Cleveland-Cliffs Inc (CLF) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Jody, and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs 2017 Fourth Quarter and Full-year 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 Form 10-K and 10-Q and news releases filed within the SEC, which are available on the company website. Today's conference call is also available and being broadcast at clevelandcliffs.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 Tim Flanagan, Executive Vice President and Chief Financial Officer.

Thanks, Jody, and thanks to everyone for joining us this morning. I'll kick off the call with a review of the fourth quarter and full year financial results and an overview of some important outlook items for 2018. Before diving into the results, I wanted to first highlight a very important event and its positive impact on our business. In December, President Trump signed in to law, the Tax Cut and Job Act of 2017, which, among many other reforms, repealed the alternative minimum tax. Resulting from the repeal of AMT, the benefit to Cliffs is twofold: first, we are now able to monetize the approximately $250 million in credits we have accumulated as a historic AMT payer. We will begin to see these credits returned to us as cash refunds. We will receive approximately $120 million in 2019, as well as $60 million in 2020, and $30 million in each 2020 and '21 and 2022, not to mention the $10 million we will have returned to us in 2018. Historically, our AMT credits have had a valuation allowance against them, which we have reversed during the fourth quarter, resulting in the substantial tax benefit you saw flow through our financials. Secondly, we will no longer be limited on the deductibility of historic net operating loss carryforwards. Previously, as an AMT payer, we were limited to only utilizing 90% of such carryforwards. With the repeal, this limit goes away with respect to the utilization of historic net operating losses. As such, given our sizable NOL position of over $2.5 billion, we will effectively be a 0% tax payer for the foreseeable future. While we are still evaluating our options on how to best utilize this meaningful income and cash flow from tax reform, it's fair to expect that the cash will be primarily deployed towards debt reduction as well as future CapEx needs associated with our core business, and last but not least, potential capital returns to shareholders.

Now moving to our financials. We wrapped up 2017 on a solid note, with fourth quarter adjusted EBITDA of $129 million, propelling us to $513 million in adjusted EBITDA on the full year. This was a 38% increase from the prior year and our second straight year of EBITDA growth in excess of 25%.

Segment wise, starting with the U.S. business, we posted $160 million adjusted EBITDA performance in the quarter, a $9 million improvement from the prior-year quarter, despite a 1.4 million-ton decrease in sales volume. Because of both strong customer appetite for pellets during the first 9 months of the year and a customer nomination reduction previously announced, which occurred late in Q3, the actual tonnage shipped in Q4 was lower than last year's fourth quarter. That said, on a full-year basis, we sold 18.7 million long tons, a 500,000 long ton improvement from the prior year. In 2018, we expect another increase in sales volume to 20 million long tons as a result of strong customer nomination and our third quarter acquisition of the remaining interest in the Tilden Mine.

Consistent with our disclosures in the third quarter 10-Q, we've adopted the new revenue recognition standard, effective January 1 of this year. As a result, we will be recognizing sales sooner than we historically have. In the past and through 2017, Q1 sales represented vessel shipments made from December through February. Going forward, Q1 reported sales tons will reflect shipments made from January through March. Even though actual sales are unaffected by the reporting change -- reporting methodology change, our overall reported volume in Q1 2018 will be lighter than what is typical for Q1. This is because we are replacing a heavier December shipping schedule with a lighter one in March. Conversely, the second quarter will show a more pronounced tonnage increase, resulting in greater seasonality in our results in comparison with previous years. In sum, we expect the always-seasonally light first quarter to only show about 1 million long tons this year, offset with much higher volumes in the remaining 3 quarters. There will be no impact to our full-year expectation of 20 million long tons, nor will the new revenue recognition practice result in a change in timing of our cash inflows.

As for the revenue rate during the fourth quarter, we saw in USIO a realization of $83 per long ton, representing a 13% increase from the prior year quarter. However, given the reduction in nomination from a major customer we discussed last quarter, as well as a lower average Q4 IODEX pricing and higher freight rates, we saw this rate fall from a quarter ago. Looking into 2018, based on the performance to date for iron ore, U.S. hot-rolled steel and Atlantic pellet premiums, and assuming that these pricing levels persist throughout the remainder of the year, we should expect a substantially positive impact in our full-year 2018 price realizations.

