Cleveland-Cliffs Inc (CLF) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Sally and I am your conference facilitator today. I would like to welcome everyone to the Cliffs Natural Resources 2016 first 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 it's forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on the Company 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. The Company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in 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.

Thank you, Sally, and thanks to everyone joining us on this morning's call. I'm joined today by our Chairman and CEO, Lourenco Goncalves. I will lead off the call with a review of our first quarter results, outlook for the remainder of this year and provide some additional comments around our most recent debt exchange.

Once again this quarter, the performance at our US and Australian operations was outstanding despite a challenging commodity environment. Disciplined cost control coupled with an uptick in iron ore and steel prices not only drove our strong first quarter financial performance but also suggest a more optimistic outlook on the balance of the fiscal year.

Starting with the US market, the impact of successful trade case rulings and a drop in imports have pushed steel prices dramatically higher since our last conference call with hot-rolled steel prices settling above $520 per short ton compared to the sub $400 per short ton prices in the fourth quarter. If the current steel prices persist, let alone improve, our cash margins in the US should improve as well. For now we are holding our current price forecast for hot-rolled steel at $450 per short ton for the full year but will adjust as the market and our order book evolves. In the first quarter we realized $84 per long ton of pellets.

Our cash production cost at USIO was $48 per long ton during the quarter, a 26% reduction from the $65 per long ton performance reported in the 2015 first quarter. This quarter-over-quarter reduction in production costs can be attributed to reduced repair costs, lower diesel fuel and natural gas rates and drastically reduced labor expenses. Just to reaffirm our full-year 2016 guidance, we are maintaining our outlook on full-year cash production costs of $50 to $55 per long ton as well as our cash cost of goods sold guidance of $55 to $60 per long ton.

With our United Taconite and Northshore mines down for the entire quarter, we incurred $25 million of idle expenses. As you saw in our March 14 announcement, Northshore will resume production in May and we expect to restart UTAC in the fourth quarter. Accordingly, our remaining idle expenses for the balance of the year will be in the range of $40 million, or approximately $65 million for the full year if you include the first quarter idle costs.

USIO adjusted EBITDA for the quarter was $46 million. Our 1.9 million long tons was generally in line with our sales volume expectations during what is our seasonally lightest quarter of shipments. Consistent with the seasonality of our business, shipments are starting to pick up right now. We expect to ship about 3.5 million long tons in the second quarter with the shipping season hitting full stride in the third and fourth quarters to fill out our 17.5 million long ton order book for the full year.

Before reviewing the Asia-Pacific iron ore results for the year let me briefly touch on the encouraging increase in seaborne iron ore prices since the beginning of the year. Among other factors, which Lourenco will address, Chinese steel mills increased output upon signs of an economic recovery, which drove global iron ore prices back above $50 per metric ton during quarter and reaching as high as $70 last week. While the IODEX price has a limited impact on our realized prices in the United States given the structure of our domestic pellet supply contracts, our Australian business benefited substantially from higher seaborne spot prices during the quarter, reporting an adjusted EBITDA of $23 million.

On the cost side, similar to our USIO team, our APIO team continued to outperform our expectations. The focus on costs and productivity delivered first quarter cash production costs of $27 per metric ton compared to $37 per metric ton reported in the prior year's first quarter. Compared to the fourth quarter of 2015, cash production costs for the first quarter were up slightly due to a small headwind from the Aussie dollar exchange rate. If we stripped out the Aussie dollar impact, our APIO business has reported seven consecutive quarters of cost reduction.

For the full year we are maintaining our Australian cash production cost guidance of $25 per $30 per metric ton and our cash cost of goods sold expectation of $30 to $35 per metric ton despite our new assumption for the Aussie dollar of an appreciation of $0.06 from $0.69 to $0.75. Our expected improvement in price realizations, due to the recent run-up in iron ore prices, can be calculated based on the revenue outlook table provided in our press release this morning. We have also seen lower freight charges and improved lump premiums, which has bolstered our revenue per metric ton expectations in Australia.

