Cleveland-Cliffs Inc (CLF) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Kelly and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2016 second-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 risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially 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, Kelly, and thanks to everyone joining us on this morning's call. I'm joined today by our Chairman, President and CEO, Lourenco Goncalves. Our financial results this quarter were outstanding. Yet the most significant events in the second quarter are not part of our financial statements, but instead deal with several positive commercial and competitive developments which Lourenco will cover in his remarks.

Second quarter of 2016 is the first quarter since Q4 of 2014 that we have eclipsed the $100 million mark for adjusted EBITDA. That is largely without help from iron ore prices. The Q2 (inaudible) average of $56 per metric ton during the quarter was actually lower than the comparable period last year, yet we generated $35 million more in adjusted EBITDA this quarter. Despite lower year-over-year iron ore prices, several other factors drove this improvement including higher domestic steel prices.

As our investors know, a certain of our agreements -- customer agreements are set up to be mutually dependent. In short, when the customer wins we win. As the steel trade cases have reduced the massive amounts of illegally dumped steel into the United States, we saw domestic steel prices climb back to more normalized levels which directly improve the bottom line of our US iron ore business.

Second, the cost reduction initiatives we implemented over the past two years are increasingly reflected in our operating results. Our USIO and APIO operating teams generated 15% plus year-over-year cost reductions, and we have steadily cut our SG&A.

Now to highlight the results of our two segments. Starting with USIO, the improvement in steel prices offset the negative impacts from iron ore prices, leaving our revenues per ton flat year over year at $78 per long ton.

Cash production costs were $46 per long ton during the quarter, a 17% reduction from the $56 per long ton performance reported in the 2015 second quarter. Improved maintenance practices and reduced repair expenses based on condition-based monitoring, lower diesel fuel and natural gas rates as well as substantially lower employment costs were the main drivers.

USIO adjusted EBITDA for the quarter was $97 million. Our sales volume of 4.1 million long tons reflects the seasonally expected mid-quarter pickup in shipping on the Great Lakes. We are now moving product on the lakes at full stride. Based on customer nominations we expect to ship approximately 5.5 million long tons in the third quarter, with the remaining 6.5 million long ton coming in the fourth quarter to fill our 18 million ton order book.

Based on customer mix and year-to-date average compared to the revenue guidance table we provided, we do expect a slight dip in our revenue per ton rate in Q3 before closing out the year around our projected average. With United Taconite down for the entire quarter and Northshore down for about half of it, we incurred $20 million of vital expenses during Q2.

With Northshore now back and with the earlier than anticipated restart of United Taconite our total full-year idle cost expectation has been reduced to $55 million from our previous expectation of $65 million. For the full year we are maintaining our USIO cash production cost guidance of $50 to $55 per long ton, and our cash cost of goods sold expectation of $55 to $60 per long ton.

Now moving over to APIO, a $50 plus IODEX price allows this business to be a healthy cash flow generator for us, and that was clearly evident during the quarter. The APIO operating team continued to outperform our aggressive expectations, delivering second-quarter cash production costs of $28 per metric ton, a 17% decrease from the $34 per metric ton cash cost reported in the prior-year quarter. As a result of this we were able to outperform our prior-year Q2 adjusted EBITDA, which in spite of the lower [class] index was the highest quarterly EBITDA mark out of this business unit since 2014.

For the full year we are maintaining our Australian cash production cost guidance of $25 to $30 per metric ton and our cash cost of goods sold expectation of $30 to $35 per metric ton, assuming an Aussie dollar exchange rate of [$0.75]. Our expected full year price realizations can be calculated based on the outlook table in our press release. Our spending remains very disciplined, cash capital spending was $10 million this past quarter, a 45% reduction when compared to last year's second-quarter spend of $18 million.

Our capital expenditure budget for the full year remains $75 million, which includes about $25 million of spend related to producing a specialized superflux pellet at our United Taconite mine for ArcelorMittal, or what we call the Mustang project. We've spend a limited amount for this project year to date, but expect it to pick up in the back half now that we have the new agreement with ArcelorMittal.

