ArcelorMittal SA (MT) 2011 Q1 法說會逐字稿

Dear analysts and investors, welcome to the ArcelorMittal's first-quarter results 2011. Please note that we will take maximum two questions per analyst and investor. If there's time left at the end of the call, we will be happy to take your additional questions. We would like to inform you that this conference will be recorded.

I leave the floor now to Mr. Aditya Mittal, CFO and Group Management Board Member, Flat Products America.

I hope you can hear us, because we are having -- I think our audio problems are fixed. Good morning and good afternoon again. I am Aditya Mittal, CFO of ArcelorMittal, and today I'm joined on this call by Christiano Genreno from our Finance team as well as Daniel Fairclough, who many of you must know from our -- who heads up our Investor Relations effort.

There are a few changes that we have in this call in terms of disclosure, call participants and segmentation. The participants this quarter reflect the focus of the results of Q1 2011. As we intend to have a more detailed and more focused call on a biannual basis Mr. Mittal and the rest of the GMB will be present as they have at full-year results. And those results we will also discuss market outlook and get into more detail on how each of the businesses are doing.

Secondly, we are reporting Mining as a separate segment. There is a slide on this later on in the presentation, and I will talk about the logic, the rationale and exactly how we have done it.

And, lastly, we've also published a detailed Q&A together with the results, and we are including an EBITDA bridge to highlight the key drivers of our performance. As we go through the results today I hope that you will appreciate increased disclosure, which should also help improve your understanding of our business.

In today's call I intend to review our Q1 performance. Then ask Genreno to discuss our financials in more detail. And Daniel talk about the segment results, and I will then conclude with guidance and corporate update. At that point in time we will answer your questions.

Let me begin with safety, which is corporate responsibility, which is our number one priority across the Group. I am pleased to report that the Group's health and safety performance has improved during the quarter. Our Lost Time Injury frequency rate decreased to 1.4 times from a rate of 1.6 in Q4, compared to a rate of 1.7 in Q1 2010. So clearly we have quarterly improvement as well as improvement on a year-on-year basis.

We believe this improvement is driven in particular by our Long Carbon operations, modest improvements elsewhere, including mining, except from Distribution Solutions whose frequency rate was slightly higher this quarter.

Globally we continued to make progress in our safety performance, as we strive to be the safest metals and mining company in the world. Last week we also celebrated our Health and Safety Day on a global basis, which was well received. And we continue to make good progress in the month of April in this regard.

In terms of our overall financial performance, during Q1 as you know we generated EBITDA of $2.6 billion. However, this includes $0.3 billion of non-cash provision impacts. As you can see from the chart, our EBITDA is constantly moving higher as the underlying demand recovery continues.

In Q1 2009 we generated $56 per tonne of EBITDA. In Q1 2010 it moved up to $81, and this quarter of this year it is at $118 per tonne. Similarly volumes have also increased for all of the -- for Q1 2009 compared to Q1 2010 and compared to Q1 2011.

These levels are still somewhat short of our normalized profitability levels. But our Q1 2011 number reflects an operating rate of just 75%. So clearly the potential for increased profitability to continue to improve as the increased profitability as well as management gains, performance, as well as growth performance potential exists.

For the first quarter our net income was $1.1 billion, which is 67% higher than last Q1 2010. This includes a non-cash gain of $0.4 billion, which is reported in discontinued operations.

This is the final accounting impact from the demerger of Aperam. It is as a result of the foreign-exchange balance sheet translation reserves on our stainless assets, which have been recognized from equity to the P&L account.

Looking at our operations, steel shipments increased 4% to 22 million tonnes. And while our own iron ore production was lower than fourth quarter 2010 levels, it is still up on a year-on-year basis by about 12%.

As anticipated, we also invested significantly in our working capital during the quarter due to higher activity levels as well as higher prices. Together with our spend on Baffinland, our free cash outflow for the quarter was $2.3 billion and our net debt increased to $22.6 billion.

Let me now turn to the next slide, mining reported as a separate segment. As you know, we are building a global mining business at ArcelorMittal, and now are reporting this business as a separate segment. There are number of drivers behind this change. It is a separate business [through] steel production. It has a dedicated management team. And as a management team we need to have the right information to make optimal capital and operating decisions.

As we manage the mining business internally as a separate segment we are required by IFRS to disclose its performance externally. The key benefits of this new segmentation is to understand the profit contribution of each of our separate businesses. And this helps us make better day-to-day operating decisions, better strategic decisions and also optimize our capital deployment decisions.

The remaining steel segments as a result of this are now more comparable. Flat Carbon Americas and Asia, Africa, CIS still benefit to a degree from ore transferred on a cost plus basis, but we can now clearly see the contribution of the steel assets to EBITDA and cash flow generation.

We sell around 15% of our iron ore production externally at world market prices. All the remaining production that could practically be sold externally we are shipping to our internal customers at prevailing market prices. The remaining captive ore that is constrained by logistics or quality is transferred to our mills on a cost plus basis.

As a result, for the quarter we shipped 5.9 million tonnes of iron ore at market prices and 1.1 million tonnes of coal at market prices and generated $0.6 billion of EBITDA.

We have also recapped our prior quarters for 2010. And as you can see on the chart on the left-hand side, the Mining segment has consistently generated around 25% of ArcelorMittal Group EBITDA. That is probably on the previous slide if you're looking at it on the webcast.