As we begin the year, in order to provide some further transparency into some new customer arrangements, along with the customer mix we anticipate for 2018, we provided an expected realized revenue range in our press release this morning using year-to-date average prices for the commodities that impact our realizations most. The figures we have utilized do not reflect our internal view on pricing and therefore, should not be construed as guidance. Rather, we are just using what has transpired thus far in the year. So with the $77 iron ore price, a $675 per net HRC price in the United States, and an Atlantic pellet premium of $58, and holding all other assumptions such as mix, freight rates and PPI constant, our U.S. realizations would range from $97 to $102 per long ton. This would represent a double-digit percentage improvement from 2017. And just to be clear, this yearly range already includes the first quarter realization that is expected to be only around $75 per long ton. The reasons for a lower price realization in Q1 than what we anticipate for entire 2018 are well known by the investors following Cliffs for some time. Consistent with previous years, it includes negative carryover effects, the lower reported volume driven by the winter shipping restrictions and an unfavorable customer mix dictated by rail-only delivery, which, for this specific year, were exacerbated by the accounting change -- accounting standard change during the year. By using these data points, coupled with historical sensitivity information from previous results, the investment committee should have an adequate starting point to model our expected realizations for the rest of the year.

USIO cash costs for the fourth quarter were $59 per long ton, close to our best performance of the year, putting our full-year cash costs at $60 per long ton. Thanks to our excellent operational performance, we are able to remain within our original cash cost guidance, despite higher employee-related expenses, higher energy rates for national gas, diesel and electricity, the implementation of a new product, the Mustang pellet, and 2 additional unanticipated DR-grade pellets runs. In 2018, we expect to see cash cost at a similar level as in 2017, with a guidance range of $58 to $63 per long ton.

Now moving over to Asia Pacific. The increasing preference of Chinese steelmakers for higher-grade ore has put a lot of pressure on our APIO business, which reported a negative $3 million of adjusted EBITDA in the fourth quarter. Throughout the entire year 2017, the discounts applied to lower-grade ore have only worsened. Over the past 2 years, our expected realization, relative to IODEX has decreased over 40%. In addition, over the past 6 months, the Aussie dollar exchange rate has become more unfavorable for us. In today's iron ore price, lump premium, FX and discount environment, we would expect slightly negative EBITDA on a full-year basis and, as such, we expect to cease mining operations in Australia sometime during 2018. Lourenco will address this in more detail during his remarks.

SG&A expense during the quarter was down 22%, primarily due to lower incentive compensation. On the full year, we finished out favorable to our guidance by about $4 million. For 2018, we expect SG&A expenses of $115 million, which is higher than last year, due mostly to a pension/OPEB reclassification, driven by a new accounting standard. As it is simply a reclassification within the income statement, there'll be no impact on net income or EBITDA. Overall, on an apples-to-apples basis, our expected 2018 SG&A lines up very similarly to what it looked like in 2017. As for miscellaneous net, we expect to continue to incur Empire idle expense at a rate of about $7 million per quarter for the full year of 2018.

Total capital spending for the quarter was $77 million, which includes sustaining capital, preliminary spending related to HBI as well as our acquisition of certain land rights in Northern Minnesota, which pushed us above our previously disclosed guidance. We finished the year with total free cash flow generation of $182 million, which, in large part, went towards successful efforts in enhancing the core business, including the acquisition of the remaining minority interest in both Tilden and Empire mines. For 2018, capital expenditures will be taking a large step up as we begin major spending on the HBI project, our most important strategic priority over the next couple of years. Capital expenditures will be broken out into 3 areas: we expect spending related sustaining our ongoing operations of about $85 million; spending related to the DR-grade pellet upgrade at Northshore of $50 million; and the largest and final piece, spending on the HBI project is estimated at $250 million for 2018, or about 35% of the overall project cost. With the completion of our capital raising in December 2017, the $700 million total needed for the HBI project is now fully funded.

Finally, I will conclude my remarks with one of the major themes for 2017: capital structure optimization. We finished the year with net debt of $1.3 billion, nearly our lowest level in over 6 years, along with a vastly extended maturity profile. We also lowered the average carrying cost on our outstanding notes to 5% compared to the 6.8% it was at the beginning of the year. The balance sheet is clearly in much better shape now than it was a year ago. With the improved capital structure in place and strong earnings outlook, we're very well positioned to both grow the company and weather any volatility the market may throw to us.

