Cleveland-Cliffs Inc (CLF) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, my name is Melissa, and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2014 third-quarter conference call.

All lines have been placed on mute to prevent background noise to prevent any background noise. After the speakers remarks, there will be a question and answer session.

At this time, I would like to introduce, Terry Paradie, Executive Vice President, Chief Financial Officer and Treasurer.

Thanks Melissa, I'd like to welcome everyone to this morning's call.

As we start, let me remind you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor Protections of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially.

Important factors that could cause results to differ materially are set forth in reports on forms 10-K and 10-Q and news releases filed with the SEC, which are available on our website. Today's conference call is also available and being broadcast at 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 was published after market yesterday.

At this time, I would like to discuss Cliffs liquidity and our bank amendment. Despite the steep decline in iron ore prices and the payment of expenses related the proxy contest, during Q3 we were still able to pay down $100 million in debt.

At the end of the third quarter, Cliffs had long-term debt of $3 billion with zero drawn on the revolving credit facility and $244 million of cash and cash equivalents. During the second quarter of this year, we had $3.3 billion of long-term debt, including $275 million drawn on the revolver.

In comparison to the third quarter of 2013, long-term debt was $3.3 billion, including $380 million drawn on the revolving credit facility. The next [rich] future maturity date of long-term debt will be in 2018. As of today, we have $250 million of cash on hand and no drawings on our revolver.

Now, I will turn my focus on the new bank amendment. We did seek a new amendment as a result of our recorded non-cash impairment of long-lived assets, attributable to Cliffs shareholders of $5.7 billion after tax for our seaborne iron ore and coal assets in the third quarter of 2014.

We worked with our banking group to obtain an amendment that eliminated the debt to capitalization covenant of 45% that was introduced in the revolving credit facility in June of 2014. We actually reduced that during the quarter. However the non-cash impairment charge increased the debt to capitalization ratio over that threshold and that amendment.

The new bank amendment terms continue to ensure we have flexibility in our covenant structure and enough liquidity to comfortably run our business. As of today, our liquidity is approximately $1.4 billion. We appreciate the ongoing support of our current lenders.

With that, I would like to turn the call over to our Chairman and CEO, Lourenco Goncalves. Lourenco?

Thanks Terry, and thanks to everyone for joining us this morning.

Today, we are going to go over a lot of ground, most of which will be forward-looking. I will discuss Cliffs newest strategic direction, the progress we have made on the 90-day plan I set out before I assumed the position of Cliffs CEO, and key highlights of our third-quarter performance. At the end, we will take your questions.

This is my first investor conference call at Cliffs, but not my first conference call with several of you. We appreciate the support of the vast majority of Cliffs shareholders, which voted for real change in this Company in late July. Several of these investors have made a lot of money with Lourenco Goncalves before. And we will make money together one more time.

Some others will lose a lot of money for trying to continue predicting the past with complete disregard for a well thought out business plan being implemented with discipline by a CEO with a track record of success. The past is over in this Company, and the present is a lot of work to bring a profitable future for Cliffs. We will reward the [longs].

For most of the 167 years of Cliffs history, the Company has primarily been an operator of iron ore mines on the Great Lakes. Today Cliffs Great Lakes regional mines remain our biggest strength.

Over the past decade, prior management teams moved away from the score, diversifying into different products and geographies in an attempt to replicate the big three global mining companies. It was a mismatch of capital investments in where we make money.

As evidenced by our recent impairment announcement, it is now quite clear that this attempts to expand and diversify were misguided and resulted in the destruction of several billions of dollars in shareholder value.

Let's consider the 90-day plan I developed for the Company and presented to ISS in June. This plan has been a guide for my management team and the Board. And I'm proud to tell you we have marked accomplishments against every element.

We have a sharp focus on improving the Company's overall profitability and EBITDA is the key indicator that we use to evaluate the Company's financial performance. Due to the impact of the impairment charges and other items, at this time, we're using an adjusted EBITDA, which gives us a better view of our operational and financial performance.

When you look at Cliffs portfolio from an EBITDA perspective, you see that we have two assets that are positive EBITDA contributors, one lone core asset that is EBITDA neutral, and three sources of negative EBITDA that contributes to our current challenges.

Let me explain. For the third quarter 2014, Cliffs reported adjusted EBITDA of $233 million. Our US Iron Ore and Asia Pacific Iron Ore business segments, generated nearly $300 million in adjusted EBITDA supported by deep cost cutting efforts and enhanced productivity.

Our core business, US Iron Ore, demonstrated remarkable strength in the third quarter, as it generated $249 million of adjusted EBITDA. This is more than any of our other business segments and exceeds the adjusted EBITDA for the Company on a consolidated basis.

In Asia Pacific Iron Ore, we were able to report $46 million of adjusted EBITDA, despite the much lower iron ore pricing in the quarter. That was accomplished thanks to our cash production cost in the low $50 per ton range in Q3.

Even more important regarding our Asia Pacific Iron Ore business, our total CapEx needed for the next six years is a total of only $50 million. And that is for the rest of the life of mine to continue to operate at this cash cost or less.

Our cash cost expectation for APIO in 2015 is $48 per ton. We are totally confident that our Koolyanobbing Mine is as good as or better than the major global iron ore producers due to their massive capital needs now and in future years.

Additionally, our rich product mix, with more than 50% of lump ore commands a higher premium for Chinese buyers, as China starts to address their serious problems with air pollution. Our lump mix will become 53% next year and is already much higher than the percentages of lump ore in the mix delivered by the three Australian majors.

With all that, we are not in a hurry to sell the Koolyanobbing Mine, even though we have no plans to continue in Australia beyond the life of mine. Now, let's talk about the North American Coal business.

North American Coal reported $6 million of adjusted EBITDA in Q3, basically breaking even for the quarter. This is a big accomplishment. Our operational team in coal has been cutting costs and operating wisely despite the depressed met coal pricing.