Turning to the EBITDA analysis. Here for the first time we are presenting a bridge explaining the 39% increase in Group EBITDA from the $1.8 billion in Q4 2010 to $2.6 billion in Q1 2011. In order to compare the figures we must strip out the nonrecurring elements.

Firstly, Q4 2010 included $140 million gain due to the sale of CO2 credits, which was booked in the FCE segment, which largely accounts for the delta in non-steel EBITDA between the two quarters.

Q1 2011 EBITDA includes a reversal of provisions, which we talked about earlier, in terms of inventory and litigation, which is represented in the bridge and in the Others column.

So on a comparable basis, EBITDA included $218 million due to a better volume and mix impact, which reflected the seasonally stronger volumes at Flat Carbon Americas, Flat Carbon Europe as well as Long Carbon.

As you know, praises rose particularly towards the end of the quarter, and this was offset to some extent by higher costs. And overall there was a favorable price cost impact of $342 million, largely in Long Carbon and also in Mining.

The price cost impact in Europe was negative, largely due to slower pickup in prices and the impact of legacy contract sales, which have not yet moved onto the new pricing structure.

Let me know ask Genreno to go through the P&L and cash flow in further detail.

Thank you, Aditya. This slide helps to show the changes in key lines of our P&L relative to the previous quarter. So we will focus on the waterfall chart in the upper half of the slide, with the comparatives also provided.

Starting with EBITDA, as we have seen, Q1 2011 EBITDA was higher than Q4 by 39% or $0.7 billion. Depreciation, amortization and impairment was lower than in Q4, primarily because we had no impairment or a very small amount. As a result, operating income was over $1 billion, significantly higher than in Q4.

Income from equity investments was slightly higher than in previous quarters. Our finance costs remains at the same level at $1.1 billion. But as you can see, the makeup was very different. There was no mark-to-market impact on the convertible bonds due to the new hedging structure that we put in place in Q4. However, the weakness in the dollar during Q1 2011 meant that the ForEx element of finance costs was higher.

Also, there was a smaller positive impact from taxes in Q1. We are splitting, as you can see, our current tax expense was higher, primarily because of the higher profitability. And deferred taxes, as was said, was slightly smaller. So overall we report net income from continuing operations of $0.6 billion compared to a loss of $0.2 billion in the prior quarter.

So we had a positive impact from discontinued operations. That is the last one from the merger of Aperam. So this includes $42 million from our share of Aperam's net profit prior to the merger on 25 January. And the balance primarily presents the non-cash impact from recognition through P&L of current valuation reserves that previously was reported in in equity. So overall we recorded EPS of $0.69 a share, of which $0.39 came from our continued operation.

So if we turn now to cash flow and net debt, so we have another bridge. As we flatten our guidance, net debt increased to $22.6 billion from $19.7 billion at the end of 2010. Our cash flow from operations was negative by $1.3 billion, primarily due to a $1.8 billion investment in operating working capital. This investment was due to increased price as well as higher volumes due to increased activity levels.

The impact of price increases on working capital, we estimate it to be approximately $0.9 billion. And it could be seen as temporary, and will reverse even when raw materials and steel prices normalize.

During the quarter cash out of CapEx expending was just a little over $1 billion, of which $328 million was growth. Splitting out mining CapEx separately, we spent $200 million on mining CapEx, of which $143 million was growth.

So in terms of M&A we spent $482 million -- we invested $482 million primarily on the completion of our position of Baffinland. The usual $294 million cash out went to dividends. And we have received the full $900 million bridge loan that was provided to Aperam also during the quarter.

The other element you can see in the bridge is the 6.3% depreciation of the euro -- meant that there was a net impact of $435 million on our new debt position. And in order to see others for a small amount, $227 million, and this is primarily due to capital lease.

So as expected our net debt did return to slightly higher than Q3 levels, Q3 2010 levels. And as we will discuss later, net debt is likely to increase near term as we continue to invest in working capital at higher price and activity levels.

So Daniel will now walk you through the segment performance.

Beginning with Flat Carbon Americas, FCA delivered a better performance in the first quarter of 2011 following a weak fourth quarter 2010. Capacity utilization increased to 73% from 68% in the fourth quarter. Our Tubarao operations in Brazil were negatively impacted by the coal supply disruptions. These are being resolved first, along with to rebuild our coal inventory levels, which should support a return to pre-accident production rates at Tubarao this month.

Also, we executed the below end of Indiana Harbor 3. That is the IH3 West in April. So this will support US shipments in the second quarter of this year.

During the first quarter there was an 8% increase in our crude sales production at FCA, and that has translated to a 2% pickup in shipments. But if we look at the shipments out of North America flat operations those did increase by 14%, so that is where the strength came from.

The big positive though, and the big positive driver of EBITDA was selling prices. Spot HRC prices began to recover strongly in all North American markets at the end of last year, and that positive momentum was maintained throughout the first quarter. As a result average selling prices increased by over $60 a tonne, more than offsetting the delta in costs.

So reported EBITDA, which don't forget also included $185 million non-cash items from inventory write-backs and provision reversals, and stripping that out the underlying EBITDA per tonnes was $60 -- $62 for the quarter.

