Cleveland-Cliffs Inc (CLF) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Sean and I will be your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2015 third quarter conference call.

(Operator Instructions)

The Company reminds 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 risk and uncertainties that could cause actual results to differ materially. Important factors that could cause the 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 the Company website.

Today's conference 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.

The Company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found on the earnings release which was published this morning.

At this time, I would like to introduce Kelly Tompkins, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Sean. Thanks to everyone for joining us on this morning's call. I'm joined today by our Chairman, President and CEO, Lourenco Goncalves. I will kick off the call with a review of our third quarter results and related financial commentary before turning it back to Lourenco for his remarks.

This quarter's financial results clearly reflect the disciplined execution and great cost management we have undertaken at Cliffs. As a result of our relentless focus on cost-cutting, we've generated solid operating results during very challenging market conditions. To highlight our two continuing operations, USIO cash production costs were $49 per ton, the lowest we have reported in this segment in years. Just as notable as our performance in Asia Pacific iron ore, where cash production costs were $27 per ton, a record performance since Cliffs became 100% owners of these assets back in 2008.

On the revenue side, the continued softness of iron ore prices and the further decline of hot-rolled steel prices have impacted our realizations in both USIO and APIO. We have, however, largely offset lower realizations with these lower operating costs, as well as cuts in overhead to achieve third quarter adjusted EBITDA of $60 million, which I will note includes $33 million of costs related to the idle of Empire and our United Taconite mines. Excluding these idle costs, adjusted EBITDA for the quarter would be $93 million. Despite the impact of idle costs, we are maintaining our cash cost of goods sold guidance of $60 million to $65 million per ton for the whole year.

From a liquidity standpoint, we ended the quarter with $270 million of cash and cash equivalents, which includes the $160 million tax refund we received in early August. We had no borrowings on the Company's asset-based lending facility at the end of the third quarter.

On top of our cash balance, as of September 30, we have about $255 million in available borrowing capacity in our ABL, net of outstanding letters of credit. Liquidity will continue to be a key focus for the entire management team particularly as we head into the winter months. Our ABL was a perfect match for our seasonality as during the inventory building winter months, the cash we use while we are not shipping is offset by the additional inventory based borrowing capacity under this facility.

In terms of our capital structure, we took advantage of the opportunities offered by the debt markets during the quarter and completed a cash tender offer for a significant portion of our senior notes due in 2018, capturing these notes for $0.55 on the dollar. The tender offer allowed us to significantly reduce our nearest dated maturity and reduced future interest payments by nearly $18 million until maturity. In so doing, we created $56 million in implied equity value.

We also completed some open market transactions in the third quarter with some of our 2020 and 2021 unsecured bonds which resulted in an additional $24 million of value creation. Through both the tender offer and these transactions, we reduced total debt by $173 million. These smaller transactions will reduce future interest payments by nearly $13 million. We'll continue to monitor the Capital Markets for opportunities like these while ensuring we maintain adequate levels of liquidity to manage the business. We are comfortable with our current liquidity levels, given our current outlook on the base business and are prepared for any further weakening in pellet demand.

At the end of the quarter we have net debt of $2.5 billion compared to $2.6 billion of net debt at the end of the second quarter of 2015 and $2.9 billion of net debt at this time last year.

In terms of our capital expenditures and SG&A expenses during the quarter, we continued to reduce both significantly. Our cash capital spending dropped to $24 million this past quarter, a 66% reduction when compared to last year's third quarter spend of $69 million.

Year-to-date we are at $58 million in total CapEx spend, a 75% decrease in just one year. Because of the discipline of our operating teams with respect to capital expenditures, all while operating safely and responsibly from an environmental standpoint, we are lowering our full-year CapEx spending to between $85 million and $95 million, down considerably from our previous expectation of $100 million to $125 million. This reduction truly emphasizes the team effort and cost-conscious attitude we have undertaken in all areas of the business with employees at every level vested in managing cash as conservatively as possible.

As for SG&A, this quarter's results are just another example of the spending discipline implemented in this Company. Our third quarter SG&A expenses were $22 million, down 55% from the prior year third quarter expense of $50 million. Given this improvement, we are lowering this year's full-year SG&A expectation to $110 million from our previous expectation of $120 million. For some further context on this, less than two years ago, this company's SG&A and exploration budget was nearly $300 million. Cutting nearly two-thirds of overhead expenses in less than two years is never an easy task but this management team has done it, and we will not sit still going forward.

With that, I'd like to turn the call over to Lourenco for his prepared remarks.

Thank you, Kelly, and thanks to everyone for joining us on this morning's call.

I'm very proud of what we have accomplished since August last year. Our management team and our operators have been able to consistently reduce costs across-the-board and improve our execution during one of the most challenging times in the history of the business.