For those of you that know me from my days at Metals USA, I will treat the coal assets like I did with Metals USA building products business. We will make sure that our coal business does not consume much CapEx, nor put a drain on our over all profitability.

We will maintain the business to meet our very important safety and environmental requirements, as well as our permission to operate commitments and basic maintenance expenses. In summary, North American Coal is a zero EBITDA player until we find a buyer.

As previously stated, we have three areas that have been a drain on our cash and profitability, Wabush Scully Mine, corporate overheads, and Bloom Lake Mine. Let me be clear, we are in the process of fixing all of these three issues.

At Wabush, we are implementing the permanent closure plan for the mine, which has been idle since the first quarter of 2014. But while still carrying a lot of expenses when I arrive into the Company. With that, by the end of the year, Wabush Scully will be completely erased from the portfolio.

As far as corporate overhead, we are eliminating functions, remote offices and irrelevant activities, which we don't need to have. And are almost always associated to high costs and low or no returns. We have lowered the staffing levels across the entire Company, closed the corporate service office in Duluth, Minnesota, and further our efforts to reduce overhead and office space in Cleveland.

For the quarter, our recurring SG&A was down significantly to $39 million and we just lowered our full year expectation to approximately $165 million. Next year, these amounts will be below $150 million.

The third is our Bloom Lake Mine. Bloom Lake phase one is unprofitable, largely due to pricing, but mainly because, with just phase one in operation, we lack sufficient volume to run across the mine assets.

For the third quarter, we had a negative adjusted EBITDA of $33 million at Bloom Lake. To drive profitability and reduce cash cost to the low $50 per ton range, phase two must be developed. However, we have already made the decision that Cliffs will not develop phase two alone. We would otherwise develop phase two if we are able to attract three new equity off-dig partners who will share in the capital costs.

That's the business model of our US Iron Ore business, and that model works. We are targeting three equity partners that can appreciate Bloom Lake's most positive attribute, a high quality 66% iron ore content, low silica concentration.

Which is perfect for sophisticated blast furnace operators and also for the production of high performance DR pellets. Bloom Lakes ore is in a different class, well above the typical iron ore shipped by the Australian majors to China.

Let me be clear one more time. Bloom Lake phase two will not be developed to be a [me too] supplier to compete in international seaborne market of iron ore, [food] stock.

Bloom Lake has some of the best quality iron ores in the world for an operating mine. And given the relative ease by which we are able to separate silica and other minerals from the ore, Bloom Lake iron ore has the potential to be the ore of choice for the production of DR pellets.

The biggest challenge with Bloom Lake is that, without injecting the capital needed to build out the proper infrastructure to execute phase two, the mine will never be cost competitive. Conversely, with phase two volume, Bloom Lake cash costs improves dramatically and the real penalties go away.

In order to develop phase two, the Canadian parent company that holds the Bloom Lake Mine partnership must secure at least a 10% equity participation from each one of the three new partners that will take, for their own use, the high quality iron ore.

We believe the total CapEx required to accomplish this is approximately $1.2 billion with about $450 million of that ear marked to complete construction. And $750 million to develop the [Tabies] Pointe, which is an expenditure spread over an extended number of years.

Each of the three new equity participants with whom we are in active discussions, are top tier producers of high quality steel. With their individual 10% equity stakes, each one of these equity participants would underwrite long-term off-dig arrangements for roughly 25% of the production. Each one for their own use.

Together with Wuhan Iron & Steel Company, the four minority equity holders would absorb the entire production of the Bloom Lake Mine. With that, Bloom Lake would actually displace existing or new capacity on the seaborne market and dedicate its product to the type of customers who value its premium qualities for their [S-II] making processes.

This is the business model we have in place for US Iron Ore, and that has been working well for all our partners in the US market for a very long time. We have a goal of securing this commitment before the end of 2014.

If developed, Bloom Lake phase two would produce an estimate 13.5 million tons of high quality iron ore with a 66% iron ore content at a cash production cost in the low $50 per ton range. This would be truly outstanding and with this cost profile and equity infusion, we would surely want to continue to own and operate the asset.

However, if we're not able to achieve this option, closure or other permanent option will be immediately considered as running only phase one is not a physical possibility over the long term. Simply put, we will not continue producing at Bloom Lake and selling at a loss in 2015 and beyond.

I know that Cliffs has gravely disappointing its long-term shareholders in recent years. That's why I am here. I assure you that we're taking all the necessary actions to get Cliffs back on track.

Despite our sense of urgency, this is not something that we can achieve overnight. It's going to take more than one or two quarters of very hard work to bring everything together. Our strategic focus is to fortify the foundation of our US Iron Ore business, as well as streamline our portfolio of assets. That said, our non-core assets do have real value and perhaps greater value in another party's hands.

Despite the challenges presented by the current commodity cycle, we will not consider a fire sale of our assets. That is, we will only sell assets at the right price if and when we find buyers willing to pay what we believe the assets are truly worth. Except for our self-imposed sense of urgency, we are not working against any specific time line.

We don't need to sell assets, and we have more than enough liquidity to run our business and pay down debt. There's no time bomb ticking within Cliffs.

Some of you may recall that in my first day with Cliffs, I revoked the warn notice in place for our Pinnacle metallurgical coal mine in West Virginia. We did that because it makes sense to operate this premier low vol met coal mine.

Since the decision was made to continue operations at Pinnacle, over 300,000 tons of additional sales have been committed to our tier one customers for 2014 alone. Such orders would not be given to us if we had capped the mine on its to be idled. And we would have no orders for 2015.

Also our lower ore Eagle and Powellton Mines, both located in Logan County, West Virginia, produce high quality A and B plus high volatile metallurgical coal. While our Toney Fork Mine, also located in Logan County, produced thermal coal for tier one customers.

Our Oak Grove Mine located in Alabama produces what is classified as a high quality, low volatile metallurgical coal. Due to the high CSR coke strengths after reaction and low sulfur characteristics of this coal, it makes a superior and high strength coke product, which works especially well in larger blast furnace applications.