Moving onto Flat Carbon Europe. FCE EBITDA decreased to $471 million from $543 million in 4Q 2010 and compared to $460 million in the first quarter of 2010. And don't forget though that the EBITDA from the fourth quarter of 2010, so the base number was positively impacted by the one-time gain on the sale of CO2 credits, which was $140 million. So that was recorded in the fourth quarter, and that gain will be fully reinvested in energy-saving programs within the FCE perimeter.

Looking at capacity utilization in the first quarter it did increase by 6% to 73%. That was primarily driven by the increased demand so during the quarter we restarted four blast furnaces, one at Galati, one at Florange, one at Eisenhuttenstadt and one at Krakow. So that figure is from a rate of about 15 out of the 25 furnaces in early January to 19 out of 25 furnaces at the end of the first quarter.

Shipments increased by 12% relative Q4 2010 levels. The improvement in underlying demand was driven by seasonal factors and good demand from Germany and the German-linked economies.

Apparent demand was further boosted by customer restocking. And there was some speculative behavior from customers ahead of price increases.

Euro reference prices increased, and there was a slight currency benefit also supporting an average selling price increase of $21 a tonne relative to the Q4; however, this was not sufficient to cover the increase in cost accounted for during the quarter.

During Q1 we recorded $119 million as DDH raw material hedge gains, and that compared to $88 million in Q4. Looking through the remainder of the year you should assume approximately $150 million per quarter. So overall reported EBITDA per tonne for the quarter was $64.

Now moving onto the Long product business. Long EBITDA increased to $480 million from $315 million in the Q4. And that was at similar level to what we reported in the Q1 2010. World capacity utilization increased to 78% from 69% in Q4. Our crude steel production increased overall by 14%, reflecting the end of seasonal slowdown in South America and the higher production in Europe ahead of the seasonally stronger Q2.

Steel shipments increased by 3% to 5.9 million tonnes. In Brazil there was stronger seasonal demand. In Europe demand from nonconstruction markets is strong, and that is driven by good demand for wire rod. But 80% of our end market in Europe for our Long product is construction driven. Construction market in Northern Europe were more healthy than in the South, where demand remains depressed.

Our exports of Long product out of Europe were flat relative to the previous quarter. Profitability though did improve, as the sharp increase in scrap prices early in the quarter led to a good recovery in selling prices, and there was a corresponding improvement in profitability at our integrated facility.

Average selling prices increased faster than costs, so along with the increased utilization rates we did see an improvement and an expansion in our price and profitability from $55 a tonne in Q4 to $82 a tonne in the Q1 2011.

Now moving on to the AACIS segment, EBITDA increased to $254 million from $215 million in the Q4. Capacity utilization reached 77% versus 75% in the Q4, and that was driven mainly by Timoteo and South Africa, partially offset by operational issues at Kryviy Rih.

Despite the 3% increase in crude steel production shipments in Q1 were 7% lower than the fourth quarter level. Average selling prices increased by $70 a tonne, reflecting higher base prices in all markets and an improved geographical mix.

The increases in prices more than offset the higher cost of raw materials, and so despite the operational issues at Kryviy Rih, AACIS profitability per tonne improved from $63 a tonne in Q4 to $81 a tonne in Q1 2011.

Moving to distribution and solutions, EBITDA increased to $127 million from $87 million in Q4, and relative to $57 million in the same period last year. AMDS or shipments declined by 12% relative to the Q4 level, however this decline was in our international distribution centers in Asia, reflecting lower available supply, primarily from our CIS mills.

The profitability of those international shipments is very marginal, so the volume drop really didn't have an impact on our profitability.

We actually increased our shipments in Europe, which is a much better business, a higher margin business, a more profitable business for us. So you can see from the bridge that there was a positive overall impact from the volumes mix.

Distribution benefited from the pickup in prices without any of the order book delays that you see in some of the other steel segments, so there was a positive price cost impact for AMDS. There was a small impact from provision reversals, so if you exclude that, EBITDA per tonne was $25 compared to $18 in the Q4.

Now moving to the mining segment, as I mentioned earlier, we have separated our mining as a new segment. Sorry, as Aditya mentioned earlier, we have separated our t mining as a new segment. As you can see from the chart, this new segmentation has effectively transferred EBITDA that would previously have been reported under Flat Carbon Americas, AACIS, and the Long segment.

During the first quarter the iron ore produced at our own mines was 11.8 million tonnes, a decrease of 6.3% compared to 12.6 million tonnes in Q4. That reduction was mainly due to concentrate production impacted by fire in the number five concentrated plant in Canada. We also had some maintenance and grinding mill performance issues in the nd Ukraine. And our Brazilian operations were also impacted by maintenance and weather. So that accounts for the reduction in production.

Shipments of our market price iron ore were 5.9 million tonnes for the first quarter. That was a decrease of 12% relative to the Q4 level. And that was mainly due to lower shipments out of Canada. And that is really seasonal. It is due to the ice impacted shipping rigs, and that will be recovered in the coming quarter.

Looking at our coal production, coal production at our mines increased to 1.9 million tonnes for the Q1 from 1.8 million tonnes in Q4 2010.

So for the quarter we reported Mining segment EBITDA of $607 million. That was a 6.5% increase compared to $570 million in Q4. And that increase mainly is on account of higher market prices which offset lower shipment levels.

Now back to Aditya Mittal for the outlook.

Thank you, Daniel. I am just going to talk about the outlook and then provide you a corporate update as well. New shipment volumes, average steel selling prices, as well as EBITDA per tonne are expected to improve in the second quarter compared to the first quarter. Capacity utilization levels are also expected to improve to approximately 80%.