This quarter is another demonstration of how efficient the members of the Cliffs team are. We continue to enhance our focus on the USIO core business and address our non-strategic assets. Before I talk about USIO, and comment on the domestic steel market, let me briefly update you on the CCAA proceedings for our Eastern Canadian iron ore assets.

We are now approaching the final phase of the process. At this point, the CCAA parties have completed their assessment of the various bids and proposals that have been submitted by several interested parties. The CCAA parties are now in the process of attempting to negotiate purchase and sale agreements with the leading bidders subject to court approval in respect of certain of the Eastern Canadian iron ore assets.

In the first week of November there is a court hearing scheduled to extend the protective stay until early next year, at which time we hope the asset sales will be completed. At the same hearing, we will be seeking approval of the claims procedure for creditors of our former Eastern Canadian iron ore business. The claims procedure requires the CCAA parties to reach out to our known creditors and to provide notice through local newspapers with the specific requirements for filing a proof of claim against the CCAA parties. This process will determine the amount and validity of total claims that we will eventually share in the proceedings of the CCAA parties asset sales. In sum, the process is moving forward as we expected and further information is available on the Monitor's website which has been published in our recent SEC filings.

As for our North American coal business, here is where we stand; the last time we spoke I expressed optimism about the near-term sale of Pinnacle and Oak Grove. Since then, several coal companies filed for bankruptcy and a couple of deals within the coal space were offered at bargain basement prices.

With that, the two potential buyers we are dealing with were distracted by other sales processes with court mandate deadlines and due to several related reasons were unable to provide Cliffs with sufficiently definitive proposals that contain the assurance and safeguards we need in order to sign a binding deal. From our side, we have no intention to be at the mercy of the buyers' timelines. We control the process and not them. While the effort to sell these assets continues, we must do more to shore up profitability as we operate these mines during the sale process.

As a consequence, we are adjusting our operating plans to ensure we extract as much value from the coal mines in the near-term. Going forward we will operate these assets to ensure that we maximize cash flow and still meet our customers' needs, while more aggressively cutting costs and slashing CapEx.

Since about half of the costs associated with operating a longwall coal mine is related to future development, we will be reducing this cost by eliminating the labor and operating costs associated with future mine development as we focus on mining and selling the coal from the longwall panels already developed.

This new operating plan will drive a drastic improvement in the near-term financial performance of the North American coal business. Over the next six months, cash production cost will be cut in half. We anticipate that through 2016 the EBITDA and free cash flow generation of this discontinued operation will go to meaningfully positive territory as we operate and sell coal from these mines while we continue to pursue the sale of assets. With this development and the significant reduction in staffing levels, we are beginning the notifications process to the union representatives from the United Mine Workers of America and to our employees at the Pinnacle mine, US Virginia, and the Oak Grove mine in Alabama.

Before I wrap up my comments about coal, I would like to say a word about Dave Webb, the Executive Vice President in charge of the coal business. After 37 years in the coal business and 4 years with Cliffs, Dave Webb has decided to retire at the end of this month. Dave has done an outstanding job with his operations teams, particularly over the past year, controlling all they can control, despite the numerous external headwinds in this business. Without Dave's leadership, this down turning coal would have been much more difficult to navigate.

I cannot say enough about Dave Webb and his leadership during these extremely difficult market conditions and for building such a competent group of operators led by Mark Nelson, US Virginia and Larry Millburg in Alabama. I wish Dave well as he moves onto a much less hectic life, and enjoys valuable time with his family. With Dave's retirement, Clifford Smith, Executive Vice President, Business Development, a very experienced mining operator will assume oversight and responsibility for our coal operations which will continue to be led locally by Mark Nelson and Larry Millburg.

Let me now turn to our core business of iron ore. The big Australian iron ore miners misguided focus on market share at the expense of price, continues to give the Chinese mills a cheap avenue to overproduce steel. China is shipping even more steel into the world markets as its economy is [lost] leading to lower steel prices, reduced earnings for global steel makers and more trade disputes. In the United States, steel import penetration was 34% in January. As of September, import penetration has dropped pretty significantly to 25%. While that figure is still far too high, this shows an encouraging trend.

US domestic steel makers have filed four major trade cases against unfairly trade, line pipe, corrosion resistant steel, hot rolled, and cold rolled. The trade cases are targeted at several countries including China. As we get preliminary countervailing duties and anti-dumping duties determinations later this year and early next year, we should see a continued trend toward lower steel import levels and that should benefit our blast furnace clients' order books.

In the meantime, as our US clients reduce production, we had to do the same. As we announced last quarter, we made the necessary decision to adjust our production plan based on our customers' nominations. The Empire mine in Michigan, which was idled in the second quarter, is back in operation. We then completed the idling of United Taconite in Minnesota by the end of August. If not for the reduced nominations from our customers, we could have avoided idle costs which, as Kelly mentioned in his remarks, weighed on our EBITDA during the quarter by $33 million.

