Cleveland-Cliffs Inc (CLF) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Kelly, and I am your conference facilitator today. I would like to welcome everyone to the Cliffs Natural Resources 2014 fourth quarter conference call.

(Operator Instructions)

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

Thanks, Kelly. I'd like to welcome everyone to this morning's call. Together with me today I have our Chairman and CEO, Lourenco Goncalves; and our Executive Vice President, Business Development, Kelly Tompkins. 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 for -- 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 the risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on forms 10-K and 10-Q and news releases filed with the SEC which are available on our website. Today's conference call is also available and being broadcast at www.CliffsNaturalResources.com.

At the conclusion of the call, it will be archived on the website and available for replay. We will also discuss our results excluding certain special items. The 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' financial performance during the fourth quarter of 2014.

Due to the impact of the impairment charges and other items since the third quarter we have adopted adjusted EBITDA as our main metric as it gives us more -- a more accurate view of our operational and financial performance. For the fourth quarter of 2014, Cliffs reported adjusted EBITDA of $297 million. This number does not include Bloom Lake which was recently removed from our portfolio of assets.

Comparing apples-to-apples our fourth quarter EBITDA represents a sequential improvement of $30 million compared to an adjusted EBITDA of $267 million reported for the third quarter, also excluding Bloom Lake. Even more important, our core business, USIO generated $275 million of adjusted EBITDA in the fourth quarter with a 36% EBITDA margin.

In Asia Pacific Iron Ore we achieved $30 million of adjusted EBITDA during Q4 versus $46 million in the prior quarter. The APIO segment continued to be cash flow positive in Q4 despite the deterioration in the seaborne Iron Ore pricing and consequently much our lower realized pricing in the fourth quarter. During the fourth quarter we announced a tender offer to purchase our public debt at steep discounts as well as a new secured notes offering.

This was an opportunistic deal and was driven by our desire to pay down debt and not due to any imminent need for cash or liquidity; however, as we got closer to launch and realized that the execution would not be as interesting for Cliffs as we originally were led to believe, we decided to postpone our refinancing plans until Cliffs' story is better understood by the potential bond buyers. After the postponement, we used our ample liquidity to execute open market purchases of our bonds, taking advantage of the steep discounts that the market gave us in December and this past January.

Going forward, we will continue to be patient and disciplined in assessing opportunities to tap the Capital Markets. During the fourth quarter 2014, we were able to pay down $300 million in net debt. By quarter end Cliffs had net debt of $2.7 billion with total debt of $3 billion, zero drawn on our revolving Credit Facility and $290 million of cash and cash equivalents.

On top of this, in January we further reduced net debt by another $100 million through bond purchases in the open market, primarily with the net proceeds from the sale of Cliffs Logan County Coal and cash from operations. These actions demonstrate our capital discipline and should address any concerns about our leverage. Moreover, last week, we announced the elimination of the common share dividend. That decision enhances our liquidity with additional $92 million in free cash and should help us continue to pay down debt.

We also recently filed an 8-K with an amendment to our revolving Credit Facility which reduces the size of the facility to $900 million with a further reduction to $750 million by the end of May. I would like to point out that this reduction in size was not forced upon us by the banks. As a matter of fact the capacity was adjusted to reflect our smaller global footprint and our changed mindset with respect to capital allocation. I'll remind you that the most we have ever drawn on this facility was $550 million, and that was in a prior era of heavy growth and CapEx spend.

I will also point out that as part of our proposed refinancing last quarter, our new borrowing structure would have included an asset based backed lending facility that would have likely had a capacity of $500 million to $550 million. Despite the deal not going through, this is still the direction we are headed capital structure wise. During the forth quarter, we decreased our capital spending by $69 million or 57% to $51 million when compared to the fourth quarter in 2013.

The reduction was mainly attributable to the exit of our Eastern Canadian operations. For this year, Cliffs' full year 2015 CapEx budget is anticipated to be in the range of $125 million to $150 million. Our fourth quarter recurring SG&A expenses were $39 million, and the full year 2014 recurring SG&A was about $165 million. We continued to reduce staffing, reduce the use of outside services and consolidate office space at our corporate headquarters.

Our planned SG&A will be reduced further by 18% to $140 million in 2015. With that, I would like to turn the call over to our Chairman and CEO, Lourenco Goncalves.

Thanks, Terry, and thanks to everyone joining us this morning. Next Saturday, I will complete six months on the job, and the fourth quarter of 2014 was my first full quarter as Cliffs' CEO. Q4 was a truly remarkable quarter for Cliffs in which we accomplished some very important things. First we paid down a substantial amount of debt.

Second, we lowered our costs beyond even the most optimistic expectations. Third, our US Iron Ore business generated $275 million of EBITDA and 36% of EBITDA margin. Fourth, we sold Logan County Coal and fifth, last but not least, we resolved Bloom Lake. As Terry reported earlier, we continue to make consistent progress in reducing our debt. Going forward, the elimination of the common share dividend should allow us to further pay down debt.

This accelerated debt reduction program is a more effective method to protect our shareholders than continuing with the quarterly dividend. As I informed all of you during our Q3 conference call, I proposed to the Board to keep the $0.15 December quarterly dividend on the common shares, and as expected, the Board approved that dividend payment.

The rationale for keeping the dividend in place last quarter was simple. First, we thought it would provide some support for the share price while we got investors comfortable with Cliffs' new US centered strategic direction. Second, we had then and still have today the liquidity to pay the quarterly dividend. Our liquidity is not the issue now, nor do we anticipate any issues affecting our liquidity in the foreseeable future.

The primary issue is that, despite all the decisive moves we have made to reshape the Company as a pure US player and to take Cliffs out of the iron trade with China, the short teases gained momentum and the quarterly dividend was not supporting the share price. As a consequence, we as a Board decided that was in the best interest of our shareholders to no longer pay a quarterly dividend to the common shares, and instead, apply the cash to continue our accelerated debt reduction program successfully implemented in Q4.

Back to what we have been doing at Cliffs. The Company is a lot more rigorous today in our capital allocation than ever before. For your comparison, Cliffs has spent $1.1 billion in CapEx in 2012 and another $862 million in 2013 mainly to fund the Bloom Lake mine. Now that we no longer have Bloom Lake to consume our precious capital, we expect to allocate less than $150 million in CapEx for the entire Company in 2015.

