Cleveland-Cliffs Inc (CLF) 2016 Q4 法說會逐字稿

Good morning ladies and gentlemen. My name is Jodi and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources' 2016 fourth-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 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's website.

Today's conference call is also available and being broadcast at cliffsnaturalresources.com. At the conclusion of the call, it will be archived on the website and available for replay. The Company will also discuss results excluding certain special items.

Reconciliation of four regulation-G purposes can be found in the earnings release which was published this morning. At this time, I would like to introduce Lourenco Goncalves, Chairman, President and Chief Executive Officer.

Thanks, Jodi, and thanks to everyone for joining us this morning. Before we start, I would like to introduce our new Chief Financial Officer, Tim Flanagan. In his previous position as our Controller and Treasurer, Tim has been a key player in our financial transformation over the last few years. Now as CFO, he will continue to carry out our strategy of derisking our balance sheet and Tim is replacing Kelly Tompkins who as of January 1 was promoted to Executive Vice President and Chief Operating Officer.

As COO, Kelly will continue to be my second in command. I feel comfortable that this new lineup will allow our Company to expand upon the many successes of 2016 which we will discuss today. For now, I will turn it over to Tim Flanagan for the financial review portion of the call. Tim?

Thanks, Lourenco. I appreciate your introduction and I truly look forward to taking on the responsibilities of CFO here at Cliffs. While the names have changed in this role, the mindset and the strategy have not. Kelly, myself and all of us at Cliffs share the view that it is important for us to continue to derisk ourselves as much as possible when the right opportunities present themselves.

The ultimate goal remains a bulletproof balance sheet that can withstand the inherent cyclicality in our business. This strategy has worked very well and much progress has been made, but we are not done yet. With that in mind, our focus on debt reduction and maturity extension will continue to be front and center as I begin my tenure as CFO.

As I move to the discussion of our financials I will lead with this very topic. Our net debt as of year end was $1.8 billion, over a $600 million reduction from last year and our lowest recorded level of net debt since early 2011. Consistent with our priorities, as well as what we have voiced throughout 2016, reducing our debt balance has been our number-one focus and I can happily say that we have beat even our own aggressive targets.

Now transitioning to our fourth-quarter results, our adjusted EBITDA of $174 million was the highest quarterly EBITDA result in two years. This achievement was a direct consequence of the massive cost-reduction initiatives we implemented over the past two years. Additionally, we experienced much healthier sales volume in response to increased customer demand and better realized pricing.

Starting with the US business, we posted $151 million adjusted EBITDA performance compared to $98 million in the prior-year quarter. The increase is attributable mainly to a solid cash-cost performance of $53 per long ton, compared to $57 per long ton in the prior-year quarter driven mostly by the absent-to-idle cost this past quarter.

We also saw a big increase in sales volume. The 6.9 million long tons this quarter from 4.5 billion long tons in Q4 of 2015 as pellet demand from the steel mills we serve has largely improved. Additionally, prices for iron ore and steel, the two most important components of our contracts pricing formulas climbed nicely during the fourth quarter.

However, due to the full-year lag customer realized or fixed-price nature of certain contracts, we haven't seen the full benefit of these reflected yet in USIO. If market prices persist at or even near these levels, you can expect to see substantial realized price improvements this year.

Also for 2017, consistent to what we have guided on previous calls, we expect to achieve our total capacity of 19 million long tons on both sales and production volumes representing a solid increase compared to 2016. As usual, sales volumes will be heavily weighted to the back half of the year as in the seasonally slower first quarter we expect only about 2 million long tons of sales. Finally, our USIO cash costs for next year remain consistent with what we've guided to in 2016, despite introducing a more specialized pellet into the production mix.

Now moving over to APIO, the $71 average IODEX price in Q4 drove $60 million in adjusted EBITDA, the strongest performance from this business in 10 quarters. With a much more rational environment in the seaborne iron-ore market, we realized $57 per metric ton on our sales and a cash margin of 36%. On the cost side, as operating conditions have improved, our mining footprint as well as our revenue-based royalty payments have increased driving the small increase in cash costs to $36 per metric ton for the full quarter.

In 2017, sales and production volumes at APIO will remain pretty consistent with the prior-year as we expect to sell and produce at our max capacity of 11.5 million metric tons. We expect our cash costs to be in the $34 to $39 per metric ton range reflecting a small increase due to the expanded footprint in increased royalties I mentioned previously.

SG&A expense during the quarter ticked up to $36 million due to a one-time accrual related to incentive compensation plans as well as increased the spending associated with the development of alternative iron unit technology. Clearly the level of SG&A spending we saw in the fourth quarter will not be a continuing trend.

In 2017, we are expecting $100 million annual run rate implying about $25 million per quarter. Capital spending for the quarter came in under budget at $23 million compared to our implied guidance of $29 million.