Despite the low coal prices we have been facing, our coal business during Q3 was able to generate $6 million of EBITDA, and that was due to the low cash production cost of $68 per ton achieved in the quarter.

This is strong operational performance continues to significantly drive down cash production costs and the cost reductions we have made are sustainable going forward. As I have said before, this is a good business, but it is no-core and at the right price we will sell our coal assets.

Now, I will address the perceived threats to our US Iron Ore business. Cliffs is a leading producer and supplier of iron ore pellets in the US domestic market, particularly in the Great Lakes region where we have transportation advantages and a stable base of customers, committed to long-term supply contracts.

These contracts are built on formula pricing, which helps to mitigate the volatility of seaborne pricing and works as a natural hedge against downward pricing pressure in global markets. Platts is spot pricing is just one factor in the revenue we generate from our customers.

To illustrate that, this quarter bench marked iron ore pricing averaging $90 per ton. After sea freight to China and quality discounts, the major iron ore producers in Australia, probably realized revenues of $70 to $75 per ton. And that may even be generous.

As you saw in our release yesterday, our US Iron Ore business was able to get above $100 per ton. That's a very good price realization under the current market circumstances and something I feel that many people do not appreciate about this business. Considering it is more than half of our iron ore sales.

As we move forward and some of this contract near expiration, most notably in late 2016, we will continue to structure them in ways that remove volatility. Cliffs and our customers are co-dependent. We know that and they know that.

I also want to highlight here that, not only do we have natural geographic and pricing structure advantages in our core US Ion Ore markets, but we also sell a value added product. Our US Iron Ore pellets are often incorrectly compared with seaborne iron ore finds.

Finds require additional processing at the sintering plants of the steel mills where they are processed into sinter at the cost not very different from our cost to produce pellets. Our pellets are shipped primarily to Great Lakes blast furnaces as opposed to the iron ore finds that the Australian majors shipped to Chinese ports.

Cliffs distilled customers understand and appreciate the values and used attributes of our pellets. In addition to the cost to produce the sinter, sintering plants also create significant air pollution, which is visible to the naked eye in China.

Neither the cost to produce sinter, nor the pollution generated is taken into consideration by the casual observer when comparing Cliffs iron ore pellets, influx pellets, delivered to the blast furnace of for our US customers to Australia fines delivered port side in China.

While we are on this topic, there are three other misconceptions I would like to address head on. The first misconception is that Cliffs is a high cost producer of iron ore. This is not the case.

Cliffs is a high cost producer at Bloom Lake only, which makes up less than 20% of our overall sales volume. All other operations are as good as or better than anyone else in terms of costs. During the third quarter, US Iron Ore cash production costs was $59 per ton, and that includes the cost of the pelletizing process.

We have undertaken extensive internal benchmarking exercise within our US Iron Ore business segment. The main focus is on labor productivity, as well as maintenance and reliability engineering.

Additionally, long-range mine plans have been reviewed and altered. Going forward, we believe that we'll be able to further reduce our already very good US Iron Ore cash cost number.

The second misconception is that Cliffs is a proxy for highly volatile iron ore pricing. This is simply not true. In fact, there is no major iron ore producer in the world whose business model is tied less to seaborne iron ore than Cliffs.

More than half of Cliffs iron ore production is sold through a stable long-term contracts to a steel manufacturing base at the heart of the US market. Also, some of these contracts have downside protection built in. And the current low IODEX numbers are already below the minimum threshold for these contracts.

Cliffs should therefore instead be seen as a proxy for the US economy, which is more resilient and growing consistently. In sum, correlating our enterprise value directly to seaborne pricing is not accurate.

The third and related misconception is that Cliffs is a pure play seaborne producer. Nothing could be further from the truth. Our US Iron Ore business is not seaborne, and does not compete with seaborne.

But our US Iron Ore business is cost competitive, has low CapEx requirements, healthy cash flows, strong margins, contracts with downside protection, and generates more than half of our total revenues. This strong franchise in US Iron Ore supports the Company even in the most difficult parts of the commodity cycle.

These misconceptions are not only frustrating, but also harmful. We are neither a high cost producer, a proxy for highly volatile iron ore pricing, nor a pure play seaborne producer. On the contrary, we are a fundamental play on the US industrial economy.

One other item to address in the US Iron Ore business is the threat of new supply entrants in the Great Lakes. We, quite frankly, believe this concern is over blown. In the event that these products come into production, we believe that they would still have a hard time displacing Cliffs.

Cliffs has long-term contracts with our customers and a deep knowledge of the blast furnaces. We provide these blast furnaces with homogeneous pellets, taylor made for each one of them. Changing the raw material input is not an easy task, and our customers are aware of that as well. As I said before, we are co-dependent.

Additionally, these products may have made sense in their $140 plus per ton iron ore environment that we saw a few years ago. But in the current price environment I don't see how they make sense when the steel makers have favorable existing contracts with a proven supplier like Cliffs.

Building on the strength of our US Iron Ore business, there is no better example of the tremendous opportunities that lie ahead of us in the US than the potential we have to supply [electronic] steel makers.

Clearly the integrated blast furnace market is not going away and it will continue to be the anchor of our US Iron Ore business. What's exciting is the chance to participate in a market we have yet to tap. We are well positioned for it and ready to do so.

So while we have many strengths and many opportunities in our US Iron Ore business, the fact is we have other assets that we must manage as well. As I stated earlier, our Asia Pacific Iron Ore business is a profitable business segment. It has a strong cash flows and continues to generate a healthy EBITDA. Despite the depressed price environment.

For the third quarter, our cash production cost was $52 per ton. The depreciation of the Australian dollar against the US dollar in recent months, which effectively lowers production and operation operating costs and results in higher margins for all Australian producers, including Cliffs APIO and also including the big three iron ore miners, has helped further alleviate the pressures resulting from the depressed pricing environment.

Moreover, our Koolyanobbing Mine produces a very competitive iron ore product with a 50/50% mix of high quality, 61% iron ore content lumps and 59.9% content fines.

