Cleveland-Cliffs Inc (CLF) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Mariana, and I'm your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs 2018 First Quarter Conference Call. (Operator Instructions)

The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward looking within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that 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 report forms on 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 clevelandcliffs.com, http://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.

Thank you, Mariana. And thanks to everyone joining us this morning. I'll kick it off today with the financial review of the first quarter and a discussion of what we expect to see for the remainder of the year.

Our Q1 total company adjusted EBITDA of $12 million was a direct consequence of an outstanding $77 million adjusted EBITDA performance from our core business, USIO, offset by the negative impact of the closure-related charges recorded at APIO. USIO's phenomenal results were driven by stronger-than-expected selling prices and sale volumes as well as better-than-expected cost performance. This outcome was achieved in the face of an always seasonally light quarter for shipments, exacerbated by the accounting change that further pronounced this seasonality. This is especially remarkable considering that we only recorded about half the sales volume this quarter compared to last year after factoring in the lower carryover sale and the impact of the new revenue recognition standard that we adopted. That said, our sales of 1.6 million long tons of pellets did beat our previous expectation, mainly because our customers' low pellet inventories and favorable shipping conditions allowed us to deliver a healthy amount of vessel shipments at the end of March. This demand will carry over in the next quarter, with shipping likely to pick up drastically to about 5.5 million long tons, well ahead of what is typical for the second quarter. Given this strong demand, we've increased our full year sales volume expectation to 20.5 million long tons. To do so, we'll be delivering some of the inventory we built at the end of last year.

In addition, cash costs decreased 2% from last year's comparable quarter to $57 per long ton. This came in slightly better than our full year guidance range, primarily due to our standard cost methodologies' outsized impact on DD&A per ton in a lower-volume quarter. For the balance of the year, we continue to expect cash costs in the range of $58 to $63 per long ton.

Our pellet price realization of $105 per long ton represented a 32% improvement over the prior year. This amount also came in ahead of our previous guidance largely due to the increase in hot-rolled steel pricing and its impact on the value of some of the unconsumed pellet inventory. With the sizeable lift in HRC pricing since our last earnings report and a more favorable customer mix than originally expected, our realization saw quite a boost in the first quarter.

Year-to-date averages for the relevant commodity prices are: $770 per short ton for HRC, which, I'll note, is much lower than today's price; $73 per metric ton for IODEX; and $58 per metric ton for the Atlantic pellet premium. Assuming these averages would carry forward for the rest of the year, our full year USIO revenue realization would be approximately $102 to $107 per long ton.

Alternatively, if we adopt, as reference, the HRC price, the IODEX and the Atlantic pellet premium as reported at yesterday's close, then our USIO revenue realization would be $1 to $2 higher on both ends of that range. As we noted in the past, these figures do not reflect our internal view on pricing, and therefore, should not be construed as guidance.

Now moving on to our Asia Pacific Iron Ore segment. APIO's adjusted EBITDA of negative $40 million was primarily a consequence of a large number of accounting adjustments triggered by our decision to move to a permanent closure of the mine. Earlier this month, we announced that we are committed to a course of action expected to lead the closure by June 30 of this year. This decision was based on the economic profile of the mine, both from mine cost of production standpoint and the expected price realizations of the ore resources remaining in the ground. Increased strip ratios and haulage distances as well as reduced production levels drove up cost rates for ongoing operations, negatively impacting mining, haulage and administrative expense rates. On top of this, we recorded $22 million in LCM adjustments on inventory that we still expect to sell as well as $2 million in unfavorable ARO adjustments. These 2 particular items contributed to the negative adjusted EBITDA performance in the quarter.

In addition, we recorded $19 million in impairments on inventory for lower-grade iron ore products and supplies, $3 million in fixed asset impairments and $2 million in severance costs. Due to the nature of these final 3 items, they were excluded from our adjusted EBITDA calculation, consistent with past practice.

As noted in our 8-K filed 2 weeks ago, we expect cash and noncash accounting charges related to the closure of $140 million to $170 million, including contract terminations, impairments, write-offs and demobilization costs. Approximately $50 million of these charges were already taken in the first quarter, thus, the expected future range will be reduced by that amount. We do expect these future charges to be shown under discontinued operations within our P&L in future results.