Despite all of these global pressures, Cliffs continues to deliver. Our cost reductions are no miracle, just the result of very hard work day in and day out. Even with the reduction in production tonnage, we were able to beat our previously guided cash production cost expectations for USIO.

We are optimizing our mine plants to meet current market needs. We are realizing procurement savings through our relationships with our vendors. The operations teams' expertise in predictive maintenance has kept our CapEx spending down and resulted in very well-planned maintenance shutdowns for Northshore and Hibbing all of which positively impacted USIO's EBITDA and free cash flow generating capabilities. We remain highly confident in our USIO-centric strategy, and are planning for the future.

I am happy to announce that Cliffs Natural Resources has completed the production of our first industrial-sized trial round of 60,000 tons of DR grade pellets at Northshore in Minnesota. These pellets were developed with full input from the client and their full spec including low silica content is very good. At this point, we have started to ship the material and utilization of the DR pellets at the customer's DRI plant should be concluded during Q1 2016. We are very optimistic about this market opportunity and believe that there is real demand from electric arc furnaces steel makers for alternative iron ore units to meet the chemistry and residual requirements of higher quality steel products.

While scrap may be a good source for lower grade steel, iron substitutes are necessary for higher-quality steel products that fit the automotive market, which is one of the bright spots in the domestic steel industry. With a very real prospect of demand growth that lies in serving the electric arc furnace markets, Cliffs will be able to supply both blast furnace and EAF steel makers in the United States.

As for labor negotiations, this continues to be ongoing. We are on the same page as our US (inaudible) Union represented labor force and we appreciate their recognition of the challenges this industry is facing. We remain optimistic that a new labor deal will emerge but, until then, we will let the negotiation teams do their work.

Clearly, what's on top of mind for many of you is the status of our supply relationship with Essar Steel Algoma. The contract was terminated by Cliffs because Essar was not complying with the contracts; as simple as that.

At the beginning of the month, the court ruled on our motion for partial summary judgment, and the judge has found that Essar is in breach. When Cliffs terminated the contract, Essar asked for, but did not obtain any emergency relief from the same court. Because of the confidentiality order over the case, I cannot go into greater detail, which I really regret. What I can say is that we are willing to sell them iron ore pellets under a more commercially appropriate arrangement. We know the quality of the Cliffs products, as well as the advantageous geographical position of our mines.

Separately, I would also like to point out that due to certain credit measures we put in place several quarters ago with this particular customer, we eliminated any potential credit risk we would have had otherwise. As a result of the Essar Algoma contract termination, as well as reduce the demand from other customers, we are lowering our sales volume forecast to 17.5 billion tons for 2015. This new sales forecast assumes no sales to Essar Algoma for the remainder of this year but is subject to change if a new commercial arrangement is established.

Let me also comment on the recent news that AK Steel, one of our most valued customers, is idling its Ashland Works blast furnace. Based on the contract we have in place with AK Steel, the tonnage we'll supply will not be affected by these idle nor the presence of magnetation pellets in 2015 or 2016.

As we look ahead to 2016, our sales tonnage will be ultimately determined by our customers' nominations, which typically come in during the month of November. As fourth quarter sales and 2016 nominations firm up, we may adjust our production to match our expected sales. The flexibility of our mine footprint enables us to adjust production to what best serves our customers while optimizing cash flow and seasonal working capital.

Importantly, even with the reduction in sales volume, our recent change in customer mix will drive a realized revenue rate that is drastically improved, and even less sensitive to movements in the volatile IODEX index. Based on realistic IODEX price assumptions, the improvement in our realized revenue more than offsets the impact of lost tonnage. As our new customer mix has improved, our expect USIO price realizations by approximately $4 per ton over the next year.

Moving to our Australian operations. While the current seaborne pricing environment has been challenging for our Asia-Pacific iron ore business, we have executed our cost production opportunities. During Q3 we generated adjusted EBITDA of $10 million while spending only $200,000 on CapEx. Continued cost reductions in this segment have been essential, and our Australian team has definitely delivered the results. In addition to increased efficiencies and lower mining costs, we are also benefiting from all of the headcount reductions that we executed this year. Our cash production cost this quarter was in the $26 per ton range down from the $34 per ton in the second quarter of this year.

Just a year ago, our cash production cost was $53 per ton, confirming that we have cut our costs in more than half in just a one-year period. Our commercial team has also delivered the maximizing our realized prices mainly by taking advantage of our high percentage of lump ore in the mix. With all these combined efforts as well as the help of a continually weakening of the dollar, we have been able to keep this operation cash flow positive.

