Cleveland-Cliffs Inc (CLF) 2014 Q1 法說會逐字稿

Good morning ladies and gentlemen. My name is Jessica and I am your conference operator today. I would like to welcome everyone to the Cliffs Natural Resources Q1 2014 conference call.

(Operator Instructions).

I would now like to introduce you to your host for today's call, Jessica Moran, Director of Investor Relations. You may proceed.

Thanks, Jessica. 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 10K 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@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 regulation G purposes can be found in our earnings presentation 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 I will turn the call over to Gary.

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

Before I review our results for the quarter I want to briefly address the matter of ongoing shareholder engagement. As you may know, one of our shareholders, Casablanca Capital has nominated director candidates for election to our board of directors.

We welcome open communications with all of our shareholders and strive to maintain a constructive dialogue with them. We also remain committed to acting in the best interest of our shareholders.

Although we will not take questions on Casablanca today, we do have an update regarding the annual meeting. After taking into account what the Company's board and management believe to be in the best interest of Cliffs shareholders, with respect to our attempts to solve the ongoing situation with Casablanca, we have set a record date of June 2 for the annual meeting which will be held on July 29, 2014.

With that said, the focus of today's call is on our earnings results, so we ask that you please keep your questions focused on that topic. We do not intend to make any further comments or statements during this call regarding Casablanca and I thank you for your cooperation in that regard.

In my first few months at Cliffs we announced a number of decisions to cut spending, suspend projects, idle under-performing assets and sharpen our capital allocation discipline. During the first quarter we successfully and safely idled Wabush's mine and processing plant. While I regret that this decision impacted the jobs of 500 people, we must strive for continuous improvement in lowering our cost profile.

I am pleased to report that our first quarter capital expenditures were 55% lower year over year and our SG&A and expiration expenses decreased 30%, excluding severance related charges. These severance costs were associated with our overhead delayering efforts and directly related to a 21% reduction in officer level executives since year end.

As the year progresses, we will continue to look for opportunities to reduce our overhead and capital expenses, as well ask evaluate benchmarking strategies to improve our operating costs. While only a small portion of this cost cutting efforts are reflected in our first quarter results, I'm confident that there is more to come.

This first quarter progress has come in spite of difficult weather conditions that impacted our North American operations. As most of you are aware, the first quarter is always slower given the seasonal lock maintenance and freezing of The Great Lakes. The conditions experienced this winter further magnified this seasonality.

Also, pricing for iron ore and Met Coal products was softer both quarter over quarter and year over year. While these factors impacted our first quarter results, we are keeping our full year 2014 outlook largely intact, thanks to the focused efforts and resilience of our skilled operators at all of our sites.

Having said that, there are a number of positive results to report from all of our business segments. Starting with Bloom lake, in a quarter where iron ore operations across the labrador trough were hampered by severe winter weather, Bloom lake's production volume was a first quarter record. This bodes well for us as the spring thaw will provide for better operating conditions.

In our Asia-Pacific iron ore operations, we generated over $100 million in cash margin, which is better than last year's first quarter despite a 19% drop in market pricing and higher freight rates. In North American Coal, excluding lower cost or market inventory adjustments, we generated positive cash margin despite operating in some of the worst market pricing seen in the last decade. And finally, in US iron ore, the business perhaps most impacted by the harsh winter conditions, we are maintaining our 2014 sales volume and cash cost per ton guidance.

Our focus on disciplined capital allocation and cost-cutting enabled us to significantly reduce the first quarter borrowings under our existing credit facilities. Terry will provide more details later in the call, but I think it's important to highlight that we increased our liquidity 32% versus the prior year's first quarter despite the external headwinds. This increased liquidity will keep us financially flexible and well-positioned to manage through future market pricing volatility.

Turning to end markets for our products, in China, the implementation of a reform agenda with credit tightening and pollution control measures has hampered growth in steel production, excuse me, in 2014 which has impacted iron ore demand and ultimately pricing. Currently, higher iron ore port inventories with low steel utilization rates are bearish indicators, but the mini stimulus passed earlier this month gives us confidence that the government remains committed to its target GDP rate.

Also we were encouraged to see the expected increases in quality premiums that I highlighted last quarter materialized in our results. The higher year over year premiums for both our Australian lump and Bloom Lake concentrate products help to partially offset the decline in sea-borne pricing.

In the US, the demand from our customers is stronger than ever. This is driven by the weather's impact on movement of iron ore pellets across The Great Lakes.

We experienced over 70 days of negative -30°F temperatures over this winter season. The freezing climate resulted in the most ice coverage we've seen in over 30 years, essentially halting lake freighters and causing our customers to dip into already low steel making raw material inventories.

This low raw material inventory has driven some North American steel makers to run at reduced rates or idle production altogether. A dynamic that has directly tightened the US market for flat steel products. While the warmer weather slowly improved shipping and operating conditions, we will continue to work closely with our North American customers to do whatever we can to help deliver pellets to them.