I continue to be impressed with how much our Operators have been able to cut from our budget while maintaining extremely productive, safe and environmentally compliant mines. Let's now move on to our business segment highlights starting with Asia Pacific Iron Ore. For the 2014 full year, Asia Pacific Iron Ore achieved record production of 11.4 million tons.

Only the low cost producers will stay in business in Australia, and our Koolyanobbing Mine is one of them. Due to the severe cost cutting initiatives implemented in our Australian business, APIO continues to generate good EBITDA. For the fourth quarter of 2014, our cash production cost was $43 per ton. This is a 25% cost reduction or a $15 per ton cost reduction over Q4 2013, when the cash production cost was $58 per ton and a $10 per ton cost reduction sequentially from Q3 2014 when our cash production cost was $53 per ton.

Just to reiterate our strategy for our APIO business, we don't have to sell the Koolyanobbing Mine, even though we have no plans to continue in Australia beyond the end of the remaining five years of mine life. The total CapEx necessary during these five years is only $50 million, and then we will completely exit the Australia/China trade. In the meantime, 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, a need our Australian operation does not have.

The intense depreciation of the Aussie dollar against the US dollar has helped lower the production and operating costs of all Australian Iron Ore producers including our Cliffs Koolyanobbing Mine. That will continue to positively impact our APIO results going forward, as the Australians have a very little to do at this time beyond continuing to manipulate their currency. Despite of that, we are already seeing lay offs and mines shutting down throughout the entire Australian Iron Ore mining landscape.

The consequence of the glut promoted by the majors will be seen for several years, and we are happy that we are strategically removing Cliffs from the seaborne trade of Iron Ore in the near future. In the meantime, with no Canadian shipments into the seaborne mine, Koolyanobbing is our only direct exposure to the IODEX, and we are comfortable with our cost of structure and our ability to survive in Australia through the end of the life of mine.

Next, North American coal. For the second quarter in a row, our North American coal team met its EBITDA neutral target, reporting a net adjust EBITDA of positive $4 million. Cash production costs for North American coal was $57 per ton in Q4. This is a big accomplishment, especially when you factor in how a year prior the cash production costs for North American coal was as high as $82 per ton in Q4 2013.

Our operational team in coal has been cutting costs and operating extremely well despite the persistently depressed met coal pricing environment and the fact that a portion of the business has been sold, and the rest may be sold as well. The sale of Logan County Coal generated $174 million in cash and on top of that, gave us a meaningful tax benefit to cash flow.

For our remaining two coal mines, Pinnacle in West Virginia and Oak Grove in Alabama, we continue to be open to selling these assets if the value proposition is right. While we continue to operate these coal mines we should not consume much CapEx, and the business should remain EBITDA neutral. 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.

Now let's discuss Bloom Lake. The fate of Bloom Lake was resolved in November when we announced that one of the three steel mills we were in discussions with was not able to make the equity investment we were seeking within the compressed time frame we had proposed.

Last week, we announced that Bloom Lake Group which is essentially the various legal entities that hold the mine related assets and liabilities commenced restructuring proceedings under the Company's creditors arrangement act in Canada, also known as CCAA. Over the past two months, we have worked with several potential interested parties and were approached by the provincial government through Investissement Quebec, to sell these assets and liabilities outside of CCAA.

After considering several dual proposals, we concluded that the best way to proceed with our exit strategy is to restructure the business through CCAA. We believe the CCAA proceeding will ultimately result in a sale of all or substantially all of the assets. When we made the announcement in November we noted that the liabilities associated with the exit of Bloom Lake were $650 million to $700 million assuming no mitigation of this liabilities; however, that has changed with the CCAA filing.

As of the date of the filing, the Bloom Lake Group has been effectively ring fenced; therefore, Cliffs Natural Resources no longer has any obligations to fund this free filing liabilities. Let me make it clear, the liabilities associated with the exit of Bloom Lake will actually be funded by the cash on hand in the Bloom Lake Group and by the proceeds realized from the sale of assets of the Bloom Lake Group under the CCAA process and not from cash coming from Cliffs Natural Resources.

To simplify, the previous $650 million to $700 million figure now equals zero. Kelly Tompkins and I will be happy to address your questions related to Bloom Lake in the Q & A session. The Logan County Coal sale and the Bloom Lake CCAA are very important steps in executing our strategy to transform Cliffs into a stronger pure play US Iron Ore supplier.

As I have stated several times, our new Cliffs is a differentiated mining Company and should be seen as a proxy for the US economy which is a lot more resilient than any other. Even more important, the fluctuations of the commoditized price of seaborne Iron Ore have a limited impact on us, largely due to the structure of our US IO contracts and the value-added products supplied by our US pellet plants to our domestic clients.

At this time let's talk about our core business, US Iron Ore. The very first thing I would like to point out is our EBITDA and our EBITDA margin in USIO. For the fourth quarter, USIO adjusted EBITDA was $275 million, and the EBITDA margin was 36%. Our average price realization for the fourth quarter was $99 per ton.

That compares with our price realization of $101 per ton during Q3 2014, a quarter that also produced a strong EBITDA of $249 million and the same EBITDA margin of 36%. Now, I ask you how can that be for Cliffs during a turbulent six-month period for seaborne Iron Ore in which the IODEX for fines with 62% iron content delivered to Qingdao went from $98 in July down to $66 in December.

The answer is threefold. First, in the US, we do not sell Iron Ore fines. We sell our value-added product, call it pellets. Second, our contracts are long term and don't reset as some outsiders insist to say and third, Qingdao is in China, not in the United States.

As we continue to implement our strategy and refocus the Company in our profitable and stable US Iron Ore business, we believe that our future ability to make money should be primarily compared to the profitability of the other participants of the US Supply Chain such as the US steel mills and US service centers, which like Cliffs does primarily serve the US market and US customers. Cliffs' business model is far more connected to the fundamentals of the US economy and to the domestic end Markets for value-added steel than to the price of Iron Ore in China.

Our participation in the international seaborne market of Iron Ore is now limited to APIO only, and even if we never sell APIO, it will no longer exist in less than five years. As far as our US based customers, we now have satisfied clients, a lot more than they have been in a very long time. This is very visible when we compare the huge difference between the tonnages of pellets shipped in Q4 2013 and in Q4 2014.