In closing my prepared remarks, I would like to state one more time how proud I am of the Cliffs team. Even with all the headwinds from market conditions, our employees are performing exceptionally well. This past quarter's results demonstrate the quality of leadership and employee teamwork that we have here at Cliffs. I am highly confident that we are on the right path with our strategy to fully prosper for the long-term.

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

(Operator Instructions) Michael Gambardella, JPMorgan.

Yes, good morning and congratulations, Lourenco and team, on basically doing a great job on everything under your control, seems like, especially on the cost front and even going on the new markets with the DRI facilities. But a question just going forward, first question in regards to this Essar situation, do you have any legal recourse back to Essar?

I'm not sure -- thanks for the congratulations, Mike, but I'm not sure if I understand what you mean by that.

Can you sue Essar and expect to get anything out of them for the breach of the contract?

Well, first of all, we are dealing with Essar Steel Algoma in this lawsuit and I know you understand how limited I am in what I can and what I cannot talk about. But the target of the lawsuit is Essar Steel Algoma. In this particular case, regarding the commercial contract, they were in breach -- the judge agreed they were in breach. At this point, we no longer have a contract so I don't really understand what kind of recourse you were talking about.

Just in terms of suing them, just recourse in the courts, but let me go to the next question?

Suing them for what? What I would like to get I already got.

For the breach of the contract.

They were in breach so there is no more contract.

Right, but in terms of -- won't there be some negative implications in terms of your cost structure because of the lower volumes?

On the other hand, we have the benefit of not having a contract that was a lot more leverage to the IODEX but that was not the intent of the lawsuit.

Michael, it's Kelly. At this point we are holding firm on our USAO cost guidance. Obviously we're not prepared to fully talk about 2016, but at this point our guys are doing a superb job and even with this reduced sales volume expect to maintain their cash production costs.

Okay, thank you very much.

We have a different lawsuit going on but it's completely separate and it relates to other things, but again, the defendant is Essar Steel Algoma.

Got it.

That's all I can comment on the lawsuit, Mike. I am sorry.

I understand.

Jeremy Sussman, Clarkson.

Thanks very much for all the color, Lourenco, and congratulations on all the cost reductions.

Thank you, Jeremy.

Just on the cost front you noted that you had, I think, $33 million of idle end costs this quarter. How much of that was recurring and how much goes -- essentially was just the one-time specific to the third quarter?

I will let Kelly take that. Kelly, please?

Yes, Jeremy, the $33 million breaks down between Empire and UTAC and it's roughly even between those two, but in terms of the $33 million I would say roughly $5 million was one-time or severance [worn] related items, if you want to look at it that way, call it $28 million net of the one-timers.

That's helpful. And, Lourenco, interesting comments on the coal front, which I know is still classified as discontinued ops but I guess from a timing standpoint, when should we start to see some of the changes in the mine plan start to flow through in terms of positive free cash flow? Thanks very much.

Immediately. We are starting immediately to no longer develop the new longwalls. We are going to only mine what we have already developed. And you are familiar -- I know you are familiar with that, Jeremy. The costs associated with coal mining are more or less 50/50 related to current longwall -- development of new longwall to continue mining indefinitely.

We're not going to do that going forward. In other words, the clock's ticking for the buyers. If they don't buy -- if they don't buy in the next several months, very soon they will have a different asset to be pursuing. The space is crowded by several bankruptcies.

There are buyers out there, we know them all. We have been dealing with them. They are serious people and they are doing their homework and they are in the (inaudible), and they are dealing with us. They delivered documents, but the documents are not good enough. They are not focused enough because they also have limited resources to apply and they are running against a court mandate -- dates with other [process sold.]

Look, I'm a very emotional person, as you know. I cry with them every day but I'm not going to wait for them. I'm moving with my [team] and this will be good for Cliffs and it's the best thing to do for our shareholders. That is what we are going to do. We have contracts in place with clients for coal. We will continue to honor all of these contracts, but we are going to only work in the existing longwalls and the clock is ticking for the buyers.

We're talking about probably the two best met coal mines in the country, Oak Grove and Pinnacle. They know the quality of the assets. They also know what they are pursuing with other processes in this bankruptcy mandated sales process that they are busy with right now, but it is what it is.

I tried to avoid as much as I could let my great people, both in Alabama and West Virginia go, but also the mine workers, the union, will see that Cliffs is serious about moving forward with that situation. The asset's for sale, the sales process is alive. That's what we are going to work to mine what we have and move on.

That all makes perfect sense. Thank you very much and good luck.

Thank you, Jeremy.

Matthew Fields, Bank of America.

Just have a few housekeeping questions. You said the bond buyback, the $48 million were 20 and 21 bonds. Can you care to give us a breakout between how those were bought back in the quarter?