Now turning to the performance of our business segments during the quarter. In US iron ore, first quarter sales volume decreased 8% to 2.8 million tons and included approximately 100,000 tons sold into the sea-borne market. This decrease was primarily due to the previously discussed weather conditions.

We expect tightness in the pellet market to continue into the second quarter as we are still experiencing some difficulty in moving product across The Great Lakes. Current ice conditions continued to restrict vessel movements to small convoys requiring Coast Guard icebreaker systems. As a result, product movement across Lake Superior, where about 90% of our volume is transported, is still very low.

Making up for the first quarter volumes will not be easy, but we expect our 2014 nominations will be delivered. We expect to continue shipping through the traditional summer depth that we have seen in prior years.

The ice on the lakes has contributed to higher water levels which means we can increase the draft on the vessels, or essentially load them heavier. And also there are some currently idle vessel capacity that could be brought in for the season.

One thing the weather did not hamper during the quarter was our commercial team's successful execution of an extended pellet supply agreement with ArcelorMittal. This will keep our Empire Mine operating through at least 2016, reflecting the excellent commercial relationship we have with our partner.

This could not have been done without the hard work and planning from our dedicated Empire team at our Michigan operations. They kept the mines safely running to provide us with the valuable option of extending the mine life's reserves. Also, we successfully restarted two idled furnaces at our North Shore facility that were down for the majority of 2013.

For full year 2014, we are maintaining our US iron ore sales volume expectation of 22 million tons to 23 million tons. On the DRI front we remain enthusiastic about the potential for supplying this emerging market. From our North Shore Mine we are positioned to be the natural supplier for DR grade pellets to serve any one of the DRI plant projects currently under pre feasibility study in the Midwest.

Turning to Eastern Canadian iron ore, first quarter year over year sales volume decreased 14% to 1.6 million tons and included 350,000 tons from Wabush, with Bloom Lake making up the remainder of the volume. The decrease was primarily driven by a Chinamax size vessel shipment, that was delayed due to the weather's impact on logistics. I was very pleased with Bloom Lake's record first-quarter production volume of 1.5 million tons, a 10% increase versus prior year's comparable quarter.

Coming off the encouraging quarter, I am optimistic about the traction we are gaining at Bloom Lake. The decision to indefinitely suspend Bloom Lake's phase II expansion, has given our team the singular focus of improving Bloom Lake's phase I operations. We expect mill availability and throughput to both favorably impact production volume, which will ultimately improve the cost per ton longer-term.

We have made it clear that we will not be moving forward with Bloom Lake's phase II expansion alone. During the quarter, we made progress in identifying a wide range of perspective partner candidates.

Also we have engaged our bankers, our data room is set up, and we have a methodical process in place to evaluate potential offers. All options remain on the table for this asset with the top priority of extracting the highest value for our shareholders.

While we work towards attracting a partner for Bloom Lake, the political landscape in Quebec is changing. We are encouraged by the liberal party's recent victory in the Quebec provincial elections a few weeks ago. Historically this group has been supportive of developing in the natural resources industry.

We are maintaining our full year Eastern Canadian iron ore sales and production volume expectations of 6 million tons to 7 million tons which is comprised of 5.5 million tons to 6.5 million tons from Bloom Lake with Wabush making up the remainder. As we finalize Wabush's idle we may have additional, residual product to sell which will be all volume upside to our current sales forecast.

Turning to Asia-Pacific iron ore, first quarter sales volume increased 15% to 2.6 million tons from 2.3 million tons in prior year's comparable quarter, this was driven by favorable timing of vessel shipment. We are seeing additional cost benefits from moving less material which is driving efficiencies in our loading and hauling costs.

This combined with the impacts from favorable foreign exchange rates continues to push this asset left on the cost curve and to the lower end of our cash cost per ton guidance at today's Ausie to US dollar exchange rate. Our full year 2014 expected sales and production volumes remained unchanged at 10 million tons to 11million tons comprised of approximately 50% lump and 50% fines ore.

Now turning to coal, our first quarter sales volume decreased 12% to 1.6 million tons from 1.8 million tons last year. This was attributable to lower sales to certain customers due to extended price negotiations and adverse weather related impacts.

Just a few weeks ago, the team at our Pinnacle Mine broke another Longwall operation world record, for the most volume produced in a 24 hour period. Our ability to produce more volume will help lower our unit cost in efforts to remain competitive in this tough pricing environment.

The second quarter, met coal, benchmark settlement of $120 per metric ton at the port, presents challenges in the long-term economic viability of running our mine. However, we are encouraged to see the recent announcements of idle North American capacity which could be constructed to met coal's supply demand market dynamics. We will be following this market closely, and if pricing continues to decline or stays at the current level, for a sustained period we will have to consider other options.

In light of the current pricing environment, our team is more focused than ever on squeezing cost out of this business. For 2014, we are maintaining our sales and production volume expectations of 7 million tons to 8 million tons largely comprised of met coal.