The bulk of that $25 million will be spent evenly between the third and fourth quarters. The remaining $40 million of the $65 million total project cost will be spent over the first three quarters of 2017. SG&A expense decreased 27% to $23 million for the quarter as we continue to aggressively manage our corporate overhead.

As our operating performance is improved and inventory and receivables begin to turn, our overall liquidity is improved. We ended the quarter with $108 million in cash and $313 million in ABL capacity, for total of $421 million in liquidity, up over $100 million sequentially from Q1.

In addition to our good working capital performance, we received $31 million as part of a long-term arrangement with Minnesota Power that will ensure we have very cost effective power rates for our Northshore and United Taconite mines in the future. In addition, we repaid the remaining balance on our equipment loans during the quarter which was a $23 million cash outflow.

Finally looking back -- looking at the back half of the year, based on our guidance, we will be selling 2.7 million more tons than we produce in Q3 and Q4, as a result we will be generating over $200 million in cash from inventory. So with that, I will now turn the call over to Lourenco

Thank you Kelly and thanks to everyone for joining us on this call. When I started at Cliffs almost two years ago in August of 2014, the Company was immersed in too many self-inflicted problems, all of them completely ignored. Adding complication to a bad situation. An avalanche of unfairly traded steel into our core US market was in full development, making our domestic clients sell fewer tons of steel for fewer dollars per ton.

On top of that, Cliffs was forced to fight for sanity in a seaborne iron ore market full out [stupidity], entrenched of the [C threes] of the biggest international miners. To those of you who witnessed Cliffs make it through this difficult time and now believe we have gotten to a great spot, we would like to say four things. First, yes we won. All the problems we encountered here two years ago have been resolved. Second, we knew we would win. Third, we're just getting started. Fourth, Cliffs' best days are still ahead of us.

On our conference call last quarter I properly recognized one major iron ore producer, Rio Tinto for removing sand wash, the key architect of the disaster that they inflicted upon themselves. Since then in late June, Rio Tinto announced another high-profile departure, the head of iron ore Andrew Harding was let go. Harding was the executive who declared in March of 2015 during a presentation in Perth, Australia, quote, at the end of the day what the customer really wants is lower prices, unquote.

Such logic may be correct if we were a used car salesman, but does not apply to a complex multinational supply chain such as iron ore miners, the steelmakers, downstream steel users. In which everyone knows everything in real-time, including the transaction prices. Point in case, Harding's used car lot wisdom does not apply to the vast majority of his clients such as the Japanese and South Korean steel mills, whose respective domestic markets were flooded with cheap Chinese steel enabled by cheap iron ore.

Even more importantly, I am encouraged by the refreshing message coming out of Rio Tinto's net leadership. It is good to hear that the leading iron ore miner is now pursuing value, performance and shareholder returns instead of the misguided ghost of the previous regime, market share, volume for volume's sake, and not paying taxes in Australia. Iron ore is not your normal commodity like copper, wheat, soybeans or pork bellies.

The global iron ore market is dominated by only three mining companies who hold the vast majority of supply. From their office in the tax haven of Singapore, they can move iron ore prices in one direction or another. Long story short, it is good to see sanity back in the seaborne iron ore market. At this point we can only hope that Rio Tinto moves toward a more rational behavior with continued and bear fruit, so far so good.

With that let's now move into our other major macro driver, the health of the domestic steel industry. The consistent rise in the price of domestic steel since the beginning of the year is indicative of what a level playing field can do for our customers, the steel mills and for Cliffs. The American steel mills attack this problem in the most effective manner they possibly could, with anti-dumping and countervailing trade cases that are rock solid and airtight.

More importantly, the verdict applied to all trade cases so far confirmed what we have always said, that the lower the steel prices we see from foreign sources are not a consequence of these foreigners being more efficient or more cost-effective. They are just the consequence of illegal dumping. Based on previous anti-dumping and countervailing cases, the duties imposed at this time around will be in place for at least the next five years, until they are due for a sunset review and will likely stay in place for some more years after the sunset review.