Also very important and not always understood, while the largest miners in Australia will continue to spend billions and billions of dollars as CapEx, during the next several years, we can operate our Koolyanobbing Mine for another six years with a very low total CapEx of approximately only $50 million over the six years remaining in the life of Mine.

Maintaining the integrity of the operation and meeting all our environmental obligations. We are fully aware of the price war currently going on among the three biggest Australian miners, which is based on the well advertised low cash cost of two of them.

However, not a lot of time is spent discussing the several billions of dollars that these companies need in CapEx during the next several years. As far as Cliffs APIO business is concerned, we confirm that it's non-core, and we would like to sell it. However, if we don't find a strategic buyer who will pay fully and fairly for the value that is there, we will continue to operate through the end of the life of mine.

Due to our competitive cash costs, our very low CapEx needs, and no commitment to stay long-term in Australia, or no commitment to sell our ware in China, we'll be able to succeed for the next six years, even if the low price environment persists or even if it becomes worse.

By the way, I have doubts if the big Australian miners will be able to sustain there huge CapEx requirements out of the cost plus business model or if in a few more quarters, their current behavior toward pricing will not change.

I have seen change in this business, after being in this business for 32 years. However, this is none of my business. Cliffs Koolyanobbing Mine has staying power for the next six years. In the meantime, we may sell the asset. If not, we are in good shape.

We have surely covered a lot on this call already. And very much look forward to answering your questions. I would like to reiterate that we are prepared to drive the Company forward or a new strategic path that restores and delivers value for our long-term shareholders.

With that, I'll turn it over to the operator to direct the Q&A part of the call.

(Operator Instructions)

Your first question is from the line of Jorge Beristain from Deutsche Bank. Your line is open.

Hey, Lourenco, Jorge from Deutsche Bank. I thought that was a really great summary. I guess the largest concern and overhang, though, related to Bloom Lake is if an exit at all is possible that the number one concern seems to be there are the liabilities at that subsidiary recourse to the parent company.

So I'm wondering in the event that you are not able to get the steel mill partners together by the fourth quarter, could you give us some idea if there's some downside protection to the strong US Iron Ore cash flows from the legal structure the way that Canada is set up that these liabilities and the take-or-pay contracts would ultimately not be recourse to the parent?

Good morning, Jorge, thank you very much for your comments. And the answer is yes, there is no risk of contamination to the parent company in the event that we need to do something specific about Canada. Everything would be within the parent company that holds the Bloom Lake assets.

Great. And my second question is when you contemplate bringing in the steel mill partners, could we read into the tea leaves that US Steel's recent announcements to pare back their own CapEx commitments to fund internal iron ore projects is perhaps clearing the way for them to be a participant in this project?

And could you give us an idea as to what of the pending $450 million of growth CapEx that would be required in Bloom Lake, what would be your or Cliffs' specific share, would it be 25%?

Well, we have a partner there that owns 17%, that's the public information. We attract another three partners, each one with 10%. That makes 47%. So Cliffs would be a 53% shareholder and a 53% party responsible for the CapEx to deploy to build phase two, in case all three come to play.

And is it make or break that the three is the magic number or could this be done with two? Is it basically --

Jorge, it could be done with one. Then one needs to buy 30%.

Okay.

What if two come and one doesn't come, then all three are out of lucky because I'm not going to go with phase two. I don't have a blast furnace and I'm not planning to produce DR pellets. I don't need DR pellets; I don't use blast furnace. Cliffs needs profits and the shareholders need to be rewarded.

As part of the offtake agreements, so the offtakes would each be for each 10% equity infusion from a partner potentially, 25% offtakes. Could that also contribute to some more up-front cash that you could see getting from these partners if they come in above and beyond their 10% equity stake?

Yes, look, this is just a proposal that would not only give these steel makers that are big, highly sophisticated but do not own any iron ore assets on their own, to warrant some real high-quality iron ore that they can use and mix with the commercial quality finds that Australia sells in Asia and somewhere else.

So that's their ability to own some iron ore that could position them well. And the important thing is that we are not planning to build phase two to go compete in the seaborne iron ore market. That's out of question. If this mine will be built, if phase two will be built, then we will be in completely great shape if terms of our cash loss, rail penalties, everything. It will be to displace new capacity in the iron ore seaborne market. If that's not the idea behind, forget it.

Bloom Lake phase two is not going to happen. And Bloom Lake phase one alone will not fly. So I'm giving until the end of the year to sign documents and have binding agreements.

It's not like we're going to make a decision December 31st. The decision will be made before that. By December 31st, we are going to be announcing the construction of phase two or going to phase zero, let's call it that. Phase one doesn't exist.

Perfect. Thanks very much.

You're very welcome.

The next question is from the line of from Sal Tharani from Goldman Sachs. Your line is open.

Good morning.

Good morning, Sal.

Lourenco, there was a comment you made which I probably missed that your US contracts have some downside protection if iron ore goes further below, is that correct I heard?

Yes. Some of our contracts -- not all of them, but some of them we are already below the threshold. So it's like iron ore international prices are $100, $90, $80, $70 or $60 is basically the same thing; doesn't change.

Got you; okay. And also on Bloom Lake, [or comment] of which is phase zero, do you have any idea of what kind of cost will be involved? And also would you be able to take all the liabilities of that (inaudible) asset, including railway contract, and combine that to make a decision whatever you want to do, like, bankruptcy or whatever you think can be done like US Steel has done for their Canadian assets?

I do have more than an idea. I know exactly the number, but I'm not going to tell you and I'm not going to tell publicly in this call.

And phase zero, we are not there yet. Phase two, we're not there yet. I'm going to take my shoes off when I get to the river. I'm not there yet. I'm working to get there.

That's understandable. Just one quick question, on your -- the Wuhan contract also has some offtake agreement. How would that play if you do have to shut down phase one?