With that, I'll now turn it over to Lourenco.

Thank you, Tim, and thanks to everyone joining our call this morning. At the outset of last year, I promised strong and sustainable results in 2017, and we delivered. The main metric we focused on, adjusted EBITDA, surpassed $500 million. This significant result is a direct consequence of our shift to a U.S.-focused strategy, taking advantage of our strengths in the domestic market, that were ignored for some time in this company, and also making all the necessary improvements across the board, commercially, operationally and financially. Since my first full year with Cliffs in 2015, our EBITDA has increased a lot. From 2015 to 2016, the growth was 28%, and between 2016 and 2017, the increase was 37%. Therefore, despite the undeniable volatility of the iron and the steel business, some companies still deliver consistent growth and increased profitability, if they have the right strategy in place and the discipline to execute without getting distracted by day-to-day noise in the market. That's Cleveland-Cliffs. That's us.

We also enjoyed the positive consequence of the industry finally waking up to the importance of rational supply behavior and environmental compliance. We actually designed our strategy around these 2 things. The strategic moves we made at that time, which I have laid out in past conference calls, put us in a position to thrive in 2017 and should boost Cliffs' results even further in 2018. Dating back to the early days of my tenure as Cliffs' CEO, the most prevalent thing that iron ore industry's so-called experts were focused on was on who was a low-cost producer and who could pump out the most volume. The environmental harm this "low-cost tons" caused to China was never discussed. So from the very beginning, I was in a daily fistfight about this deeply misguided view. As a producer of high-quality pellets, we knew that not all iron ore was created equal. As we look at what transpired in 2017, China finally started to care about pollution. With this new attitude towards environmental stewardship, the Chinese government mandate curtailments of some highly polluting steelmaking bit -- China's government mandate curtails some highly polluting steelmaking capacity. This action forced the remaining operating steel mills to produce more steel, while generating reduced emissions, all for an end market that was, and still is, very healthy. Exactly as we predict a few years ago, the Chinese became a lot more selective over the feedstock they use in their blast furnaces, and the dime a dozen low-grade fines coming out of Australia just weren't going to cut anymore. This resulted in the price for benchmark rate iron ore increasing over 20% in 2017. Even further, pellets became a lot more expensive. Good pellets are scarce, difficult to produce, and they allow the blast furnace to run the most environmentally friendly and productive operating -- operation possible. With our patience finally paying off, these international market developments helped improve our USIO results in 2017. Our full-year realized revenue rate of $88 per long ton was up 17% over 2016, and segment EBITDA was up 55% year-over-year. With the Atlantic base in pellet premium jumping to a value of $58 per metric ton since the beginning of this year, we expect our segment EBITDA to take another substantial move upward in 2018, especially with our 20 million long ton order book for the year.

On the operational side, I asked so much of our team last year. And of course, they absolutely delivered. This included the ramp-up of the Mustang pellet production, which could not have gone any better; the planning of the upcoming Northshore upgrade project and 2 additional DR-grade pellet runs. This operational excellence continues to support and serve well, a healthy domestic market. The steel prices in the United States are at a 6-year high, and our customers have a strong appetite for pellets. In addition, 2 weeks ago, the Department of Commerce submitted the result of its Section 232 investigation to the White House. We don't have much visibility on the contents of the report and have even less clarity on what President Trump will actually do with the report, but what I believe is most important, is the enforcement of any restrictions that are put in place. We, as a country, continue to look the other way when the conversation is about the domestic buyers that are recipients of unfairly traded steel. The Department of Commerce knows, and the White House knows that we must focus on these folks, make a few serious examples out of them and hopefully, put an end to this bad behavior. That, as the industry knows, is still is a huge part of the problem. Amazingly cheap steel does not exist because other countries are amazingly more efficient than the United States. It exists because some foreign players cheat and some American companies enable them by acquiring their steel. That includes, for example, the steel from Iran sold in the international markets, and in United States, as made in Turkey; or steel produced in North Korea disguised as made in Indonesia or made in China. By the way, a huge portion of the iron ore produced in North Korea is consumed by the Chinese steel mills to produce their so-called cheap steel. If you're a buyer of this so-called cheap steel, you are an enabler and Section 232 should be coming for you.