Of course, 2016 and 2017 market prices for steel in the United States will fluctuate up and down, in sync with demand. The way a mature market should behave. However, important steel will come back soon and flood the market, forcing prices down is at this point a very bad bet to take.

We also hear a lot of chatter from analysts and investors that the Chinese will circumvent this punitive anti-dumping and countervailing duties by using other countries like Vietnam as a pass-through, I know that. You know that. But the good news is that the US government knows that as well. The current trade cases were all put in place with this reality in mind.

If and when we see a lot of Vietnamese steel or any other country's steel come into our borders you will see counteraction. If my explanation is not clear enough or if you still disagree with my assessment, please feel free to ask any questions you may have during the Q&A portion of the call.

Between the encouraging message coming from the seaborne iron ore market and the once again healthy domestic steel market, we expect Cliffs to thrive for the remainder of 2016. And in 2017, with these factors fully reflected we will do even better.

At this time, based on current market prices for seaborne iron ore and domestic steel and the range of variation we expect for these prices between now and 2017, we expect our EBITDA in 2017 to surpass $500 million. Of course, if the internal bears at the commodities desks of the big banks and the research analysts that get their steel price information from middlemen working out of their respective basements are all correct, our 2017 forecast of more than $0.5 billion of EBITDA in 2017 would not be achieved.

On the other hand, any improvements beyond current international iron ore prices or domestic steel prices will cause our actual 2017 EBITDA to increase both the forecasts. In sum, we believe that our $500 million forecast is actually pretty conservative.

Lets now get into the accomplishments of what was a remarkable all around quarter for Cliffs. In the United States iron ore business unit, segment EBITDA came in at $97 million, more than double what we recorded in Q1. As shipments have started to pick up after the winter in Q2, costs continue to come down and we begun the restart of Northshore in May. The EBITDA margin of this business continues to be strong, at 30% for the quarter.

With revenues at $78 per long ton of pellets, I repeat long ton of pellets, and cash production costs at $46 per long ton of pellets. For the ones that are not familiar, long ton is different from net ton. During the second quarter, we successfully completed a new customer agreement with US Steel Canada which exceeded our original sales expectation to our new client. As a result, our total USIO sales volume forecast for 2016 increased to 18 million long tons, along with our production forecast increasing to 16.5 million long tons.

This new agreement with US Steel Canada was also the reason why we were able to bring our employees at United Taconite back to work earlier than previously expected. It is very clear that US Steel Canada prefers our pellets over the stuff that they were using before, and we love having US Steel Canada as a Cliffs client. At this point we can only hope that their CCAA process will be resolved soon, and in a way that is important Canadian steel mill will be independent from US steel. And therefore no longer forced to use pellets of inferior quality, just because they are supplied by their parent company.

As I said during our last quarter conference call, I love to compete. Furthermore, during the quarter we received $31 million in cash from Minnesota Power as part of a long-term power purchase arrangement for our Northshore operation. With the deal, we expanded our previous agreement with Minnesota Power and locked in low-cost electricity rates for the long-term at Northshore and United Taconite. As you can see we're not only the supplier of choice on the Minnesota iron range, but also the customer of choice.

Why we take very seriously our permission to operate in Minnesota, others have not. We saw this first hand just recently with another one of our so-called competitors, Essar Minnesota, also known as neverland, never finished, never producing pellets, never paying anyone. After years of lies and broken promise, the local community came to realize that the future of the iron range is not with Essar, but with Cliffs Natural Resources.

The state of Minnesota's government came to the same conclusion, we applaud Governor Mark Dayton's decision to terminate the state's ironwork mineral lease the Nashwuak mine site, and are pleased that workers, contractors and vendors will no longer be subject to any misguided statements about that project from the Essar folks. We have presented to Governor Dayton and to other members of his administration our ideas on how to develop the Nashwuak site as part of our future plans for supplying the EAF steel industry with DRI and HBI.