The US Mills recognize what we have been doing to take care of their needs. We have recalibrated our US Iron Ore business, and we have focused our attention back to our core customers. If our American customers make money, then we make money. Also, the breakeven cost of any competitor trying to enter into this market from Brazil or from Eastern Canada is prohibited.

These two barriers, cost and quality, are the main reasons why Cliffs has survived for more than 160 years. That being said, the supply agreements we have with our clients are and should continue to be mutually beneficial, stable long term contracts that shield all of us from unnecessary volatility. All of us need to manage and plan for a level of certainty in our businesses.

Here in the United States, we should keep the long term view that brought us all here where we are and preserve the long term viability of each one of our co-dependent businesses. As for new supply in the Great Lakes, we continue to closely monitor progress on this front but ultimately believe that economics and the proving quality of our value-added product will prevail. In addition, in order to be considered a real threat or at least a credible competitor, any new entrant must become a reliable producer and supplier of pellets at Cliffs' high quality level by next year, 2016.

We believe the value our customers place in our pellet quality and reliability of supply will more or less take care of the situation by itself. To the ones concerned about Cliffs' commercial contract negotiations, let me tell you, your fears are overblown.

For the record, prior to coming to Cliffs, I spent 10 years at Mills USA basically dealing with contract renewals and price based competition. The steel mills were my suppliers. Compared to the dog eat dog environment of the service center business in the United States, selling and shipping pellets to the steel mills is a lot less complicated from a business or contract standpoints.

We are taking all the necessary actions to get Cliffs on a consistently profitable path. With the full support of my fellow Board members, we are executing a methodical plan to fortify the foundation of our US Iron Ore business as well as streamline our portfolio of assets. We have the discipline, the willpower and my full commitment to get the plan completely implemented.

I know if you'll take time and I actually told you that last time we spoke in October during our Q3 investors conference call, but I knew that when I decided to come to Cliffs through a very unusual path through the vote of Cliffs shareholders. Had we not been elected by the shareholders last year, this great American Company would have continued to be plagued by denial and inaction, and Cliffs' future would not be a bright one.

Therefore, I would like to one more time reassure all investors both long and short that I will be here until the job is completely and successfully done no matter how much time and effort it takes. In closing, my prepared remarks we know exactly what the CEO and the Management team can control such as production levels, CapEx or number of employees, even the timing and scope of a CCAA filing we can control.

What we cannot control is the day-to-day behavior of the stock price. We can only do so much to educate investors, but there's still several things beyond our control may affect the stock price every day. That includes wrong conclusions about our liquidity going forward in case these investors fail to appreciate the meaningful positive impact to our cash flow of the tax benefits we will enjoy in 2015 as a consequence of the actions we have taken during the last six months.

Even the investors that are loans in holding the stock have a lot more control over the share price than we do when they cave in and sell the shares at extremely low prices, or even when some of these loans, not all of them, allow their shares to be born by other investors short in the stock. Please think about that. Another thing, we do not control is when we will be contemplated with reports like the one issued by Standard & Poor's on Friday after market closed.

One trading day ahead of the release of our annual results and electing to review our credit rating without having the benefit of our earnings Press Release issued yesterday or the information they could have obtained from today's conference call; however, after the window opens following this call, if our bondholders offer our bonds for sale at deep discounts to par, you make no mistake, we will use our liquidity to continue to act as a clearing house to acquire these bonds, and we will continue to execute our accelerated debt reduction program.

That execution we do control. And last but not least, we still have that gun on the night stand. The stock buyback of $200 million authorized by the Board should be seen as what it is, an insurance policy at hand. The timing of the deployment of the stock buyback we definitely control. We have surely covered a lot on this call already and very much look forward to answering any questions you may have.

With that I'll turn it over to the Operator to direct the Q & A part of the call. Kelly?

(Operator Instructions)

Your first question comes from the line of Michael Gambardella from JP Morgan.

Good morning, as well as congratulations on the good work in a very tough environment in the last six months. A couple of questions, though. When you mentioned about the possibility of new capacity coming into the marketplace, and that it would have to be ready by 2016, are you referring to the fact that your ArcelorMittal contract comes due in 2016 and if you were to renegotiate that that there would basically be very little tons available to the marketplace for new competitors?

That's exactly right, Mike, and first of all thank you very much for your kind words. Yes, I'm referring to the fact that our first contract to go up to renewal is one of our contracts with ArcelorMittal and that will happen in December of 2016.

Until December 2016 we have no real negotiations, no reset, no changes in any of our contracts and each one of these contracts have yearly nominations, tonnages tied to the contract letter, and there's no room for as long as they don't -- the mills don't change their production capacity, there's no room for new entrants in the marketplace anytime before the renewal of the contract; however, we are dealing with pellets in a very stable and predictable self-contained US domestic market.

I don't believe that any spot seller of pellets or new entrant or any pellet plant that would be ramping up in adjusting quality would have any chance to succeed before we renegotiate any contracts in this market. That's my point.

Second question, using today's spot price on seaborne pricing and adding to it the pellet premium in today's market and the transportation, say, a Brazilian producer like Vale to move the product into the Midwest market with all of the transportation, what would the landed price be of that product right now to a Midwest consumer?

We believe that that number would be north of $100 per ton just to break even, and we are probably right because they wanted to just mention has been trying -- or not has been but in the past tried hard to sell in the United States and failed, so we don't believe that anything has changed for the better.

But if you took the spot price of seaborne today and added to it the conversion cost for pellets and then added to that the transportation cost to get it into the Great Lakes, what would that be?

That's the number I give to you, north of $100.

Yes, north of $100. And final question, you're cutting your SG&A by about a third, you're forecasting for 2015 by $70 million. What are the major components of that $70 million cost reduction?

In SG&A?

In SG&A.

Is that what you're asking? I'll let Terry answer this one. Go ahead.

Yes, Mike the majority of the costs in there are employee-related. We've done a lot with reducing our head count, especially at our corporate headquarters in Cleveland. We've cut down to two floors here in Cleveland, we were at five there in prior years. In addition to that, we're really doing a lot of work around looking at our outside service spend and reducing the costs associated with outside services and making sure that we are very efficient with our spending from an SG&A standpoint, because that's all really what we have control over.