We also expect higher operating costs due to higher raw material prices. And we are forecasting that mining production and profitability will improve in the second quarter as well.

As result of all of these factors, second-quarter 2011 EBITDA is expected to be approximately $3 billion to $3.5 billion. We also expect working capital requirements to increase in line with increased activity and prices, leading to further increases -- leading to further increase in net debt in second quarter of 2011.

Now let me just quickly talk about our two mining projects as well as G Steel and GJ Steel in Thailand and then open the floor to your questions.

As some of you may know, our iron ore project in Liberia is progressing well, and the first DSO phase is close to completion. You can see, I hope, in the images the progress we have made. The rehabilitation of the 240 kilometer rail line, linking the mine to the port is now complete.

Similarly, the upgrade of the port at Buchanan will be completed in June. And as you can see in the image on the top right-hand corner, the construction of the crushing and screening plant is also almost complete.

So we are in good shape to ship our first Liberian ore, or ore from Liberia, during the third quarter of this year. And we will ramp up production to 4 million tonnes by 2012.

Now let me talk about Baffinland, which basically focuses -- which basically is our growth in our iron ore business beyond 2015. The growth and the opportunity lies in the Arctic. We acquired this asset in Q1 of this year, and as a result we own 70% of this asset and Nunavut Iron Ore, our partner, own 30% in Baffinland.

Baffinland is a Tier 1 resource. We have tried the ore in our furnaces and have seen fantastic value and use numbers. And are very pleased with the tests we have done. It has very high Fe content. It is ore that can be shipped directly with no processing. It has got a very high lump to find ratios, and as I mentioned, earlier, very high value in [used] properties.

Therefore, we believe it is a premium product that will occupy low-cost position on the iron ore cash cost curve. Nevertheless, as you know, it is in the Arctic, which creates challenges, both to the construction and the logistics, but we are confident that we have the right in-house skills and a very experienced mining team to bring this project to fruition. We are all very enthusiastic about the potential here in Baffinland.

To bring you up-to-date with developments, in January we submitted a draft environmental impact statement to regulators initiating the process of environmental review and permitting. We have also reinitiated negotiations with local stakeholders to finalize the Inuit Impact Benefits Agreement.

So overall a very exciting development for us. And we believe we are on track to complete the feasibility study by end of 2011 prior to construction decision review by the Board.

Turning to G Steel. I hope G Steel will be our first venture in the high-growth ASEAN region. In March we signed agreements to invest in a new equity issue that would give us a 40% state in G Steel and 49% of its voting rights. If the deal goes through we will inject -- we will also inject another $500 million for working capital and CapEx, and prepayment of external debt.

The deal also provides various management fee payments and debt guarantee payments to ArcelorMittal. And it is still subject to a credit restructuring, as well as other conditions precedent. So there are still some hurdles to cross, but this is a quality asset, and would be a great step in the fast-growing region of ASEAN.

With that, I would like to finish my remarks and hand over to the operator so that we can take your questions. Thank you.

We'll now begin the question-and-answer session. (Operator Instructions). Alessandro Abate, JPMorgan.

Just a couple of questions. If you can give a little bit more light about the situation between imports in Brazil from Q1, how you see the things going forward, also in view of the depreciation of the dollar. And if you can give a snapshot on the situation in the Middle East and North Africa, considering the strong impact that this is having on the scrap price.

And, if possible, just as a follow-up question, if you have a kind of insight about consumption of scrap in Japan and other dynamic trade flows out of the country. Thank you.

In terms of the Japanese -- sorry, the Brazilian market, I will talk about the flat products area, because I think that is where we have more imports versus long or other aspects of our business.

As you know, we experienced an inventory bubble in the second half of 2010. We had expected the level of imports would decline in the beginning of this year, i.e., in first quarter 2011, and therefore we would move faster in terms of eliminating this inventory bubble.

However, as you alluded to, the real has appreciated, which has made the Brazilian market more attractive. And the level of imports have not declined and we still have a relatively high level of inventory. As a result, I would expect that this high level of inventory would continue. And it may be until the middle of second half or in the second half when it will be -- when it would come to more normalized levels.

In terms of scrap prices, impact due to Middle East, North Africa, MENA scrap, as you know, remains very volatile. It is moving within a tight range. I don't expect any further impacts due to the political environment in MENA.

In terms of Japan, the question was -- go ahead.

Similarly , the Japan scrap price, both the impact on scrap from the Japan situation, I think similar Aditya's comments, we don't expect any near-term developments in the scrap market within the current

Thank you. Just to verify one thing. In the MENA region, I was just mentioning, whether you see some kind of recovery in some particular area in terms of demand? Thank you.

We don't have that much of direct exposure to the MENA region. It is about 2% of our sales. Egypt clearly is the biggest steel consumer in that region, but what we can gather, the level of steel demand and supply remains relatively okay.

Turkey clearly is exhibiting high growth so it masks some of the weaknesses that we have seen in other parts of the region.

Michael Shillaker, Credit Suisse.

It is Michael Shillaker here. Two quick questions if I may. The first question, back in February you gave some slightly cautious tones over the second half of the year and the risk that we would enter some sort of form of downturn. Can you give us your thoughts now, now we are close to Q3?

Clearly steel prices, I think, especially in Europe, have fallen somewhat -- and in the export market. So how are you feeling about the second half of the year from where we stand right now?