We will have that all laid out in the 10-Q which will be filed today, Matt, so why don't we just defer to that. We're going to break down every maturity and give you the pricing and all the details of both the open market and the tender.

Okay. And then, where in the cash flow statement does the $160 million tax refund show up?

It shows up -- overall in the working capital. The $160 million shows up and it is a big item, obviously, in the period-over-period flip. The $293 million roughly, has got the $160 million tax refund. But remember, we immediately put that cash to use and really was the main driver of our ability to do the debt reduction that we benefited from during the quarter.

So that's part of that big $217 million sort of working capital source?

Yes.

Remember, we bought a lot of bonds. We made a cash offer, $0.50 on the dollar; we were very successful with that. We appreciate the help we got from the bondholders at tender and we also appreciate Kevin Cohen's report telling everyone to sell and head for the doors. This type of help is always great. I am sure that Kevin will be asked that question later in this call. I can't wait to hear from him because he always helped me with his reports saying that the world is coming to an end. Go ahead, Jeremy -- or Matt.

Then one last housekeeping question. Do you guys have any receivables due from Essar Steel Algoma on your balance sheet?

No, we --

Can't comment. It's a lawsuit. Be careful.

No, but just in terms of the financials as we commented in the prepared remarks, we have been dealing with Algoma, mindful of their credit situation for several quarters. We don't have any exposure from that standpoint.

Matt, those things don't develop overnight. I have been here for a little more than a year. We changed the way we are collecting our money long ago because the writing was on the wall, so the answer is no.

That's good; good to hear. And then one last bigger picture question, why do you think Essar Minnesota invited you and your management team to tour the plant?

Because they are not very smart. That was one of the most stupid things I have ever seen in this business. Inviting the enemy to take a look from the inside is basically -- with the ridiculous impression that me or my guys, Terry Fedor, Clifford Smith and Jack Croswell, would be impressed with a very convoluted construction site, with people basically banging heads against each other and with the only positive of having cheerleaders in the local press that had no idea that they are basically inviting for trouble by continuing to support that stupid development.

But, you know what? That thing is a construction site. One year from now they will not be very different from what they are right now. And at the very least, the exposure that they have right now will not allow them off the hook. They are on record saying that they will be producing pellets mid 2016 or second half of 2016.

I will give them December 31, 2016. December 31, 2016, they will probably not have their pellets plant with a roof yet because they don't have any equipment in place yet. They do not have any wires. They don't have any motors. They don't have anything. They are not even close to start to get in trouble in terms of their schedule yet to commission the plant.

That's when the problem starts. When you have everything good to go and things don't really match. Things don't really work the way they should.

Take a look at Roy Hill, that's a much more serious type of investment in Australia and it's just to produce fines. This one here is to produce pellets. After the equivalent to fines, you have to concentrate and you have to pelletize. That's not even a factory. That's just another Essar endeavor similar to several others.

They collect a lot of money from the government, which I fully believe that Governor Mark Dayton will get his money back on behalf of the people of Minnesota. We will go from there. Until they produce their first pellet, they are just that, just a construction site in disarray; nothing else. Why they invited us, ask them.

All right. Well, thanks very much for the color. I really appreciate it.

Thanks, Matt.

Nick Jarmoszuk from Stifel.

Just returning to the Minnesota trip. When are you guys scheduled to tour it?

I am sorry? What is the question? I am sorry, could you repeat?

When are you scheduled to tour Essar Minnesota?

I didn't schedule; they invited me three times. The third time, I accepted. Do you guys remember when I went there, in July? Yes, in July.

Okay. Returning to Algoma, do you have a view as to how sustainable their present supply arrangement is?

I don't have a view on Algoma. The only thing I can tell about Algoma is they used to have a contract with us. They were in breach. We, after trying to mitigate the breach for no avail, completely unable to resolve our differences in a friendly way, we finally sued them in front of a court of law in Cleveland, Ohio. The judge agreed with us that they were in breach; we know longer have a contract. That's the story. I'm not going to elaborate more than that regarding Algoma.

Okay. And then with the contracts that are coming up towards the end of 2016, anything you can provide regarding discussions with Arcelor?

No.

Okay.

We are still in 2015. We still have a year and a quarter to reach the first contract deadline. It's clear that we understand our contracts extremely well, and we are dealing with each quarter the right way. We have partnerships with our clients, by and large, with 100% of the ongoing clients for sure.

Things are in great shape with ArcelorMittal. That's all I can tell right now. So far, so good, but keep in mind the contracts expire, one in December of 2016, the other one in January 2017, so we are far away.

Okay. And then regarding the coal assets with the change in the long wall mine plan, what sort of runway do you have to keep on producing? And then once you run out of -- once you've run through the current mine development, do you anticipate if they haven't been sold that you would close the mines? And then is there an associated reclamation expense with that?