For 2017, we are expecting about $105 million of total CapEx. The components of this spend include the capital necessary to maintain our continuing operations and the $40 million required to finish the Mustang project United Taconite which I must say is progressing nicely towards our planned spring completion.

From a liquidity standpoint, in Q4 we saw a major cash inflow generating over $200 million in free cash flow during the quarter. Not only was this driven by our great operating results, but also a 2 million long ton inventory reduction in the US which we have foreshadowed throughout 2016. We ended the year with cash of $323 million, up nearly $200 million sequentially from Q3.

Total liquidity at the end of the year was $550 million net of outstanding letters of credit up $170 million sequentially. Given the strong cash position at year end and our encouraging outlook for 2017, we do not anticipate any borrowings against our ABL facility during the year. Finally, I want to make sure acknowledge our new approach to guidance in 2017.

Previously, we provided a sensitivity table with various levels of iron ore pricing and our corresponding realized revenue rate holding all other assumptions constant. As Lourenco has indicated on previous calls, given the conflict that this presentation created, we realized that the table is not the optimal way for us to provide our investors or the analyst community an accurate picture of our forward-looking adjusted EBITDA. In light of this we decided to cut right to the chase and provide net income and adjusted EBITDA guidance as you saw in our press release earlier this morning.

Applying January's actual average iron ore price of $81 per metric ton and January's AMM hot rolled coil price of $618 per net ton on a full-year basis, we expect 2017 adjusted EBITDA of $850 million. This compares to our previous guidance of $500 million adjusted EBITDA which was based on a $60 iron ore price and a $600 hot rolled steel price in the United States for the entire year.

With these two guideposts as well as our continued practice of guiding to all other important metric and factors that influence our business, we believe the analysts and the investors can construct an accurate EBITDA picture based on multiple pricing scenarios. These sensitivities will also become clearer as we progress through the year and beyond. With that, I'll turn the call back over to Lourenco for his prepared remarks.

Thank you, Tim. In each of our quarterly calls, I share with our investors and research analysts my perspectives on Cliffs and my views on the entire iron to steel industry in the most honest and direct way possible. Let's briefly recap a few points I brought to your attention in our previous calls.

First, in this setting last year, for our Q4 2015 conference call, I told you that the principal executives of the major iron ore producers were hanging by their fingernails to their respective jobs. As a result of their reckless execution which I called their strategy of self-destruction. Allowing iron ore prices to deteriorate and, as a direct consequence, of their deliberate actions, decimating the equity value of their respective companies.

Within a few months, one CEO and two presidents of iron ore operations went on to quote, pursue other opportunities, unquote. Since those departures, iron ore prices have doubled from $40 to over $80 per metric ton. Second, in our Q1 conference call in April of 2016, I announced that we would start the deployment of capital toward the development of a customized pellet product, the Mustang pellet, for our largest customer, ArcelorMittal, even though we had, at the time, not yet finalized our sales contract renewal with the customer.

Despite all of the naysayers telling us that we would not be able to renew the contract, we knew here internally the strengths of our codependent relationship with the client and that the renewal was only a matter of time. Within a couple months, we had renewed our contract for the full tonnage amount for the next 10 years. And at the time we signed the renewal, the Mustang project was already underway.

Third, in August 2016, during our Q2 conference call, I told you that, at that time, our 2017 EBITDA guidance was $500 million or slightly above and qualified such guidance as a very conservative figure because it was based on then-current prices of $60 for iron ore and $600 for domestic hot rolled steel. And these two values were both conservative assumptions for the numbers iron ore and hot rolled steel should actually average in 2017.

Finally, in our Q3 call in October, I said that service centers were playing with fire by keeping these two inventories excessively low and for placing an excessive dependence on buying imported steel illegally dumped into the US market. Since then, inventory levels are up, imports are down, and the price of hot rolled steel has risen from $490 to $630 for short term in just three months. That brings us to today's call.

The most important point I would like to make today, we finally have sanity back in the seaborne iron ore market. I truly commend Rio Tinto and Vale for eliminating their reckless behavior that had infected the market for a number of years and destroyed several billions of dollars in equity value. Once the market analysts saw iron ore prices at $40, they believed that this was the new normal. Not the case.

For a controlled commodity like iron ore, in which only three big players have the ability to move market price up or down, this should never be the case. Iron ore at $40 is not nor will it ever be normal.

The so-called experts defended this figure as a possible scenario, or even worse as a sure thing, should have learned a tough lesson between January 2016 and January 2017. Iron ore prices increased month after month after month during 2016. Please check the actual curve.

Furthermore in January 2017, 62% FE content iron ore price averaged $81 per metric ton, $81.08 to be precise. As of today the same 62% FE content iron ore price is $84. Please check tonight when you receive your plats -- $84.00.