One final important strategic highlight for our U.S. business. During the fourth quarter, we acquired additional real estate interests in Northern Minnesota from Glacier Park Iron Ore Properties, including a significant portion of the land previously leased to Mesabi Metallics, formally known as Essar Steel Minnesota. As a mining company in business for 170 years, Cleveland-Cliffs is constantly in the pursuit of new iron ore reserves in order to continue to grow and to make sure we have unrestricted access to feedstock in the future. You saw 2 other examples of that this year, with our acquisitions of the remaining minority interests and iron ore reserves in both Empire and Tilden mines in Michigan, from ArcelorMittal and U.S. Steel, respectively. With that in mind, the land acquisition in Minnesota is just part of our long-term growth plan, while the acquisitions in Michigan not only increased our annual USIO production capacity to 20 million long tons for 2018 and beyond, but also created future optionality for Cleveland-Cliffs in Michigan.

Mining is a long-term business, and what we do, or don't do, today, will have repercussions for generations. Despite the fact that the state of Minnesota has backed the wrong horse for the last several years, we still believe that we are best positioned to bring new growth and market diversification to Minnesota. As evidence of that, we are proud to present our real projects: Mustang at United; DR-grade pellets at Northshore; and HBI in Toledo, Ohio. Cleveland-Cliffs is still stands ready to implement our plans in Minnesota, but we'll not wait forever. In the meantime, we are very comfortable with what we have done so far in Minnesota, in Ohio, and in Michigan, and look forward to continue to methodically execute our overall business plan.

Now moving on to Asia Pacific Iron Ore. Our negative $3 million EBITDA performance in the fourth quarter should not be a surprise for those following us closely. As the Chinese preference for higher-grade ores has only increased over the past year, our noncore low-grade operation in Australia has continued to refine its mine plan and perform to the best of its ability. That said, we will likely cease mining operations in Australia later this year. Our goal is striking the right balance between economically mining the remaining mineral reserve base and fulfilling our contractual obligations. In any case, we'll continue to meet our obligations as they come due, and we'll work to minimize their impact on our business. For most of my time with Cliffs, I have stressed that I would not tolerate a loss-making performance in APIO. I appreciate the hard work and sacrifices our great team in Australia has made and continue to make, to keep this business viable much longer than we thought it could. I will certainly be keeping the market updated on the status of our Australian operations throughout the year. With the EBITDA contribution from Australia ultimately going away, we have our eyes firmly set on the new EBITDA contributors we will be adding to our business over the coming years, starting with the HBI plant in Toledo, Ohio. During the fourth quarter, we completed the significant accomplishment of fully funding the entire $700 million construction cost of the plant. Why did we decide to fund the entire project cost upfront? Number one, this is an incredibly important project, not just from a business diversification standpoint, but also in that it will add significant EBITDA power to Cleveland-Cliffs. Because of this importance, we wanted to remove any uncertainty with respect to our ability to fund the construction cost entirely. We saw the opportunity to do this while securing very favorable interest rates and removing any other market risks. And finally, we wanted to eliminate any uncertainty around the necessity of partners, making abundantly clear that we can, and will, proceed without one. We issued a combination of secured bonds and convertible notes, and were able to price the deal at a very attractive weighted average coupon of 3.4%. The 1.4% convertible notes will be treated as debt, not equity, both accounting-wise and as we plan out our business. Our issuance of the converts was not a dilutive exercise. You'll see that reflected in our financials with the convert categorized as a debt instrument on the balance sheet and with no change to our share count on the income statement, in the calculation of earnings per share this quarter. With that important transaction behind us, the year 2018 will be all about execution. Our capital structure is in the right shape to support our future growth. Our HBI team is in place and the important contractors for technology, construction and material handling are officially assigned. The permitting process is well on track and we're very pleased with the support from the EPA as well from the state of Toledo and from the state of Ohio. Our conversations with future customers continue to go well and it has become abundantly clear what a sought-after project our customized HBI is. Groundbreaking at the site will happen in April, and we will commence construction work shortly thereafter. I think the HBI project team were moving through this process so effectively and keeping us well on track to add this important plant to our asset portfolio by mid-2020.