On the topic of closure costs, the dollar amount assumption of our net overall cash obligations has not changed materially since we last spoke 3 months ago in our year-end conference call. Last quarter, we gave the assumption that after asset sales and other mitigation strategies, we would estimate about $80 million in cash obligations. This remains the case. The range of $120 million to $140 million of cash obligations reported in our 8-K disclosure was not a net figure as it did not include the expected offsetting proceeds from the sale of assets and those other mitigation strategies. We would expect the majority of these net cash obligations to be settled within 2 years, with about 65% to 75% of the total net amount coming this year.

I'll wrap up my remarks on the topic of capital expenditures. We spent $71 million in the first quarter, $57 million of which related to the HBI project. As we progress with the civil works and the foundation construction, we have further refined our view on the cadence of overall spend. The overall project budget and expected completion timing in mid-2020 has not changed, but we have lowered our expected outflow this year to $225 million, down from our previous assumption of $250 million. This is attributable to the further refinement and scope as we progress with the bid packages. And finally, our 2018 guidance towards capital spending on sustaining capital and the Northshore upgrade remain unchanged.

With that, I'll pass it over to Lourenco for his remarks. Lourenco?

Thank you, Tim, and thanks to everyone for joining us this morning. Let me start my remarks, saying that Cleveland-Cliffs has a lot to be excited about this year. We closed the first quarter with a revenue realization in our U.S. Iron Ore business of $105 per long ton, our best reported selling price since I started with Cliffs in August of 2014.

When you layer in our costs of $57 per long ton, our USIO EBITDA margin was 46%, also, by far, our best quarterly performance since our 3-year transformation began.

And remember, when I started here on August 7, 2014, seaborne iron ore prices were $96 per metric ton. In my opening quarter, our pellets sold for $101 per long ton, with an EBITDA margin of 36%. Now in the most recent quarter, seaborne iron ore prices were more than $20 lower at $74 per metric ton. And yet, we are selling pellets at higher prices and generating stronger EBITDA margins.

Over the past 3 years, we have planted the seeds to generate enormous amount of free cash flow and to expand our business for the future. We have transformed this company into one that's now able to take full advantage of our strength within the Great Lakes market, including high barriers to entry; the quality of our pellets; our technical expertise; and last but not least, contracts to sell pellets a lot more favorable to Cliffs.

Our sales contracts are influenced by the things that truly matter, such as the resilience of the domestic steel market, the scarcity of pellets worldwide and the growing appetite for high value in used iron ore in China. While these things that truly matter, we were not recognized by almost anyone 3 years ago. These were the things we adopted as the base for Cliffs' turnaround and are at the core of the strategy we have implemented in our company.

During the quarter, we saw healthy steel demand in several sectors, including automotive, construction, machinery and equipment and energy. The U.S. is the largest importer of steel in the world, and any restrictions on the steel imports should lead to stronger demand for domestic-produced steel and improve the steel pricing. Higher steel prices have clearly benefited Cliffs from a pellet price realization standpoint, given that the HRC domestic price is a metric used in our contracts. We are also seeing a worldwide scarcity of pellets. The global pellet market is small, with high barriers to enter. At the same time, demand for pellets continues to increase even in China. Recent work stoppage at Rio Tinto-owned IOC, a Canadian company supplying pellets to Europe, is adding further tightness to the seaborne pellet market. All this development supports our robust Atlantic pellet premium, which is another metric we introduced in our contract. These dynamics have increased volume demand for pellets from the blast furnaces we serve in the Great Lakes.

In the last week of March, our customers were eager for us to deliver pellets to them the second we could, starting a much-needed replenishing of their depleted pellet inventories. This increased demand gave us the heavier-than-expected shipment volume we saw in Q1 and led us to increase our sale volumes expectation to 20.5 million long tons for the year. The pellets we did not sell in the first quarter of 2017, we sold in the first quarter of this year, and for higher prices.

The long-term resilience of this industry is what I centered our strategy around, and as well fluctuations quarter-over-quarter are not a real problem. With a healthy manufacturing economy in the United States, like what we have today and expect to continue, Cliffs will thrive as a strong and critical entity.

While we plan to continue to be a vital part of the domestic steel industry forever, we have never felt the same about the Asia-Pacific market. Since my first day on the job here, APIO has been a noncore asset. As I have made abundantly clear, I never felt comfortable with the Australia-China trade situation and always believed that China would eventually start to care about pollution, leaving low-grade ore producers, like Cliffs' APIO, with a nonviable operation. We are actually very fortunate that the Chinese move toward higher-grade ores did not happen earlier. With that, we were able to benefit from our APIO asset as long as we did through the end of the viable mining over there.