We recognize that the situation is not simple and may take some time to be resolved within Essar's Chapter 11 process. But we will continue to pursue an adequate solution while also staying mindful of our balance sheet and other competing capital allocation priorities. Our most significant highlight of the quarter was the ten-year pellet supply contract signed in May with our largest customer, ArcelorMittal USA.

Since the day I started at Cliffs I have constantly heard from the vast majority of the outsiders that there were several other options available to this client. That we would lose contracted tonnage, that we didn't have any leverage, you name it. However, constant repetition of something inaccurate does not make that same thing accurate. It only makes these people repeating the thing time and time again look uninformed and plain wrong.

At this time, instead of trying to educate these stubborn individuals and try to explain why they are wrong I will just tell them one thing, do your homework. The pellet business in the United States is based on producing and supplying high-quality, tailor-made pellets designed to optimize the performance of a specific blast furnaces. That's what Cliffs provides. And we will continue to provide for the next 10 years and beyond to ArcelorMittal, USA.

The new contract is great for us and great for ArcelorMittal. We will be supplying the entirety of their pellet needs covered by the current two contracts which will expire later this year. The new contract also establishes a minimum purchase requirement of 7 million long tons, which is higher than the minimum level from the current two contracts combined.

The new deal also preserves our position as ArcelorMittal's sole supplier from the outside. With the signature of this contract any potential competitor of Cliffs within the Great Lakes will have 10 years to start producing pellets or to improve the quality of the pellets, just to try again.

As a said before, I love to compete. With the contract signed we have then started our spending on the Mustang project. As a reminder, the Mustang project involves developing and producing a customized superflux pellet that has shown to work effectively at the customers' blast furnace. We will break ground at United Taconite next month, and for the next eight months we'll be building a storage facility, new silos and the limestone crusher as well as adding new conveyors.

We are on track to deliver Mustang pellets to ArcelorMittal when the shipping season starts next year. As you may know, the Mustang pellet is being developed by Cliffs as a replacement to the Viceroy pellet that is currently produced at Empire pellet plant, which will be transitioning to an indefinite idle status later this year. This reality has been well known for many years by Cliffs, by our joint venture partner ArcelorMittal, by our employees and by our investors.

Empire has been a great mine since 1964, but due to the lack minable ore in the ground we will be moving to an indefinite idle in the coming months. We are thankful that we found a quality replacement for Empire with our UTAC mine, and we look forward to the future of our USIO business with the four top-tier assets we will continue to operate, Tilden, Hibbing, Northshore and United Taconite.

Lets now discuss the great contribution of our other business unit, Asia-Pacific iron ore. APIO segment EBITDA came in at $27 million. Thanks again to our continued discipline on the cost management side. As well as a $50 plus iron ore pricing for most of the quarter.

We also continue to explore one of our most important advantages in Australia. Our very favorable 50%-50% mix of lump oil and (inaudible). With that, our biggest client and Asia is not in China. It is in South Korea.

Additionally, we have more business in Japan than Fortescue, even though Fortescue is approximately 13 times bigger than Cliffs' APIO. Finally before we go to Q&A I would like to address one last item. The balance sheet.

In less than two years we got rid of the money-losing Canadian assets, we sold all the coal mines, we sold the ring of fire chromite bad idea, we drastically improved the cost structure in the United States and in Australia. We renewed the ArcelorMittal contract, we got new business from US Steel Canada and we terminated the contract with Essar and then restated the contract when we decided to do so.

On top of that we took advantage of the skepticism around our ability to turn Cliffs around. And with that, we paid down a lot of debt. As you likely saw on June 16 we filed a draft S-1 with the SEC showing our intention to issue equity to retire more debt.

I hope you recognize that I'm being forthcoming when I say that we view this action at the next logical step in what has been a very successful turnaround of Cliffs Natural Resources. However, due to the usual restrictions with an S-1 under review, I will not be able to dig into the details surrounding the S-1.

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

(Operator Instructions)

Michael Gambardella, JPMorgan.

Congratulations on just a wonderful effort over the last two years to you and your team; it's been a spectacular turnaround.