So in closing, I'm pleased with our operating performance in light of the external environment factors that were plaguing us in the quarter. We have demonstrated meaningful progress in both, reducing costs and becoming more focused on extracting value from our assets. In recent conversations with several of our top shareholders, we have been encouraged to hear that they are supportive of the changes to our board and recent actions taken by management to improve the financial performance of the company.

We have made good progress, and I expect this to accelerate as we are focused on delivering our near-term cost savings, so that we are well-positioned to enhance long-term shareholder value. And with that I will turn it over to Terry to discuss our financial results.

Thank you, Gary.

Despite the pricing and whether, we ended the quarter with over $1.9 billion in total liquidity, a 32% increase compared to the prior year. This is the result of having a higher cash balance of $364 million and amounts drawn under our existing credit facilities of $225 million, a reduction of nearly 60% from the first quarter of 2013.

Our success in cutting capital overhead and operating cost has enabled us to significantly minimize our debt borrowings in our seasonally slowest cash generating quarter. The covenant suspension period implemented in partnership with our revolver bank group during the first quarter of 2013 expired at the end of the first quarter of 2014. We have now resumed measurement under the facilities previous covenant structure, this includes a 3.5 times maximum debt to EBITDA ratio and a 2.5 times minimum interest coverage ratio.

At quarter end, we were well beneath the debt to EBITDA requirement of ratio less than 2.5 times. While I'm comfortable with our current leverage position especially considering the headwinds we have faced in the normal first quarter seasonality, our near-term target will be to reduce our debt profile.

Consolidated revenues for the first quarter were $940 million down $201 million from the prior year. The lower pricing impacted our first quarter revenues by $173 million with the remainder driven by lower sales volumes.

Cost of goods sold decreased slightly to $877 million primarily driven by favorable foreign exchange rate variances totaling $45 million and $29 million related to the lower sales volumes. These decreases were partially offset by incremental lower cost for market inventory charges of $33 million.

Consolidated sales margin for the quarter decreased to $63 million which also included a $25 million sales margin loss from our Wabush mines operations. Our first quarter SG&A and exploration expenses decreased 30% year over year to $50 million excluding $5 million in severance cost.

Our first quarter miscellaneous net expense increased to $59 million and included $39 million in Wabush related costs, $16 million related to minimum take-or-pay volume commitments with the QNS&L rail line as a result of our Bloom Lake delayed expansion, and $7 million related to unfavorable foreign currency exchange re-measurements. Excluding some of these special items incurred during the quarter, EBITDA from our core operations was approximately $177 million.

First quarter 2014 results included an income tax benefit of $22 million versus a benefit of $6 million reported in last years first quarter. The increase is mainly a attributable to a higher expected full year effective tax rate and a decrease in year over year net income. Our expected effective and cash tax rates for the full year, including discrete items is expected to be approximately 24%.

Turning to our business segment performance, revenues per ton decreased in all of our business segments year over year, primarily driven by a 19% lower market pricing for iron ore and a 13% lower market pricing for met coal. Higher freight rates from both Canada and Australia to Asia also contributed to lower realized revenues.

Partially offsetting these unfavorable revenue impacts were increased premiums for our high-quality products. During the quarter our revenues reflected a $38 per ton pellet premium attributed to USIO's export sales, a $12 per ton iron content premium for Bloom Lake's concentrate in Eastern Canada, and a $16 per ton lump premium in Asia-Pacific which is about half our volume in that segment.

As expected, on a percentage basis, the decrease in USIO's revenue per ton of 9% was the smallest compared to our sea-borne exposed iron ore segments, this was largely driven by the long-term supply agreements that mitigate sea-borne iron ore pricing volatility. Customer mix and provisional price settlements, also unfavorably impacted USIO year over year revenue per ton results.

In addition to lower pricing and increased freight rates, APIO's revenue per ton of $96 was unfavorably impacted by $6 per ton, related to iron ore grade penalties and $4 per ton of foreign exchange hedging losses during the quarter. Our Eastern Canadian iron ore revenue results included 350,000 tons sold from Wabush Mine which achieved of lower realized price compared to Bloom Lake's high-quality concentrate.

As detailed in last night's earnings release, the first quarter year-to-date average iron ore price of $120 per ton is the underlying price assumption with in our full year 2014 iron ore segments outlook. The US iron ore we have reduced our full-year revenue per ton expected range to $100 to $105 per ton.

We're at the lower end of the previous expected range of $105 to $110 per ton. And 8% lower sea-borne iron ore price assumption took our range down a notch. Despite this, the revenue per ton sensitivity for every $10 per ton change (inaudible) sea-borne iron ore pricing for the year, is approximately $1 per ton impact to the USIO realized revenue expectations.