When I first came to Cliffs, we had 4 business segments, 2 of which were profitable, USIO and APIO. We quickly and efficiently exit coal in Bloom Lake, then profitable operations at that time. Now that APIO is unprofitable, we are exiting it quickly and efficiently as well. This is our final strategic exit of a business that was on my initial agenda. So as of this past Sunday, we have officially seized all mining activity and foregone any initiatives to sell additional tonnage. We will crush, rail and sell the remaining inventory in the second quarter. 50% of the workforce is already gone, and we have brought on a third party, (inaudible), to begin assisting with the mitigation process. We have a number of assets with real value that we will be divesting, including rail cars, trucks and the rotary car dumper.

As noted in the press release this morning, our last shipment comes in June, and therefore, the APIO segment will be treated as a discontinued operation, starting in Q2. With that, we would no longer report segment-specific results, nor we would be part of our ongoing operations per adjust EBITDA. Thus, the entity -- I'm sorry, thus, the entire $40 million of negative EBITDA from APIO reported in Q1 will be reverted in Q2.

One final comment on APIO. I can't possibly talk about the closure of this business without expressing my sincere gratitude to our phenomenal team in Australia. With great work and dedication, the team kept this asset alive, probably longer than anyone else would have, and consistently kept a clean, safe record. To our General Manager, Jason Grace, and the entire APIO team, my only regret about this decision is losing your efforts. You will be the one thing I will miss about Australia.

Back in the U.S., 2 weeks ago, we celebrated the official groundbreaking of our HBI plant in Toledo, Ohio. However, because we will detain all our permits in record time, we were actually able to start the physical work almost 2 months ago and are currently ahead of schedule. The project team has worked quickly in awarded civil works, piling and foundation contracts, which will allow us to begin setting steel in the third quarter of this year. Thus, along with the great progress made so far at Northshore puts us well on track to deliver DR-grade pellets to Toledo by the end of 2019 and to deliver customized HBI to electric arc furnaces by mid-2020. The most important attribute our HBI will have is that we control the primary feedstock needed to produce it, our Northshore low-silica pellets that have already been tested and approved by the most selective of the pellet buyers. This is completely different from other producers of HBI who need to rely on outside sources for DR-grade pellets. When you don't have the right pellets or can't buy pellets at all, nothing will work for you. We not only have the pellets, but we also have the right pellets as we are the only ones in the Great Lakes who can produce DR-grade pellets.

To wrap up, we are headed in the right direction toward the business I have always envisioned for our company. Today, we are more profitable even at lower iron ore prices. The last remaining noncore business segment is almost out of the picture, and we are grateful to be operating in a domestic market that's trustworthy and resilient. Q2 has already started, and it looks really good. Even if you are skeptical for a living or if you don't appreciate a real company doing real things and generating real results, 2018 EBITDA and cash flow generation will leave you with 0 doubts about Cleveland-Cliffs.

With that, I'll turn it back to Mariana to begin the Q&A.

(Operator Instructions) Your first question comes from Lucas Pipes with B. Riley FBR.

Lourenco and team, I wanted to touch a little bit on your balance sheet. So I think you ended the first quarter with about $789 million of cash. So the way I look at your growth project, you're fully funded. And then I look at your guidance for this year, and it looks extremely robust. On my numbers, you're going to be generating a lot of free cash flow. So it seems you have maybe a cash problem. And I wondered, kind of, what are you thinking in terms of allocating that capital? Could you, for example, think about share repurchases? Or could you maybe go back to the convertible issue that was issued last year? I would appreciate your thoughts on that.

Lucas, we've never changed our way of doing business here. Our primary use of cash this year will be, of course, taking care of our HBI project. We are doing that very well. We are actually spending less money this year than we were anticipating in our conservative assumptions. And you are absolutely right, we are going to be generating a lot of free cash flow. This being said, we want to take care of our next maturities that are not imminent, but we do have $300 million of debt maturities in 2020 and 2021. We are going to take care of that at the right time. Beyond these priorities, HBI, one, taking care of our 2020, 2021 debt maturities, we are going to start thinking about returning capital to shareholders, and we are not going to be telegraphing that too much. We are going -- at the right time, we will do it. And I believe that I have been communicating very well to the shareholders and the stakeholders in general that my primary way of doing that will be establishing a dividend. We can start with a special dividend just to celebrate the beginning of the process, and then initiating an ongoing dividend that we will grow over time, the way it should be. Because this company, now that we are a USIO company driven toward both blast furnace and EAFs, we will be the best cash flow generator among all companies operating in the steel and mining business in United States. So very reliable in terms of cash and very boring in terms of how we will take care of business because we are very predictable. But these are the ways we are going to go, going forward.