Just as important, we have also begun working earnest on the upgrade of our Northshore plant, which upon project completion, will be able to produce up to 3.5 million long tons of low-silica, DR-grade pellets. Cliffs' Northshore currently is, and will continue to be, the only source for this type of pellets in the Great Lakes. The ability for Cliffs to produce DR-grade pellets is what makes our venture in HBI so value-accretive. And this unique quality is why we are the only company who could feasibly develop HBI production in the region. With the Northshore upgrade, by 2020, Cleveland-Cliffs will have 3 very effective EBITDA-generating businesses: blast furnace pellets, DR-grade pellets and HBI. I have every faith that we have the right people in place at each project to get us to where we need to be. For the time being, we have a sold-out U.S. pellet business that just added additional capacity, stable and well-run operations and an environment for iron ore, domestic steel and pellet premiums that should generate us a lot of cash. On top of that, we'll receive a meaningful $250 million cash infusion from the IMT -- the AMT monetization. Our strategy of protecting and enhancing our core business, whilst executed well in 2017, and we are certainly primed to reap more benefits in 2018. Combining these strengths with our soon-to-be expanded asset portfolio and customer base, we definitely have a lot to look forward to for the years to come.

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

(Operator Instructions) Your first question comes from the line of Lucas Pipes of B. Riley FBR.

Lourenco, I wanted to first turn to that 2020 outlook that you provided towards the end of your prepared remarks, and maybe to touch on Northshore. What makes that particular operation so unique to be able to supply DRI pellets?

We have already -- first of all, thanks, Lucas. Northshore has already proved itself as a very viable producer of DR-grade pellets. That's where we currently produce and sell DR-grade pellets to our current customers, Nucor and ArcelorMittal Long Products Canada. We use our ore that's very, very good for DR-grade, low-silica production out of the Babbitt mine at Northshore. And the product is very well liked by both clients, so that's what we have there and that's what we will continue to have. With the investments, we are going to just be able to produce more, without having absolutely any interference with productivity. That's what we're doing there. We are debottlenecking the operation and specializing even further in DR-grade pellets. We're giving them the ability to switch between blast furnace pellets and DR-grade pellets a lot easier with no interference in production.

And then you touched on this very briefly as well, and that's the contracting of the HBI output. Can you maybe go into a little bit more detail, how much of the tonnage would you like contracted out by what time? That would be very helpful.

Well, we are already talking to clients for some time. Because as you well know, Lucas, we produce customized products. We don't produce run-of-the-mill commercial quality products. So we tend to do what each one of the clients want for their specific points of consumption. So we're going to do the same thing with HBI. So we are in discussions with these clients, and we will be cutting deals throughout 2018, more likely into 2019, for the tonnage that they want to get. And what I'm seeing right now is that we are very well sized for the desires of the market, if you mind, the import commercial quality, the iron commercial quality, other iron substitutes from abroad. And they need to buy a lot more, they need to carry inventory, they need to bear with the uncertainty of deliveries, they need to bear with the uncertainty of currency exchange rates, things like that. With those, we're going to carry the inventory for them. We are going to deliver on just-in-time, we are going to customize the cargo content and everything else to the desire of each one of the EAFs. So everybody's very happy and very excited. We are going to do very well with the HBI business. But there's no pressure on time frames, even because we decided long ago not to go project finance, not to have to prenegotiate commercial deals. So we're doing it at the right time and the right way.

Okay, that's great. And then on APIO, I appreciate the commentary there and I think you mentioned in your prepared remarks that you have certain contractual obligations that you intend to honor. So first, could you break out what those are? I believe there are some transportation logistical costs, minimum payments associated with those. If you could maybe remind us what those are. And then secondly, if you were to cease operations in APIO later this year, what sort of reclamation costs should we be looking forward to from a cash perspective? So I would appreciate your color on that.

Yes, look, we prepared ourselves, Lucas, to be able to exit APIO without any pain. So if we had to decide to shut down in short term, that would not be a painful move for us. We are totally prepared, but I'll let Tim Flanagan give you a little more color on that, because I think it's a very important thing to further discuss at this time.

Yes. Thank you, Lucas. Maybe starting with kind of the big buckets, right? You do have predominantly rail and logistics -- or transportation- and logistics-related contracts, rail, port, but the other big one would be: Australia is a contract mining operation, so we have our contract miner contract as well. But I think if you think about the way we look at these costs and certainly us operating the mine as long as it is economic throughout '18, will help us mitigate those costs as much as possible and then beyond that, there's a number of mitigation strategies that we have in place, be it sale of assets, the railcars, the mobile equipment, the infrastructure that's in place -- that will take place. But to your point, let's assume we operate through the back half of 2018, we get late into '18 with the operation, we execute on some of the mitigation strategies, we'd expect those ongoing obligations to be less than $80 million and really, what's important is those obligations would be stretched over about a 3-year period. So hopefully that gives you a little bit more perspective on what we're looking at.

