ArcelorMittal SA (MT) 2013 Q3 法說會逐字稿

Please go ahead, Daniel.

Great. Good afternoon, everybody, and good morning to those joining in North America. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you very much for joining us today on our conference call for this third quarter 2013 results.

First, I'd like to remind you that this call is being recorded and we're going to have brief presentations from Mr. Mittal and Aditya, followed by a Q&A session. The whole call should last about one hour. (Operator Instructions).

And with that, I'll hand over the call to Mr. Mittal.

Thank you, Daniel. Good day to everyone, and welcome to ArcelorMittal's third quarter 2013 results call. I'm joined on this call today by all the members of the Group Management Board, and Bill Scotting, Head of our Mining Group.

Before I begin the presentation, I would like to make three key points. My opening point would be that the results for this quarter show a clear improvement relative to the same period of 2012. At the beginning of this year, I stated my opinion that our results for the second half of 2012 would mark the low point of this cycle.

Our third quarter shipments are up year-on-year. This is the first notable year-on-year increase in shipments since the first quarter of 2010. And looking at our EBITDA, the year-on-year comparisons show the continued contribution from our cost optimization efforts and mining expansions.

The second point I would like to make is the progress we have made in a number of areas during the third quarter. We have secured a new long-term iron ore supply agreement for our South African business and dissolved all outstanding disputes with Kumba. We have achieved a positive development for Annaba, our business in Algeria. And we have completed the industrial phase of our lease in Belgium, restructuring, taking the gains from asset optimization of a $1 billion level. We have also selectively restarted some of our CapEx to support the development of franchised steel businesses, and we continue to make good progress in our iron ore growth plan.

My final point would be to highlight that EBITDA for the second half of 2013 will be at least the same level as the first half and likely higher. This is again the normal seasonal pattern of our business and very different from the experiences of 2011 and 2012.

What does this mean? Are we now in the recovery or does this purely reflect restocking after a weaker first-half? It is too early to be certain, but the improvement in economic indicators does give me reason to be cautiously optimistic on the prospects for 2014.

Moving to the agenda on slide number 2, as usual, I will begin today's presentation with a brief overview of our quarterly results and an update on our strategic priorities. I will then spend some time on the outlook for our markets before I turn the call over to Aditya. He will go through the results for the third quarter in greater detail and provide an update on our guidance for 2013.

As usual, I will start with safety. The lost time injury frequency rate in the third quarter of 2013 improved further to 0.8 times from 0.9 times in the second quarter. On the left-hand side, you can see the clear progress we have made in recent years, reflecting our focus on this priority. We are performing favorably within the steel industry. At the recent health and safety session of the World Steel Association in Brazil, it was mentioned that across the WSA members, there are 176 sites having a lost time injury frequency rate of less than 1. Of those 176 sites, 114 belong to ArcelorMittal.

While I'm pleased to see our focus efforts being reflected in our performance, we will continue to strive to improve particularly in further reducing the rate of severe injuries and fatality prevention. Our ultimate objective is zero harm.

Turning to the highlights of the third quarter results, EBITDA for the third quarter of 2013 was $1.7 billion. As said previously that I believe the second half of 2012 will prove to be the low point in the cycle. On a comparable year-on-year basis, there was a clear 24% improvement in underlying EBITDA. This was driven by a 6% increase in steel shipments, a 32% increase in market-priced iron ore shipments, and the benefits of our optimization efforts.

As anticipated, our net debt did increase this quarter to $17.8 billion, largely due to a seasonal investment in working capital and the payment of our annual dividend. We expect to be back at the approximately $17 billion level by year-end and remain committed to a medium term net debt target of $15 billion.

We have also made progress on several fronts during the past quarter that will positively impact our results going forward. In South Africa, we have reached an agreement with Kumba to resolve all our outstanding disputes. This long-term agreement means that ArcelorMittal South Africa will benefit from competitively priced iron ore, supplied on more favorable terms than has been the situation under the interim supply agreement in place since 2010. In addition, we no longer have an economic interest in the high-cost Thabazimbi mine, which as you know is approaching the end of its life in its current configuration. This is a positive outcome for ArcelorMittal South Africa and will support better performance from our AACIS division going forward.