And Lucas, I would just add to that as well. I mean -- and consistent with what we've been talking to The Street about -- for the last 12 to 18 months is, as an organization, we have a net debt target of approximately $1 billion. So as you think about the fact that we prefunded the HBI project last December, we're going to generate a substantial amount of cash this year. That just gets us back to that net debt number more rapidly than what we would've otherwise forecasted previously. So very much in line with what our expectations are.

And actually, about this $1 billion, we are not talking about buying-the-sky goal. That would have been accomplished at the end of last year had we not spent close to $300 million, making 3 very strategic acquisitions that people tend to forget about. We acquired the minority position of U.S. Steel at Tilden, we acquired the minority position of ArcelorMittal at Empire, and we acquired land in Nashwauk, Minnesota. And we would be at $1 billion net debt by the end of the year if we had not done that. But these 3 acquisitions were, strategically, a lot more important than checking the box. "Oh, Lourenco got today -- L.G. got today $1 billion that he said." Yes, I got it, and then I spent the money. I just did it a little earlier than the end of the year because that's what a dynamic company does and a CEO that knows what he's doing does with a board that understands the business, and that's what Cleveland-Cliffs is about. We work for the long-term shareholders. We don't work for the guy that go in and out in the stock. This is not a trading stock. This is a company that generates cash, generates a lot of cash and generates a lot of profits. And we -- over time, we appreciate, and we are patient people.

Got it. Very helpful. I wanted to touch on -- a little bit on your very strong cost performance in Q1 and then how that ties in with the full year. So you were below the low end of the range for full year. You produced 4.5 million tons. So I mean, that's pretty good chunk of your annual production target. So do you have, maybe, visibility on where you could shake out within the range? Are you maybe being a little bit conservative on the cost side? I would appreciate your perspective.

Lucas, first of all, we -- our assets are very well maintained. When we have to spend a little more money to do things we do, we do not skip stuff just to show a quarter that if -- with what the [wise] might look a little worse. So we do what we have to do, and we have a very mature implementation of predictive maintenance throughout all of our operations, mining and pellet plants. So we are in good shape as far as the condition of our assets, our equipment. We also do a phenomenal job mitigating inflation, and we have hundreds of cost initiatives going on at a time. With that, we believe that we are in a very comfortable cost position in terms of cost to produce high-quality pellets. We are feeling that the price of pellets are not only staying good but will continue to appreciate and all margins should enlarge. The cost will fluctuate plus $1 or minus $1. It's hard to anticipate, but we are in the ballpark. We are in the range. And our margins are in phenomenal shape. So think more about the margin, less about the cost bites, Lucas.

Yes. No, I'll -- we'll see how it plays out over the course of the year. But as you said, a very good position relative to your guidance. Maybe one last one. You sold a lot more tons in Q1 than anticipated. I think the release mentioned the shipping season opening a little bit earlier. But I was wondering, to what extent it also related to inventory situation at your customers? So I think somebody -- someone of your customers pushed some tons out late last year. So if you could comment on the inventory position and maybe if that also has an impact on Q2 deliveries and maybe even for the full year from that perspective, given the very strong backdrop on the industry fundamentals.

Look, by and large, the -- our blast furnace clients, they were low in inventory at the end of last year. So it's easy to see that when you think like that. Our USIO business, Lucas, likes to end any given year with 3 million tons of pellets in inventory. At the end of 2016, we ended with 3.2 million tons in inventory. At the end of 2017, we were at 3.4 million tons of inventory. So they -- it's a bad life's award. They can do that because they trust Cliff so much that they know that we are going to take care of them. So they were low, but they were not bothering me because of that. Of course, I would love to have sold a little more in Q4, but I love even more that I sold the same pellets in -- the same physical pellets in Q1 a lot more expensive because that's the way the contracts work. So they will adjust going forward, I guess. If they don't, I'm fine as well. But this year, consumption will be very high because their business is good. No matter what happens with Section 232, prices will continue to be high and demand will continue to be good. Service centers and others will be a lot more cautious in how much they are importing. How many tons they are importing of steel. Where they are getting steel from. How much they're paying. All these good things. So this year will be a good year for the steel business in United States. So the -- in the 500,000 tons of pellets that increased in our sales forecast, if you noticed, this is exactly what we have already increased. We can always dip more into inventory. We can end up with sales of 21 million tons or even a little more than 21 million. So that's the year that we're envisioning. Good prices, good demand. Volumes, very solid. So that's the best I can give to you at this point. And it's -- at this point, it's not even, "Oh, but we're going to have a lot of exceptions on Section 232." I'll tell you, I don't see any service centers importing a lot of galvanized from Vietnam because they will be very concerned about not getting the galvanized that they need from them using United States. And then they will be left without steel in a moment that the market is doing well. So it's good dynamics in the market right now.