So they're fairly certain cost reductions for the upcoming year?

Absolutely, and Mike, I believe that your question ties back to our cash generation 2015 and our ability to service our debt, and we stay in good shape. It's not just that. We are not done with a lot of things.

We are here for six months, so there's a lot going on at this point, and we will continue to cut costs in places that, to be honest with you I haven't addressed, because we have been doing a lot of things at the same time. But my day has only 24 hours and my team has been worked relentless, but we haven't been able to address all the things we need to address. I'll give an example.

We are planning to cut another $5 per ton in our cost in US Iron Ore, times 22 million tons, we are talking more than $100 million in cost- cutting for 2015 for the entire year. It's not going to happen quarter-over-quarter but for the entire year 2015. Another thing that people are not really paying any attention so far is that we wrote down a lot of assets. We had a lot of things done in 2014 that will give us the full benefit in 2015, and these are cash tax benefits that we are going to enjoy, so this will all play for 2015.

We are planning for the long-run. We are not doing anything short-term. We are not just doing for the quarter. We are doing for the long-term survival of this great Company.

Thanks, Lourenco, keep up the good work.

Thank you very much. I appreciate it.

Your next question comes from the line of Aldo Mazzaferro from Macquarie.

Hi, good morning.

Good morning, Aldo.

Lourenco, a few questions on the cost side. On the SG&A you've got $39 million on a run rate in the Fourth Quarter which I think would annualize out to about $156 million if you ran forward so you're planning to cut about $16 million or so in the full year. Is that a target that could be moved a little more aggressively, or is that something you think is locked in stone at this point?

This is Terry, Aldo. I think we have the opportunity to be very aggressive. We are currently working on cost-reduction efforts with respect to -- the size of our business is changing. You look at our strategy as we exited Eastern Canada. We've sold portions of our coal business, we continue to refine the efforts we do in Australia. We'll continue to stay focused on having the right size of organization and obviously outside service spend associated with the new size of our business as we become more US IO focused. So that is our focus today, and we're confident that we can get to the $140 million for the full year FY15.

Great. And then if you look at production costs at the mines especially US Iron Ore, I was wondering if you've noticed any reduction yet in things like fuel cost that might reflect lower diesel or any other operating costs that might be coming down or could still come down further from those items?

Yes, Aldo. We're looking at -- our energy cost represents about a third of our total cost so what you've seen with diesel, which is about 5% of our production cost, natural gas, electricity, also we use coal from our furnace standpoint, we're looking at some reduction for this upcoming year to the tune of $2 to $3 which has been baked into our production cost guidance for the year. So we are seeing the impact of that for 2015.

Great. Thanks, Terry. I've got two other quick ones, if you could.

Go ahead.

I know you discontinued Bloom Lake as of the end of fourth quarter. Would that imply that there's nothing on the balance sheet now from Bloom Lake liabilities or is there anything on there still remaining?

I'll let Kelly Tompkins answer that one. Go ahead, Kelly.

Well, the balance sheet of the Bloom Lake Group reflects the liabilities and as Lourenco commented at the beginning of the call, the Bloom Lake Group is now self-contained, and the liabilities within that group will be covered by its cash on hand and the proceeds from asset sales. And as I think you probably saw in our 8K that was filed, we have effectively de-consolidated Bloom Lake which will be reflected in the first quarter results, and you'll see the pro forma balance sheet from that filing as well.

Just to clarify a little bit, the balance sheet you saw on our release is the consolidated balance sheet. We will have the deconsolidation when we issue our results in the first quarter.

Great, and then if you can just tell us what your corporate accrued tax rate might be next year or this year and what the cash rate might be?

Yes, Aldo, from the standpoint with the losses that we've incurred this year, our cash tax rate for the current year was pretty close to zero. We didn't really pay a lot of deminimus tax payments. As we move forward into 2015, with some of the loss carry-forwards we also have had to use some loss carry-backs, and you'll see on our balance sheet what Lourenco alluded to, we have a pretty sizeable receivable that's due from an income tax standpoint. So our cash taxes going into next year will be a lot lower than they have been in the past, something I would, if I'm modeling I'd use something less than 10% or lower.

10% or lower, and a pretty full tax rate accrued or around 30% would you say?

Yes, I think from a GAAP standpoint that's in the ballpark.

About 30%, thanks. Thank you.

Thanks, Aldo.

Your next question comes from the line of Kevin Cohen from Imperial Capital.

Good morning, and thanks for taking the questions and, Lourenco and Terry, congratulations on all of the positive news year-to-date. A couple of items, first in terms of the tax asset that you alluded to from the CCAA filing, does that reside in Canada or is that in the US and fully available to the parent?

No, there is no connection with the parent. When we file CCAA, the parent is completely separated from the assets, or the assets have been completely separated from the parent. So what we are calling the Bloom Lake Group, Kevin, is completely self-contained. So they either have cash on hand at this point and there is no needing, at this very point, there's no need for a deep or anything like that. So the Canadian thing is on each zone, separate, ring fenced, completely insulated from Cliffs Natural Resources.

In terms of the prior comment about Bloom Lake being self-funding in terms of cash outlays and no cash outlays from the parent, does that include environmental, severance, any costs like that? Is that truly entirely self-funded from the Bloom Lake Group assets, just so I'm clear on that?

Yes, everything, 100% self-contained within the boundaries of the Bloom Lake Group under CCAA, under the control of the monitor and the overseeing of the court.

And then just two last real quick questions. Any granularity in terms of when Bloom Lake might be resolved in terms of timing on that?

We believe that we are going to sell assets -- not we, but the Bloom Lake Group, will be selling their assets during the course of 2015, but we will have some tail to deal with after that. But all things being considered, we are very confident the Bloom Lake Group will be done with the CCAA within the calendar 2015.

Last question, probably a little bit more of a Terry question. Can the Company disclose the current outstanding balances of the bonds outstanding?

At this point in time, I think we've said our net debt was from $2.6 billion. We'll give you more disclosure when we move into the first quarter and results from each of the tranches.

Great. Thanks for taking all the questions and best of luck.