That's helpful. And so the $80 million would be the aggregate amount over a 3-year period or so and that would not have an effect on the issue?

That's correct. The reclamation would come after that, and the reclamation currently is recorded at about $20 million.

So the way to maybe think about it is that you have $80 million left to pay and any additional ton that you produce between -- debt that you produce is incremental cash versus that $80 million? Is that maybe a good way to think about it?

That's a good way to think about it. And keep in mind, we are going to sell the railcars, we're going to sell a lot of stuff over there. We are working on that. So it could be pain-free.

And then maybe lastly, the reclamation, what -- how quickly would that follow after that? And what sort of -- how should we model that?

Yes. So that would still be a couple years out, and it's about $20 million and it stretches over a few-year period.

You're next question comes from the line of Seth Rosenfeld of Jefferies.

I have a couple of questions just starting out on the 2018 guidance once again. So first, thanks for providing explicit guidance on expected realized prices based on the year-to-date trends, but can you just update us on the sensitivity that you might expect? Should spot prices for iron ore, hot-rolled coil or pellet differ over the course of the subsequent 11 months? Has the sensitivity changed versus what you told us in past years? I'll start there, please.

Well, in past years, we didn't have a big impact on pellet premiums because pellets always commanded a premium, but not a premium that would change the -- significantly the outcome of the number. Knowing that pellets would become more sought after, the most recent contracts that we designed, they have a much bigger influence of the pellet premium. So the fact that pellet premium grew between the -- I'm talking about the Atlantic basin pellet premium, that doesn't fluctuate every day like that Chinese pellet premium, I'm talking about the Atlantic basin pellet premium. The Atlantic basin pellet premium that used to be historically low $30s is now $58. So we saw that coming before the move happened. So the most recent contracts, they have a much higher influence of the pellet premium than contracts that were signed prior to my arrival here at Cliffs. So that's a positive that I would like to point out. As far as iron ore and hot-rolled, the sensitive -- you guys know the sensitivity. They don't change much. It's the IODEX and the price of domestic hot-rolled that's traded inside the United States. So that's pretty much it. Some contracts have a weight between iron ore and hot-rolled, more towards hot-rolled, less towards iron ore and then others is their opposite -- some others are -- have a fixed portion. So each contract is different. But by now, you guys set -- have the fluctuations of iron ore and hot-rolled well-defined within your model. The biggest problems continues to be the amount of grat that the commodities desk of the big banks continue to put out. So there's absolutely no commodity -- there's no big bank that has a price above $65 for iron ore. And as of this morning, $75.05, and 2 months ago, Goldman Sachs was saying that iron ore price will go to $60, then $55, then $50. Until when? How much longer? The bosses at Goldman Sachs need to see that their people -- or they don't know what they are doing, or they are doing something very well sought after, because Goldman Sachs has been in all my deals, they're very supportive. They like to put their money with us, they know that our views are completely different from their commodities desk and they even have one of my deals as a bought deal with Goldman Sachs, against their own commodities desk. So it's like one side of the coin they win, the other side they win as well. So that's one way to do it. The other one is JPMorgan. JPMorgan can't be worse. They can't be worse. JPMorgan would be so much better off if they fire everybody in the commodities desk. Maybe somebody there would learn how to read balance sheet and miscellaneous net and stuff like that without the bad input of the commodities desk. Some guys, over time they lose their heads. So anyway, that's the biggest thing. Like, you guys on your own, especially Jefferies, because at least you're better than the average because you don't have a commodities desk, that's great. You have -- actually, you have a commodities desk, but you seem not to follow them too much so -- and I hope that other analysts will be like you, sir. So that's my thing. More than the other (inaudible). More than (inaudible) I know very frankly, that I would like to have them gone. They are a disaster. They are a train-wreck. But you guys are good. You guys try to do a good job and I appreciate that. Except the ones that have an agenda, because these ones, over time, they just lose their job, they move from a bad place to another -- for a worse place. But other people, they try to do a good job, they try to educate -- I should best point -- the big funds, they know what they are doing very well but they retain investors. These guys, these poor (expletive), they read these things every day and it's so bad. All right, Seth, what else? What can I do for you?