Your next question comes from Curt Woodworth with Crédit Suisse.

So first question just in relation to HBI. The global HBI market has transitioned a lot over the past 10 years. It's been -- Venezuela has gone from, I think, 7 million tons down to 1 million. I don't think any of that's going into the U.S. Obviously, U.S. -- many mills have shifted more towards pig iron and pushling(inaudible) feed. So I guess the question is, what gives you confidence that you would see a larger shift back to HBI in U.S. market? And can you comment, just generically, on how you think it would be priced on a, say, value and use basis relative to pig iron or pushling (inaudible), however you think about it?

Well, sure. I'll be more than happy. First of all, Curt, the fact that the domestic mini-mills continue to acquire and import [virgin] iron units just confirms the thesis that they need virgin iron units badly. So they -- it's -- you're completely right. They started with HBI program as well, and then they shifted towards PI. Why was that? Because Venezuela was never really a source of reliable supply any time of -- in the history of this business, became even worse in recent years. So Venezuela, that was not a great supplier, became a totally unreliable supplier. So they shift -- the domestic buyers, they shift towards the sources that they could get. And they could get sources in Ukraine, they could get sources in New Russia, even some few tons from the Middle East. Even India is showing at the shore right now. So they are getting what they can get. This being said, this is commercial HBI, commercial pig iron that is produced in mass. And it is what it is. So the phosphorus that come in the HBI from Ukraine and the sulfur that comes in the HBI from Russia or the compression resistance of the HBI that comes from India or Pakistan, it is what it is. So we are going to supply HBI for EAFs that are really serious about producing high-end automotive EAFs that are really serious about producing the most difficult specs of SBQ. So we are going to be very selective in our clients. We are going to allow these clients to reach markets that are completely out of reach even now, even when they use the start of a commercial-quality feedstock. And we are going to benefit together. They will make a lot of margin, we will make a lot of margin. That's all I can give to you right now about what's going on, on HBI. Conversations are ongoing. And we are going to start to see noise about -- and a lot will be just that, noise because we're talking to very selective partners. And we are developing our business plan quietly. We didn't do project finance because of that. We didn't grow apart -- we didn't get a part because of that, because I didn't know what to disclose what I'm doing commercially. We are going to make a margin that will be a lot bigger than pellets. In the past, I have said 2 to 2.5x the margin we make with pellets. I'll tell right now, Curt. This was very conservative. We are going to make more than that.

Okay, that's helpful. And then just a follow-up on capital allocation to Lucas' point, given you're funded on the HBI. And I've got your core USIO business generating over $800 million of free cash this year alone. So then you have another $180 million of tax benefits coming in, in the next 2 years. Would you look at any other projects? I mean, obviously, the HBI, you're going to take 2.5 million tons of DR pellets out of the North American market. Are you going to look to replace that capacity at all? And then I think at the groundbreaking, you mentioned evaluating a potential additional HBI unit. I would appreciate your comments.

Yes, look, we are a lot more concerned about the first HBI facility at this point than anything else. We are the ones that use the value-over-volume metric before anyone else in the entire world had used that. So when I talk about second HBI in a groundbreaking ceremony, I'm talking to Ohio, I'm talking to Governor Kasich. There has been a huge support of our project in Toledo, together with the local fishers and the elected congressmen and senators in Ohio. We have been having all kinds of great support in Ohio. But I'm also talking to Minnesota because Minnesota, basically, did not support me to get my first HBI facility there. And they may -- they might lose it in the second, whenever the second comes. But that's not my concern right now. My concern is the first one. My concern is generating a lot of cash flow this year. I want that you and others 3, 6 months down the road start asking me, "Why did you issue those bonds and those converts in December if you could have funded this thing without the issue?" I'll say, "Yes, because I don't have a crystal ball. I need to be conservative." So we did, and we did it right, and we got it very cheap. And we had a transaction that was extremely positive for us under any circumstances. And we are going to start thinking about returning capital to the shareholders. And that's what our company is about, to reward the long-term investors in the company. We -- by the way, I'm #10 right now. I have 9 hedge funds ahead of me, I'm #10. I'm the 10th largest shareholder of this company. So I like dividends and things like that. That is my case. The other ones are [Capri] and Blackstone (sic) [BlackRock], State Street, all these guys.