In Eastern Canadian iron ore, our revenue outlook remains unchanged at $95 to $100 per ton despite the 8% decrease in the underlying iron ore price assumption. This is driven by the benefit we expect to achieve from realizing higher quality premiums and lower freight rates versus our previous expectations. Our Asia-Pacific iron ore outlook was reduced to $95 to $100 per ton in line with how you would expect the 8% lower sea-borne iron ore price assumption to impact our realizations.

For North American Coal, we are lowering our full-year revenue per ton expectation by $5, to $80 to $85 per ton reflecting the lower market pricing for met coal. We currently have approximately 60% of our sales volume price at approximately $85 per ton with only met coal left to price.

Now looking at our segments cash cost results, US iron ore first quarter cash costs were $65 per ton up 9% from prior year's comparable quarter, this was driven by higher maintenance activity and energy costs. The quarter's colder weather contributed to higher natural gas pricing and electricity rates across the country. However, I'm pleased that our cash cost results were at the lower end of our expected range.

Also keep in mind that the inventory produced during the first quarter, when energy rates were elevated will be sold in later quarters in 2014. So those elevated costs will be reflected over the remaining quarters as the inventory is sold.

Our US operators are working diligently to offset some of these energy driven pressures by reducing contractor spending. For the full year we are maintaining our cash cost expectation in USIO to $65 to $70 per ton.

First quarter cash cost in Eastern Canadian iron ore were $104 per ton and reflected the results from both Wabush and Bloom Lake mines. At Bloom Lake, excluding the lower cost for market inventory adjustment of $7 per ton, cash costs were $87 per ton, compared to $89 per ton in the prior year's comparable quarter. The decrease was driven by favorable foreign exchange rates partially offset by increased mine development work.

In Asia Pacific Iron Ore, first quarter cash costs were $56 per ton down 25% from a year ago, quarter. About half the year over year improvement was driven by favorable foreign currency exchange rates, with the remainder of the improvement driven by less all material movement and increased fixed cost leverage.

In our North American Coal segment, we also incurred a lower cost of market inventory adjustment of $22 million or $14 per ton during the quarter. Last year's first quarter results also included $2 million or $1 per ton in lower cost for market inventory adjustments.

Excluding these adjustments in both periods, our North American coal cash costs were $86 per ton, a 4% decrease from prior years first quarter, the decrease was driven by continued focus on improving operating efficiencies. Also, because of lower cost for market inventory adjustments are essentially timing differences of when the costs are expense through our income statement, we are maintaining our full year cash cost per ton expectation of $85 to $90 per ton.

On a consolidated level, we successfully reduced our first quarter capital expenditures by $127 million or 55% to $103 million. The decrease was largely driven by lower spending at Bloom Lake, where the team is very focused on extracting value from the operations first phase.

For the full year, we are maintaining our capital expenditure outlook range of $375 million to $425 million. We are also maintaining our expectation for full year SG&A and exploration expenses of approximately $200 million, excluding severance related costs.

In closing, we have begun delivering our year over year cost savings as demonstrated in our first quarter results, our balance sheet position is substantially improved from where we were a year ago, leaving us well positioned to manage for the inevitable volatility in commodity pricing. Our ability to deliver these improvements in a seasonally slow quarter through top operating conditions gives me confidence in our ability to successfully deliver the cost reductions within our 2014 outlook.

With that Jess, I think were now ready to open the call for questions.

That concludes our prepared remarks for today's call. We request that you please keep your questions to our earnings results and outlook. Operator, can you please open the lines to begin our question-and-answer session.

(Operator Instructions).

Mitesh Thakkar.

Good morning, everybody, and congratulations on the good cost performance in the quarter.

Thanks, Mitesh.

My first question is on the US iron ore side.

It looks like weather issues had increased the call for the balance of the year for that segment to perform. How do you think about, the amount of inventory you have and what it means for the cash flows for the back half for the remaining nine months?

And are there any potential logistics constraints which could show up and prohibit you from achieving the guidance on the full-year basis?

Thanks, Mitesh.

Maybe Terry will chime in. But basically, as we said, we are still maintaining the full-year guidance on total shipped product to our customers. Obviously, the weather plays into it. If I looked at last year's weather, we had an early close to the season.

Based on what were looking at for current shipping and the availability by quarter, we think that were going to be able to make it. And we won't get it all back in second quarter, but were looking at late third quarter, possibly into the fourth quarter, barring any terrible weather for this coming winter.

Mitesh, from a cash flow standpoint, obviously the first quarter traditionally is a quarter where we build up our inventory balances. So in the second part of the second half of the year is when we wind down those inventory balances so it will generate positive cash flow.

You can see for the quarter, we had negative cash flow from operations of $82 million with a good portion of that as a result of the build in inventories. ( Multiple speakers )

Is there any way to quantify that?

From a timing standpoint? I think it will be based on how we schedule out the remaining tons for the year.

We're keeping our guidance at 22 million tons to 23million tons. We've done just under 3 million tons for the quarter.