On top of that, there is no new development in the marketplace other than the usual shallow talk about the Roy Hill ramp up, the start-up of S11D or the accumulation of low FE content iron ore inventory at the Chinese ports. As these three arguments grew old and useless, the persistence on their utilization by the folks interested in denying reality became ridiculous.

In conclusion, there is nothing out there to justify lower iron ore prices going forward in 2017. And therefore, we predict that the price of iron ore will continue to be strong throughout the year.

Since the adoption of a more rational behavior by Rio Tinto after the departure of its former CEO, the other two major producers, Vale and BHP, followed suit and also adopted a more disciplined approach to selling iron ore. Vale for example, has made it abundantly clear that they have no intention to flood the international market with more iron ore than the market can absorb and that S11D despite being a very high grade ore is construed as a replacement mine. We expect this type of responsible behavior to carry on which will continue to support the strong iron ore prices and bear fruit for not only the three measures but also for Cliffs.

We have also encountered some new dynamics in the Chinese markets. Between the improved profitability of the Chinese steel mills, the elevated prices of coking coal and, most importantly, the increasingly serious crackdown on pollution is sponsored by the Chinese government, demand for higher grade iron ore has risen significantly. As a consequence, low-grade 56% iron content ore is having a tougher time to find a home with good clients.

This is evident as we observe the wider spread between the 62% FE referenced price and the price of low iron content ore. Previously, when the Chinese mills were not being forced to pay attention to pollution and coking coal prices were extremely low, iron content didn't matter. Now it does matter.

And that's why we continue to see higher ore inventories at the ports. This stuff accumulating portside is not the good ore; it is pollution-heavy, low iron content material. In sum, the port stocks could stay high or even go further up and that will continue to have a very limited influence on the 62% iron-ore price index.

And that's the index that our agreements are based on to price the products we sell to our clients. Particularly on this topic, please feel free to clarify any doubts you might have regarding port inventories during the Q&A portion of the call.

Here in the United States, thanks to the several trade cases initiated by the domestic steel producers and litigated in 2016, we now, in 2017, have a much more leveled playing field in the domestic steel market for all flat-rolled steel products. And that includes hot rolled, cold rolled, galvanized and plates. These are the products that our clients, the integrated steel mills, produce and sell to their clients.

Due to the nature of the trade cases and how the cases were litigated in 2016, the duties imposed on several steel mills from several different countries origin will stay in place for several years until each case comes through for their respective sunset reviews. In the meantime, the domestic steel mills have a real ability to price their steel sales at fair levels. As a consequence, the other factor affecting the contract price of our pellets, domestic, hot rolled steel price, is also supported by a solid foundation.

With these two fundamental game-changing events positively affecting the two pillars of our pricing methodology, the seaborne iron ore prices and the domestic hot rolled steel prices, and with it the backdrop of the incredible amount of heavy lifting, the Cliffs team has done here within our Company. We are at the point in 2017 that we can reap the benefits of a more rational and predictable business environment. In the US markets, on top of the reduction of imports associated with the positive outcome of the trade cases, a major event with the potential to positively impact the market in 2017 and beyond, is the result of the presidential election.

All other matters aside, President Trump delivers a message that's positive for Cliffs and for our customers, the domestic steel mill. The stated commitment of President Trump to create real conditions for the resurgence of manufacturing in America can only help and enhance the environment we are operating in.

While we cannot give the new President all or even most of the credit for this improved outlook, as it's actually a result of the 2016 trade cases. President Trump's directives on buy American and build in America have the potential to multiply the benefits of the current positive environment for manufacturing in the United States.

On that note, with respect to the new administration, we are very pleased with the nominations of Wilbur Ross as Secretary of Commerce and Robert Lighthizer as US Trade Representative. Both of these men are, in different capacities, steel industry veterans that understand not only the importance of fair trade to our industry but also how to prevent circumvention and punish the bad actors through full enforcement of the rules on each trade case.

Talking about bad actors, foreign steel mills and trading companies benefiting from subsidies to produce steel and then dump it into the United States are not alone as perpetrators of this illegal activity. A number of steel buyers within the boundaries of the United States, including but not limited to distributors and service centers, have built their respective business on being the final recipients of illegally traded steel. With that, they benefit from an unfair advantage against other steel buyers and service centers that play by the rules.

Nobody has any doubts that buying these stolen goods is illegal. Well, buying dumped steel should be seen as it is -- and it is also illegal. We fully expect that the renewed emphasis on enforcement of trade cases to be implemented by the Trump administration will soon result in identifying and punishing the recipients of illegally traded steel.

From now on, I will develop a lot of time and effort to get these downstream folks treated the way they deserve. I believe that fighting for a level playing field in the US market is a fight worth fighting. And that the rule of the law must prevail and be enforced all the way downstream in the supply chain.