Thank you very much, Mike; I appreciate your kind words. And more than everything, I appreciate you being the great analyst that you are and not being afraid of putting sometimes opinions that are not mainstream, and I appreciate the great words. Thanks a lot.

Thank you. I have a question, with the recent bankruptcy at Essar, how are you working with the government to get your hands on those leases?

We have a signed commitment with Governor Dayton that we are -- as soon as Essar vacates the site, the lease are ours -- 41.6%, so almost 42% of the land that's currently occupied by Essar. It's a matter of time. It's not a matter of if; it's a matter of when.

They are in breach of everything. They are not paying anyone, they don't pay their bus drivers that takes the politicians to visit the site. They don't pay any bills, so they are really a strange type of people over there. So it took long, longer than it should have taken to kick them out.

But anyway, now they did what they normally do; that's their MO. They filed for bankruptcy. They have bankruptcies all over the world. They filed for more bankruptcies than Trump, it's amazing.

So anyway, just to stay on track, so as soon as they vacate, we are in. That's the bottom line.

We have a signed document with the Governor. And we have support from Governor Dayton, Senator Amy Klobuchar, Senator Al Franken, Congressman Rick Nolan, one of our best champions, the Chief of Staff of the White House, Denis McDonough. So we have a few people supporting us. It may work, I don't know.

(Multiple speakers) without that lease, it would be impossible for someone to come in and try to restart the construction effort to build that facility. Is that correct, without those leases?

Well, I'm going to be the landlord. I will be the leaseholder. So do you want to ask me if I will allow anyone else to do something over there, the answer is no. And on top of that, with the leases surrounding, the center lease that's owned by the state of Minnesota on the hands of the other private owners, there's no way that once I have the center, anyone else who have the surroundings.

So we are in control. We just need to be patient and allow the Chapter 11 process to follow through the motions. That site is ours, it's just a matter of time, Mike.

Got it. One last question: With your sensitivity to HRC prices and to seaborne pellet prices, does that include the new Mittal contract going forward?

I'm sorry, I did not understand the beginning of the question. Can you repeat one more time?

The new Mittal contracts that will take place at the end of this year and the beginning of next year, will that change the sensitivities that you have to pellet and steel sheet pricing?

Okay, I understand. Look, the sensitivity tables that we have in our press release and we have always being publishing, only apply to these two contracts. But these two contracts will be no longer valid coming January 1, 2017.

So for next year, the sensitivities will be different because the new contract is different from the two contracts we have now. The table is only valid for the balance of 2016, the table that we put on the press release.

As far as 2017, I'm giving the guidance and I'm normally conservative in our price assumptions, as history proves. But based on my conservative assumptions we are highly confident that $500 million of EBITDA in 2017 is a good number.

Okay. All right. Thank you very much.

Thank you, Mike.

Anthony Young, MacQuarie.

Good morning, guys, thanks for taking the questions.

Good morning, Anthony.

Good morning. Congratulations on the good quarter. First question just on Australia, solidly profitable there, how long do you guys envision that facility running with iron ore prices in the mid to high $50 range? Is that something that could keep on going for longer than what you previously thought about?

If prices stay in this $50, $60 range, we have another 4 to 5 years in Australia.

Okay. If pricing goes higher, could it run for longer than that or would you have to spend some capital to do some exploration work?

Yes and yes, we can run longer but we're going to have to spend some capital. It all depends on how higher, Anthony. I'm not going to take the extra risk over there. However, if price move higher in a way that we feel is consistent, we may, two years down the road, to consider deploying some capital to open new areas.

Okay. And then on the commentary this morning there was no talk of the DRI facility. I assume that's dependent on you guys getting the lease in Minnesota first, or how should we think about that going forward?

Look, DRI is in our to-do list. DRI we are totally committed with supplying the EAF side of the business here in the United States. This being said, our preferred bet is to do it in Nashwauk. It's not like we got delayed; it was part of our plan.

We knew that Essar would file for bankruptcy. That's their MO, that's what they do for a living. They file for bankruptcy, and try to get the assets free and clear, not paying their bills. That's how they operate.