I will let Kelly answer that.

Yes, at this point, we are going to operate and utilize all of the coal currently developed. When we reach the point where that's run out and if we have not sold these assets, which, again, remains our primary objective is to get these assets sold, then we will move to the next phase of as-needed reclamation. But we think this new operating plan, which will significantly reduce the CapEx burden over the next, particularly over the next two years, coupled with the significant reduction in costs -- because think about, we're going to be reducing labor, materials, energy, maintenance costs all by about 50%.

The turnaround from an EBITDA standpoint will be significant. We're going to extract all that value over roughly the next six to twelve months. At that point if the asset's not sold, we will do what we need to in terms of moving to a reclamation, but all that is factored in and we believe the new operating plan is still the best near-term alternative while we are pursuing a sale and may well be a critical catalyst to push a couple of the buyers that we are dealing with across the finish line.

So is the production -- available production for another six to twelve months? Is that the way to think to think about it?

That's a reasonable estimate.

Regarding the cash costs at USIO, they were down nicely year-over-year. There was discussion that it was from reduced maintenance, repair cost, et cetera. Can you delineate how that's split, actually, between eliminating Empire, which is a higher-cost mine and then the benefit from the lower costs that were running?

First of all, we're not eliminating Empire. We are, actually, right as we speak we are operating Empire. Due to the fact that we delayed a little bit of bringing Empire back due to the current nominations coming from the client, we -- they have iron ore at Empire to explore even beyond December 2016.

We don't know yet. We are still in the process of discussing nominations with the client, so we don't know how much we're going to mine out of Empire between now and the end of 2016. But the assumption that we are not having Empire is not correct.

Just an added comment to that, it's really not -- doesn't have anything to do with Empire -- really, the guys from an operating standpoint, better stripping, lower energy rates and usage, the predictive maintenance work that we've done which has also enabled us to manage our CapEx spend much better. This is just good, solid operating performance. Empire is really -- it's a factor in terms of the idle costs for the quarter. You can look at Empire that way, but really I wouldn't look at it in terms of contributing to the significant USIO cost performance in the quarter.

That's all I had, thank you.

Thank you, Nick.

Tony Rizzuto, Cowen and Company.

Thanks very much. Good morning, Lourenco and Kelly. Solid job on attacking the costs and driving the other initiatives. My first question is with regard to your guidance on the USIO, the Q4 revenue per ton? What is the hot-band assumption that's embedded in that guidance?

We are going to have that in the 10-Q.

It's going to be in the 10-Q?

Yes, which will be filed shortly after this call.

Okay, okay. And very positive to hear about the development of -- and just going back to the pricing for a moment -- obviously the Platts IODEX has softened further and we are below 50 right now. I'm concerned about the near-term, as you indicated, you've got ramp-ups going on in Brazil and Australia right now. Is there some cushion that you've provided for in that range? You talked about the realization of $80 to $85 per ton?

IODEX is really below 50 right now. But you just issued a report today saying that Rio Tinto is doing everything right. If everything is doing everything right, I (inaudible) is doing everything wrong here, because I have been separating ourselves from China since the day I put my feet here.

On the other hand, Rio Tinto -- that per your report -- is doing everything right, continues to say that China will reach 1 billion tons of steel production. Now they act a little bit (inaudible) because they are saying that the world, instead of going to the old (inaudible) 2.5 billion tons is going to 3 billion tons. They are bending backwards to justify their own strategies, but you still say that they are doing everything right.

On the other hand, I am doing everything to separate ourselves from China because I believe that China is a disaster. I believe that China will bring Australia down, but you know, Australia is not very different from Minnesota. I think that Australia will only believe that China is destroying Australia when they build an artificial island on the Great Barrier Reef that they can see from the shore.

So it's a matter of myopic approach to world geopolitics and economics. The United States will survive. We are going to continue to be insulated and Cliffs is the only 900-pound gorilla in this marketplace. So you've got to pick your poison. If they are right; I'm wrong. If I'm wrong; they're right.

I meant more on an operational front in terms of how they're managing their operations, just like you are doing a great job managing your operations, but we can talk about that later. I just wanted to know how should we -- very exciting comments about the DRI grade pellet. What should we be looking at in terms of development time frame? How we should be thinking about the trials and so on and so forth? Maybe you could elaborate a little bit more on that?

I'll be glad. Look, our -- I'm very proud that Cliffs is now an industrial-sized producer of DR pellets in this country. The United States has officially started to produce DR pellets. It's a pretty big landmark for this 168-years-old Company.

This being said, the scrap substitutes have a place for EAF developments, especially regarding high-quality steels for the automotive industry via the EAF route but we have to be cognizant that all of these things will only pan out if and when scrap prices go back to a normal price level. With scrap prices so cheap, with iron ore so cheap and with everything being so cheap, it's very difficult to justify investments that would put more capacity to produce DRI in the Great Lakes.