Moving to capital expenditures and SG&A expenses for the quarter, we continued to show year-over-year reductions in both areas. Our cash capital spending dropped to $10 million this past quarter, a 35% reduction when compared to last year's first quarter spend of $16 million. Our previous full-year capital expenditure outlook of $50 million was increased to $75 million this quarter as we prepared to begin investing later this year in the equipment and flow sheet modifications required to produce the superflux Mustang pellet at United Taconite. Lourenco will be provide more detail on this in his remarks.

As for corporate overhead, despite some one-time non-cash charges we had to take in both SG&A and [miss net] related to writing off some unneeded office space at our corporate office in Cleveland, we still showed a year-over-year reduction in SG&A. For the full year we are increasing slightly our full-year SG&A guidance to account for these charges as well as some higher-than-anticipated legal expenses. That all said, we will continue to aggressively manage our corporate overhead for appropriate cost reduction opportunities.

Let's move on to liquidity. We ended the quarter with over $300 million of total liquidity net of outstanding letters of credit. Liquidity was down quarter-over-quarter due primarily to the higher weight of interest payments in Q1, both normal coupons and the cash payout of accrued interest related to the secured notes exchange and an $80 million usage of working capital related to payables and accrued expenses. We also used about $60 million in cash as we build inventory during the quarter; however, we retained a majority of the value of this as borrowing-based liquidity on our ABL facility. Furthermore, we made over $70 million in repayments on our outstanding equipment loans during the quarter, which was a use of cash but was effectively a wash from a liquidity standpoint since our letters of credit subsequently were released.

We had $60 million of cash on hand and no borrowings on our asset-based lending facility at the end of the quarter. We will be converting inventory into cash in the second half of the year as shipments peak. This working capital benefit will be even greater this year as our expected sales exceed our expected production volumes by 1.5 million long tons. This working capital benefit, the season pickup up shipments, combined with our still historically low CapEx reduced cash interest expense and increased price levels, provides us with ample liquidity to operate our business.

Before turning the call over to Lourenco, the final topic I will touch on is our debt. During the quarter we completed our largest liability management initiative to date, a secured debt exchange that created implied equity value of nearly $300 million and which also reduced our annual cash interest expense by almost $15 million. As a result, our cash interest expense expectation has been reduced to $185 million for the full year 2016.

Because of the accounting treatment of this debt exchange, our new 1.5 lean notes will sit on our books at their $219 million face value plus the total undiscounted interest to be paid until maturity of $79 million. No future interest expense will be recorded on these notes as a result of this accounting treatment but the interest will be reflected in our future cash flows. As such, we reported gain of $175 million does not fully reflect the $294 million face value debt reduction that we actually realized in the exchange.

We did record a small tax expense of $8 million during the quarter, primarily related to the gain on this transaction. Overall we will -- we see this as yet another successful step in better aligning our debt and EBITDA but also with the understanding that we've got plenty more work to do.

So with that, I will now turn the call over to Lourenco.

Thank you, Kelly, and thanks to everyone for joining us on this morning's call. I have spent a great deal of time on these quarterly calls explaining that the majors -- the stated intention to overproduce iron ore and push iron ore prices down to force their competition out of business was there the strategy of self-destruction. Several times I expressed my belief that the boarders -- the boards of directors of these Company's would act to separate their respective companies from the individuals who publicly say that lower iron ore price is something beyond their control and not a consequence of what they do, how they manage their business and, mainly, how they communicate their actions to the public.

Well, we finally saw the inevitable come to fruition during the past quarter. First, the executive vice president of iron ore for BHP, Jimmy Wilson, was fired. Mr. Wilson was the most vocal Australian on how to intentionally destroy international iron ore prices. He is on record with the statements about deliberate overproduction and his lack of concern on the impact that might cause on others. As a representative of BHP in this Samarco joint venture with Vale, Jimmy Wilson was also the chairman of the board of Samarco where we can only assume he also left his mark. Later, the CEO of Rio Tinto, Sam Walsh, was told by his board of directors that his fingernails would only support his weight until this coming June. From that point on, gravity would play its magic and, for Mr. Walsh, there will be no more, quote, hanging on by his fingernails, unquote, to his job -- exactly like I predicted and informed you during our last quarter investors conference call.