So you can probably spread that, maybe less in the second quarter and more in the third and fourth quarters because we still dealing with weather and ice conditions in the Great Lakes.

Mitesh, this is Kelly.

Just a couple of other comments, as I'm sure other analysts are questioning our ability to meet the volume for the balance of the year, given the condition on the lakes.

I think there are a couple things to consider. One, we fully expect idle-vessel capacity will come online. Certainly be an economic incentive for some of these vessel carriers to come online.

Secondly, lake levels will be up' so we will load a little heavier. And then I think equally important, we typically have a lull in the summer months; so we would expect to ship on a much more radical basis across the remaining quarters of the year.

And we do always build in a little bit of a contingency in the fourth quarter, just because it's uncertain in terms of how early or late winter conditions will arrive. So we have factored in some of that contingency as well. So that give us a reasonable confidence that we can meet the volume commitment.

Great. Thank you for the color, guys. Good luck.

Thank you.

Thank you.

Michael Gambardella, JPMorgan.

Yes. Thank you and good morning.

How much of the total tonnage so far year to date in the Great Lakes has been affected, do you think, by the weather?

The shipping was 2.8, so we normally don't have any product during that time period anyway. So the total is -- I'm not sure of the total.

Last year it was 3.1.

So about10%.

At least, and then there are other guys on the Great Lakes that are shipping vessels too. I don't know how much they've missed out.

Yes. But our expectation, as Kelly mentioned though, we will be able to move the tons in the second, third, and fourth quarter. And we, historically, haven't been able to get those average volumes in those quarters. ( Multiple speakers )

I guess our focus. Michael -- (multiple speakers )

I was going to say, if one of your customers has been delayed from a shipment from you into another quarter, what's the pricing that they get on that shipment?

Mike, we wouldn't comment on particular customer pricing. But we are working -- I was up at one of our customers for most of the day on Wednesday, and a couple of my sales guys are out with customers today.

We are working hand-in-hand with them. And part of the challenge for a number of our customers, of course, is they work their inventory down low as they're managing their working capital.

So the days of having had some buffer inventory is not there. Our customers recognize that they're part of the solution here as well.

It's a customer-by-customer, hand-in-hand working relationship to work through this. And they all understand; they're in a similar situation and are supportive of our efforts.

Say a customer shipment is delayed by three months. Does the pricing -- I'm not asking for the specific pricing, but say the pricing is referenced off of sea-borne. Is it the seaborne when he was supposed to get it or the seaborne when you ship it three months later?

It's going to vary by customer. Is going to be reflected in their particular contract pricing.

Okay. And then last question, how much of a penalty did your cost get in the order due to higher energy costs?

USIO is the biggest impact for all the sites. The total there was about $45 million. On an annualized basis, that's about $2 a ton.

Obviously from an impact first quarter, it's where we are expecting it all to land. About two-thirds of that was driven by natural gas pricing and one-third by electricity, mainly in Michigan.

Yes, the $45 million increase would have been over Q1 of 2013's energy rates.

And as I mentioned in my comments too, Mike, probably a lot of that is built in the inventory. That's on the balance sheet now, and we will see some of those costs coming through in the second, third, and fourth quarters as we move those tons.

And when people bring on some of this idle-vessel capacity to accommodate the additional flows of iron ore in the second, third, and fourth quarter, who pays for that? Is that the customer or is that you?

Mostly paid by the customer, but it varies by contract.

Okay. Thank you very much. Thanks.

Tony Rizzuto, Cowen and Company.

Thank you very much. Hello everybody.

Hello, Tony.

My first question is more strategic in nature,

And I guess, Gary, I would like to know what you're finding from your evaluation thus far of the technical and engineering aspects of Bloom Lake. I am just trying to understand better your costs and why they are so high compared to others.

Obviously, you were operating in the trough at much lower cost. And I know certainly volumes are a factor and efficiencies of scale, et cetera, economies of scale.

But do you think the engineering there is flawed in some ways? I would like to hear the thoughts on that, please.

Sure. Your spot on; mainly it is a volume driver for Bloom Lake when you compare to what the neighbors are producing there as well. And that is why we see the opportunity for reducing off of phase 1. Obviously if you expanded the 13 million tons, 14 million tons, you do see that net drop.

There are some fundamental differences as well as to how we grind and produce our product. It's based on us using spiral concentrators in there. There is no magnetite recovery process to itself.

It all factors into some of the variability that you'd see. It is comparing fruit, but not apples to apples between the products.

That being said though, we're still in the early days of that project. And as I said at the beginning, seeing a record of 1.5 million tons is the first thing out of the chute.

The challenge I gave to the guys just within the last couple of months of how can we focus just on Bloom 1 and extract maximum value both in terms of capital and operating costs?

One of the things we've seen is now were getting increased productivity improvements. And what you're going to see coming after that is a definite lowering of unit costs coming off the back of that. But there is a bit of a lag time; first comes production and then comes the lower cost.