At this point, I have no doubts that with the focus of the Trump administration on [legal] trade and full enforcement of our trade laws we will be able to catch at least some of the bad players among the buyers of illegal steel, making them a clear example to the ones that were lucky enough not to be caught. In sum, if President Trump delivers on not all but just a portion of what he promises he's going to deliver while in office, regarding domestic manufacturing, and with the 2016 anti-dumping countervailing and circumvention trade cases in place and being strictly enforced, Cliffs will benefit significantly in 2017 and beyond.

One more time, between the rational behavior of the major players in iron ore and a constructive business environment surrounding our domestic steel industry, we have plenty of confidence that 2017 will be a great year for Cliffs. When I last gave a projected 2017 EBITDA figure, it was based on then prevailing market conditions.

Our then guidance for 2017 was $500 million, based on a $60 iron ore and a $600 hot rolled steel. I also told you that this estimate was very, very conservative. Well, since then, prices have risen.

Given all of the factors mentioned above, we expect that iron ore and steel pricing averages for January should be at least sustained throughout the [year] if not improved. In our new best-case scenario of these prices staying where they were in January, I mean $617 per net ton hot rolled steel and $80 iron ore, we expect to generate $850 million in adjusted EBITDA in 2017. This new guidance very importantly even takes into consideration that in Q1 we always are negatively affected by some factors.

This year we are going to be affected by the cheaper pellets carried over from the expired 2016 contracts and steel delivered in Q1 2017. And, of course, the seasonally lower sales volumes always associated with the winter months. This new 2017 guidance of $850 million EBITDA is a number that is more than double our actual 2016 EBITDA and would translate into over $550 million of free cash flow.

As Tim Flanagan mentioned in his remarks, given the conflicts that the revenue per ton sensitivity table presented, we thought it would be more beneficial to provide the number everyone is trying to get to anyway instead of providing the information indirectly through the table. Assuming that the major iron ore producers continue their rational behavior and the enforcement of illegally traded steel is strong, we should only have to worry about upside scenarios from here.

I should note that daily fluctuations in pricing would not have a material impact on our guidance as the data points we used represent full-year average numbers. Tim and I we will be glad to clarify your questions related to our 2017 guidance during the Q&A portion of today's call.

Wrapping up my prepared remarks, I want to go back to our call at this time last year when I laid out the three steps that would drive the Cliffs turnaround. One, maintaining our no-stop focus on cost reduction. Two, using our strong market position in the United States to secure volumes and foster the improved profitability; and, three, promoting debt reduction through liability management exercises.

On number one, cost reduction, when most people thought the well was dry and nothing else could be done, we continued to cut costs. In the US business, we cut cash costs by another $4 per ton compared to the previous year adding over [$50] million directly to our bottom line, compared to 2015. Even more impressive, this came in a year when we had to bring two mines back from long idles, Northshore and UTAC. We indefinitely idled a mine at its end of life [Empire] and we executed important [metal] projects as well as started a major construction project to produce the customized Mustang pellet.

The cost reduction continued at APIO as well even as market conditions improved in the back half of the year, and how our mining footprint became larger. Our Australian team remained disciplined cutting cash costs by another $3 per metric ton or 8% adding another $35 million to the bottom line. I applaud and congratulate Jason and our team in Australia for doing what had to be done in darker times and we are now seeing the rewards of their hard work from the last two years.

Our number two commercial strengths in 2016, our strong market position in the Great Lakes, was demonstrated on several different occasions. We locked in a 10-year supply contract with our largest customer. We watched our potential competitive, quote unquote, threats as Essar and Magnetation both dissolved. And picked up volumes from customers who were unsatisfied with their previous supply source.

With the vast majority of our sales tonnage locked up for several years with ArcelorMittal, the liquidation of Magnetation and the additional volumes we got from AK Steel as a consequence, the additional tonnage we secured with our volume through a new long-term agreement and the addition of a second customer for DR grade pellets, Cliffs business is indeed in very good shape. Also, with solid demand and the exclusive nature of our contracts, keeping one of the competitors watching from the outside and talking a good game, at this point we are sold out for 2017.

Finally, on number three, the liability management exercise that we executed throughout the year have generated a lot of equity value through more than $300 million in debt market discounts we were able to capture. On top of that, we have a clear debt runaway until 2020 and taking care of this maturity wall will be a priority in 2017.

In summary, our ability to execute in operations, sales, business development, and strategy is what has set us up to drive. With a much leaner costs, volume certainty in the United States, lower interest expenses, a lighter debt load, and sanity restored to the market, we are in position to generate one of the best free cash flow years in the history of Cliffs Natural Resources.

With that, I will now turn the call back to Jodi, the operator, for the Q&A portion of the call. Jodi.

(Operator Instructions)

Michael Gambardella, JPMorgan.

Good morning, Lourenco.

Good morning, Mike.