Wuhan has an offtake contract of 3.7 million tons that is related only to phase one. So pretty much fits my thing because we get to 13.5 million, 14 million tons with phase two, Wuhan would be one of the offtakers.

Okay. Great. Thank you.

You're very welcome.

The next question is from the line of Timna Tanners from Bank of America Merrill Lynch. Your line is open.

Hello, good morning.

Good morning, Timna.

Just a couple things. So I wanted to ask about exit costs and the remediation or permanent closure costs when you think about Koolyanobbing, but also if you don't go ahead with phase one. Can you just give us a little idea about what that might entail?

Well, the cost of Koolyanobbing, basically the numbers that are already built into OpEx, because I'm just talking about ARO, asset retirement obligations. So there is nothing else for us to be concerned about. It's all booked. It's all being accounted for. So there is nothing to be concerned about in Australia.

My $50 million CapEx, that's it. And if you want to make a quick and dirty calculation, instead of saying six years, say five. And you're talking an average of $10 million per year. And instead of talking about the 11 million tons per year, let's talk about 10 million just because I don't have a calculator.

So $10 million per year, 10 million tons, is $1 per ton. I would love to see in your next report, Timna, a comparison in CapEx between my Australia assets against BHP, Rio Tinto, Fortescue and these guys. Maybe they deserve a better price than $4 per share. I don't know.

Yes, so, no, that's interesting, there's no closure costs then on top of that then? I just wanted to clarify.

Nothing, zero, nada.

Perfect. Excellente. And if you could would that also be not a consideration then are you saying for Bloom Lake if you don't go ahead with phase two? Is that also something that we wouldn't have to calculate in?

Like I said about Bloom Lake, I'm now -- -we're operating phase one, and phase one is no man's land. From phase one I'm going to phase two with three new equity partners, sophisticated steel makers. They are doing a lot of homework, are being very active in understanding what they are stepping in.

And all of them have long-term relationships with me and some relationship with Cliffs. But long-term relationship with Lourenco Goncalves, so that they are dealing with a partner that can do good on things that I promise.

So they are doing their homework, but we have no decision yet, so bear with me. I know people are anxious to hear about Bloom Lake, but this is not like selling a house. I know that you guys, you sell houses very quickly, but here it's more complicated than selling a house.

Okay. I have another question on Bloom Lake. But I'm going to hold off because it sounds like you're telling us to stay tuned. I'll do that.

And then I guess the only other question I had was people keep asking about the status of the buyback that you announced. So I just wondered if you had any update on how you're thinking about uses of cash?

Look, the buyback, you should see the -- well, first of all, the buyback is in place until December of 2015. So we have plenty of time to execute on the buyback. But you should keep in mind, Timna, that the buyback is a way to reward shareholders, not the only way to reward shareholders.

And also, we need to do a lot of homework in this Company before we start rewarding the shareholders. And I believe that the shareholders that put me here, the vast majority of the shareholders of Cliffs Natural Resources, they understand that. And they will bear with me, and they will stay put and they will wait for the right time.

But the buyback was put in place quickly because I had no idea what would happen with the stock price. Let's assume that anxious people would drive my stock price to a very, very low number. I would use the buyback. But apparently, this situation, this understanding is behind us. It doesn't mean that I will not use the buyback.

I may use the buyback, but the buyback is kind of a loaded gun that I put it in my side table at night. Doesn't mean that I'm going to shoot, and doesn't mean that I'm going to kill anybody, but the gun is there, for my protection.

Okay. Great. Thank you for your help.

You're very welcome.

Next question is from the line of Mitesh Thakkar from RBR. Your line is open.

This is Mitesh from FBR actually. Just a quick question on the APIO segment. Lourenco, you mentioned that reclamation liabilities and asset retirement obligations are all accounted for, but has the cash been paid out for it? If not, what is the cash impact?

All these numbers are accounted for. This is a mine with a long life. It's not like Bloom Lake that's a new mine. These numbers are not really relevant to the point that we would be so concerned about. But we are talking about something like $20 million, $25 million distributed in five years. So it's not really relevant.

Okay. Great. And just to follow up, obviously a very good job on the cost side. On the coal and APIO side, can you give us some color, and I know you have mentioned this before, that you have done a lot of homework on the ways to reduce cost in the US Iron Ore side as well.

Could you tell us what kind of magnitude are we looking at here? And how should we think about normalized cost in that part of the business?

You mean US Iron Ore?

Yes.

Okay. US Iron Ore, first of all, let's qualify, in your model, do we use fines or use felts?

I use pellets.

Okay. So if we were talking pellets, we accomplished in this quarter $59 per ton.

Right.

And I can't emphasize that enough. This is the cost to produce pellets. So we have a cost here probably below $40 to produce fines, people don't realize.

But anyway, stay with your costs to produce pellets of $59. We are going to continue to drive these costs down. We are going to go to a low $50 per ton to produce pellets in the next couple of years. How fast I'll get there, I don't know. We'll see. We're working.

And I'm sure the energy component of the pellet production is also helping you a little bit there. Does that low $50 include that?

Yes, absolutely. Yes. That's the reason I started asking before including the cost to produce pellets or not; you said yes, so I gave you my expense including the production of pellets.

Great. And the maintenance CapEx, how should we think about the US Iron Ore maintenance CapEx?

We are continue to benchmark maintenance. We are continue to optimize preventive maintenance. Terry Fedor and I have been talking a lot about what we can do. At this point in time, if I had to plug a number in your model, I would plug $100 million.

Thank you very much. I appreciate it and good luck.

Thank you, Mitesh. I appreciate your support.

The next question is from Evan Kurtz from Morgan Stanley. Your line is open.

Good morning, guys.

Good morning.

Good morning, Evan.

Yes, maybe just a couple questions on US Iron Ore. So first maybe just coming back to the guidance you just gave on costs for that business. It seems like you're splitting out costs into two categories now that we haven't seen before, a cash production cost and a non-production cash cost.

Can you maybe explain what's in those two buckets and why are we splitting those out? Is there a way to get those non-production cash costs down quicker or how do you think about that?