Overall, the difference in focus with the guys and what they can do, we've seen some pretty good daily production rates. It is just smoothing out and understanding the ore body and how we mine it.

We also had some increased costs in Q1, just based on where we're at from our stripping ratios. And overburden in the past has been capitalized.

We now take it as operating, and that overburden essentially goes from close to one million tons to zero in second quarter. There are changes occurring in that that are going to continue to make us more efficient at that plant.

I appreciate that.

Now, I understand -- correct me if I'm wrong -- but I think I have heard that in the bankable feasibility study, when it was done on Bloom Lake that it originally called for a magnetic recovery system. Or is it magnified recovery? I forget.

And then I understand that was going to be installed at a later point. I wonder if you can tell me how has that affected your recoveries there?

And if you were to implement that system, what kind of capital cost you talking about? Is that something that you think is required there?

Let me give you a quick snapshot.

CT did have, in the original feasibility document, a plan to put in a magnetic recovery plant. They grossly underestimated at the time the amount of capital to go into it.

Based on this low pricing we're in, just based on what I see for recoverability of the magnetic iron, I don't see the feasibility of heading down there. I think our focus right now is really on what we currently have in front of us, what we can do to partner up into phase 2 to actually extract the volume based on the current plant the way it is.

If there is an opportunity in a rising market down the road, I think we've got to refocus on that based on that disciplined capital that we'd look at.

Okay. All right.

And then my second question is on a different matter. But overall your guidance appeared somewhat conservative. And I was wondering, is that by design? Or, for example with respect to Asia-Pacific, are you building in some currency reversal?

It sounded like some of the factors you described were more sustainable in nature. So I'm just wondering why the continued same guidance for the year despite a very stellar first-quarter cost performance there and that type of thing?

Thanks. You know, it is only our first quarter; and we're early out of the gate.

I can get Terry to comment on a couple of aspects to that, but part of it is driven by changes in FX rate and --

Yes, I think, Tony, from the standpoint our range that we have given guidance was 65 to 70. Were at the low range as low end of the range; we're still within that range.

The biggest piece that we've seen this quarter where we're at is the fact of currency. And from a plan standpoint, the Aussie dollar we plan for about $0.90.

Right now, today, the Aussie dollar is at $0.93-$0.94. And therefore there is some risk with respect from a cost standpoint with the Aussie dollar.

I think we are at the low end of that range. And, again, in the first quarter, the fact that were dealing with I think some currency exposure on where we're at from a plan standpoint versus where it is today, we're comfortable with that range at this point.

Okay.

And just one more quick question. Back to Bloom Lake for a second, Gary.

Do you think there was adequate delineation of the ore body? It sounded like you have got obviously higher mining expenditures. You have been doing pushbacks, and you've had some higher stripping, et cetera, But just your thoughts on that.

Sure. I guess the easy answer is, we need more delineation. And we identified that towards the end of last year. We were just doing our analysis of the three pits based on total iron. And we actually differentiate that to get a better feel for recoveries within the circuit.

So we are doing that, but part of it is we are stepping back and looking at the actual drill core data to actually get a better differentiation from there as well.

Overall, it doesn't change where we're at from mining the three pits. It's looking at optimizing mine planning and where we go, both from blast hole data and from understanding the ore body with more clarity. So that will lead to better focus of where material goes in terms of feeding and blending.

All right. Very good. I appreciate your responses. Thank you.

Timna Tanners, Bank of America.

Good morning. Happy Friday.

Good morning, Timna.

I just want to get a little more sense about the export opportunity. If you could refresh us on how that is proceeding, given the pellet premiums and how exports look going forward and what they might have looked like in the quarter?

Hello, Timna. It is Kelly.

I think you will recall our guidance was a million tons of export this year, compared to a little over two million last year. So we're still holding to that guidance.

Now, if there are opportunities throughout the course of the year to retain some of that tonnage in the Great Lakes, we'll do that. But there is a healthy pellet premium right now, we know. But at this point, were just holding at the million ton guidance for exports.

There was 100 thousand tons in the quarter, Timna.

Okay. Thank you. That's helpful.

And also, I'm sorry if I missed it, did you give us -- on the weather resolution, it sounded like there will still be some spillover into Q2 in terms of Great Lakes still thawing out? And it will take throughout the year to resolve that situation.

Is that the way to think about it -- that there will be some spillover?

Yes. That's a good summary.

We are still seeing some effects. We're still have Coast Guard guidance of the vessels. And with a bit of Mother Nature going in the right direction here, that will rapidly increase.

And everybody is hoping for that. But based on our analysis, we have the capacity to recover Q3 and Q4.

Okay, makes sense.

The only other little question I had, if I could, was on the coal side. What is it going to take for you to make the decision on whether to continue? Is it going to be a couple of quarters?

I mean, you noted that other people's setting is helping the situation. But what would it take for Cliffs to make a decision on setting -- you said flat or below current levels. I'm just wondering what timeframe you might be making a decision?