Appreciate it, Kevin, thanks.

Your next question comes from the line of Sal Tharani from Goldman Sachs.

Good morning.

Good morning, Sal.

A couple of questions. You cutting the US IO costs, and you had mentioned further cuts in the past over the next two years. I'm just wondering is there any CapEx involved if you want to go beyond the $4 or $5 you're doing in 2015?

We believe that the CapEx for US IO for the entire year will be less than $100 million. And of course it's included in the CapEx figure that Terry Paradie informed during his prepared remarks, but US IO alone is less than $100 million.

And you don't need any additional CapEx if you want to cut for the cost any further equipment availability or anything like that?

No it's all-in.

Okay, and obviously very tough challenging time, but not only for the traditional Iron Ore producer but some of the alternative guys in the Mesabi region like the Magnetation is also having some issues. And I was just wondering if there is enough availability in case something -- one of those facilities did not work out in terms of the economics at your place to fulfill those orders if need to be over the next year or so.

Well, in the past there was no Magnetation. Cliffs was always able to take care of business so that will be the future. I'm not saying that if, I'm saying when.

Okay. And last question on the Canadian lease structuring. Does it also take care of the WISCO contract, or you'll have to still fulfill the WISCO Iron Ore contract?

The WISCO contract was also part of the Bloom Lake Group, so right now, Mr. Cameron Dang should be dealing with the monitor in Canada, but there's no more Iron Ore there, so there's a problem there.

Okay, thank you very much.

You're very welcome.

Your next question comes from the line of Nathan Littlewood from Credit Suisse.

Good morning, guys, thanks for the opportunity and congrats again on a really good result. I just had a couple of clarifications on your guidance starting on the US Iron Ore business. I guess I'm surprised to see the volume expectations there essentially flat year-on-year given what's going on with the US blast furnace industry at the moment, sort of tidal wave of steel imports coming into the country.

Was wondering if you could talk a little bit about some of the expectations you've baked in here with respect to sort of blast furnace utilization. Also one of your customers [SRL Goma] had talked about a potential restart of one of their Mills this year. Has that been baked into your guidance? And just to finish off the US part on pricing, could you talk a little bit about some of the other assumptions that you've made outside of the Iron Ore price?

I understand that you don't have high leverage to the seaborne market directly, but indirectly global Iron Ore prices do impact US HIC prices, and some of your contracts do link to drivers such as HIC and steel utilization. So just a little more color on some of the assumptions would be useful.

I'll be glad, Nathan. I appreciate your congratulations, especially because our earnings per share in Q4 was coincidentally exactly equal to your price target for the stock, so even if we're trading at zero dollars right now, we are even. So $1, that's exactly our EPS and that's exactly our price target, so it speaks highly about the precision of your model and your conclusions.

But back to your questions one by one. Imports, the United States has been flooded with imports and that's not new stuff. The new stuff is the depth and intensity of the avalanche of imports reaching this country, and these will be taken care of, as we have done in the past. You make no mistake.

We are going to defend our turf, and we are going to use the trade laws, every single weapon that's in our disposal to protect what's ours. But on the other hand, you've got to discount the fact that some of the imports don't even affect Cliffs, because some of these imports are [lone] products. They are produced by minimills and minimills by and large use scrap. They don't use Iron Ore.

So the impact of imports is a lot less than it looks like at first glance. On the other hand, if the domestic integrated blast furnace mills reduce production, something they haven't done yet and we have to adjust in order to satisfy their current needs, we are partners. We'll work with them, so imports are a potential problem.

We are working carefully, and we are getting ready to act and we are going to be acting in complete sync with our clients and our partners. The second was about the [Saragoma]. I don't really remember exactly what you said about the Saragoma, if you could help me?

The second furnace coming on.

Oh, the second furnace coming on. If they come with a second furnace they are going to need more pellets, and we are going to be able to supply if they need more pellets. We are going to have to discuss, but we will certainly take care of business with the Saragoma. And the third was about the indirect impact of the IODEX in the US Iron Ore? Is that correct, Nathan?

The hot band prices.

Yes, look, Lourenco, the color is all very, very useful, but I guess what I was trying to get to was whether or not you could share with us some of your assumptions about is SRL Goma included or excluded from that 22? Secondly, what US HRC price assumption is your pricing guidance based upon, and also what level of US steel industry utilization have you assumed in this volume guidance as well?

The utilization that we use is the current level, around 77%. Then the Saragoma second blast furnace is not included in the 22 million tons.

And the hot band pricing assumption we're using is in the range of $575 to $600.

There you go.

Perfect. That's all very useful, guys. Just one other question on APAC. As I'm sure you know, the lump premium has shot up recently. We're now at about $27, $28 a ton, I think. Freight rates have also capitulated over the last little while, both of which are very, very favorable to the realized pricing of that APAC business. So again I was just wondering if you could clarify for us what assumptions you've baked in for freight rates and the lump premium into that APAC selling price?

It's a lot more than we had in the past, number one, because freight rates have been going down. Second thing, we have increased the participation of CFR sales instead of FOB, and that is benefiting our price realization. And last but not least, we are moving towards selling more separate cargoes between fines and lump. We used to sell a lot of combined cargoes, and now we are selling more of lump cargo separate from fines cargo, so we are playing in all three things in order to improve our price realization in Asia Pacific.

Okay. That all sounds like very smart things to be doing, but can you tell us what the lump premium and freight numbers that you've assumed are, because at the end of the day, both will have a pretty big impact on your EBITDA regardless of how you're selling the ore.

Well, we don't have the breakdown because we currently sell -- we still sell a lot of combined cargoes, and then we don't have the number we're asking for. As we start to sell more and more lump cargos separate from fine cargoes then we will have this number a little more clear.

Okay, no problem.

You see on the outlook box that you have the realized pricing for APIO, so you can take the [plas], and you can probably use some assumptions that you see in the marketplace for freight and lump premium, and then you've got to look at discounts and moisture and things of that nature, typically nets down to a realized pricing. And you could probably come up with a triangulation on what we're using based on that.

Yes, sure I hear you, Terry. I guess my concern was that over the course of the year most of us are expecting that lump premiums will come down and that oil and freight rates will probably go up. So I was just a little worried the translation from 62 IODEX into those APAC ASPs might sort of move against you a little bit over the course of the year. That's kind of what I was getting at, but I'll look forward to further updates. Again, congrats guys, and I'll turn it over.