I just wanted to say couple of things. First of all, congratulations. But most of all, thank you for making my job so much easier in covering Cliffs. You have been so honest and you've given everyone the details of your analysis of the marketplace, the iron ore marketplace, over the last year and a half. You've been spot on and anyone who listened to you would be spot on, too, with your call on Cliffs. So again congratulations and thank you.

But, I have to say listening to your comments this morning, I think you might have missed a positive point on the iron ore market and I'd like you to comment on it. And that is, it seems like the market may be anticipating too much production out of Vale's Samarco operations from what I'm hearing. What are you hearing on that?

First of all, Mike, I can't thank you enough for your kind words about what I have done here in our interaction. I'm doing my job. I'm doing what I feel like is my obligation with not only the investors that are honest and then fair in terms of their analysis and their ability to deploy their money and make it grow like a real investor does. But also trying to educate these people because they are by and large very smart people. If they listen, if they pay attention, if they put their arguments on and you have an intelligent conversation. We will always will be able to grow together and make money together.

But anyway, moving to your point, Samarco: well Samarco at this point is a very big unknown. The current scenario there is that they have an idle facility over there that they are of course trying to bring back to operation and in the process they need to bring along lots of different constituents that have different agendas. For the company, what they want is to be back in operation. For the regions that were affected and for the towns that were shut down by that disaster, what they need is to be brought to life again. What hasn't happened yet since November of 2015 when the incident happened.

For the several people that lost their loved ones, for a total of 19 deaths, they want to at least see justice be served. The process of indemnifying the family members, cleaning up the region that was affected and doing good with everyone that was, one way or another, brought down by the Samarco disaster, is a very costly one and I don't know why people don't talk about that. Samarco does not have any money left on them and nor do they have an ability to pay anything for the several tens of billions of dollars of the bill that's bouncing around. So this bill is up with the Vale and BHP, they're 50-50 owners of the thing.

Press forward, assuming that they are able to pay, which I fully believe that they might, Samarco apparently is pushing ahead with a strategy that is different from the way they operated before. They used to operate like we operate here at Cliffs, the vast majority of not the totality of their big bells operations in the world operate with obtaining and generating tables and then building over time to tailings spots that our contained by tailings vents. That was the technique that they had before.

What we hear through the press and at that point I only have the public information that you have as well, they are planning to restart using for depositing their tailings, exhausted bids from mines that were used in the past and are no longer in operation. So it doesn't take a mining specialist to see that this type of attitude is at the very least limiting in terms of their ability to warehouse tailings because no matter how big the hull is, one day the hull will be full; so they are limited on that regard. And in order to mitigate that, they say that if they come --when they come back, they don't say it, if is my word. They say that when they come back, they will be a much smaller operation, instead of operating at million] tons, they will be operating at 16 million tons or 17 million tons; we hear different numbers.

So long story short, Samarco is an unknown at this point. There is absolutely no certainty about if and when and how Samarco will come back. The only thing we know is that if Samarco comes back, it will not be the old Samarco; it will be a much smaller Samarco due to the self-imposed limitations on how they will deploy their tailings. And on top of that, the two shareholders will have to bear, and that's regardless of coming back or not coming back in operation, would have to bear a big bill.

How big is the bill? Hard to say. And, in the meantime, 21 executives from Samarco BHP and Vale are facing criminal charges and they have to fight that, as well. I think I covered all the points and if I missed something, Michael, please let me know.

No. That is great. One last question, could you discuss give us your thoughts on how you feel the US steel, the restart of Keytech impacts you longer-term. I know you're sold out this year.

That's a good question about Keytech. First of all, let me take one step back and think about why Keytech shut down in the first place. Keytech was the supplier of two US steel mills; one was Fairfield and the other one was Granite City. Fairfield shut down with the assumption that they would replace blast furnaces with EAF and therefore they would not be using pellets anymore.

They would be using scraps so Fairfield was never a player to be brought back to support Keytech, but Granite City was idle more than a year ago. I don't recall how long ago, but a long time ago. And they never said that they would shut down for good, so it was easy to assume that Keytech would be supplying Granite City ones and Keytech when Granite City comes back to operation.

This being said, we heard the announcement of Keytech coming back and we did not hear the announcement of Granite City coming back yet. Why I fully believe that Granite City will come back because otherwise there is no -- it's a mathematical impossibility to have the output of Keytech allocated without having Granite City in operation. I also tried to understand where US steel is going to sell their pellets because not -- certainly not to ArcelorMittal because I know the contracts we have in place. Certainly not to AK Steel Dearborn because I also know the contracts that we have in place.

And then, I have to guess, I guess that they are not selling to AK Steel Millertown, because AK Steel Millertown is very happy with our pellets and they don't seem to be the type of steelmakers that replace good pellets with bad pellets like Algoma did when they did not have an option back in 2015 when I blew up the contract with Algoma and they had no option other than going to US Steel.