So there's no change in our time to have DRI, but we are going to have to be patient and go through the process, but we knew that, it was part of the plan. Keep in mind, I believe that the next 10 years is a big window of opportunity to produce iron substitutes in the United States.

China will become a big importer of scrap, before they will be self-sufficient in scrap. So that will create a big wind of opportunity here. But that's not going to happen next quarter and not next year, it will be longer than that.

So again, we are playing with the cards we have, and we are planning three, four moves ahead in this chessboard, and this bankruptcy was right on cue. I told Governor Dayton that they will file for bankruptcy way ahead of the filing, so it's all good.

Okay, I appreciate the time, guys.

I thought you had heart attack or something.

No, I appreciate the time.

Thanks, Anthony. Always nice talking to you.

Matthew Fields, Bank of America.

Hey, Lourenco, congratulations on the quarter and congratulations on a couple of your long-standing predictions coming true.

I appreciate the recognition.

If you have lottery numbers, I would love to know. But your other forecast of $500 million for next year for EBITDA, can you just talk a little bit about some underlying assumptions about what's going into that, whether there's incremental volume from maybe a new customer [to report to] or any kind of pricing, just any color behind that $500 million?

Sure, I'll be glad. Start with volume, the volume number that we have baked into our forecast for next year is 19 million long tons in the United States production and sales. Because that's pretty much what we're going to have as installed capacity going into 2017 without Empire, and 11.5 million metric tons in Australia because that's pretty much our nameplate capacity [RF] APIO. So no big deal on that, we are going to be full on both US and Australia.

As far as prices, I'm a very conservative person when it comes to forecast, so I am forecasting iron ore prices next year, IODEX prices at $60 per ton, six zero, that's the number that's baked into our forecast to get to the $500 million EBITDA. And by the way that's today's price; that's today's IODEX price and today's metal bulletin price as well, Platts price. So we have the Platts and you have the metal bulletin price, both at $60 as we speak right now, just a coincidence. That's my forecast for next year.

And then you may say, look, but the commodities of the big banks, they are forecasting that prices will go down to $40 and $30 and stuff like that. Well, I'm expecting them to forecast a fifth quarter for 2016, that's the only chance that they have to be right this year. Why should we believe that they will be right next year; there's a big change in the behavior of the big miners.

The Three Stooges are gone. So we have a new CEO at Rio Tinto. We have BHP getting religion out of Samarco; they need money to pay their own disaster over there. And Vale, same thing, with a lot of debt to pay associate of that bad investment, S11D.

So they have no choice, there's no more time for empty speeches, they need to get these iron ore prices right, even if they have to cut production. Because, number one, this business is not about cash cost per ton, there's a lot of other costs, a lot of other things including safety and environmental -- if you don't believe, look at Samarco -- that needs to be taken care of. So they need to generate EBITDA, they need to generate shareholder returns, and more or less what apparently the new management at Rio Tinto and the Board of Directors of Rio Tinto are already doing.

So we should expect they are the two to fall, Vale and BHP. So, my $60 may be pretty conservative, and the commodities desk will say whatever they want.

As far as US, I tried to explain in my prepared remarks how this countervailing and anti-dumping duties imposed, and the ones that will be imposed because of the suits are still in the preliminary phases. But anyway, how these duties work -- this is airtight, this is good. And if we see the steel from other sources coming to the United States, we will counteract. The mills are very prepared for that, we are totally aware.

So I believe that predicting stable prices at the levels that you are seeing right now in the US is a good assumption. Prices will fluctuate; they may go down $10, $20, $30, I don't know how much, and then they will go up $10, $20, $30, $40, $50, I don't know. But the reasonable number is the numbers that we're seeing right now or better.

Oh, but there's a big differential between the price of steel in the United States and the price of steel in China, and so what? What's the reason why those prices are so low in China -- is because the Chinese are more competent or more efficient than the American mills? Of course not. It's a combination of subsidies, artificial lower ore prices, more iron ore into the market than they should be receiving, all these things altogether.