We can only hope that this high level departures are indicators that, going forward, the individuals that are now in charge at these majors will show better common sense and will express themselves in public venues in a more responsible manner -- one that is best for their shareholders. Very importantly for their host country Australia, [for there is] to making clients located in several continents and for everyone else directly or indirectly affected by what they say and what they do.

Coincidentally or not, just like last week, both Rio Tinto and BHP announced cuts to their full year iron ore production plans, quickly followed by a similar announcement made by Vale. Immediately after these announcements, we saw a drastic improvement in the price of iron ore. That should help their bottom lines as well as our own, especially in our Asia-Pacific iron ore business.

And speaking of our APIO business, let me give you a typical example of a real cost cutting initiative applied by Cliffs. In Australia when a mine is located in a remote location, the mining company uses the fly-in, fly-out method to bring its employees to the work sites. All the Australian majors mining in the Pilbara do that and Cliffs in the Yilgarn was no different. Not anymore. Since the second quarter of last year, Cliffs APIO has started using the bus-in, bus-out method. Instead of using very costly chartered airplanes to fly in our employees from their homes in Perth to the mine in Koolyanobbing 250 miles away, we bring them by bus. It is a lot cheaper.

This is just one of the many consistent and sustainable cost-cutting initiatives we have implemented in our Company since August 2014 in Australia and here in the United States. Time and time again we have demonstrated that we know how to cut costs for real in a way that cost-cutting initiatives are translated into real gains. At Cliffs, the results of our actions have a real impact on our cost of goods sold. They show in our audit financials and can be identified in our public filings. Different from what we see out there at Cliffs, these gains ultimately translate into positive EBITDA.

With that, lets now move on to our core business division US iron ore. A lot has been said and written about the difficults the North American the steel industry has been going through related to dumping activities and unfair subsidies of foreign steel that stole an unprecedented market share in the United States last year. The excessive amount of unfairly traded steel imports denied all the domestic steel mills the full appreciation of the benefits of a pretty decent market, with some steel companies being hit a lot harder than others. What's good for Cliffs is that the one steel company suffering the most is not one of our clients. It is US Steel. That has been a real positive for Cliffs' well-established, long-term customers. What's good for Cliffs customers is good for Cliffs. And the shrinking steel footprint of US Steel is actually an overall positive for Cliffs. I will be glad to explore this issue during the Q&A portion of the call.

Starting late last year and going through the first quarter, the United States Department of Commerce has found injury to the domestic steel industry and imposed preliminary duties on different steel products imported from several countries. While the DOC continues to review the pending trade case, now including a very important new one just filed related to steel plate, hot-rolled steel prices in the US recovered more than 40% from $360 per net ton a few months ago to more than $520 per net ton as of now. And as I have said before, when our customers win, Cliffs wins.

As for our business specifically, a first quarter that's light on shipments is something we always deal with at USIO. Segment EBITDA came in at $46 million, a good number for Q1. As it always happens with us in the US due to the seasonality of the business, we should expect a higher EBITDA in Q2. More importantly, the EBITDA margin of this business continues to be strong at 25% for the quarter with revenues at $84 per long ton and cash production costs at $47.88 per long ton of pellets.

Confusion between long tons and net tons may lead to wrong conclusions and, therefore, we feel the need to clarify this point. Our reported number is equivalent to $42.75 per net ton of pellets. And just to make abundantly clear, our reported cost of $47.88 per long ton is exactly the same as $42.75 per net ton. Cliffs reports cost results using long tons while US Steel adopts net tons for their steel, as all other steel companies do, and also for their pellets. We don't actually make our cost $5 cheaper if we report the same result in dollars per net ton. After reading the press today and before a mispresentation becomes the truth by exhaustive repetition, we feel the need to clarify this point.

At this time, we are still maintaining our USIO sales and production forecasted numbers for the full year at respectively 17.5 million and 16 million long tons included in the forecast as tonnage associated to two previously undisclosed commercial arrangements, which combined, support the estimates that we guided to last quarter.