My second question is we met with Cliffs recently. He was effectively saying that they were running flat out in terms of their available raw material tonnage into the US. So I think [Aditisa] mentioned back in February that the US, although is running at 70% odd utilization was effectively running at full capacity -- available capacity.

Is that still the case? And although we see a lot of potential available capacity there are constraints, including raw materials, meaning that this capacity actually can't come back. Thanks very much.

Thank you, Michael. Let's talk about the second half, and then we will address the US market. In terms of the second half, when we spoke in February, we talked about the large price variance between an imported tonne of steel from China relative to the price levels in US and Europe.

To date that risk has not significantly manifested itself in the level of prices that we see, but clearly we are anticipating some short-term spot price weakness. We can see that in terms of the commentary in the marketplace that is taking place. So I think that risk remains.

In terms of our cost position vis-a-vis the second half, clearly we have a delayed impact in our financial results of how the cost impacted. In Q2 we have raw material price increases, so Q2 would have 40% of the impact of that quarter, Q3, 35%, and then 15% and 10%. So we still have increasing raw material prices in Q3 and Q4.

The other -- the positive on the cost side is that we should be renegotiating some of our contract businesses. And we are quite optimistic that we should recover the cost increase when we do that in June/July timeframe, and that should impact our second-half results.

So to cut a long answer quite short, I don't think there is a change in our assessment of the risks associated with the second half. The risks that we alluded to in February remain in place in the marketplace.

In terms of Cliffs, I don't have a good sense of where we are -- I don't have a good sense of where Cliffs are in terms of their supply and demand capability. I can comment on where we are. After we started our furnace at Indian Harbor West, the number three furnace in April, we are basically running full on all capacity, which we want to bring on stream on a medium-term basis, i.e. this is capacity which we believe has a competitive cost position.

So that is what we alluded to when we said that our US business on a medium-term basis is running full. We have a low cost position due to some of the captive ore that we still have due to the Cliffs contract that we have on the ISG side, etc., etc.

In the US, the US clearly was not running full in February, because we know can see new capacity or new supply coming on stream. We have heard the new L furnace -- or not be new L furnace, but the L furnace under new ownership at Sparrows Point is coming on stream.

Obviously, TK's capacity is coming on stream. So I'm not sure whether -- so there is -- so I am not sure whether the US market is full. I'm not sure why Cliffs is suggesting that they are sold out. Perhaps ore that was being sold domestically in North America is now being exported. But clearly the [class] utilization levels are not as high as they have been in the past.

Okay, thanks. So what we are basically saying is there is no effective raw material constraint to reopening shuttered facilities that you can see?

Yes, I would say that. Also, I recognize that Sparrows is on the coast, so it never really needed raw materials to start up. It can import the raw materials. TK is importing slab, so it doesn't need raw materials to start up. I think the other asset is owned by U. S. Steel in Canada. And I think U. S. Steel has its own raw materials base and may not rely on Cliffs to start up.

So maybe there is truth in what everyone is saying, i.e., Cliffs are fill, but there is the ability to start up capacity in the US without relying perhaps on Cliffs.

Okay.

Did that help?

Yes, very clear. Thanks a lot.

Vincent Lepine, Exane.

I had three questions, if I may. The first is just following up on Michael's questions in China, and you answered, you said that the price differential had not moved very much between China and the West. It has been there for two or three months, and you said so far the impact had been limited. So why do you think it has been limited, and why would it become possibly bigger in a negative fashion in the second half?

The second question, again, has to do with the contract with Cliffs. You did say the impact in the P&L was on only $8 million, but I guess that is versus a provision you had taken. When I look at the volumes of iron ore coming from the Cliffs contract it has come down to zero in Q1 from almost 5 million tonnes in Q4. So should we assume that now you are purchasing all the iron ore from Cliffs at the market price, and was that already the case in Q1?

Lastly, on distribution and AMDS, the increase in profitability there was relatively limited in Q1 if you strip out the provision reversal, particularly compared, for instance, with what Cliffs may have reported to their European operations today.

So I was wondering if you could tell us why the increase was so limited? And did that have to do with the lower working capital at the end of last year, which maybe limited the amount of windfall gains you could have booked in Q1? Thank you.

In terms of the price differential, the price differential exists even today. Why is there a greater risk going forward? I'm not sure the risk is pronounced in the second half, but already we are seeing a little bit more import pressure, especially in the southern European markets. Less so import pressure in the US, I would say, but there is some more import pressure.

So what I think we are suggesting is that more of that risk is manifesting itself in the market. The risk in the US marketplace clearly is the onset of new supply.

In terms of Cliffs the contact that has been renegotiated affects 30% of our Cliffs purchases. So it only relates to the number 7 furnace in Indiana Harbor East. It is a nominations contract. And so we still -- for example, if you look at last year's purchases, 70% of last year's purchases are slightly higher of that amount would still be done under the old formula and, i.e., the existing contract. So it only affects 30%.

The reason why Q4 to Q1 is so pronounced is just timing. I think we bought 4 million in Q4, which is not normal. We normally buy 2 million -- 2 million to 3 million per quarter, so we bought extra in Q4, and now that is why in Q1 there is no significant purchase.

So I hope that answers your Cliffs question.

Yes, that is (inaudible).