Once we correct the cause, the effect is predictable. And it's not to make the mills in China more efficient, it's just making the mills producing less and that will fix their problem over there and their prices will increase, not ours will decrease. I'm probably giving you a lot more details than you are asking for, but my price assumptions are in the range of iron ore prices that we're seeing right now and the range of steel prices that we're seeing right now.

That's great detail, I appreciate it. On your cost side, is it going to be reasonably consistent with 2016?

You know what, I'm going to have Kelly answer the cost question. Please, Kelly?

Matt, we would expect to, as we maintain our cost guidance for the balance of this year, would expect next year to be in that same zip code of cost. And again, we expect to have incrementally higher volume next year, which will also help. So, long story short, consistency on the cost front.

Matt, we're not going to have any violent move in our costs, but we are responsible miners. We're not running these mines for next quarter or for next year; we're running these mines for the next 100 years. So every now and then I'm going to see a quarter that's going to have a little more cost because we have to move some earth in order to open new mining areas; that's the way the mining business is. There is no such a thing as cash cost per ton, stuff like that.

We've got to be responsible holders of the assets of the shareholders, that's what we are here. We work for the shareholders. We work for the long run, we don't work to deliver quarter results. So we're going to act accordingly. But all in all, you should, in your model if I were in your shoes I would plug the number you have right now, you're not going to be too far from the reality.

All right, thanks. And then just lastly, you've gone after the 2018 notes a few times now. Is there any remaining appetite to try to make another run at those or do you think you'll just wait until near to maturity to pay them off?

Look, when we announced our intention to raise equity, we put the usual procedure for retiring the 2018s and that did not change. We are going to extend the runway by eliminating the 2018. And the 2018s, there's a big component on the 2018s of bonds owned by retail. And these guys can't participate in exchange [anything], so my intention is to retire them for cash.

Okay, that's good to hear. Thanks again for all the detail and we appreciate it.

Thanks, Matt.

Evan Kurtz, Morgan Stanley.

Hey. Good morning, Lourenco.

Good morning, Evan.

Congrats, great job handling Essar Minnesota and the Mittal contract, credit where credit is due. Just wanted to ask a couple questions, maybe get your view on US Steel Canada, any thoughts on the outcome of that CCAA case? I know it's something you're following pretty closely.

No, look, we are watching and we know how CCAA process work. We know that any other owner of the assets at the end of the CCAA process, different from US Steel, will have US Steel Canada as a long-term client because they like our pellets better than the stuff that they were using before supplied by US Steel.

This being said, if US Steel, the one that is the biggest creditor in CCAA becomes the owner at the end, they will probably go back to the old same old and they will impose their pellets on US Steel Canada. I feel bad for my good friends at Stelco, the real name of US Steel Canada. But at that point I can't do anything about it, other than regret.

This being said, we have alternatives to sell pellets to other clients. So for us it will not mean much, but for US Steel Canada it would be having the right pellets or having something else.

Are you concerned at all that there might be a scenario where the blast furnaces at those mills are idled?

I'm not; even if the assets end up with US Steel and they can't supply pellets and they are still in operation not using my pellets, I am not concerned. If the blast furnaces are shut down, it's even better than that from that standpoint because I will be supplying the same amount of pellets; it means zero. And they will not be able to produce any more steel, so they are not going to be producing virgin steel from pellets. They may be rerolling -- they'll be doing some [carnegarie] stuff, I don't know, I don't care at that point.

Got it. Okay. Then just one more, on diesel, what is your usage or percent of cost in USIO and Asia Pac, how should we think about that?

I'm sorry, what was the question, can you say it again?

Question is on diesel cost, I know you've been getting some benefit from that, just trying to quantify like how much diesel do you actually use across the Company?

I will ask Kelly to take that one. Kelly, please.

Yes, as kind of a rule of thumb, Evan, look at it about 5% to 10% of our cost component. So, we've seen PPIs in our commercial contracts, we've not gotten quite the benefit of inflation there, but we've got more benefit on the cost side, energy in particular, along with all the other things we talked about in the prepared remarks, condition, maintenance, lower employment costs, et cetera. But 5% to 10% of cost is a good rule of thumb.