Your next question comes from Seth Rosenfeld with Jefferies.

Just to start out, I know you already touched on this a bit, but I'd like to understand a bit better the development of realized prices and expectations and guidance around that through the course of Q1. A couple of weeks ago, or I guess 3 months ago, at the time of your full year results, the guidance was around $75. You came in at $105 realized price for U.S. Iron Ore. Clearly, spot market trends have been stronger than, perhaps, forecasts over the last couple of months. But given your long-term contracts and for my own math, it doesn't really explain the scale of the uptick in realized prices. So can you talk a little bit more about how, perhaps, your customer mix or freight mix changed over the course of the last couple of months? And how that will impact your ASPs and, perhaps, the sensitivity to that, moving forward?

I'll be glad to. Here's the thing. In the winter, we don't ship vessels through the lakes. We only -- we are only able to rail stuff. And we have one client that takes a lot of rail shipments. And that one client used to have a contract with us that is not the best contract in the world. That client is Algoma. Well, during the last 3.5 years, we renegotiated a lot of stuff with Algoma. We placed them one other contract that was a lot better than the previous contract. And at that point, we're averaging Algoma the way other clients are treated. And then on top of that, we added a third contract with Algoma, and that contract even makes things slightly better for us than they were before. But at the end of the day, the contract that shipped rail is not a great contract for us. Well, we were planning to rail. And we knew what we were going to rail, and we started to be only doing rail. And then the weather improved. And because we are -- we've managed this business as a commercial enterprise, we had vessels already loaded at port. So as soon as the weather improved, we were able to start delivering ore to our clients. So we delivered a lot of ships to clients in the last 10 days of the month of March. Those who are the rail contracts, they're not -- the one specific contract with Algoma that has a small amount of stones, but it's the one that, unfortunately, is the only one that we can do and the lakes are frozen. So then we were back to -- back in business, back in the real business. And that was enough to improve our pellet realizations as much as they did. More color than that, I can't do it. The important thing that I did not mention that hot-rolled price improved a lot in the first quarter. So that was already an underlying benefit over the -- even the rail contract that goes to Algoma. So that contract alone was a little bit better just based on the enormous appreciation of the hot-rolled price that happened in the first quarter.

Just a follow-up on that and excuse me if I'm just being pedantic on this. But if I think about your guidance, you're targeting 1 million tons at $75 ASP. You were 1.6 million tons at $105 ASP. What's the disparity in realized pricing between the rail contract and the nonrail contract to drive that scale of an uplift? And can we assume that the last 600,000 tons was actually achieving a realized price well ahead of the group average, $105?

Okay. So again, we are assuming 1 million tons of rail contract alone at a much lower hot-rolled price than we realized. If we had done just the 1 million tons of rail at the actual hot-rolled prices, we would be way above the $75. And then on top of that, we are able to send 6 vessels through the lakes in the last 10 days of March that we are not anticipating at all. So that was a double deal that the contracts and the same better hot-rolled price influenced that. Did you get it?

That's great.

Yes, but did I answer your question, Seth? Or not yet?

No. Yes, that's very helpful.

Your next question comes from Matthew Korn with Goldman Sachs.

Question for -- you alluded to it a little bit before, speaking of the national operation. What's the most updated news there that you can share where you and the other part, there's some competing property claims. What do we need to pay attention to, timing wise, around any court deadlines? Other regulatory decisions that are coming in the near term? And then I guess, Goncalves, from your perspective, what's at stake there for Cleveland-Cliffs?

Look, we acquired land over there. We acquired land. We acquired 100% of several parcels, and we entered in long-term leasing for 100% of several other parcels. And we also acquired land that was 50% in very few parcels inside the Nashwauk property, and the other 50% was owned by Superior Minerals. And Superior Minerals sold to Chippewa. So sold to Chippewa. So now instead of having 50% Cliffs and 50% Chippewa, I'm sorry -- 50% Superior on those few parcels, we have 50% Cliffs and 50% Chippewa on those parcels. So that's pretty much it. The 50% never changed. Only the owner changed. So that's the first thing.