Thank you, Nathan.

Your next question comes from the line of Evan Kurtz of Morgan Stanley.

Good morning, guys.

Good morning.

So first just wanted to try to clarify maybe this question for Terry, some of the cash tax benefits that you're going to see in 2015. If you could just quantify what is carry-forwards versus carry-backs, I think that would be really helpful?

Evan, I think probably the easiest thing to do is move to our balance sheet on our Press Release, and you can see there's an income tax receivable of $261 million. And the majority of that really is associated with carry-backs with the items we noted in our Press Release with the impairments, the loss on sale of CLCC, as well as us executing on a financial guarantee in our Company node. So that generated a significant amount of cash benefit going forward for us for next year.

We also have a significant amount of tax NOL carry-forwards associated with our AMT rate that we have a full valuation allowance but also we'll protect from a future cash tax rate going into 2015 and beyond.

Okay, got it, thanks. And then maybe not to beat a dead horse here, but just a clarification on Bloom Lake exit costs being zero. So correct me if I'm wrong, but it was my understanding that the environmental reclamation bond may have been guaranteed by the parent, so if you can't sell the assets or Bloom Lake Group, rather, can't sell the assets, will there be a different scenario where you might be on the hook for some cash if you had to actually clean up the site in the near term?

The answer is no, but I will let Kelly Tompkins give you a little more color.

Great.

Yes, as I mentioned earlier, Bloom Lake will fund its obligations by its cash on hand and asset proceed sales. And after we conclude the sale of assets process, we move into a liquidation mode which is yet another form of selling residual assets. And then ultimately you move to abandonment, which essentially those obligations like the environmental obligations would revert to the province because we would be no longer operating the site and no longer involved. So it's ultimately the answer is no, but we go through the process sale, liquidation and abandonment.

Got it, thanks. And one last quick one, if I may, on CapEx. Pretty surprised to see the CapEx number for 2015 come down so much. And I assume like you weren't spending any CapEx on Canada in the fourth quarter, and your run rate annualized was closer to $200 million or so, so you're coming down pretty significantly even from that. I just kind of wondered what some of the big pieces are that, outside of Canada, that are moving that number so much and how sustainable do you feel like you can -- that number is. How many years can you maintain kind of the mid point of [137.5]?

Well, if you consider that you no longer have Canada. If you consider that I have already disclosed the total CapEx for Asia Pacific through the end of life of mine as $50 million for five years, or $10 million a year. And if you consider that we already sold Logan County Coal, and we are highly confident that we are going to sell Oak Grove and Pinnacle at the end of the day, we are talking CapEx just for US Iron Ore, and that's the new Cliffs. So the CapEx for the new Cliffs, like I replied earlier before in this call, will be less than $100 million. So even the figure that was given today is a little bit in the high side if you consider just US Iron Ore, so that will be another source.

Keep in mind, Evan, the time of the $1 billion CapEx, the time of the $1.8 billion revolver, this is gone. This is the old Cliffs. This is that Cliffs that was going to be the next Rio Tinto. We are going to be the best Iron Ore mining company, the most profitable, the most reliable, the most predictable in the world.

We are the ones that where the Australians and Brazilians will be bleeding like crazy in the next couple years, we are going to be standing tall. It's sort of stupid betting against America. And that's what we're positioning ourselves for, to be standing tall when others will be dealing with the mistakes that they are making as we speak. That's what we are doing.

Just to add to that, Evan, you'll recall from a Canada standpoint, we did produce throughout most of the year, and we always said last year that we have a significant amount of CapEx related to tailings. So with that going away, that's really a big driver of the significant decrease in 2015 from 2014. Actually to the point where we have more capital allocated towards our core business of US IO from where we were last year.

That's helpful. Thanks, guys.

Thank you.

Your next question comes from the line of Mitesh Thakkar of FBR MArket.

Good morning and thank you, guys, for taking my questions. And congratulations on a very good quarter and cost control.

Thank you. Appreciate, Mitesh.

So my first question is, Lourenco, on the Canadian side. With Bloom Lake into the restructuring, does it include all of the other reserves which were acquired through that acquisition? And how should we think about any other Eastern Canadian ops, including Wabush going forward, any associated ongoing costs which you can help us?

I'll let Kelly answer that. Go ahead, Kelly.

Yes, Mitesh, the reserves that were acquired as a part of Bloom Lake would be included in the Bloom Lake Group filing. The Wabush assets, which includes the Scully Mine and certain other infrastructure, were not included in the CCAA. The focus was to put, if you will, the tournequet on the bleeding at Bloom Lake. Wabush, the liabilities there are more longterm oriented and are very manageable and we have opportunities potentially to sell assets within that portfolio as well, either alongside or separate from the CCAA.

So when I really think about asset sale, I should think about those assets plus your US coal assets and even Asia-Pac asset, is there anything else? Of course, the coal mine assets too?

That's right.

Okay, great. And just on the US IO, Kelly, I know you haven't provided a 2016 revenue outlook, but from the comment which Lourenco made about the contracts are not resetting or anything like that, should we assume more like a $4 for every $10 move in Iron Ore price as the sensitivity, or is that something else?

Look, we used to supply that table with the number of dollars fluctuation around the $10 variation, but we replaced that, Mitesh, with the table that we supplied at this time because we believe that that would be a better indication. That one was -- we always received a lot of follow-up questions, especially our IR Manager [Bofine] regarding clarifications related to that way of providing guidance. We replaced that with the table with the hopes that this would facilitate your ability to make conclusions.

Yes. No, the 2015 table is excellent, actually. There's no debate about it. It's just I was thinking if I'm thinking about 2016, should I use like similar sensitivity or is it more or less?

The problem with 2016, Mitesh, is that 2016 is so far away and so far removed from the reality of January or February 2015, that it's very, very difficult to give any type of reasonable guidance about 2016. I know that spreadsheets ask for that, but realities are a lot different.

Think about it. Two years ago, everyone was betting on BRICs, Brazil, Russia, India, China. Which one of the letters do you want to take now? None. Six months ago, everybody was very confident that fuel prices would continue to be extremely high, and oil will be great for the foreseeable future.