We have also announced that we have reduced our stake in Annaba, the long steel business in Algeria. The project to more than double the capacity has been launched. In return for our ownership dilution, the government has offered various incentives, including low-cost local bank financing for the project. ArcelorMittal will remain the operator of Annaba and retain a 49% stake in the expanded operation. As I noted in my opening remarks, the economic indicators do suggest that we are turning a corner.

We are cautiously optimistic on the prospects for 2014; and as a result, we think it is time to start selectively exercising some of the options we have in our steel business. We are focusing on the development of our franchise businesses. I want to take the opportunity now to reinforce a message that we will remain very disciplined with our CapEx; and therefore, you should not be anticipating an increase in this area in 2014.

So on the next slide, I want to recap on what we are doing to support and develop our franchise steel businesses.

During the third quarter, we have restarted our optimization of the galvanizing operations in Dofasco. This will involve the construction of a 660,000 tonnes heavy gauge galvanizing line in Dofasco. We will at the same time close an older and smaller line with capacity of 400,000 tonnes. So shipments could increase by around 260,000 tonnes per year and Dofasco will benefit from an improved mix and optimized cost. The line six will also incorporate advanced high strength steels capability and is the key element in a broader program to improve Dofasco's ability to serve customers in the automotive, construction, and industrial markets.

We also announced the investment of $100 million to construct a new rolling mill in Acindar, Argentina. The new 400,000 tonne rolling mill will also enable Acindar to optimize production at its special bar quality rolling mill in Villa Constitucion.

As you recall, we have restarted our Monlevade expansion project in Brazil. The first phase is focused on downstream activities, including a new iron ore mill in Monlevade, as well as further investment in Juiz de Fora to raise meltshop and rebar capacity. And the project is scheduled to be completed by the end of 2015.

We're also making good progress in development of our automotive steel capacity in China. That is the construction of the VAMA steel complex, and which is proceeding well and we expect to produce the first coils in the second half of next year.

Moving on to the development of our mining business, we are making continued progress on our plan to take iron ore production capacity from our own mines from 56 million tonnes in 2012, up to 84 million tonnes in 2015. We are pleased to report the ramp up of our Canadian expansion, which is on track with full 24 million tonne run rate production expected to be achieved before year-end 2013. As a result, AMMC, that is Canadian mines, will produce approximately 18.5 million tonnes in 2013, up from 15 million tonnes in 2012.

Moving to Liberia, operations are running well. We achieved record production in third quarter. And the first nine months of this year, the operation has shipped 89% more volume than in 2012. We are also progressing with our second phase expansion from 4 million tonnes per annum direct shipped ore to 15 million tonnes per annum premium sinter feed concentrate. We now have all the environmental permits and civil works have commenced in the mine and processing sites. We still aim to complete the expansion before the end of 2015.

Moving to net debt, as expected, net debt did temporarily increase in third quarter, but we expect it will return to approximately $17 billion by the year-end. Our medium-term objective remains a net debt position of $15 billion. This is the level of debt that we believe the business can sustain at any point in the cycle. Ultimately, this will be achieved through free cash flow, and so I do not want to put a specific timeline on this target.

What I will confirm though is that while we have restarted some steel development CapEx, we do not intend to ramp up major steel growth CapEx, nor increase dividends until $15 billion target has been achieved and market conditions improve.

Moving to the next slide on asset optimization, in Liege, that is in Belgium, the industrial plan has now been completed. Mothballing of the facilities is underway and we are proceeding with the next steps of the social plans. As you can see on the chart, including residual cost effects, we have now exceeded the targeted $1 billion level of savings on a run rate basis. These residual costs will disappear from the system as you pass through the various legal and process milestones.

Importantly, we are now seeing the actions in our financial results. We are now seeing the results in our financial results. Excluding the impact of DDH, EBITDA for our Flat Carbon Europe segment was nearly $450 million higher in the first nine months of 2013 as compared to the same period of 2012.