The first one is a new agreement to supply pellets to US Steel Canada. Since the first quarter of this year, Cliffs has started supplying pellets to this steel mill, which was a former captive customer of US Steel when it was part of their organization. As soon the CCAA court allowed US Steel Canada to act freely, they came to Cliffs to have us supplying them with pellets. In Q2 we will be supplying nearly the totality of US Steel Canada's pellet needs.

The second is the supply of pellets to Algoma restarting in the third quarter. This is a consequence of the settlement of our well-known legal dispute. Cliffs and the CCAA monitor recently reached an agreement to settle within the scope of Algoma's CCAA filing. The settlement was reached just three days ago and is currently being properly documented. We will provide additional disclosure after final court procedures as appropriate.

Before I close my prepared remarks, I would like to give you information regarding our pellet supply contracts renewals with ArcelorMittal, which involve approximately 9 million long tons of pellets per year. Cliffs and our longtime customer equally recognize the importance of one another and our similar necessity to sustain [trustable] businesses. The pellet business in the United States is based on producing and supplying tailor-made pellets designed to optimize the performance of its specific blast furnaces and supported by long-term contracts.

Developing a tailor-made pellet takes a lot of time and a lot of technical cooperation between the client's engineers and our Cliffs team. We have been working for some time with ArcelorMittal on the development of the new super-flux pellet called Mustang, which will replace the Viceroy pellets currently produced at our soon-to-be idle Empire Mine. The investment required to produce the Mustang pellet is now part of our revised CapEx forecast.

During the Q&A part of the call, please feel free to ask any questions you may have about this important subject. Finally, you should feel free to ask questions related to subjects that may be relevant for you, such as the already successfully resolved Bloom Lake CCAA or pellet supply competition coming from US Steel or Essar Minnesota.

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

(Operator Instructions)

Nick Jarmoszuk with Stifel.

Hi. Good morning. Thanks for taking my question.

First one -- let's talk about Arcelor. You are investing to make the super flux pellets. Is the direct implication that the contract is renewed and can you give color as to how long the duration is and details on the economics?

I will start with the details on the economics. The CapEx involved to retool, if you will, to do the modifications at United Taconite to produce the Mustang pellets are around $65 million. We booked 25. And that is what we would spend if we start deploying the capital later this year.

We still have the two quarters in place. We have plenty of time to complete our negotiation and we are not in a hurry. We continue to work together with the client to produce the perfect pellet as soon as we are ready to do so. Our commitment is to keep the client in good shape and as soon we have -- we are done with the inventory of Viceroy; we should have Mustang to replace that.

Okay. So nothing has been signed yet but everything is progressing in the right direction?

That is correct. That is a perfect assumption.

Then on to US Steel. They have been talking about how their long pellets and could potentially look to sell pellets in the Great Lakes. Are you seeing them in any negotiations? Are you hearing anything regarding how they are positioning themselves?

Well I would like to start with your statement that they are long pellets because that is probably a fact. But we need to take a step back to understand why they are long pellets. It all started when they shut down Fairfield and announced that they would replace their blast furnace over there with an electric arc furnace. So it would be like improving their production facility to a more modern, more efficient, whatever -- anyway, never heard about the electric arc furnace anymore sp Fairfield remained shut down. Then they shut down other locations -- even the big location of Granite City. And then they had no choice other than shut down Keetac, because pellet inventories accumulate fast, as you know.

That is the reason they are long pellets. And they may continue to be longer based on what I hear. So but the problem is that in order to participate in the Great Lakes market for pellets, you need to have clients. And even the captive clients US Steel Canada, formally known as Stelco, is now a Cliff's client. So I don't know of any development going on -- engineering development going on between US Steel and ArcelorMittal.

But we live in the higher range. All the mines are close by, North Shore, Keetac, Minntac, Hebe, UTAC, Minorca and we pretty much know everything that goes on over there. So I can very comfortably tell you that there is no development of any customized pellets going on between US Steel and ArcelorMittal unless next week ArcelorMittal on their conference call tells you exactly the opposite.

So with this being said, I don't see how customized pellets will be replaced by opportunistic availability of pellets, even being completely aware of the fact that if there is a person in this industry that has been very vocal about introducing anti-dumping and conservation duties and restrictions on imports, it is Mario Longhi, the CEO of US Steel. And I understand that he is doing that just to bring his own steel capacity back to operations. And if he brings his steel capacity back to operation, all this conversations about being long pellets will be long gone because he will need his pellets to feed his own facility.