But on a going forward basis, clearly 30% of that tonnage that we do buy from Cliffs is market related. Now that -- just to elaborate a little bit more on that contract, that contract always had a market-based re-opener starting from 2009. And in 2009 it was favorable to us. In 2010 it was favorable to Cliffs. What we have done is we have renegotiated the contract, so instead of working on re-openers and n a very complicated dynamic, we simplify the contract to market, and it affects [30]% Of our tonnages. That contract, in any case, was going to expire by the end of 2015.

In terms of AMDS, clearly we had volumes in our international markets in AMI. What you did mention in terms of having lower working capital did impact some of the profitability. But nevertheless, we do have still some EBITDA growth, because $87 million has still become $105 million of EBITDA.

So I agree compared to others maybe not that significant, but the two differentiating factors are lower businesses in our AMI segment and clearly a tighter working capital management in Q4.

Jeff Largey, Nomura.

I have a question on the Mining division. And I think, Daniel, you might have hit on this slightly. But in the first quarter we saw the production outstripped shipments. And I think you said that was largely related to ice floes in Quebec. I'm curious if in the second quarter do we see -- is that the main reason in the second quarter, do we see a boost of shipments as that material can finally be shipped?

And secondly in mining, have you considered at all getting more color? I would say, first of all, the extra disclosure is great. I'm happy to see it. But I am just curious if you're thinking on at some point going forward splitting the EBITDA between say the iron ore side of things and the coal side of things? Thank you.

Thank you for your question and thank you for your comments. Yes, there will be a pickup in mining shipments in the second quarter compared to Q1. The production recovery, though, will not occur so quickly. Production recovery, we are hoping the production that we have lost we will recover over the full year.

But to give you a sense, there is quite a significant pickup in shipments in Q1 to Q2. That is why we highlighted mining as one of the (technical difficulty) improvement in the profitability, i.e., in the EBITDA.

Secondly, also, there is a production improvement in the second quarter, but it will not offset fully the loss that we had due to these factors in Q1.

In terms of splitting out iron ore and coal, we have no plans to do that in the short to medium term, primarily because we would have to report it as a separate segment then. And there is not enough, I guess, activity or scale in our coal operations to merit such disclosure and such further segmentation.

Okay, if I could just ask one follow-up. Just, again, on some of the mining projects, the feasibility study for Baffinland, if you can shed some light on when you might have an announcement there, and as well the decision on the concentrator in Liberia?

Both those answers are in 2011. We have not given exactly a forecast, but Baffinland clearly towards the end of 2011, maybe Q1 of 2012, we're in the process of completing those studies. There was a lot of work that was already done at Baffinland. I was there a few weeks ago, and you can see the quality of the work. But more importantly you see the quality of the mine, which is world-class.

In terms of Liberia, we are also working through finalizing that, and I hope we can make an announcement before the third quarter of 2011.

Okay, great. Thank you.

Anindya Mohinta, Citigroup.

Thanks for taking my questions. Just three questions, please. If you look at the diminished profit -- the lower margins you now see in the steel assets because of the mining being reported separately, is there an end goal in this in terms of can all this now be used as a justification to say we need to cut more cost or we need to rationalize some assets?

Secondly, Aditya, you mentioned the G Steel deal. Can you just give us a bit more color on why that deal was done? Because if you look at G Steel's earnings, this was until very recently a lossmaking company. What is the value that you get out of this?

Just lastly, can you give us any sort of rough ballpark numbers in terms of -- I know you don't give annual guidance, but just in terms of iron ore and coal shipments this year, what sort of -- what are the rough ballpark numbers we should think about? Thank you.

In terms of iron ore, we previously said that we expect an increase of 10% for the year. So we had 49 million tonnes our shipments, so we expect 10% higher. And that is what I was alluding to in terms of the issues we had in Q1. So we are presently behind achieving 54, but the mining team and Peter assure us that by the end of the year through all their efforts we will achieve that number. In terms of coal, we had suggested a high increase of about 20%. So that is more like 7 becoming 8.

In terms of splitting out these results and the impact on FCA and AACIS -- AACIS division, I think it is not necessarily to highlight so there is more cost cutting that we are doing. I mean, I think as an organization we are very focused on reducing costs. We have made a lot of progress in that regard. Even this quarter we increased our management gains to $3.5 billion since the crisis. So I don't think we needed restructuring like that, or re segmentation work like that to achieve further impetus.

I think where we benefit is in terms of capital allocation and growth, because we can clearly see now the returns on a new steel investment. And if we were to make that investment in iron ore, even in North America or in Kazakhstan and sell it to third-parties, what would the return be?

So we can split out the return numbers, and then make a determination of whether is there an adequate return on steel growth or is there a higher return on the mining side. So it helps capital allocation.

Sometimes it also helps us in not destroying value, because we have seen in the way the steel market has moved, let's say, in the fourth quarter of 2010 there were times in which bioprocessing the iron ore and selling it in the steel markets we were actually losing EBITDA. So in Mexico, that is the FCA division, we actually sold iron ore pellets in the fourth quarter versus actually processing the steel into a slab.

So it helps the operating decisions. It helps capital allocation, and, therefore, it helps the overall growth story of the organization. So I think that is really why we're doing it.

Nevertheless, as I mentioned FCA, CIS still have some captive ore, and as a result you see their margins still are higher than our other divisions in the Company.