Continuing the theme of cost cutting, we are also making progress in our new $3 billion cost optimization program. This program focuses more on variable cost reductions in our plants than on fixed-cost savings, although these will continue to be substantial. This is very much a bottom-up process rather than a top-down objective. The individual components that make up the total $3 billion plan are based not on theoretical calculations, but rather on actual KPIs, that is key performance indicators, that have been realized at our existing operations.

This is a very powerful program and I remain convinced that it is not something that all of our competitors can match. As a result, I expect the business to retain the majority of these savings. In the first nine months of the year, we are on track with annualized saving of $800 million achieved so far. This remains a key support to our results.

Next, I will discuss our market outlook briefly. Global economic indicators have rebounded, particularly those in developed markets. This indicates that manufacturing output expanded during the third quarter and is set to continue to grow through fourth quarter. As we can see on the chart, the ArcelorMittal weighted global PMI remains above 50 and the highest level since first-half 2011 despite the temporary impact of the US government shutdown.

In the US, underlying fundamentals still remain positive, but steel demand in 2013 has been impacted first by the sequester and then by the government shutdown in October. Consumer confidence has been shaken, but remains at high level supported by government growth and rising credit. Auto sales remain robust and appliance demand continues to grow strongly.

Non-residential construction has remained weak during the first half of the year, but it has begun to grow again and the rising ABI Index -- ABI, this Architecture Billing Index -- bodes well for the demand in 2014. Steel demand was negatively impacted by destocking in the first half of 2013, but since bottoming in July, inventory has begun to slowly rebound, causing apparent steel consumption to be up year-on-year in July and August and that is likely to be the story for the second half as a whole.

In Europe, after two years below 50, the Eurozone Manufacturing PMI has stayed above 50 for four consecutive months. This indicates a continuation of the slow growth in manufacturing we have seen over the past few months. The stabilization in underlying steel demand in Europe is also seen in auto sales, which after hitting 20-year lows are now up year-on-year in third quarter of this year.

We remain cautiously optimistic that with economics sentiment at its highest level since mid-2011, manufacturing will continue to slowly expand in 2014. Construction demand is likely to take longer to return to growth, but we have seen output begin to stabilize in the second half of 2013. Together with an end to destocking, apparent demand is now rising year-on-year in Europe.

Moving to China, China GDP growth accelerated to 7.8% in third quarter, the strongest rate of growth this year, supported by a pickup in investment and industrial output. Steel demand continues to remain robust, due particularly to auto production, infrastructure investment, and a rebound in the property market. Steel production has been higher than expected in the second half, but inventories have declined rather than increased.

Overall, with the stronger demand focus in China, and demand in the other major regions of EU27, Brazil, and CIS likely to be at the top of our forecast range, global apparent demand is expected to grow by over 3.5% in 2013, while ArcelorMittal shipment to increase approximately between 1% and 2%.

With this, I hand it over to Adit for his financial remarks.

Okay, great. Thank you. Good afternoon and good morning. I'm on page 13. I'm going to start with the EBITDA bridge from the second quarter of 2013 to third quarter 2013.

As you can see on the slide, EBITDA performance for the business was essentially flat in the third quarter. This is unusual, as normally the third quarter is weaker as compared to the second quarter. We did better as there was a smaller volume decline, better price cost performance, and improved mining results.

Specifically, in steel, volumes declined in Flat Carbon Europe, in line with normal seasonal trends, offset by an increase in Flat Carbon America, especially after the operational issues we had in the second quarter in AM USA. The positive price cost benefit in the third quarter was primary in FCA partially offset by slight declines in Flat Carbon Europe and AACIS operations.

In our mining business, there was an overall increase in marketable iron ore shipments, driven by improved volumes in ArcelorMittal Mines Canada, following the ramp up of the expanded capacity. The positive price effect of $30 million is because of the higher seaborne iron ore market prices, offset by our like contracts that we have on a portion of our shipments from Canada and Mexico.