So once I reenacted the contract with Algoma, Algoma came back running and they would have given me the 100% business there. I elected not to take it because, on top of Keytech, US Steel also had an equity position in Tilden and an equity position at Hibbee so I tried to make sure that I know where these pellets are going. So by keeping Algoma on the occupied portion, I pretty much defined that Keytech -- not Keytech, I'm sorry -- the Tilden portion of the equity position that US steel has in our mine would grow where it belongs and it belongs to Algoma.

So it's a big interesting question for you to ask US Steel. Where in hell are you putting your pellets? Because the numbers don't close. And one last thing on that. If US steel brings back Keytech, when US steel brings back Keytech, and I gotta believe that's what they are looking for because the US Steel CEO is very vocal about a level playing field and if we are a level playing field will be implemented in the United States. He said that he is going to bring back 10,000 jobs to US Steel, so I'm watching that. I'm watching that.

So when US Steel -- Granite City comes back to operation, these clients that are buying pellets from US Steel right now will have to find a new supplier and guess who is the supplier? It's Cliffs and of course that will come with a price, because I am, among the other things, I am a guy with a great memory.

All right. Thank you. Thank you, Lourenco.

You are very welcome, Mike.

Evan Kurtz, Morgan Stanley.

Hey. Good morning Lourenco and congrats to Tim and Kelly and Kelly for all the listening.

Thanks.

Thank you very much, Evan. Appreciate it. Good morning.

Good morning. So nice quarter, just wanted to ask a couple of questions, maybe one following up on some of the last commentary there on Algoma. I know they're in a midst of a restructuring and USW is now talking about or threatening a strike. I'm sure you have some thoughts on this; what is your view on how that situation might play out and is that a risk to you? How much of that 19 is committed to Algoma at this point?

We reenacted the old contract and the old contract covered for 1.5 million tons and we signed an addition that was for 900,000 tons. So the total January 1 through December 31 is 2.4 million tons. This being said, the union, the USW at Algoma. They are trying to get what they feel is fair and I'm not going to give you any position on that. But at the end of the day, they know what's feasible. They know what's real. They know what's true and they know what's a lie, and sanity will come back.

The judge and the monitor, the others, all the parts involved will end up realizing, and I think that we are pretty much there, that the best course of action is moving on and fixing what needs to be fixed, getting a new owner, and working with Cliffs to continue to make that view a strong view. I feel that there is room for Algoma. There is a future for the Algoma workers, but they need the right ownership over there. I'm not going to deal with Essar. I put very clear to the court and the court approved that thing was a difficult point to make and we made it, it's approved it; it's behind us. I have the right to terminate the contract if Essar comes back as the owner of that facility. So that's my position on that.

Thanks for that. And then I just have a quick question on the guidance. What are you assuming for pellet premium in that number?

We used the reference of the pellet premiums in the Atlantic Basin and that pellet premium today is $45 and just for a reference just in case you need it, DRI-grade pellets in the same token is $54.

Great. Thanks and maybe just one final one if I may. I read an interesting article in the Metropolitan around some of the work that you've been doing with the GRI plants and you had mentioned that potentially you could see a long-term customer in Trinidad; it was a little easier to get your pellets there versus Gulf Coast. So just curious what are you selling there now and what size opportunities do you see that in the future?

Look, the DRI-grade pellets for us is our future. And we continue to develop the product. We continue to produce and sell to our well-established clients and that's new for Trinidad. From the logistics standpoint, due to the design of the unloading dock at -- we can't get there by rail and it's impossible to get there through the sea because there's a thing called Jones Act, that would take a long time to explain in the call. But we can chat off-line, that makes departing the United States and the arriving United States a complicated thing.

But departing from the United States and arriving in Trinidad is (inaudible). This being said, we continue to do business in Trinidad. We are very happy with the development and the relationship with Nucor. They will always be my preferred client for DRI-grade pellets because they --when nobody knew what would be doing, they first -- I really appreciate the support that I got from, John Ferriola, Joe Strattman and all be people at the plant. And our people worked very well with them to develop a product that now we are selling to another client, ArcelorMittal Canada. We just started doing business with them, so it's starting small, like these things always start, but ArcelorMittal Canada owns two DRI facilities and we are going to start supplying them soon.

Good to hear. Thanks. I'll hand it over.

Thank you, Evan.

Lucas Pipes, FBR & Company.

Hey. Good morning, everybody, and good job on the quarter and appreciate the guidance.

Thanks, Lukas.

Good morning.

So one of the other -- another company that I cover, they were asked about a year ago or so on the conference call very clearly about equity and the response from the CEO was absolutely not; I think we've been very clear on the issue. A common question I get is what are you going to do with the 2020 maturities? I wondered if you could give a similarly clear message on equity and, if not, maybe elaborate on the plans for addressing the 2020 maturity? Thank you.