In terms of G Steel, I don't want to get into a lot of detail, as we are still in the midst of discussions with both the creditors and the equity holders. However, I do recognize that this is a 2.6 million tonne facility -- or 2.8. There are two electric arc-based facilities, what is G and one is GJ. One has a medium slab caster and one has a 10 strip caster.

I think some of the reasons for nonperformance which we have discussed with the team are -- with the management team there is lack of financing. I think they were very constrained on working capital. So they were acting more like a transformer or a converter, i.e., the trader will bring the scrap and take away the steel, versus a business.

I think that is why we are injecting capital to ensure that the facility has adequate working capital, both the financial and operations. And number two to earn an adequate return on capital.

And plus, because we are a minority, we intend to charge the appropriate management fees, as well as our capital costs, until we get an adequate return on our capital.

So those, I think, are the reasons for why we are pursuing the deal. Apart from the strategic interest that we have in terms of the ASEAN region, which is a growth area, we have tried for many years to be part of that growth through China or other parts. But this provides us an opportunity to have a controlling interest of steel in Thailand.

To also recognize that this is the only flat steel producer in Thailand. There is no other flat steel producer with steelmaking capability in Thailand.

Great, thank you.

John Klein, Berenberg Bank.

Thanks for taking my questions. I have three questions. The first is can you maybe give us a bit of a flavor of the cost development over the quarter in your European operations? What I am aiming at is how much is related to the restart of those four furnaces. So how much has your fixed cost base increased, and how much can we see this as a ramp up for more production in the second quarter?

Then, second of all, I would like to ask what the status is on your operational issues you were having in Kryviy Rih. And also in the mining segment, if there is any impact into the second quarter?

Then third of all there was some reports yesterday in the press along the lines -- on the sidelines of your AGM that you were seeing some over capacities in long carbon especially, but you're not aiming at plant closures, but that personnel reductions would be an option. Maybe you can comment a bit on what was meant there. Thank you very much.

In terms of the long carbon business, yes, we do see overcapacity in the -- especially in the Southern Europe or Spanish market. At this point in time the way we are dealing with it is through variablizing our fixed costs, i.e., managing our manpower. Because these facilities in Spain in long are basically minimals. And minimals intrinsically do not have a very high fixed cost base.

So if you manage the manpower we have taken out, more so the fixed cost base, unlike the integrated environment which has a higher fixed cost operating base.

In terms of Kryviy Rih, the production shortfall has to do with our sinter plant operations. The sinter plant had been causing us trouble in Q1, and we are on track -- I wouldn't say we are on track, but we are making progress in terms of recovering production in our center facilities, and therefore Timoteo should -- not Timoteo, Kryviy Rih should have a better second half than first half because we should have expected to resolve our sinter plant issues by the end of second quarter 2011.

In terms of fixed cost, these are quite small. I would say the fixed cost increase for some of these furnaces is 100 to 200 people more. So we're not looking at more than $10 million to $15 million per furnace. And when we take such decisions we believe the contribution is in excess of that on a very short-term basis. So we should recover that in terms of our EBITDA performance through higher shipments.

In terms of mining, most of these issues are resolved, but clearly to regain the lost production will take time.

Okay, thanks very much. Thank you.

Alexander Haissl, Shapiro Cheuvreux.

It is Alexander Haissl from Shapiro Cheuvreux calling. I have two questions, first, again on the mining separation, I mean, it clearly increased the visibility; however, you have had your target of $150 basically structured margin on EBITDA. If it not really forces more benchmarking, more cost cutting, you're still 50% below basically in the steel business. How can you really [target it]? When can you really expect that you will return or you're not destroying value in the steel business going forward, given that you already close to 80% capacity utilization?

To me it seems that over the last two years pure steel plays have performed better than the integrated ones in terms of cost cutting because they have been able more to deal with the rising raw material costs.

The other question that I have is basically you have given already some indications on the second half. Would you agree that -- of course, there is a risk of prices and rising material costs, however, given the inventory levels and the stock levels in Europe and in the US much lower than one year ago that the volume risk in the second half as much lower compared to last year?

Do recognize that when we talked about the $150 number, that included mining.

Yes, that is (multiple speakers) including mining.

Yes. So, and also we have achieved $118 per tonne in Q1 at 75% capacity utilization. That means we still have another 25% of free capacity available. And as we all know, in the steel industry as you ramp up volume not only do you get benefits from cost as you operate your facilities better, but more importantly, you move up in terms of margin, because you are pricing that on a marginal cost basis.

So I think there are -- that is a key aspect. And that is why there are still a lot of potential left in the global steel industry. I mean, we are still significantly below capacity, and we have a lot of furnaces, which remain idle. Not to say that situation is going to change overnight. The recovery is slow, but deliberate. We are still suggesting that it will be before 2015 when we return to pre-crisis level demand in Europe.

So we are still away in terms of achieving full capacity. But that clearly is something that is unique to what we provide on a medium term basis.

In terms of the inventory situation, I think the inventory situation in the US is very similar to where we were last year in Europe. You're right, it is marginally lower now than it was last year. But I wouldn't say that it is significantly different to the inventory picture we had approximately around this time last year.

But would you agree that this year's recovery is more driven by underlying demand as opposed to restocking last year? So at least we don't have the risk of real destocking into the second half?

I would say that clearly as capacity utilization levels are higher, we are also forecasting higher capacity utilization levels, which reflect an improved demand -- real demand environment. That is why overall we expect 2011 to be better than 2010. You can see that in terms of sequential EBITDA Q1 2010 compared to Q1 2011.