So I wish US Steel to fix her own thing, to go back into being a steel mill. If they will not be able to do that, which I am working side-by-side with Mario to be able to have this playing field reestablished here in the United States and then we all can thrive together. But if that will not be the case -- look, I'm a warrior. I am ready to compete.

Okay. And then with the supply arrangement with Stelco and Algoma relative to the 17.5 million ton shipments, does the 17.5 million include the Stelco and Algoma tons, or is there upside to this year?

Look, we always had in our forecast that we would settle with Algoma. So as soon as we were able to establish a decent communication with the monitor, we got it done. So the Algoma thing was always part of our 17.5 million. And we also booked the new business because at the time that we announced our forecast, we were very close to supply US Steel Canada -- what materialized and actually increased toward almost to full capacity for Q2.

So all these things so far are included in our 17.5 million tons. Any new business coming from more supply to AK Steel or potentially more supply to ArcelorMittal are not part of this number and then we will revise the number accordingly. But so far everything has been included in the original 17.5 million, because we planned ahead and we knew what we were doing to get this number done.

Okay. And then last question and I will hop back in the queue. Equity's had a really incredible run. At what point do you start thinking about issuing equity to address the debt?

Look, Nick, I am the largest shareholder. Every single action that I have taken in this Company here since August 7, 2014 was to protect the shareholders. I will continue to do so. Everything I do going forward is will be exactly like everything I have done so far to protect the shareholders.

This being said, I take shareholders dilution very seriously, but we consider all tools in our toolbox, and this is not a phrase that I say lightly or a cookie-cutter type of a statement from CEOs. I have been very creative so far in deploying different types of liability management exercises, making stuff happen here with very little resources. I get the backdrop of a very tough businesses environment, not only here in the United States but also in the international arena and we are winning.

We are squeezing the freaking shorts and we are going to take them out one by one. I'm going to make them sell everything to get out of my way and they're going to lose their pants. How are we going to get there? The tool box is full. Go back to the queue -- take further questions.

Tony Rizzuto with Cowen and Company.

Lourenco, you made me giggle there a little bit. Good morning, Lourenco and Kelly. It is great to see your initiatives.

Hi, Tony. Good morning.

It's good to see everything bearing fruit and the market cooperating a bit. But perhaps the majors exhibiting some discipline as you alluded to. I want to follow up on ArcelorMittal a little bit. It would seem that with the seaborne opportunities for their Canadian ops clearly on the rise, and even certainly less attractive for them to supply their US mills, it would seem that would seem to be working in your favor. And the comments you made about US Steel and the more temporary nature if they were to supply -- look to supply on a merchant basis. Would that be a fair statement -- I mean just beyond the US Steel just the further comments about ArcelorMittal?

Yes. Absolutely.

Alright. And your volumes, and just to follow up there, I want to make sure I understand this because it seemed to me that the volumes for USIO would appear to be somewhat conservative. You're restarting North Shore then you talked about UTAC later in the year. Does that -- does the UTAC restart -- does required an assumption of restarting of idle mills in the US at all?

It is more than that. The restart of United Taconite is a necessity in order to continue to supply our biggest client ArcelorMittal. So United Taconite will happen. We are going to restart United Taconite this year. That's how I read the market going forward at this point. Okay you say there is upside. Look, I'm a pretty conservative person. That's the reason we have been so successful. We have been working very close to the line but we never cross the line.

We have been challenged to drive this Company here into situations that they look complicated. And they are complicated. But we have a great team here. And we continue to make the right decisions by playing aggressively, but very conservatively. And that's the way I continue to position our forecast going forward.

Understood. That is a good position, I think, to have. Just how should we think about the idling expenses in the second quarter and remainder of the year? Obviously you indicated $40 million but should we assume second quarter level will be similar to first quarter? And then trailing downwards, how should we think about from a modeling perspective on that?

Yes, I will it Kelly Tompkins answer that, Tony.