Look, the reason why I'm splitting is because some of the research analysts, including yourself, Evan, believe that Essar Minnesota would come online and you also believe that the costs would be $40 per ton. They don't have the impact of cost of goods sold because they haven't started to produce yet.

So the breakdown is basically cash production costs and a bucket of things in which the biggest thing is the impact of running the costs through the inventory. And then we have all kinds of impact; could be low cost of markets and stuff like that.

So in order to compare apples with apples, I need to really separate that. That is very important thinking that per parcel that adds to the cash production costs would be royalties, which we have full control and full knowledge about the number.

But these things are not being compared when people talk about the potential entrants in there. So the main reason why I am opening the cost a little more is basically to try to give you guys some type of indication to compare those. Because the other project that was advertised as being a $40 per ton cash cost, Bloom Lake.

Go back, two, three, four, five years ago, you want to see Bloom Lake be advertised at a $40 per ton cash cost. So people can talk whatever they want. Everybody that has a mouth tends to talk. But the fact of the matter is that US Iron Ore has been there for a long, long, long time. The Essar Minnesota that may or may not come online is just an extension of our heating line.

We know the iron body; we know how to explore ore in the area. We have a very good mature relationship with the Union, so we don't believe that they can get any benefit in mining or in labor costs. We have a very good relationship with the railroad, BNSF. They are doing a phenomenal job for us, especially now that I am here at Cliffs, dealing with Dave, the EVP that fixed my problem with BNSF at California Steel, and that was 14 years ago and we are back again working together.

So they're not going to get an advantage as far as railroad. So where in hell are they going to get better than Cliffs, a company that has been in business for 167 years in that specific area. We command more respect. We are very competent and we need to put numbers for you guys to compare comparables and that's what I'm doing.

Okay. I mean, I guess just to clarify, one of the main reasons I actually asked was when you talk about maybe getting costs down to the low $50s in the US, you're talking about these cash production costs, not the total cash costs?

Well, if we don't have fluctuations in price, if we don't have LCN, and we are just talking about royalties, then we are basically talking about the same number.

Okay.

Did you follow my logic?

Yes, I got you. There's a lot of inventory coming, the other number that could smooth out over time.

Yes. Evan, and then you have the compare those to start to produce, they will also have inventories. They will also have to calculate costs through the costs of goods sold, so then I may stop and give you the two figures.

But for the time being, I'm going to insist to give you the two figures. You pick the one you want. If you're long, you'll pick the low cost; if you're short, you'll pick the high one. Use in your report whatever you want.

Really just trying to get a sense of whether you're talking about a $5 decrease or something more. But maybe moving on to pricing in the segment.

The last Management team always talked about having 40% of their contracts tied to a seaborne linked rate. And we kind of hear from some of your customers that they're on a one-quarter, one-month lag. So I'm just kind of curious about how we should think about first-quarter costs as we roll into next year? Because some of those one-quarter, one-month lags will start to roll in, I assume?

Are they hitting floors, maybe how many of that 40% is actually floored? And the other factor is the Essar contract? That, I believe, switches from fixed price to floating in the first quarter of next year as well. How do we kind of think about that as we model going forward?

Right now it's all in flux, so the long-term clients of Cliffs, they are protected. Cliffs is protected as well. We are very pleased that we were able to attract a new client for Cliffs. We are starting to deliver iron ore to ArcelorMittal Dofasco and that is allowing us to be able to sell 100% here instead of exporting a million tons seaborne. I'm very pleased with that.

And so I'm not very concerned about the Essar Algoma contract at this point because at the end of the day, the 3.3 million tons that I supplied to Essar Algoma at this point, I may need for somebody else. And then they would need to count on Essar Minnesota. And if Essar Minnesota doesn't come, unless they find replacement for iron ore, I think that Essar Algoma may be in trouble.

So what about that? So there's a lot going on in this special thing, so I'm not going to discuss any details on commercial contracts.

Great. Thanks for answering my questions.

Thank you, Evan.

Next question from the line of Sam Dubinsky from Wells Fargo. Your line is open.

Thanks for taking my question. Just in Q3, looks like pricing was pretty good in the US, better than I thought based on where the spot is. Was there any higher price carryover tonnage from the first half? Just because I know there were some supply disruptions that pushed H1 into Q3 a little bit. And then I have a couple follow-ups.

Sam, I appreciate you saying thank you for taking your question, but I'm not going to answer your question because you already know everything about my Company. You have a $4 price target, and we think that we can sell assets. So I'm going to take the next question, I'm not going to answer you. Next question, operator, please.

The next question is from the line of Nathan Littlewood from Credit Suisse. Your line is open.

Good morning, guys, thanks for the opportunity. Apologies in advance if I have missed some of this. There's a lot going on this morning.

Lourenco, you talked a lot about the US Iron Ore pricing and there's clearly a lot of moving parts to that equation over the next little while. Just wondering if you might be kind enough to provide an estimate of where we could expect USIO average selling price to be next year if we were to see a scenario where the current spot prices were maintained at circa $80 a ton for the full year?

That's one part. The other part, if we could? You mentioned that you're expecting to get US Iron Ore cash costs down to the low $50s over the next few years, which sounds like a great outcome. Again, could we go into that in a little bit more detail? And would you be able to perhaps provide a bit of a profile of what that might look like over the next few years?

Sure, Nathan, thank you very much for your questions. I'm going to reply, the cash cost US Iron Ore part, and then I will ask Terry Paradie to reply to the pricing part of your question.

As far as the cash costs of US Iron Ore, we are extremely excited what's going on at the mines. I have been through the iron ore mines a lot, and on Thursday I'll be in Hibbing again. Terry Fedor, the EVP of US Iron Ore and I, we're working hand on hand with the general managers, with the plant managers, with the mine superintendents, and we are working hard to cut the fat.

We're working hard to trim the stuff that we don't need. We're working hard to make the BNSF and the CN [quadrants] to work in our favor, not having to spend extra money to put pellets on the ground and then bring the trains and move the pellets out of the ground.