So we have the capability, we are proving the capability. I believe there's no assurance because the trial has not occurred yet. It will be more towards Q1 2016, the trial we use at the client's facility, but the capability will be there because when things go back to normal, we will be able to supply and we are ready to supply. Hopefully, in the meantime, we will be able to have someone invest in the capital to put a DRI facility in the Great Lakes and we will be the supplier of that facility.

I think that's a proper strategy to pursue, particularly with all the challenges the integrators are facing. Thanks for your responses. Lourenco, we can talk off-line about the other. Thanks.

I'll be glad, thank you.

Aldo Mazzaferro, Macquarie Research.

Good morning, Kelly and Lourenco, how are you?

Good.

Good morning.

A lot of my questions have been answered. I just had a little follow-up on the $33 million of idle cost. I heard you say that some of it's going to come to an end. Was that the $5 million non-recurring, I assume, and then leaving $28 million continuing? If I remember correctly, that was over two months, so that would be a rate of about $14 million a month? Is that what we should be looking for in the fourth quarter?

Not quite the $14 million. The $5 million I referenced was the front-end idle cost particularly related to UTAC, but you're going to be looking at $5.5 million, $6 million a month going forward apart from that upfront, one-time cost assuming UTAC remains idle.

Okay, $5.5 million, $6 million if UTAC stays idle. And at this point would you have any kind of forecast to how long that might be? Is it through 2016, should I be safe or --?

Yes, it's really going -- it ties back to the nominations that Lourenco referenced in his comments. Typically, we see our nominations come in in the November time period and then they firm up by the end of the year. We match our production to what we see from the client's nomination so we're several weeks away from really getting good, firm visibility on what that will be and then we will make whatever decisions are needed in terms of production, be it UTAC or elsewhere.

And then, Kelly, a couple other things. On the SG&A expense, I know $22 million is a great number in the quarter, but I would bet you, given your cost reduction, there was a declining run rate on a monthly basis. You have any kind of feeling for what fourth quarter SG&A might come in at?

Fourth quarter is always a little bit messy, but I think directionally, we ought to be reasonably in that range, maybe $25 million. As you kind of wrap up accruals for year-end and wrapping up outside service provider spend, so it might be a couple million more than what we saw this quarter. But importantly, we are continuing to keep the pressure on SG&A and doing everything we can to reduce it going forward. We're not taking our foot off the gas from that standpoint.

Great. In terms of working capital, Kelly, you've seen fairly high volatility, I would think, right? Are you going to be using working capital as we go through the winter? Then let it go in the summer?

Yes. That's the seasonal pattern, Aldo, and that's why in my remarks, we're going to stay very focused on liquidity. We feel good. You saw where we ended the quarter with total liquidity of over $500 million.

As we go through the winter months, that working capital becomes more strained. We're going to be very mindful of that. We're following typical seasonal patterns. We are going to be very focused too on managing inventory levels as well which all tie back to ultimately what we see from customer nominations and how we deal with production accordingly.

Okay, and then just one final thing. You commented that you were a creditor on the CCAA and possibly stand to collect something. Is there a way you can tell us what the size of your credit is? I don't think I'd assume 100% collection, but just can you give us an idea what the size?

I think it's probably easier just to reflect that question back to you to look at the 10-Q. We lay out in our discontinued and deconsolidated detail for -- well, both for coal and our Eastern Canadian operations. We lay that detail out. We clearly are the largest creditor, but ultimately, any recovery is going to depend on asset sales and kind of where we stand relative to other claimants. But we are the largest creditor so to the extent there's recoveries, we would stand in line to have the largest share of whatever that is.

All right. Thanks very much, guys.

Brett Levy, CRT Capital.

Hi, Lourenco. Hi, Kelly. Good job in bad circumstances. It's an extrapolation of a question I asked on the AK call. Sounds like they're going to ship the Magnetation volume from Ashland over to Middletown. Can you give a little more color on why that doesn't displace you?

Because of the -- first of all based on our contract and AK is a real client and they understand the contract. The nominations don't say anything. The contract doesn't say anything that would allow the nominations to be played. There is a nomination number for 2015 and there is also a number -- by the way, nominations are range. There is a minimal nomination range for the nomination number in the range for 2015. That is a minimum nomination number for 2016.

We haven't finalized the discussions with AK Steel for 2016. But we know the minimum nomination number for 2016. That's the reason we are 100% sure that we will not be affected. We don't disclose this number, but the numbers exist and we know the number. AK knows the number.

What I guess, Brett, and it's just a wild guess because I don't have all the details about AK, is that they buy from Cliffs the vast majority. They buy from Magnetation, they buy from someone else. That someone else will probably be reduced or go away. I don't know, but we will not be affected, for sure. 100%.