Okay. Appreciate that. Thanks, guys.

Thank you. Operator, let me just ask one question to Evan Kurtz. Evan, what's the commodity desk price forecast for Morgan Stanley?

We're at $42 for next year.

Good. I'm glad (laughter). Okay, operator, let's move on.

Jeremy Sussman, Clarksons.

Hey, Lourenco, congratulations and thanks very much for taking my question.

Oh, Jeremy, always a pleasure.

At $500 million in EBITDA next year, seems like you generate a lot of free cash, what would be the first use of proceeds on that front?

The first use of proceeds will be paying down debt, always, always, always. Debt is our main goal, until I see this -- look, we already paid down close to $1.5 billion in net debt since I came to the Company, but until I pay another $1 billion I will not be ready to talk about other things as far as use of capital. We're going to continue to pay down debt as if there is no tomorrow. We are going to continue to retire debt in this Company.

Understood, that's loud and clear. And just more of a modeling question, what benchmark hot-rolled is in the second-half 2016 assumption to get to the $480 full-year figure in the sensitivity table? And then is it safe to say that low spot hot-rolled prices in the beginning of this year hurts your 2016 realizations, but that should be a tailwind for 2017? Am I thinking about that correctly?

No, you are not correct. Our current contracts, by and large, they are based on cost of the full-year average price and includes a lot of things. And some sales have lagged pricing, of course, current hot-rolled prices is not reflected yet so you can't really tie one to the other the way you want.

I would recommend you to stay with the tables that we provide. That will be the best way to replicate what we have in our existing contract sales instruments.

Understood. Thanks very much and good luck again.

Thanks, Jeremy.

Lucas Pipes, FBR & Company.

Hey, good morning, everybody, and not to sound like a broken record, but I would like to add my congratulations for a great job, not just this past quarter but since you started your tenure. I wanted to follow up a little bit on 2017, a tremendous amount of detail, and appreciate all of that. In terms of the sensitivity to iron ore prices, maybe to follow up just a little bit on that, when I go back to your initial 2016 guidance it looked like just about $2 or so in USIO price realization changes for every $10 change in the IODEX. For 2017, what do you think is a good range to be thinking about?

We haven't developed the tables yet for 2017, so actually at this point, Lucas, I don't even know if we're going to continue to have the same type of table. Of course, Paul Finan and Kelly Tompkins will be talking to you guys and getting your feedback on that, each one of the research analysts that cover Cliffs, to see if that is helpful or not helpful.

Sometimes I feel that the table is not really helpful. You heard the last question from Jeremy Sussman that he was trying to do a different way of concluding the price, not using the table. So if the table is not a helpful tool, probably it's better not having the table. But the fact of the matter at this time, we don't have the 2017 tables finalized yet, so I can't tell you that.

What I can tell you is that I feel a lot better with the new contracts in 2017 as far as our ability to generate EBITDA than I do today with existing instruments. Keep in mind, more than half of our demand for next year is covered by ArcelorMittal contract, and the ArcelorMittal contract is mine; so the other contracts I inherited when I got here. So I feel good about our ability to generate that $500 million or more, but I'm a conservative person so I keep it low.

Great, well, appreciate that and good luck. Thank you.

Thanks, Lucas, and I appreciate the upgrade you recently gave us in our stock price -- upgrade for how much, I forgot the number?

Absolutely.

Absolutely is not a number, what's the number?

My number as of the most recent report published is $7 per share.

So went from $4 to $7, and now we're $7.95; you're late again, so I recommend you to take another look.

I always do, I certainly take all the information in.

I appreciate that, Lucas. Thank you so much.

Operator, it's great to have one Kelly in this call, today I have two. So we're good to wrap up, and at this point we're not going to take any more questions.

Thank you so much for continuing the attention to our moves here at Cliffs. Like I said before, we are far from done. We have a lot to do, the best years of Cliffs are ahead of us, especially when we have even smaller debt in our balance sheet. We will continue to work on that. And we will continue the dialogue with all of you. Thank you so much and have a great day.

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