Hi, Tony. We will be working at about $50 million of idle expense for the year, given the fact that North Shore will be starting up in May and the assumption that we will restart UTAC later in the year. We're not get into a precise start date. But I think it will be sometime in the fourth quarter. So I think that's a reasonable assumption you could use in your model.

Okay.

And then shifting gears to APIO and the vastly improved seaborne market year-to-date, has the market opened up enough to create increased buying interest there in your Australian ops or maybe just, more specifically, for the Port of Esperance?

Tony, look, we -- in the last two years we have been producing at capacity.

I know you have.

Last year was record and the previous year was then record at the time. This year we are going in record levels of production over there. So demand is not a problem.

The problem is all the negativity regarding prices. And a lot of the negativity regarding prices is generated by the commodities back of the banks. We are getting to a point right now that Morgan Stanley, Citigroup, Goldman Sachs and several others with less importance and some with absolutely no importance, they will just have to have a Q3 of negative prices in order for their average price for the year to be correct.

Let me explain what I mean. Prices are so much higher right now and they keep going to their bosses and saying price should go down, price should go down, price should go down. That is because they that need to keep prices fixed at the end of the year. So the fulcrum is Q3. So in Q3 I see Rio Tinto, BHP and Vale not only selling iron ore for free, but also giving some money to the clients in order to make this price forecast to be correct. But people like to believe in stuff that they don't understand. So be my guest. I understand this stuff. We have an opportunity to do well over there.

Understood. Good stuff. I will get back in the queue. Thank you.

Just a question for you, Tony. Does Cowen have an iron ore price forecast?

I think that the given the prospects -- we have got Roy Hill coming on, you've got S11D that looks a little bit ahead of expectations, I would think that it would be reasonable to expect some type of retracement. But I'm not looking for prices to go really below $45. I think there's going to be good support in kind of a $45 to kind of $65 range here over the near-term.

Look, prices will not go below $45. Because below $45 --

I don't think they will.

I know. I am agreeing with you. Prices will not go below $45 because below $45 the majors get crazy. The majors will start to try to stretch payables, things like that. Because it's not about -- this business, Tony, is not about cash production, cost per ton. This business is about cost and valuing use. Cost per ton is just a metric.

You produce for a demand that does not exist, you're going to get hurt. You have to carry a terrible, horrible, tremendous overhead. In Singapore a lot of people doing absolutely nothing, scratching their heads all day long. But they are not confident the cash production cost. If the executives of these companies believe that the board of directors are not seeing, they are wrong.

But anyway, good luck.

Thank you for that, Lourenco. We do have to monitor obviously the Chinese equation to that, obviously -- what's going to happen with production going forward here too. Thank you very much.

Alright. Appreciate it. Thanks a lot, Tony.

Michael Gambardella, JPMorgan.

Hi, Mike. Mike Gambardella went back to check the --

Hi, Lourenco. My question was answered already.

But mine was not. What is the current price expectation at the [desk] of JPMorgan for iron ore, Mike?

Let me just say they are below your expectations. I realize that our commodity team set those prices --

When are you going to fire these at the desk? They are making your company look ugly.

Okay. (laughter) I guess they can be thankful you are not their boss.

Please say hello to [Jamie]. Next time we meet at the elevator, I promise I will talk with him about the commodities desk of JPMorgan.

Alright. Thanks. Goodbye.

Bye now.

Matthew Fields, Bank of America Merrill Lynch.

Hi, Lourenco. As long as you're entertaining offers, if you'd like to join the research team at Bank of America, we would love to have you.

I can't. I was not even included in the lineup for your conference in Miami and I live in Ft Lauderdale. I did not make the market [share]. Because $1 times 200 million shares is $200 million. $5 is $1 billion. But don't invite me anymore. I'm not going to go.

You are always invited to the credit conference.

I know that, Matt. I'm just giving you a hard time.

I wanted to ask a little bit about the iron ore dynamics in China with a couple of different angles. One, at what price do you see kind of incentive for some domestic Chinese producers to restart production?