What about now? $50 or $51, last week $44. Two years ago, Brazil would dominate the world and the Iron Ore projects in Brazil are all great. Now you would not bet a rat's ass that Brazil would be able to do anything with what they have right now. And it will keep going, so do you know what? Iron Ore is at a very low point right now. The Australians don't know what to do anymore.

They are putting even the kangaroos for sale. And the Iron Ore price is not going anywhere at this point, and they are starting to manipulate their currency, and the situation is starting to smell bad over there. So I don't know what's going to happen in 2016. Nobody knows. So you've got to plug in your spreadsheet whatever you want.

Okay, thank you. I think, just to follow-up on the Aussie cost, obviously came down dramatically. How should we think about other non-cash production cash cost -- sorry, production cash costs which are in the other category which I think is mostly royalty. But is there something else flowing through that because it looks like a really low number there?

Go ahead.

The primary driver in the non-production cash costs you see in our results are just lower royalties. The royalties are linked to the realized pricing, and we've seen that come down, and that's why you've seen that come down dramatically. There's obviously inventory movement and things like that that impact that number as well, but what you're seeing this year in our results is the lower royalty rate.

Okay, great. Thank you very much, guys, and good luck. Good job on the costs again.

Thank you, Mitesh.

Appreciate it.

Your next question comes from the line of Sam Dubinsky of Wells Fargo.

Thanks for taking my questions. Just to follow up to a prior question, can you disclose your sensitivity to every change in HRC pricing? HRC, to my knowledge, is near $540 today, but internal projections are around $575 to $600? And then I have a follow-up.

I will thank you for saying thank you for taking my question, but I still will not answer a question because you continue to believe that you know this business better than Cliffs Natural Resources. But because I'm in a good mood today, I will ask Terry Paradie to reply to your question.

Yes, Sam, I think we've disclosed in the past for hot roll pricing sensitivity, for every $50 change on a full-year basis it's just under a $2 impact on our realized pricing, and that has not changed. That sensitivity stays pretty consistent from year to year, and you can use it in your model today.

Great, thank you very much. And just a follow-up on the ArcelorMittal contract. I know you guys don't see any risk from that, but could you just give us an idea of how pricing on that contract compares to the corporate average?

We have several contracts with ArcelorMittal, Sam, so we have contracts that have price floors. We have other contracts that have different metrics, and we overall all blended. We supplied a table that should guide your conclusions in terms of prices. And what we do know is that at this point, we don't have any reliable competitor. We are following the progress of the one that is pretending that's building a pellet plant in Minnesota, and we are also discussing with ArcelorMittal, so your fears are overblown.

Great. And just my last question is when should you get the income tax receivable from a cash-flow perspective, the timing of that?

It would be throughout 2015 and through the start of being able to receive soon.

Okay, thank you very much for taking my questions; good luck.

It's always great to receive your questions. If you ask more questions you get more answers. But you need to start calculating better price target because our EP, was your price target. Okay, Operator, who is next?

Your next question comes from the line of Brian Yu from Citi.

Great; and congrats, guys, on a pretty strong Fourth Quarter.

Thanks, Brian.

My first question is just you mentioned that Bloom Lake Group, it will be funded by cash on hand. How much of that $291 million at the end of 4Q will be a part of the Bloom Lake Group when it's deconsolidated?

Kelly, please go ahead.

Brian, the Bloom Lake Group right now has about $40 million of cash on hand which we would expect will be able to cover the care and maintenance and related required obligations through the bulk of the CCAA process, supplemented by asset sales once we get into the sale process.

Got it. And then second question on a different topic is I know in the past when prices were going up, the contracts around the collars and you had these whatever fell outside of the collar either carried over and had an impact on the following year, they were calling it lag-year adjustments. I think we're obviously dealing with a different situation now, but is there any of this carryover impact or lag-year adjustments as we look out into 2016 from the prices we're seeing now?

Brian, this is Terry. From a contract standpoint, we don't disclose the specific [deed] to our clients' contracts. That's why we provide the sensitivity box. Any floors, collars, carryovers and things of that nature are built into our sensitivity at this point in time. I think that in the past we may have had some of those carryovers, but I don't believe we have any of those going forward.

Okay, thank you.

You're welcome.

Your next question comes from the line of Tony Rizzuto from Cowen & Company.

Thank you very much. Congratulations on the success, gentlemen.

Thank you, Tony. Appreciate it.

You're welcome, Lourenco. I've got just a follow-up question on strip ratios US. You've indicated that you're targeting $5 per ton of lower costs in 2015, and it seemed like about half of that was owing to lower energy costs. But I wonder if you could talk a little bit more about what you're doing with strip ratios there and have you been able to -- I know there was some strides made there in previous quarters, but just update us a little bit about strip ratios, ore grades, things of that nature, haulage profiles, all those types of things in the US.

Look, we are not high-grading any mines, if that is your concern.

No, no, no. I wasn't asking that.

Okay, just trying to guess what your concerns are. We are not high-grading. We are not changing anything in terms of how we mine our properties. We are going to continue to cut what we have been cutting a lot more, for example, in Australia, because that's where the focus was. Or like we did in coal, because they were in surviving mode, and we were really acting fast to keep that business afloat while we were closing the sale of Logan County. And now we are doing the same thing with Pinnacle and Oak Grove. So these businesses, I was a lot more focused on the details of contracts and outsourcing and personnel and extra costs that you can take out of the picture, and that's where we are going to continue to focus.

It's not like we haven't done anything. We have done a lot. I believe we have probably the most competitive cost structure for all pellet plants in the world, but that's not enough at this point in time. We need to do more. And that's the challenge that's in front of us, and we will continue to cut costs out of the picture. But not doing anything is stupid, that we will regret in the future or pay the price in the future.

Fully agree, Lourenco. All right, thank you very much. Appreciate it.

You're very welcome, Tony.

Your next question comes from the line of Lucas Pipes from Brean Capital.

Thank you and good morning, everyone.

Good morning, Lucas.

You mentioned earlier landed price of the product north of $100 into the Midwest, and I was wondering at current IODEX pricing, so based on your table there, your net-back pricing, call it in the low $80s or so, what would be your landed price into the Midwest?