Lucas, you know that these maturities are taken care of here in the company very seriously and we move the right way at the right time. We have been addressing that 2018 gone and we are still in February of 2017. So talking about 2020 and to be specific about your point on equity, I am a large shareholder. I am a large shareholder. I bought a lot of stock in the open market. I bought stock with after-tax dollars. I bought stock at $5. I bought stock at $3.06. I bought a lot of stock in this company for cash, after-tax dollars. Very few CEOs do that. I did and I plan to continue to do it.

So being a shareholder, I feel exactly the same things that all shareholders feel and I always have the shareholders front and center in my mind. Every single transaction that we will do, no matter if it's this or that or that or more complex or less complex, I have one thing in mind and one type of stakeholder in mind. The shareholder. I take dilution extremely seriously.

But equity is a tool in the toolbox. We only use equity if it's ultimately accretive to the shareholders. If there is no accretion, there is no deal. If there is accretion involved for the shareholders, we might do it.

This being said, we are going to generate a lot of cash in this Company in 2017, $550 million at the level of the current guidance. So that should also go toward addressing the 2020 tower. But everything that I'm telling as shareholder, I'm trying to share with you and all the investors in the call how I feel about using another tool in the toolbox and there are several in the toolbox.

That's very helpful. I appreciate that and maybe one quick follow up on that topic. Thinking about that 2020 maturity, do you have a certain timeframe in mind for when to address that maturity? Or should we think, look earlier in 2017 you gave a very strong guidance-

Absolutely. Absolutely. We do have a timeframe for that. It will be between February 9, 2017, and December 31, 2019.

That's --

That'll be before 2020.

Understood. All right. Well, appreciate that. And then maybe turning to the broader market, I appreciate it, the comments you provided on iron ore. And I was curious how you're thinking about the demand side of the equation at this time.

It seems like economic activity is fairly robust, but what is your outlook? I think in the past you also commented and I think you did it again this morning how China is transitioning away from the fines. What's your outlook on the demand side? I would appreciate that, thank you.

Are you talking about demand in the United States? Specifically?

Globally, please.

You mean steel demand globally?

No, no. Iron ore demand globally.

Iron ore demand. Okay. China continues to perform. China is moving toward a more responsible way of performing. The pollution combat in China is real now and we are going to see more and more and more and more moves towards China becoming a lot more like Japan, a lot more like South Korea, because, don't forget Japan and South Korea in the mid to late 90s transitioned from what China is now to what they are now, so the dynamics will be exactly the same.

The difference is the scale. The difference is size. So I continue to believe that low iron-content iron ore will continue to accumulate in the port and it will get to a point that it will start to be pushed back by the end users, because S11 D is a game changer, 65%, 66%, 67% iron content is a game changer, because that makes the life of the steel mills a lot easier.

Take a look, Lukas, in the gap between the current IODEX that tonight would be $84 per metric ton for the 62% iron and the premium that the 66%, 67%, even the 65% iron content commands right now; it's increasing. So that's what needs to be seen in China. We're not going to see China not producing, not buying iron ore, not deploying fixed-set assets; it's the opposite; they'll continue to grow fixed-asset investment. They'll continue to buy iron ore, but they will be more selective. So the times of the so-called low-cost iron ore and nobody talks about iron content, nobody talks about added properties. Nobody talks about residuals. It's gone.

China is no longer in elementary school. China is at least in -- a senior in high school. Wait until China gets to college. It will be impossible for these guys that produce black stuff and coal iron and they call the black dirty iron war to continue to be called the suppliers of iron ore.

It is a different ball game that's moving in China, but demand is phenomenal. It's great; we'll continue to support production of good stuff and the bad stuff for now we accumulate at the port, very soon we will be accumulating in Australia. That's the way I see it.

That's very helpful and then, Lourenco, I was very impressed in the fourth quarter with your performance in Australia, both on the revenue as well as on the cost side. As I model that asset going forward, it has a limited reserve life on paper. How do you think about the life of the asset in the current price environment? Should we still be modeling that the mine should be essentially closing down here in a couple years, or what is the opportunity for this asset given current iron ore prices? I would appreciate your comments.

Look, when I came to this company, in August of 2004, APIO had a life of mine of four years. 2. 5 years later, as of now, APIO has a life of mine of 3.5 years. We still have proved and probable reserves in Australia of 43 million metric tons. So we continue to develop tracts of land, continue to mine in adjacent areas that we can get material and process material and bring the material to the port of experience and sell to good clients. So as long as there is an economic reward to mine, as long as the price level is sane and it's justifiable to continue to drill and explore in Australia, we'll do it.

At the very moment, that we no longer have the ore, we will be done. This being said, it doesn't take much for, in two years down the road, we are still with another three more years of life of mine, that's how we operate there. So don't take the number of years as a figure.