No price. Because the problem in China right now is how China will position themselves to continue to behave as a superpower and not to behave like a rogue country. China is in a very decisive moment. Are they going to be part of the developing world? Or they are going to continue to be something very big but very buttery for everyone thing else. And I believe that I know the answer. I believe that China will be a superpower, will be a first world country.

We saw that happening several times in Asia. During the 60s in Japan, they grew production, curbed pollution, improved the quality of life of the Japanese (inaudible). Then we saw that happen in Korea during the 70s. Same very thing -- South Korea became a first world country, very well behaved, great air quality, great quality of life for the Korean citizens. Then we saw in a very kind of pilot scale happening in Taiwan during the late 80s, early 90s. Taiwan was a very, very polluted country when I started selling steel in Kaohsiung, Taiwan. Three or four years later we could see the difference. Ten years later it was night and day.

So it is starting to -- the move is already starting to happen in China. China will control pollution. China will curb overproduction. China will reduce their production of sinter feed. China we will move more toward EAS. China will use a lot more scrap. The air in China will be a lot better than it is right now. But in the meantime, if they don't do that, they can't be accepted as our market economy. The WTO will not accept that.

We have been talking very seriously with the US trade representative, Ambassador Michael Froman, in order to have the -- to educate the administration in terms of having the right position in terms of China. Europe has been reacting, as well. So China will have to comply, Matthew. So it is not a matter of at what level. This is too much of a minutia. What is going on in China right now is that they need to improve their behavior. They need to change, otherwise they are not going to make it.

Alright. Thanks for that perspective.

There has been a lot of noise lately about financial speculation on the Dalian Exchange with credit loosening and whatnot. And then that exchange is trying to put limits on curb margin, et cetera. I know you talked about the supply discipline by the majors, but do you see some sort of financial speculation playing a part in the recent strength in iron ore, or is that over stated?

No it is not. There is a lot of speculation going on in the Dalian Stock Exchange. Chinese people are gamblers. Go to Las Vegas and you will see a lot of Chinese. You go to Macau and you will only see Chinese. So they like to gamble.

And the Dalian stock exchange is another casino for the average Chinese. The cabbies discuss iron ore. That is the way it is. Go to China. You will see that. I have been going to China since 1982, so I know a little bit about the country.

The problem is not the Dalian Stock Exchange. The problem is not the behavior of the Chinese. The problem is the fact that iron ore is not pork bellies. Iron ore is not soybeans. Iron ore is not gold.

Iron ore is not a commodity like any other commodity. Iron ore is a controlled commodity. There are three companies that control everything in the iron ore business. Four companies that, together, have 84% of the market: BHP, Rio Tinto, Fortescue and Vale. So it only takes one of these four or two of these four to say enough is enough, or to start charging a premium over IODEX or even say, you know what my friends, Chinese, I'm not going to use your Dalian stock exchange index anymore as my reference.

You want to buy my iron ore, you're going to have to negotiate with me one-on-one. It was like that before. So were not going to change the Chinese because it's -- their culture comes from at least a few thousand years. And we'll probably not be able to change the Dalian Stock Exchange procedures, if they do mitigate here and there.

But there are four companies in the iron ore world that can change everything if they change their best behavior in terms of pretending that they don't have pricing power. They do have pricing power. These commodities are controlled commodities. Prices go up and down because of BHP, because of Rio Tinto and because of Vale.

They can deny this as long as they want. But every time their stock prices are in the trash can, they change their behavior. Every time their executives speak out of school one is fired. So if the new guy that took over over there -- if they continue their speech they will be next.

And there are a bunch of Australians and now they are using people from other nationalities so there are a bunch of people in the world that can replace these guys. But Australia board of directors have a strange ways to do their thing. So it is a lot more about how the board of directors of the majors behave and how they manage their business there at the Dalian Stock Exchange. The Dalian Stock Exchange has speculation -- will continue to have speculation.

Alright. Thanks. And then lastly I just want to follow up on a question Tony asked earlier about Asia-Pacific. I think -- I don't know if what he was trying to say about demand or increased buying was -- do you see any more buyers for the business like M&A-wise? Now that --

Oh yes. If prices stabilize at a more decent level we may have some buyers for the business. But you know what? I'm good keeping the business. It is a great business. We have a great team in Australia. We have a very well established business in Japan.