So we are working on -- it's like blocking and tackling every day. And because we have a very good operation, because we have a very committed work force from the steel workers, working hand on hand with us, together with management, the local management at the mines, we are very, very confident that we will continue to provide high quality products, tailor made to each blast furnaces in the United States.

And we will in a couple of years be talking about a 50/50, $1.50 to $2 max to produce pellets in the United States. And with that, I will pass to Terry Paradie to explain about the sensitivity of pricing.

Yes, Nathan, you know we'll provide some new guidance out from the sensitivities when we issue fourth quarter results. But the way I would look at it is kind of is you can take the sensitivities that we provided for last year on a full-year basis and instead of substituting the $2 to $3 sensitivity for USIO for every plus or minus $10, I would use $4 to $5 as that new sensitivity as we'll see more contracts next year flipping into link pricing to the Platts price. And you can be able to do the math on that and get back to where -- an expected realization range for 2015 for USIO.

Terry, that's certainly helpful on the sensitivity, but I guess what we're still missing with this puzzle is the starting point. I don't imagine, given the reset of the Essar Algoma contract that the starting point here is going to be quite as favorable as it has been for you this year. So is that starting point something you could help us with as well?

Well, I would go with your starting point as last year in Q4, we had $128. You back out and you pop in any number you want in there, $80 for the full year, you can do the math. And I think you'll get into the range, even with that sensitivity. And then we will update that forecast in our Q4 results as we always do.

Okay. Cool. Thank you so much.

Nathan, one more thing. We are working here with everything that we're forecasting in a very, very bearish situation that I don't even believe that will materialize. Because as I tried to explain during my call, one point that I believe that has been missed in this entire pricing thing for iron ore is that the majors, BHP, Rio Tinto, Valley, they -- in order to do what they are saying that they are going to do, they need massive amount, a massive amount of CapEx.

And that needs to come from the cash generation. So I believe that this price situation may even get worse a little bit in the short-term, but it will improve mid-term to long-term. This being said, I'm playing the game here, playing the fence here, and all my expectations are very, very low, when we forecast. Despite all that, we are in good shape.

Okay. Cool, thanks, guys.

Thank you.

The next question is from the line of Brian Yu from Citi. Your line is open.

Thanks. Good morning. Hey, Lourenco, your first question, on USIO I think you said -- I'm sorry, AustraliaIO, you said you would bring costs down to $48 which is really good.

I was wondering, just on the product quality side, would that be the same as what we're seeing right now in terms of FE grades, just comparable numbers?

Yes, sir. Brian, APIO next year will be down to $48. And in Australia, we have a much smaller impact of the normal production component, so the $48 is actually $49 all in cash costs next year in Australia.

These will be for the same mix that we have today or actually a little bit improvement because next year we're going to have 53% lump in the mix. Our lump has 61% iron content. Our fines have 59.5% iron content. And the most important thing is that we are going to start pushing lump premiums up because among all Australians, our APIO mine is the one that has the highest lump in the mix.

One of the Australian has 30%, the other big Australian has 23%, lump in the mix, and the last one, the one that just came on board has 0% lump in the mix. So we are both 50% lump in the mix. And lump, we will become -- has already started, but we'll become a real, real expensive commodity in China as they start to realize that where they knock down their sintering production, pollution goes down. And lump is the best remedy for pollution from sinter plants.

Okay. And then second one, just to follow up on costs for the US Iron Ore business, which, as you noted is very important. You said in the low $50s, cash cost, the next couple of years, would you be able to shorten that time frame for us, just in terms of 2015, what type of improvement you're expecting next year?

$55.

$55 is the cost structure for next year? Okay.

Yes, sir.

All right. Okay. Great. Thank you.

You're welcome.

Next question from the line of Garrett Nelson, from BB&T Capital Markets. Your line is open.

Good morning.

Good morning, Gary.

On Asia Pacific Iron Ore, obviously you have a reserve to production ratio of less than six years and the pricing is linked to the seaborne price. But could you help us understand, in addition to the lump mix and low CapEx which you talked about, is there some other strategic value associated with those assets from your perspective?

Whether it is your access to the port there or other things we should be taking into account when thinking about the value of that segment in a potential sale?

Absolutely. That's actually the reason why we haven't sold Asia Pacific yet. We got a lot of interest, unsolicited interest for the asset, but from the wrong buyers. Because why I say the wrong buyers? Because the wrong buyers don't value the things that you have just described. We have a long-term contract with the Port of Esperance.

The Port of Esperance is a port that can accommodate cape size vessels. So the freight to China is no different from the freight coming from Port Hedland, the difference would be $2, $3 per ton, no more than that. So we are very comparable with the ones operating out of the Pilbara region as far as freight.

We have a long-term contract with the railroad. We have a very good long-term relationship with the railroad operator, Lance Hockridge, used to be -- look how this world is small. He used to be the EVP [his labs] for BHP Steel when I was at California Steel. He runs the railroad in Australia right now, a long-time friend of mine. So we have excellent infrastructure situation in Australia right now.

For a miner in Australia, that will be great. That would give them the ability to survive against the big three. But it takes two to dance. If they don't come to dance, I will continue to operate for six years, and then out of Australia in no time.

The biggest disadvantage of being Australia is the same disadvantage that the big three have; the very, very, very high cost of manpower over there. So we're cutting costs, knocking down stuff that you don't even measure. Like for example, we don't have security guards anymore.

We are in the middle of nowhere. We had guards to protect us against whom? Nobody. So no more security guards. So we are cutting subcontractors; we are thinking out of the box. We're knocking costs out of the picture, as if there is no tomorrow.

And we continue to operate very well, taking care of maintenance. Taking care of our environmental liabilities. We're not creating any issues for the authorities in Australia, but we have no long-term commitment to be there. That's pretty much the story.

Okay. Thanks, that's helpful detail. And then I wanted to ask about the dividend.