Thanks for that, Timna.

The guys have done a great job of continuing to lower the unit cost, as I said, continuing to hit new records and productivity. So with that, were in the lower one-third quartile for North American producers.

And we're starting to see in this -- I think I mentioned last time where just the war of attrition, which is a natural evolution, to take some of the supply out of the market. We're seeing that coming into play.

But specifically for our assets, and we want to focus, each mine has different characteristics that we have to look at for its net cost of operating, the cost to idle, and to look at the customer base and marketing of that.

We are currently in the process of doing that based on where we're at. But at the end of the day, as I said, we don't want to be cash negative. So we're looking at what the effects are and what the trigger points are.

Once we do that announcement, we can make a quick decision on that. The issue is when you make an annealing decision, it is for a longer period of time. So we want to make sure that we do this right, but the guys are on top of it now.

Kelly?

Yes, Timna. Just maybe a couple of other supplemental points.

One, we would want to gear timing of the move relative to a longwall move, just so it is least disruptive to operations. So that would play into it.

But at this point, we're estimating there has been close to 10 million tons have been taken out of the domestic market already in terms of actual idle capacity, or at least on the verge of idling based on other announcements.

So we're looking at it with where we're at on the cost curve, the strength of our product mix, customer base. All of those things have to be factored into the decision, along with obviously the hard analysis of the economics, which is well underway. But at this point, we are still in monitoring mode.

Okay. Thanks.

(Operator Instructions).

Jorge Beristain, Deutsche Bank.

Good morning, ladies and gentlemen.

My question, I guess, is more of a strategic nature for Gary.

If you could talk to the recent announcement from Voestalpine that you guys will be one of the suppliers of iron ore for their HBI facility. And you've been talking about the DRI opportunity in North America for a while.

Could you talk in terms of the 21-million-ton baseline that you're doing for US legacy? How much of that could ultimately start to go to the alternative mini mill market, and what would be the kind of CapEx per each million ton that you start to supply to that market?

I can't speak specifically, I think as I said in the beginning. I think we're positioned pretty well as a supplier for the DR/ DRI marketplace. We believe that's going to come on stream over the next three or five years.

I think I mentioned last time, we've actually done all the test work on North Shore. We can produce about 3 million tons of product, DR quality, low silica pellet. The cost of that, based on our pre-fees level, is several hundred million dollars.

And part of our process is to make sure that based on the various people that are out there, other companies, that we position ourselves for the long term to be able to step into this in the right way.

Kelly?

Yes, Jorge.

As Gary said, we're not going to comment on particular partner or customer opportunities. But I think it's fair to say that we're comfortable with the technical feasibility.

We've reasonably narrowed down the CapEx estimates for making the pellet. And really right now were evaluating a number of possible options.

And that's whether to purely be a DR grade pellet supplier or whether we would go into a JV structure, for example, in a DRI facility. And I think, as we've said on other calls, geographic considerations are very important.

So looking at EAF opportunities around the Great Lakes from a regional standpoint to really maximize the margin potential and the transportation factor will be a key ingredient in our decision-making process.

But, again, we see it as a very viable market opportunity to maybe offset some of the export tons down the road.

Great. And if I could just have a follow-up.

On the coal business, could you just remind us of your volume targets for 2014? How much of that is already fixed-price contracted?

Yes, 60% of it has already been priced and committed for the year. So the remainder of the 7 million tons to 7.5 million tons, what we have put in our guidance, is met coal product that has not been priced or committed to yet.

So that is an average price of $85 a ton -- the 60%.

The 60%, right.

And is the remaining uncommitted product at this point viable, given where market prices are in the US? In other words, are you cash flow positive?

It depends. We're really looking at how we sell that product into the market. And we've been fairly particular with negotiating with customers on it. So it's a bit of a give and take there.

And that factors in, as Kelly said, to the overall balance point of whether you idle an asset. We certainly don't want to go negative, but were running right on a fine wire right now.

Okay. Thank you.

Evan Kurtz, Morgan Stanley.

Good morning, everyone.

Good morning.

I just wanted to get an update on Asia-Pac.

You mentioned in the press release that you made a little bit less material this quarter. And I was wondering -- they are aging mines. And I just want to get kind of the outlook for where you seeing stripping ratios going and haul distances and so forth?

Surprised to see that with moving in the right direction.

Yes, it actually was good.

As per our plan for first quarter was to have a stripping ratio of 5.0, and we actually ended the quarter at 3.6. So it was quite a drop in total movement. We actually mined at 5 million tons a month.

Most of that, we have a whole series of pits. And a lot of the movement was out of the Windarling pits; I think W1 and W4. ¶ And it is coming back a little bit better, and the guys have done some good in-road steep and pit balls, and obviously pull in that strip back. That's just optimization that the guys are continuing to do.

I can't really say forward in the plan, but that's a good indication of some of the cost-savings focus of the guys have.