Is there any way that you can quantify the new sensitivity to the pellet premium? I believe you had maybe 1 or 2 years ago, perhaps every $10 move in the Atlantic basin pellet premium, what impact would that have on your full year ASP? And then a separate question from that, I guess, within the U.S. business, you talked in the past about some of the cost inflation you've seen in that region. Given the higher volumes expected for 2018, we are hoping to see perhaps, a lower realized cash cost with the fixed cost leverage. So slightly surprised you're looking for that stability in cash cost, what do you think of ongoing cash cost inflationary pressures in the U.S.?

First, the pellet premium. The pellet premium moved from $46 -- $45 to $58, gave us another $100 million in EBITDA increase on a fiscal year basis. So I hope that's got a point to help you. As far as -- I'm sorry, the other -- that was pellet premium. Can you repeat the other question -- the other part of the question? I got -- because I was thinking about the pellet premium so I believe it didn't get all the nuances of the other question. So can your repeat, Seth, please?

If you can just talk a little bit about any cost inflationary pressure you're seeing in the U.S.? I was so much surprised that you're guiding to flat cost per ton in 2018, despite the higher-production shipment expectations? So what are you seeing in underlying cost inflation, please?

Look, we do have a cost pressure in United States and it's associated with higher energy rates that we are anticipating. We also are anticipating higher profit share, that's a good problem to have. And the worst of all is higher transportation costs. The railroads, they basically, they have a license to steal, and I don't have -- myself and other CEOs, they don't have a lot of options because they basically, they control their track. So they continue to force us into higher costs and these things, one day, will have to come to an end, but we mitigate as much as we can but we need to face that. Also, we are a real operation, so we spend money in maintenance. We have obligations that we have to fulfill. We have repairs that we have to go through. So I think that all in all, the fact that we're able to stay for 2018 within the same level as 2017, despite of all the pressures, is a big gain. I'm not going to give you any numbers because as I was saying the cost we've got this year is the cost we're expecting to have next year, so that's why we are guiding to the same level. So all the things that I mentioned to you, it's just my thing. That's my work. That's what I need to do, myself and Terry Fedor and my general managers in each one of the mines, the transportation group at the commercial tyranny and that's all our fight day-by-day.

You're next question comes the line of Matthew Fields of Bank of America.

I wanted to ask a couple questions about the Minnesota properties, the land rights that you bought. Since you essentially bought, I guess, half of the land that the other entity had the rights to, does this essentially shut the door on the Chippewa potential project, would you say?

Look, like I said in my prepared remarks, what we did in Minnesota is normal course of business. When we have opportunities to buy land, or because the existing owner wants to sell, or because the existing owner wants to cut a deal for a least for a seat in the royalty for the long run, or because the one that has the deal is sleeping at the wheel. We take advantage. I'm a competitive guy, and we have a big commitment. I have a big commitment to continue to stay in Minnesota, despite of all the bad moves that the state of Minnesota -- the HBI plant, let's face it, which I'm building in Ohio because Minnesota never really got what they were losing. They will realize over time the mistake they made. But it is what it is. So the amount of money that we've spent is not even material because if it were, we would have to disclose. And so the impact on us is optionality. The same impact that we have by acquiring the minority interest of Tilden and Empire in Michigan. So long story short, where Cliffs will go next, if it's Michigan or Minnesota, if it's Nashwauk or Tilden/Empire, it's an open question. We have optionality. We have both opportunities to grow. One of them will be explored, the other one will be put to die. That's what we have. I don't know if I answered your question, but what more color do you need, Matt?

No, that's helpful. I mean, and then, further on that, I think the old owner claimed that due to the soft ore and the low stripping ratios, their cost to make pellets can be materially lower using that resource. Do you anticipate that maybe as your production profile grows through more demand for HBI or what have you or the natural evolution of your mining footprint that you develop that resource and could lower your cost or do you not put a whole lot of stock in what the old owners have said?

