw, so different, I don't know exactly how to apply the tax rate, that $50 million benefit you got from the miscellaneous items, if you were to adjust that, what would be the impact of that on EPS will be? Can you tell us?

Yes. Sal, I can help you through that offline.

Okay. Thank you.

Thank you. Ladies and gentlemen, that does conclude our question-and-answer session for today. I'd like to turn conference back over to Mr. Gary Halverson for any closing remarks.

Thanks, Ben. Thanks again, everyone, for joining us on today's call. We're very pleased with the way we closed out the year, but I would like to leave you with a few additional thoughts.

Cliffs' foundational legacy was really built on its operational excellence. And I think simply getting back to basics through a large delayering effort, a sharp focus on improving productivity in our mines, and disciplined capital spending, we expect to really improve our overall performance and enhance long-term shareholder value. And I really look forward to meeting many of you soon and reporting on our progress in the upcoming months. So with that, thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.