Turning to the next slide on page 14, we have the P&L bridge. I'm going to focus on the chart in the upper half of the slide, which shows the third quarter results, but comparative figures are there for the previous quarter and the lower half. I will point out the key differences below the EBITDA line. During the third quarter, we booked impairment charges of $101 million against all incurred expenses related to the now discontinued Senegal iron ore project.

Net interest expense in the third quarter was $409 million, which was lower than $471 million of second quarter 2013, driven by the $4 billion gross debt reduction that we have achieved since early June 2013, We expect net interest to be at a similar level in the fourth quarter, and would expect similar levels in 2014.

Foreign exchange costs were $269 million for Q3 2013, as compared to costs of $530 million for second quarter 2013. This quarter, the closing rate of the Brazilian real was relatively stable, compared to a 9% devaluation during the second quarter, resulting in $170 million lower loss. After recording an income tax benefit of $5 million for the third quarter, we reported a net loss of $0.2 billion for the quarter, versus a $0.8 billion net loss in the second quarter of 2013.

Turning to slide 15, the slide shows the cash flow performance during the quarter. What we can see very clearly is, in this quarter, our performance was impacted by significant investment in working capital. We can see this in the EBITDA to free cash flow bridge.

Cash flow used by operating activities for the third quarter included a $0.8 billion investment in working capital, as our rotation days went from an unusually low 55 days in Q2 to a more normal 52 days in Q3. Cash outflow for net financial costs, tax expenses, and others was $1.4 billion. This includes a $0.4 billion reduction in TSR outstanding. After CapEx of $0.8 billion we had negative free cash flow for the quarter of $1.3 billion.

On the next slide, slide 16, we show a bridge for the change in our net debt. The main components of the debt increase during the quarter is the negative free cash flow as described earlier. We also paid out our annual dividend in the third quarter, which had a $364 million impact, and we had M&A proceeds from the second and final tranche of the Enovos disposal.

Lastly, as euro appreciated by 3% in the quarter, our euro net debt increased, which had a ForEx impact of approximately $200 million. As a result, net debt increased by $1.6 billion to $17.8 billion during the third quarter. With improved operating performance and previously announced M&A disposal such as Erdemir as mentioned earlier, we expect in the fourth quarter net financial debt to decline to a level of approximately $17 billion.

Let me now outline our guidance. It's in the last page of our presentation, page 17. Firstly, we are reiterating our guidance from the last quarter that full year 2013 EBITDA is expected to be greater than $6.5 billion. We're still expecting a 1% to 2% increase in steel shipments, an approximate 20% increase in marketable iron ore volumes, and support from the benefits of ongoing cost reduction plans.

Moving on to our debt position, as I mentioned earlier, due to improved operating cash flow, proceeds from already announced disposals, net debt is expected to decrease in 4Q to approximately $17 billion and the $15 billion medium-term net debt target remains unchanged. Finally, we still expect 2013 capital expenditures to be approximately $3.7 billion.

With that, we'd be happy to answer your questions. Thank you.

(Operator Instructions) We will take the first question from Mike Flitton at Citigroup.

Thanks for taking my question. I had a couple of questions. Firstly, on capacity and price rises, and then on Alabama, if you can.

So Voestalpine came out yesterday and said we are already seeing capacity coming back into the market and that's impacting the ability to raise prices in Europe. I was wondering if you could maybe comment a bit on how you're seeing the price negotiations, and also how that sits in the context of, I guess, consumer expectations that iron ore will crack in the near future and whether that's putting extra pressure and how hard those negotiations are.

Second question on Alabama, can you just give a little bit of color on the state of negotiations there? Are you actively talking to Thyssen and how much does the strategic importance of that asset sort of play a role in your valuation? And that's it. Thank you.

Adit?

Sure. In terms of Europe, if I understood your question correctly, you're talking about how capacity may increase, which dampens the possibility of price increases. There is some capacity coming back in the market. I don't think it's a significant volume. But you're right, there is some capacity coming back in the market. I don't want to speculate as to what impact that has on our market pricing as I think that's an inappropriate discussion for me to have from a competitive point of view.