Yes, Evan. We had a big change going from one large pit to these multiple pods. So the team is really focused in on their mine plan and operating efficiencies.

And they continue to focus on how to extract the most ore out of this at the lowest strip ratios. And that will be continued to focus as they moved to the end-of-life of mine.

Okay. Thanks.

And one other question on Bloom Lake. You mentioned you set up a data room. Have any potential parties come to you so far in the process?

I just can't comment on specific parties.

Not specifics, but is there any interest coming toward you? No names or anything like that but --

Yes, there has been interest. And, obviously, it is a process; and we're near early stages of it.

So it's a little too early to comment on anything specific, I guess within that. But it's fair to say that we have been specifically approached already.

Great. Thanks.

And maybe just one follow-up on Tony's question. I thought it was interesting, the initial project call for a magnetic recovery plant.

If I recall, I mean, the problem seems to be that the mill feed is not really homogenous. And you're having problems turning some of the spiral separators.

It seems like that would be a solution to that problem. And so I was just trying to get a sense -- I mean, you mentioned that the CapEx is very high.

I was hoping you can provide maybe a range or neighborhood of where you think that might be. And then is that really required to get major step function change in cost? And what do you think that could actually deliver?

Yes, in generalities, the number is around $200 million, $300 million of CapEx to do that. I would be pulling my memory banks to figure out the percentage, but it was in the order of 5% to 8% or something of the product that you could effectively recover against that.

When we did the analysis background, we just couldn't justify it in today's price environment. You have a couple of things going on there. And it's the grind size of that material, a lot of energy costs, and then you got to run everything across those magnets.

And then, obviously, that's a big differentiator to say other mines, especially in our USIO mines. That being said, it's a different product mix in those pits.

Yes. Just to clarify also on the Consolidated Thompson day when they talked about the mag line, it was also just based on the main pit and the east pit. We have since explored into the west pit, which is a higher hematite sort of pit. So it's a different sort of ballgame that were dealing with today than what they initially had.

Great. Thanks so much.

Nathan Littlewood, Credit Suisse.

Thank you very much. I appreciate the opportunity.

I just had a question first off about Eastern Canada and pricing there. You guys have dropped the IODEX reference price from $128 to $120 a ton.

When I look at the sensitivities that you provided previously, one would have thought there would also have been a downgrade to the pricing guidance for Eastern Canada to correspond with that. That doesn't seem to have been the case. You've actually maintained that pricing guidance.

When I look at what's going on with sort of value and use premiums at the moment in the freight market, I struggle to sort of reconcile that. Just wondering if you could talk a little bit about what is behind the apparent upgrade to your Eastern Canada pricing expectations there?

Yes, Nathan.

You know, what is really happening here is we give a pricing band. So your expectation that we should lower it to the next band downwards is absolutely correct.

There are a couple of things happening there. You've got to step back and look at, that is one variable that we look at in the sensitivity; but we also make estimates around FE content from premium standpoint, we also look at freight costs and what our expectations are there.

So what's happening is the market price has taken us to that lower band, but we've also seen higher FE premiums than what we had planned for in our expectations on our original outlook.

As well as from a freight standpoint, we're receiving better freight rates because were doing a higher mix of Chinamax vessels than we had previously planned for. And that's taking you from down that 8%, and that's putting you back into the mid-pack of that band we left it in.

Okay. Thank you.

The other question was just on sort of liquidity in the balance sheet.

When I look at the consensus estimates for free cash flow for this year, they are just over $300 million. I would expect that there is probably going to be a bit of a reversal of the working capital situation from the March quarter consuming part of that $300 million for a full year.

So it doesn't look like there's going to be a whole lot of cash generated, and therefore not much change to the total net debt position.

As you know, the covenants have come back from holiday now. And it looks to me that on both the sort of consensus or our own price deck, you guys are potentially going to have problems with that 3.5 to 1.0 debt-to-EBITDA covenant by the September quarter of this year.

Just wondering if you could talk a little bit about where you're at with refinancing? And maybe how you are thinking about the capital structure going forwards?

Yes, Nathan.

You know, the way I look at it is we're sitting here with a liquidity position. We're back on the debt-to-EBITDA ratio. We're ended the quarter under 2.5 times.

We monitor that very, very closely. And we look at our own plan; we sensitize that. And we're always taking a hard look on when do we think are going to have some challenges if pricing goes down? That is something we really focus on as a management team.

With that being said, I don't necessarily, depending on what price you see happening, I'm not sure third quarter would be a problem for us based on the way we look at it. In any event, we have good relationships with our banking partners; and if we needed to go for another amendment or some covenant relief, we are comfortable we can make that happen.

And we will do that far in advance of us having any challenges from the 3.5 times debt-to-EBITDA coverage.

Okay. Thank you very much. Appreciate it.

No problem.

That concludes our call today. I will be around for the remainder of the day if any of you have follow-up questions. Thank you.

This concludes today's conference call. You may now disconnect.