Okay, thanks, Aditya.

Tony Rizzuto, Dahlman Rose.

First of all, I've got a comment. Thanks so much for breaking out the mining segment. I've got two real questions here. First of all, in Baffinland how comfortable are you, Aditya, I have not followed this so closely, but how well advanced are you with this draft environmental impact statement?

And do you anticipate that there will be any opposition to that project? Obviously, in that part of the world, I'm just wondering how you see that playing out, and n you seem to be pretty comfortable that you're going to have that tied up by year-end.

Second question has to do is China. And I was wondering -- I always appreciate your color. I know you have had a difficult time in breaking into that market from a standpoint of trying to help consolidate the Chinese market, but you always have great color. I'm wondering how you're saying it play out now with steel production that is rising to record levels? We do see some impact from the governmental efforts to moderate growth there, and as a result I am saying higher net exports.

But I'm wondering how you see that playing out, first of all? And do you think the government efforts to try to reduce redundant capacity are really going to have a meaningful impact?

In terms of China, I think we have been quite consistent in our thought process, apart from our ability to grow in that market, which clearly we were more optimistic out to seven or eight years ago than we are now in terms of putting a controlling stake. Nevertheless, we still have significant minority interests in that country.

Otherwise, though, in terms of how we believe the Chinese government is going to manage its state-owned enterprises in its overall steel industry, I think it is fairly consistent and has not changed.

We believe that China does not want to build an export engine in terms of steel, for two reasons. Number one, I think it is more focused on finishing -- on producing finished goods, like automotive and appliance and maybe focused on exporting some of those.

Number two, and more importantly, I think it recognizes that by increasing the level of steel production in China and increasing exports indirectly, they are driving the cost of overall steel production much higher in China because they require more iron ore.

So whenever Chinese exports rise significantly we see the government step in and put export taxes and make it more difficult, and restrict the exports to extremely high quality type of product. So I would expect very similar behavior. So I am not particularly concerned about a sustained increase in Chinese exports, especially when iron ore prices remain so high.

Thirdly, the government has made quite a lot of progress, I would say. It is not as dramatic as maybe some of us would expect or want. But they have shut down capacity, which is both environmentally on a cost basis very inefficient. I think market forces are also forcing them to do the same, because today judging based on where the prices of steel are in China, and what is the cost of ore and coal, you don't make much money if you don't have an efficient steel facility in China.

Lastly, let's talk about consolidating the Chinese steel industry. And we have seen that China has made quite a lot of progress in consolidating its steel industry. Now we have a few players which are in excess of 35 million tonnes coming out of China.

So you can see that slowly they are moving along the goals that they outlined, which is to have a more consolidated industry, to have an industry which is more sustainable, more environmentally friendly, shut down high-cost capacity and limit the level of exports.

So that is how we characterize it. And it has been consistent in the past, and I see no reason why Chinese policy or behavior has changed in terms of the Chinese steel industry.

In terms of Baffinland, look, it is very difficult to make a very strong prediction on what will end up being the issues in the environmental assessment impact studies and the environmental approval. The studies are done in the approval of the assessment impact. But when we look at the studies and the information that we have, we are not close to a heritage site. We are not disturbing a forest. So if you go through some of the issues that others may have, there is virtually, as you can imagine, no one living there like in India, so those issues don't exist. So we don't expect a great deal of difficulty, and therefore, we hope we will get approval by the end of the year.

That is great color. I appreciate it.

Rochus Brauneiser, Kepler Capital Market.

I missed the first part of the presentation, so I hope I am not repeating something that has been said before. Can you comment on the shipment growth you're seeing in the second quarter, how this compares relative to the production growth you were previously guiding? That is the first question.

Maybe coming back to the inventory question from earlier on, I wasn't sure how you are seeing the inventory situation in Europe today. Obviously, it is better than what we saw last year. And based on that, what is the expected seasonal effect into the third quarter? Will there be a similar decline as we have seen last year or can this be different this time around?

Are there any plans for further restarts going forward in the second half or are there some dedicated maintenance shutdowns you're targeting for the second half or for the third quarter?

Finally, on the cost structure, with the rising cost becoming P&L visible in the coming quarters, do you already see some sort of a relief on a Q4 basis in terms of cost versus the third quarter?

In terms of shipments and production, generally the production increase will be in line with the shipment increase. That is what our forecast is predicated on, and that is what I would expect.

In terms of cost, our cost pressures will continue until Q4. So Q4 cost will be higher than Q3. That is just because we are getting the increased raw material costs roughly 40% in Q2, 35% in Q -- 40% now, 35% in Q2, 15% Q3, and 10% in Q4. I think there is a graph in the presentation -- on the guidance slide which shows the cost increases that we have.

In terms of overall seasonal decline and its impact, clearly we are off -- the seasonal decline will occur. There is no reason it won't. But it will be off a higher base, right? But overall the demand picture is better in 2011 versus 2010, so it is off a higher base, so overall volumes second half of 2011 will be better than volumes in second half 2010.

Okay, with that, I would like to wrap up the call. And thank you very much for your questions. And I look forward to speaking with all of you soon. Thank you.

The conference call is now over. For any further questions, please contact the Investor Relations department on the number indicated on this conference call invitation.

We would like to thank all participants of this conference. Thank you and goodbye.