All right, and I get one more question. This is kind of an open-ended one. Obviously, we've got three guys who are the biggest guys in the iron ore. BHP, Vale, Rio. They've decided to expand capacity. They're not cutting back on their high cost capacity. They are all public companies.

Do you see any signs that rationality returns to this market between them and China? Just given the world is in a contraction mode and supply is in an expansion mode, anything that as you look forward gives you a reason to think that the suppliers are going to approach rationality?

Actually, I like your question because these open-ended questions allow us to elaborate a little bit on things that otherwise sound just -- a sentence sometimes does not really bring the entire explanation. Let me try to elaborate a little bit. It's a good question.

As far as signs of rationality and cutting high-cost capacity, I see one of the three big guys already doing that. Vale is already doing that, even though they're not being very specific about. They're shy, they're not in Australia. They are in Brazil. They are far away. They have a clear freight cost advantage against the other two. But they are demonstrate some rationality.

If you look at Vale's last public results, you will see that they are replacing lower-cost -- higher-cost product with lower-cost product already. That should be even more evident when they conclude their S11D development mid-next year. It's not like they are adding. They are doing the right thing, in my opinion. They are replacing higher-cost product from their southern mines with lower-cost product coming from, at this point, from Carajas, and in the near future, I believe from S11D. There is some real sign of rationality coming from Vale.

The irrationality is actually entrenched at Rio Tinto. BHP has been trying to quietly move away for their previous numbers. Their 1 billion now is 935 to 985. Look at the precision of these numbers. 935 to 985, so they cut 15 million tons by [2013], but it's a baby step, but it's a step in the right direction. I can try to see that as more than a sign of rationale but a sign to try to differentiate themselves against the stubborn ones that are the Rio Tinto guys.

Another very, very important type of point is China, CISA, the China Iron and Steel Association. The mouthpiece for the iron and steel business in China. It's all state owned by the central government, is saying, loud and clear, our consumption is going down. We need to reduce production. All of the mills are losing money. This is not the way to go. But it's a big country. It's a complicated country. The municipality have a lot of power.

The Australians are not helping China. That's a bad thing. Another China rationality came from the Chairman of [PowerSteel]. The Chairman of PowerSteel said that China will go through the same process that happened in the past in Europe and in United States. And their steel consumption should go down by 20%; he did say that.

If the Australians don't believe it's because they -- let's call a spade a spade. If Rio Tinto doesn't believe, it is because Rio Tinto is as embarrassed -- the Rio Tinto management team is as embarrassed as the former Cliffs management team with their development that now -- they are all based on China is growing forever. That was the same thing I found here at Cliffs, but sometimes it takes some time for reality to sink in. Sometimes it takes an activist. Sometimes it takes some people calling a spade a spade.

But if we continue to try to deny that things are changing over there, if we continue to say that Rio Tinto and the Australians are doing everything right, we are going to have a revolving door of Australian Prime Ministers in the next several years. The first one is gone, actually.

I believe that some smart people in Australia are trying to show Mr. Abbott that he needed to do a real investigation to understand why prices are as low as they are or why does -- in other words, why Australia was allowing the Chinese commodities exchange to manipulate the iron ore prices the way they are manipulating the iron ore prices. But, you know, Tony Abbott was in favor until he was no longer in favor. Now he is no longer in charge. There is another guy over there.

I hope the Australians will continue to question themselves why one or two companies are giving their finite resource away to the Chinese while the Chinese build into a military powerhouse in the South China Sea. This may happen for a while; this may happen until the United States take over and Australia is member of the TPP, so he's a friend, at the same time that they supplied China to become an enemy. So you got to pick a side. That is more or less what -- the way I see the thing.

But there is some good input coming from Vale's assessment of the situation and actions that they are pursuing, and even some very clear input coming out of China showing that we don't need all this iron ore. You are screwing up my country by doing what you are doing. So change your behavior, please. So far, the word is please.

Let's see what's going to happen next. What about Cliffs and all this mess? A year and couple months ago we decided that we would just stay within the boundaries of the United States of America; the best country to be in, the best market to be in, the most resilient, good in times of peace, good in times of war. We are well-positioned. We are the 900-pound gorilla. We are developing DR pellets. We are preparing ourselves to supply the EAF markets.

We continue to supply the existing blast furnace; we even integrated steel business in the United States. We know that the current prices are temporary and things will get better. The anti-dumping suits, countervailing suits will come soon. By January, it will be a completely different ballgame as far as imported steel. We are going to be in a much better shape.

With that, I think we are way off the time. I appreciate your participation in this call. We are starting to get out of the bottom. We are not at the top yet, but we will get there. Thank you very much. We will keep in touch. Bye now.

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