Of course the Company has new Board members. As Chairman, could you tell us what is the Board's stance toward the quarterly common stock dividend, $0.60 a share?

Obviously, that's a very attractive yield, but that also requires about $92 million a year of cash to pay out. Does it make sense to continue to pay that or instead conserve that cash to maybe pay down debt even further and/or for Bloom Lake phase two?

Well, we just paid $100 million of debt in Q3. And Q3 was not exactly a very easy quarter to navigate. We still paid down debt, $100 million. So our dividend is built in to my projections. I'm Chairman of the Board. I can't speak for the Board before the Board makes a decision.

But I will tell you up front, I'm going to propose in our Board call to keep the dividend. And I believe that the Board will approve keeping the dividend at $0.50 per share.

That's my idea. It's completely built into my financial forecast and we're comfortable. We don't have a problem with that.

Okay. Thanks a lot, Lourenco. And good luck.

Thank you very much.

The next question is from the line of Lucas Pipes from Brean Capital.

This is actually Fred Hagemeyer on for Lucas Pipes. I just wanted to ask, Lourenco, what has the biggest surprise been since you joined Cliffs?

I'm sorry, say that again?

Sorry about that. Just asking this morning, what have you found to be your biggest surprise since joining Cliffs?

That you, not you -- Lucas Pipes wrote in the report of Brean Capital that we only cut APIO costs of just $5 per ton. So I cut costs 10% and you write in the report that it was just $5. It's very insulting. That was the biggest surprise I had.

Okay. Well, thank you very much.

You are very welcome.

Next question is from Phil Gibbs from KeyBanc Capital Markets. Your line is open.

Good morning, Lourenco. Good work.

Good morning.

I had a question on the cash costs for 2015 for USIO. Did you say that it should be around the range of $55 a ton? And does that number compare to the $65 you did or the $59 you just did? I'm just trying to parse out the cash production costs and the total cash costs.

When I said the $55, I was referring to the cash production costs, the one that's now $59. Okay.

Okay. Thanks for that clarification. And then as far as the fourth quarter, what should we assume for Wabush closure costs? I would say including sales margin and you may be idling costs? And then what should we be looking for as far as the net working capitol source of funds in 4Q for the entire business?

I want Terry Paradie to answer that. Terry?

Yes, from a Wabush standpoint, we'll continue to refine those costs down. We'll still have some continued costs for closure wrapping that up. As we mentioned, we'll be closing that operations up. Sales margin, there's very little tons left to sell, so I think the sales margin impact will be pretty minimal, and so you'll see that tail off.

As from a working capital standpoint, as you know, the first half of the year was obviously the biggest use of our working capital. In the back half of the year, third quarter, it starts but also the fourth quarter, we will take down our inventory levels. And you'll see that come through as cash in the fourth quarter and essentially in line with what we've done in the past.

Okay. So the Wabush costs, will those be done by the end of the year, will there be any --

Yes, yes, yes, those will be done.

And then you said for next year, your maintenance CapEx is about $100 million overall for the entire business?

The maintenance CapEx for the whole year is probably in the same range as we did to this year, $275 million, [$185 million].

Excuse me. I don't know where I got the $100 million from.

The USIO business was the $100 million maintenance caps that Lourenco mentioned earlier.

Okay, thanks very much.

You are very welcome.

Your next question is from the line of Paul Massoud from Stifel. Your line is open.

Good morning and thanks for taking my question.

Good morning; my pleasure, please.

I wanted to ask a little bit about the coal business. You mentioned one of the first things that you did was restart Pinnacle or make sure that it didn't get shut down after the previous Management team had announced that they wanted to shut it down. And obviously when you look at the production numbers, they look very good. We've seen some other US low vol met coal operators in low-price environments, they try to save the asset and so they'll take some of that production offline.

Clearly you guys are doing a lot to absorb some of the fixed costs. I was wondering, in making that decision, was there an assumption that pricing could potentially rebound from here and that today's pricing environment was temporary? Or do you see this mine continuing to run at anywhere from 600,000 to 800,000 tons a quarter, in the current price environment, in the perpetuity?

Look, I believe that Pinnacle is one of the best low vol met coal mines in the world. They are extremely competent. Our people there work extremely hard. The product that we produce there is low ash, low moisture. We supply our tier one blast furnaces, so we have a history over there.

And we were able to, by doing what we did -- and by the way, don't blame the Management team. The EVP running the coal business, Dave Webb and Larry at Oak Grove and Mark at Pinnacle and John, and all the guys there in Logan County, they are the same guys that were here before. That decision was not made by the Management team. That decision was made by the Board that is gone.

And I just had the merit of listening to the operators. And I did that in my first day here, and we capped Pinnacle open. And with that we saved a lot of money, we were able to finish Q3 with a positive EBITDA. It's a small positive, but it's better than a small negative, much better than a big negative. We'd be closing with a big negative if we had kept Pinnacle idle.

We got more than 300,000 tons of new ore just for 2014, just for Pinnacle, because we kept the mine open. So in talking about pricing that was the start of your question, talking about pricing, take a look on the last three quarters. The reference price is basically flat; $120, $119, $119.

So it's very possible that, based on what you have just said, that other mines are shutting down, that we may have some type of reaction in the coal price. If not, we have staying power. We are going to continue to drive prices down. We are going to continue to hunker down.

Some quarters we may have a slight negative. Some others we may have a slight positive. And in the meantime, we may get a buyer. It's not core, so it's for sale. We all know that.

Appreciate the color. Thanks.

You're very welcome.

Thank you. And we have reached the end of today's question-and- answer session. I'll now turn the call back over to Mr. Lourenco Goncalves, for closing remarks.

Thank you very much for joining me the call.

This is just my first call here at Cliffs. In a little more than one week, I will complete my first three months on the job. I'm giving myself an A-plus in my 90-day plan. And we plan to continue to work very hard to reward the long-term shareholders.

I wish you all a great quarter, and we'll talk again soon. All the best. Bye now.

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