Do you want to reply to that, Terry?

For the most part that is our landed price into the Midwest. That's a delivered cost to our customers, what we're showing in our realization tables.

Okay, great, that's very helpful, I appreciate that.

Thank you.

Your next question comes from the line of Jeremy Sussman from Clarkson.

Yes, hi, thank you very much for taking my questions, and I appreciate all of the color you've given on the call so far.

Thank you.

In terms of just looking at the Asia Pacific cost guidance, the 2015 level of $40 to $45 a ton obviously compares much lower to the 2014 realizations. Just wondering -- so obviously it's a very solid number. I'm just wondering if you can give us a sense of how much of the decrease is due to exchange rates and maybe a lesser extent fuel prices versus just flat out better operations.

Well, the biggest contributions if we're going to compartmentalize the contributions, the biggest individual contribution is exchange rate, and that number is $4 per ton. So just to compare apples with apples, Q3 with Q4, we are talking $10. $4 were exchange rate; $6 was several different things that we have implemented that we can call altogether operational improvement. This being said, the numbers refer to our Aussie dollar exchange rate of around $0.81.

As of this morning, the exchange rate is $0.76, so the Aussie dollars, the Australians are taking no prisoners with the Aussie dollar. So the Aussie dollar will continue to help APIO, because they don't want to help APIO. They want to help GHP. They want to help Rio Tinto. They want to help that lady over there, Gina or whatever, they are going to help continue to help Fortesque, and they believe that they will squash the Chinese producers. Big mistake, but it is what it is.

That's very helpful. And just a quick follow-up, Lourenco. You said you were highly confident that you'd be selling Oak Grove and Pinnacle, and obviously the Logan County sale was a good number in a very tough environment. So I'm wondering if you could just elaborate a little bit on what you're seeing out there in terms of potential interest and maybe timing of Oak Grove and Pinnacle. Thank you very much.

Absolutely. Look, the sale of Logan County coal was a very good one, and there was the one that several research analysts questioned the possibility to accomplish.

Nobody was really believing that we could sell our coal asset, and we did, and the multiple was great because, as you consider that we are dealing with a zero EBITDA, I don't even know how to calculate the multiple. Because zero times any number will give you the multiple we're looking for -- so the enterprise value you're looking for. So we did sell Logan County, and we are in serious discussions with several potential buyers for both Pinnacle and Oak Grove, separate and combined. Will any of these deals be closed at this point?

I don't know, but I'm very confident that we are going to be able to do so and conclude the sale, both mines, combined or separate. That's all I can give at this point.

Appreciate all that color; thank you very much.

You're welcome.

Your next question comes from the line of Garrett Nelson of BB&T Capital Markets.

Hi, good morning, everyone.

Good morning, Garrett.

Most of my questions have been answered but one housekeeping one for Terry. Following the recent bond repurchases, what should we be modeling for annual interest expense?

Yes, I think from an annual interest expense if you used somewhere between say [175] and [195] for the year you'd probably be in the ballpark.

Okay, great. And then on US Iron Ore, I know the first quarter this year hasn't been anything like last year from a weather perspective and how the weather really impacted your shipments on the Great Lakes, but what should we be modeling for US Iron Ore shipments in the first quarter? I'm assuming up somewhat from last year, but is it going to be a lot stronger or a little bit stronger or what?

Look, Garrett, this business is seasonal as far as the shipments. Q1 will always be weaker in terms of shipments, because we are not able to ship through the Lakes no matter what. Last year, you may have heard that the winter was a little worse than usual, but that's not the point. Last year this Company was unprepared for the winter.

Let's face it. And this year we will be going the same direction. And through the end of Q3 through Q4, we've moved 250,000 tons of pellets that were on the ground, we moved to the clients, because it was accumulated since last year. So at this point we have zero tons on the ground, so we are a lot more prepared, but Q1 will always be a weaker quarter in terms of shipment. Not a weaker quarter in terms of production or the ability to generate profit, but from the cash flow standpoint it's a different quarter, because we don't ship as much.

We only ship what we ship by rail. Not what we ship by vessel. I don't know if Terry would like to add something based on your question?

Yes, I guess I would just look at it, last year was definitely a different year for us. So I would just go back and look at our prior periods and go back to 2012 and 2013, and I think you can model something that's reasonable.

Okay, and then just one final question. Just wanted to clarify that the elimination of the Common Stock dividend applies to that only and not the preferred dividend as well and that we should still be modeling about $51 million annually for that, is that correct?

Yes, the preferred dividend will go away soon. We are a year away to be done with that, and we have no intention to interrupt the preferred dividend. Keep in mind, we have the liquidity to pay their dividend in the common, we cut, not because the banks imposed on us. We cut because we thought it was a better use of capital to continue to buy bonds in the open market, and we eventually may buy back stock.

As you know, we have a buyback authorized, and we will be happy to deploy the buyback if necessary. So we have other uses for our capital at this point, but we prefer to keep because of the penalty for not paying the dividend on the preferred is not something that we will want to deal with. And, like I said, the preferred will go away very soon.

Okay, thanks very much.

You're welcome. We're going to take one more question before we go, okay, Operator.

Okay. Your next question comes from the line of Phil Gibbs of KeyBanc Capital Markets.

Hi, good morning. Thanks very much.

Good morning, Phil.

Lourenco, I had a question on the cost guidance for US Iron Ore. I think you talked about it already, but should we be thinking about a $5 decline from average levels where you were in 2014 into 2015 with energy being half of that essentially, so that's in your guidance at this point?

I am basically reiterating my guidance that I gave in Q3. We are going to target $55 per ton cash cost max in 2015 and $50 per ton max in 2016. That's exactly the same guidance I gave last quarter during the Q3 Conference Call.

Okay, I appreciate that. And then as far as the accounting piece, the $240 million cash on hand for the Bloom Lake [sub], was any of that on the balance sheet at the end of 2014? How do we think about that?

Kelly?

About $20 million was on hand roughly.

Okay, thanks much.

Very welcome. So thank you very much for joining our call. And, of course, Terry Paradie and myself will be looking forward to continuing our conversations with each one of you. Have a great day, and we'll talk soon. Bye now.

This concludes today's Conference Call. You may now disconnect.