We are going to have a rule about that acquisition in Delaware in May. And we're going to have that because we are pushing to have a final rule because we have so much conviction that our purchase is good that we are asking the judge to make a determination, a final determination, on that. So that's what you should be watching. But the most important thing to watch is not this thing of who is going to end up with what. It's like that. Let's assume that, that thing starts being built, what I don't believe it will, and they will start having to hire real people, spending real money, deploying $1 billion-or-so to finish whatever is there. Then they will have to do what? They need to sell the pellets. Matt, you are not -- you're new in this thing. But other people in this call will know that not too long ago, U.S. Steel was supposed to restart KiTek, build long pellets and compete against Cliff. And what happened with that? They restarted KiTek, they tried to sell in the domestic market, ended up selling pellets in China. So that's it. That's the business model for pellets. And this other guy in Minnesota, they still have to build. And building is not easy, especially for people that don't know what they are doing, like Essar was. Because Essar tried that for like 7-or-so years, and they failed so badly. So life is bad for them, life is good for us. That's the bottom line. So don't watch that thing too much. That's so properly taken care of, and we will prevail at the end. We are prevailing every day. And (foreign language) is walking eagle in Spanish. Plus the other guy has a Venezuelan passport. So that's the story.

Got it. I appreciate the perspective. That helps out. Let me then just turn bigger picture. So far, from what we've heard from the steel markets, they're now cumulating a new. With your results today, things are pretty good as far as the steel markets. I'm -- I want to ask you, what makes you feel certain that the demand levels that we're seeing in steel markets what's driving your strong shipments today. But there's not a significant boost of -- from buyers bringing forward orders out of concern. Concern that supplies won't be there in a month, concern that the foreign steel providers won't take orders, or that there'll be more policy shifts adding to more unforeseen frictions. What gives you confidence? So this isn't a matter of timing, but this is a matter of stepping up in terms of total demand.

It's my conviction in the American economy. I really believe that the United States will continue to be a powerhouse economically, and manufacturing will continue to be a big part of the future. If you don't have that conviction, then we'll believe that things will go bad. Other than that, take the automotive market, the automotive market has been stable at a very, very high level of capital reductions in United States for some time. And the automotive industry, by and large, buys domestic steel. They don't import. They talk about 232, about this, about that, because they know that at the end of the day, the ultimate impact of these things are in the price. And they don't like to pay a little less. But that doesn't change anything from the realization standpoint. One car is 1 ton of steel. Every time you see a car, Matthew, you're seeing a ton of steel on wheels. So 1 ton of steel, 25% on the old price of galvanized $800 is $200. So then your brand-new car that used to cost $30,000 now cost $30,200. Everybody will continue to buy cars. The dealers probably will be the only ones that should be complaining about it, nobody else. So that's the story. All the rest is just blips. The economy is good. Nobody can deny that after the tax cuts, after that everything that -- if you eliminate the noise, what's going on in the economy is underlined, very, very, very good in the United States. And that's why I have so much conviction that this year, things will be okay. On top of that, a lot of people, they are complaining to you because they like to call, don't say their names in public, but they're complaining to you, to other research analysts. They are also talking a good talk to my clients in the steel mills because they want to get their fair share. The 2 mills that reported already this quarter, they both said that they're selling at the top of their range even with the contract. So that's what's going on. All the rest is just noise.

Your next question comes from Michael Gambardella with JPMorgan.

Just a question surrounding the HBI project. Have you viewed the potential market for your project in terms of tonnage and -- some of the potential users have captive sources of their own DRI? So what do you think is the size of the market for your project?

Mike, the market for HBI, DRI, pig iron in United States, as we speak, is approximately 4.5 million metric tons a year. Out of this 4.5 million metric tons a year, 3 million metric tons are in the Great Lakes. And that's the market I am aiming. So the one that has captive production, and that's (inaudible), they -- at this point, they are a lot better-served in terms of their locations in the South than their locations in the Great Lakes, because one HBI facility is in Louisiana and the other one is in Trinidad. You might say, "Oh, they can send their DRI up the river in (inaudible)." Yes, they can do that in Mississippi, but that has a cost, and we are going to beat the local guys in the Great Lakes. So I am very confident, highly confident, in bankers' language, I have a high confidence that we are going to be supplying (inaudible) in the Great Lakes. Same thing with steel dynamics. Same thing with North Start BlueScope, same thing with the Big River, same thing with several others that we are talking to. So we only have, actually, 1.6 million tons a year for a market that's 3 million tons. We don't have for everyone. We are going to have for some, not for everyone. So that's why we are not talking to everybody. We're talking to selective potential clients.