Our one-man operation in Tokyo with the Amada produced more business than at least one of the majors out of Australia. In Japan. So we're good. We are feeling good about our prospects in Australia.

But if a buyer comes and pays the right price, I will be glad to sell.

No incoming bids just yet?

It's a lot of tire kicking. But you know what? A sale is a sale only after we have a bunch of cash in my pocket. Before that, it is just a good nice cheap chat talk.

Fair enough. Alright well thanks very much as always, Lourenco. I appreciate it.

Thanks, Matthew.

Evan Kurtz, Morgan Stanley.

Hi. Good morning, Lourenco.

Good morning, Evan.

I've got a question for you on APIO as well. So say we are living in this world with $60, $70 iron ore, maybe better going forward. Are there any levers you can pull there to lengthen the mine life, due to some development work maybe and extend the volumes there a few years?

Yes we can do that at the right -- with the right economics, with the right reward we would be able to do that. And that's true for every single mine in the world. But you watch me specific about our APIO business and the answer is a firm yes.

Any kind of specifics, like if it's $60 to $70? Is that enough to change the mine plan there? Or do you need to see something higher than that?

I will not go into specifics, but I will give you directionally -- you are on the right track.

Okay. Great. Thanks.

And then my other question was just on the [Nashua half-built] iron ore mine. I read an interesting article in the Duluth news about something you said as far as bringing that maybe into the Cliffs Corporation and putting the DRI plans on top of it. Which first take on my end was that it makes strategic sense. Second take was how would you pay for it? I was just wondering how real of a target is that for you, and is it something you see happening.

Well first of all, just to keep the record straight, I never said exactly that. The press interprets things a lot. So I never said exactly that.

What I believe will be the next thing with that -- you said half-built -- there is a lot less than half-built pellet plant over there. But anyway, I believe that this thing is hopeless. Loan holders or whatever you call them -- your friends in New York will end up owning that thing. I like the iron ore that is on the ground and we will be talking. But it is too early because that has not happened yet. But it's coming.

We are the big guy in the range. We are the ones that can make it happen. We are the ones that can generate employment over there. We are the ones that pay the bills.

So it's natural that anyone that wants to do something in that site would come to talk to us. By the way, it's not a bad site to have it a DRI facility. When I say DRI I am talking HBI. I'm talking [merging this stuff]. So you know that I have that in mind so it's pretty important to me that we have one there. If I don't have that site, I will do it at North Shore. But that site works for me.

Is there something special about that site for DR pellets that's better than anything that you currently? Or does it really -- North Shore indifference between the two?

No. It is very different but the good thing about that site -- of course if I take over that site it's abundantly clear that I kick the (inaudible) out. And a year ago this call would be all about -- oh when Minnesota starts producing pellets and what's going to happen? And I have not heard any questions about that. And by the way, I have not got the invitation for the grand opening of the (inaudible). I don't know if you got because they should be up and running less than two months. So anyway --

Thanks, Lourenco.

But before you go, Evan, let me ask you a question. What is the iron ore price at commodity desk of Morgan Stanley.

I thought I was going to get off the hook. So yes, we have a big fall in iron ore prices in the second half of the year. In the third quarter we have a 30% drop. We are in the low 30s, and then the 40-ish range for the next two years and then up again.

Can you explain why that is going to happen?

The house view is that in the back half of the year you have seasonality as a headwind instead of a tailwind we've seen in the first half of the year. Also we are looking for demand to decrease over the next couple of years and there to be a deficit in the market. I'm sorry, surplus in the market over the next couple of years before the majors really step in and try to tighten up the market in 2018. That is the house view.

Evan, good. I can hear the conviction in your voice. Thank you very much

(laughter) Goodbye, Lourenco.

Thanks.

Thank you, ladies and gentlemen. I will now turn the call back over to the presenters for closing remarks.

Thank you very much for your time and interest in Cliffs. We are very excited about our prospects for the balance of 2016 and beyond and we look forward to speaking with you again next quarter. Thanks a lot and have a great day.

Thank you, ladies and gentlemen, for your participation today. This concludes today's conference call. You may now disconnect.