It's a movie. We are -- my team in Australia is very active in getting the right piece of land and getting the right mines in operation at the right time to get them the right ore to explore the fact that we have a unique position in Australia producing 50% lump ore not just the 50% prime, so we are in good shape.

That's helpful, Lourenco, I appreciate all the color and continued good luck, great job.

Thanks a lot, Lucas. I will take the last question now.

Matthew Fields, Bank of America.

Hi everyone. Congratulations on another very productive year and, Tim, congratulations on the new gig.

Thank you.

I just wanted to ask a couple of housekeeping questions real quick and then maybe some more thematical one. Did you -- it looks like you may have bought some bonds back in the fourth quarter, is that the case? I will let Tim Flanagan handle that.

Yes. So we took out about $20 million of debt through a combination of open-market purchases and a couple equity swaps that we did consistent with what we've done in previous quarters.

Okay. Great. And then, the $550 million free cash flow forecast seems to imply pretty neutral working capital. Is that what you're thinking or after two really strong working capital years, do you imagine you have to get some back in 2017?

Yes No. I think if you think about the working capital, the big driver this year was the imbalance of our production and sales tons in the past two years. And certainly to the benefit in 2016 especially in USIO, but as we guided to 19 million tons of sales and production in the US and 11.5 million tons in Australia, both on the sales and production front, you won't see that same inventory depletion. So when you think about all the other pieces and parts, AR, payables, things like that, that's just more of a timing issue; so pretty flat overall.

Okay. Great. And then Lourenco you previously as back in our conference at the end of November you said you had a $60 per ton iron ore IODEX forecast in your head for 2017. It seems like maybe you're thinking about a higher price for this year?

Look, like I said, it was the end of November. We are now in mid-February and I continue to watch how things are developing in the marketplace. We are very pleased with how the measures are addressing the business. How they are selling. The cancers that were that the reasons why BHP and Rio Tinto were behaving the way they were behaving are now pursuing other opportunities. So they need to continue to pursue as long as these opportunities are far away from the iron ore business where they don't belong.

And even the future guys that work on iron ore as if iron ore was not a physical commodity, but just a virtual thing, they are starting to see the future. So if you look at the numbers for the front-end months, March, they are indicating higher prices. If you look into their most traded contract, that's the May contract, it indicates higher prices. So let's assume that it's just that; we're going to go with higher prices just through May and then prices will go down again.

Well, at that time, it will no longer be $84 million. It will be more and then, in order to get to my forecast, you need to average down and I'm still at $80 million and $630 million $80 million iron ore and $630 million hot band. So that's the reason I'm so pumped, if it tops $850 million. My $850 million EBITDA, Matt, at this point is my old $600 million. My $600 million I called it a very, very, very conservative guidance at the time. And I'm calling the $850 million a very, very, very conservative guidance at this time. What about that?

Okay. Thanks and then lastly, you've talked a lot about the majors and the bank, the investment bank price forecast. I was just thinking about this from a different point of view. It seems like the majors bringing on supply or threatening to bring on supply scared everybody in the market including the banks to reduce forecast time and time again which makes lending to startups like Atlas and Arrium and all the guys have gotten scared away from the market made it impossible for them to secure financing for new operations or for capacity and enhancements, whatnot. Do you think it's kind of the Three Stooges, as some people have called them, kind of did everybody a favor, but they didn't live to see the fruits of their labor by scaring all the new entrants away from the market?

But well first of all, a correction. Three Stooges it is not some people that called them, I called them Three Stooges. This one is mine. I did not put a copyright on that, but it is mine. But anyway, look at that, the Three Stooges at the end of the day, they are big, big, huge, enormous; they are big elephants. They cannot be afraid of poodles. They can't be afraid of a pussycat. This is more than miners.

Even if they all come together, let's assume that 10 miners will come to operation and each one of them will produce 5 million tons; ten times five is 50; it still doesn't move the needle. Only someone that does not understand the business, or has an agenda that's not the agenda of his shareholders, can imagine that he will work to destroy $30 billion or $35 billion in market capitalization in one year to take away people that produce $5 million, $8 million, $6 million, $3 million a year. So let all these mining companies in Australia to come to operation and they still don't move the needle.

And keep in mind, if you paid attention to my explanation about how low iron content iron ore is being treated in China and we will continue to treat them in China, their window of opportunity at this point time-wise is very narrow. They're not able to sell that crap for too long. You'll never hear, for example, Fortescue nervous about a small mining company because they understand their size.

When you are big, you need to behave like you are big. The problem is when someone is small and behaves like this someone is big, because sometimes this small guy will be stopping in the rail track in a freight train, like Cliffs will come and pass over. That's happening right now in the United States pellet market between Cliffs and US Steel; but unfortunately time is up and you are going to discuss that in the next chapter in three months. So--

Thank you for your perspective.

Okay. Jodi. We are done. Thank you, investors. I will talk to you again.

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