Okay. And the iron ore feedstock into your HBI project, you're, obviously, contracted now on all your iron ore. Are you going to be producing incrementally ore, iron ore? Or some contracts coming off that will give you availability to feed the HBI project?

No, look, first of all, it's not iron ore, it's pellets. And pellets is a main (inaudible). Yes, iron ore is something that's produced in Australia and Brazil. It's like iron ore is raw meat, what you produce in New York street at the steakhouse. So it's a lot better. It's like Peter Luger. You only take cash. So yes, that's what we do. And you're absolutely right to ask the question because that's another thing. This shift that's happening in the -- in United States in steel making is ongoing. Blast furnaces are shutting down and electrical furnaces are taking the place of the blast furnaces that were there before. It has been happening for decades. So we are not creating a situation that we are going to be producing more to take care of the EAFs and then to force competition between EAFs and blast furnaces that will end up creating more friction for prices of steel in United States. We are actually replacing clients in the blast furnace market with clients in the EAF part of the business. So we are going to migrate from blast -- ultimately, were going to migrate from blast furnace pellets to DR-grade pellets supplying our facility. And those DR-grade pellets will be transforming the HBI, supplying EAFs that, ultimately, will be replacing some of the weakest of the blast furnaces. And I'm not going to determine who's going to die, but someone is going to die. And they -- appreciating competition of the market, you will determine who are going to be the survivors and who are going to be the ones that will go away. But the fact of the matter is that, nobody can deny that there is a push towards EAFs going into high-end steels. They have the ability to do it. They have the balance sheet to do it. They have the support from their clients. What they don't have now is quality feedstock. I'm providing that. The rest will be just good old supply/demand and price appreciation on both sides, the HBI and the blast furnace as well.

But do you have contracts for pellets right now that terminate before, say, before 2020, 2021, when you're going to start to need pellets to feed into your HBI project? Or can you just incrementally produce more pellets for the project?

Look, I'm not going to produce incrementally more pellets, Mike. By that time, we are going to be producing -- and by the way, it's not going to be turning off in weeks. And then we have just shut down 2.4 million tons of pellets and produce 1.6 million tons at HBI, So it'll be a ramp up, and it'll be a ramp down for blast furnace pellet supply, direct supply. But this transition is very well thought, and we are not going to continue to supply everyone in the blast furnace side by that time. We are going to be supplying ourselves with our DR-grade pellets to produce HBI because HBI will be even more profitable for us than the current pellet business. And that's what the demand in the domestic market is asking for. The demand is not asking for more production, the demand is asking for -- the market is asking for the shift toward blast furnace to DRI, and that's exactly what we are very thoughtfully doing here.

I understand that. I'm just curious, do you -- your current business is fully booked out with contracts pellets. In 2020, when you start the HBI project, where are you going to get that pellet feedstock from? And maybe another way to ask the question is, in -- by 2021, do you have contracts today that will -- that give you ample flexibility to feed pellets into the HBI?

Yes, we have different contracts with different clients that -- with different expiration date. We have all that. Of course, we are well planned for that, okay? But the most important point, Mike, is that we are not producing more just to create more friction in the marketplace. We are seeing blast furnaces going down. We -- and when the blast furnace goes down and never comes back, we -- if we don't do something to mitigate that, we are going to end up with a smaller business. We are actually showing the equivalent pellets as a runway because we're just starting that. We are just scratching the surface with HBI now. We have a runway that if in 100 years or 120 years, we have no more blast furnaces, we'll still have Cleveland-Cliffs. That's why we are here around for 170 years because my predecessors, not the ones that I kicked out 3.5 years ago, but the ones that are the legacy of this company, they have this same line of thought. And they were very strategically when they did what they did with pelletizing when they run out of ore. We are doing more or less the same thing. We are using the same strategic rationale. This is a long-term business. Decisions that we make today, they bear fruit 3, 4, years down the road, the good and the bad. So we're trying to do all the good decisions and not doing the bad that my predecessor did. This is behind us. Completely behind us. Unfortunately, I had to do what I had to do. And I don't deliver 3 quarters because I have to write off stuff. I had to shut down stuff. This is going -- we are going to be a very boring company going forward. We are going to be so predictable and so profitable that we will be totally undeniable from the marketplace.

All right. So with that, I think we reached the end of this call. I appreciate you guys stay with me through this hour and through the end, and I look forward to continue to have this dialogue as we continue to take care of all this for us, for our shareholders and for our bondholders. Thanks, again, and have a great day. Bye now.

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