Look, the one that first said that was Minnesota Steel back in 2007. 2-0-0-7, Minnesota Steel. Minnesota Steel was never able to become reality. And then came Essar from India, their saviors. The guys that knew everything about the steel business. They know how to build, they know how to operate, they know how to pelletize, they know how to sell, they knew a lot of things. They buried -- they say $1.7 billion of steel there on the ground and people called that thing a half-built pellet plant, I called it a 10%- pellet -- built pellet plant, and with probably 5% having to be disassembled before we try to do something with that amount of steel and concrete that was not poured properly. But they repeat that thing of the low cost and et cetera. Then came Metal Stock. What's Metal Stock? Metal Stock was high because he was a guy with a lot of experience, how to build pellet plants, because he had a very, very successful career. Guess where? In India. And these guys came after Essar. So that's the connection. Metal Stock came and disappeared without leaving a trace. I think reporters should even investigate where's Metal Stock? What happened with Metal Stock? And then came Chewbacca, out of Star Wars. Out of nowhere. The billionaire character of Star Wars that knows everything about pretty much everything. The gun, blast furnaces, coal, pellets, costs, this and that. Investors lend up. Wall Street people tried to give him money, money from Dubai, oh. Clients in China, wow. No land, no lease, no nothing. So what was the real question? I think I forgot the question, about the cost? I think that in order to talk about cost, first you need to know what a pellet is, how to sell the pellets, how we cut a deal, how we cut the contracts. You remember when I first came to the company, Matt, that we had Magnetation. Magnetation was real. Magnetation was 50% owned by King Steel, 50% owned by Larry Lehtinen, and it was selling pellets. Magnetation went bankrupt. We are 100% supplier of AK Steel. That's undeniable. Then U.S. Steel brought back Keetac and their long pellets. Oh, they're going to compete, they're going to do this, they're going to do that. Well, I have all the contracts in the Great Lakes, both sides, except Stelco, because Stelco is former U.S. Steel, Canada. Other than that, everyone else is mine, including Dofasco that in 2017 was U.S. Steel. For the next 3 years, it will be Cleveland-Cliffs. So what was your question, about the -- want to be compared to Chewbacca? Did I answer the question?

No, I mean, sort of. The thinking is that as he was running around trying to raise money, he at least had a 7 million-ton potential for land, and now, you basically took half his land, so he doesn't even have that so it sort of shuts the door on the option that you had, and so it shuts the door on even the potential competitor of yours down the road? And...

Look, I -- just to clarify about the land of GPIOP, Glacier Park Iron Ore Properties, or something like that. And the owner of the other land is the people of the state of Minnesota. So the other half of land belongs to the people of Minnesota and is -- the control of that land has reverted to Governor Mark Dayton. The control is under Governor Mark Dayton, the Department of Natural Resources of the state of Minnesota, and these people are public officials. They must do what's right for the people of Minnesota. A good thing about the land that we acquired control, it's all contiguous. I can operate that land with absolutely no problem, having access from public roads and we can execute a mine plan, which, by the way, has been initiated. Very soon we're going to have a mine plan to submit to the [B&R] and we're going to get permits to mine in that land. The other side of the thing that's owned by the state of Minnesota, it's a hodgepodge of separate areas that are not contiguous, unless they use drones to operate in that land, to fly in machines that will land on pieces of land and then will fly above again and then will move the pellet plant. So with this type land, they can't operate without Cliffs. So that's what we have there. That's how I operate. And we did everything completely legally. Completely within the boundaries of what we are allowed to do and we are ready to talk with the other owner. Who is the other owner? Mark Dayton. For now, until the election. Well, these guys, they are gone when an election comes and they are no longer there, but someone will be there sitting in that chair.

Well, congratulations on that transaction and the year.

I'm sorry. Say it again.

I said, congratulations on that transaction and a strong year.

Appreciate it, Matt.

Okay, I think I'll take the last question, Jody.

You're final question comes from the line of Novid Rassouli of Cowen and Company.

This is Han in for Novid. So first one I have is, I know that in the past there were some shipments sold to the seaborne market that actually had impact on pricing and cost. So my question is, if that shipment's, into seaborne market, coming down, would that lower your cost guidance and increase your price realization guidance for '18? And then secondly, now since you have enough capital to move forward with the HBI project on your own, should we assume that you will just go ahead without a partner coming in?

The answers are: for the question, yes; and for the second question, yes, no partner. You're right.

Jody, I think we're done. Thank you very much and I will be speaking with you all as soon as we can and for sure, in the next 3 months. You guys have a great 2018, and I look forward to continue to have these great conversations with our stakeholders. For now, have a good day.

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