What I can talk about is, what are the trends in the marketplace and what we're seeing in terms of price. Clearly, when we started or ended the second quarter and talked about our forecast in the second half, there was stronger price momentum in July than there is today. Not to say that the price environment is weak, the price environment is still stable, but momentum in terms of increasing our prices is more stable now than it was in July.

The positive has been since then a stronger intake in terms of volume and a better volume intake in the second half. We also saw in September a strong sales in terms of automotive.

In terms of going forward, I would say that with strong iron ore prices, clearly, there is some pressure on maintaining the price environment that exists in Europe. And therefore, and with a weakening in the euro, I see less import pressure, the recent weakening that has occurred today. And therefore, price momentum has slowed, there is some capacity coming on stream, but we're not seeing a weakness in the price environment.

On Alabama, first of all, we have said before that we continue to remain interested in Alabama. We think that it is a good asset and it could strengthen our franchise business United States. And because of confidentiality, we cannot give you any more information and we cannot make any more comments.

Okay, many thanks.

Great; thanks, Mike. We will move to the next question, from Mike Shillaker at Credit Suisse.

Yes, thanks very much. Two questions, I guess from me. Firstly, you had a good call early on in the year by talking about the second half being equal, at least to the first, which is unusual. Given your experience in an accelerating market, which we seem to be in, would you expect normally Q4 to be better than Q3? And also, what does that sort of tell you in terms of how you are shaping up for the outlook for earnings next year, given run rates and seasonality and similar?

My second question, I guess, is in terms of Alabama, CSA. You guys made -- built the Mittal steel empire from buying assets that no one wanted at the right part of the cycle. Is there not a time when you sit there and think, well, maybe we are at the low point in the cycle and maybe we should actually just go in and buy CSA as well as Alabama, combine the two, including potentially with our Brazilian assets? And actually, does that now actually look a little more attractive, especially now it looks like the cycle is passing the low point, because it does feel as though this asset is being sold at the low point of the cycle?

Thank you for your comments. This is not a question. So I hear it well. Thank you, Michael. We will move on to your question now. Adit?

In terms of our EBITDA for the fourth quarter, as you know, Michael, we're not providing a quarterly guidance. What I can talk about some of the things we're seeing in the marketplace. So as you are aware, seasonal volumes in Europe should pick up. So that's a positive for Q4.

We're seeing some weakness in the US that's seasonal as well, December is normally a weaker month in the US than it is -- than August in the US; and therefore, we are forecasting a drop in shipments in Q4.

We will have increased volumes coming out of our ramp-up in Mines Canada, which is a great story. We're doing very well there, and that will be a positive, assuming the price environment is stable.

The other negative we will have on mining will be increased shipping costs. So there will be some deterioration on FOB realization. Overall, all things considered, we're not expecting Q4 to be worse than Q3.

Okay. And if you -- and maybe, to turn the second one into a question, would you rule out any interest in CSA whatsoever?

Rule out?

Any interest in CSA.

I will not comment on anything I just hear. But clearly, the one thing is that we are surplus slab; we are not short slab.

Yes. Fair.

And I will just add that our focus, as an organization, I appreciate the history of how we are created, but equally important in that history has been financial prudence. So it is important for us to maintain our debt targets, to maintain that we have a strong balance sheet. So anything we do, we reiterate our net debt target and medium-term net debt target. So you can draw whatever conclusions you can as to what our ability is on those contexts based on those limitations.

Okay, okay. Thanks a lot. Well done. Thanks.

Great. So let me turn to the next question from (technical difficulty) Goldman Sachs.

Hi, good afternoon. I just have two questions, please. My first question is if you look your European footprint, the furnaces that you've got switched off at the moment. Are you thinking about restarting any capacity at all? What sort of demand environment would you like to see? How long would you like to see this recovery sustained forward before you make that decision?

And my second question is, just on the market, especially in the North American market, could you please share your thoughts with us on, I guess, the spread between US and Chinese prices? Do you think this is sustainable? Thank you.

So I'll take the first question, and then maybe Lou can comment on the second. In terms of furnaces in Europe, I think there are two stories in Europe. There is Western Europe, where all furnaces are running. They are running at high levels. To the extent that the market improves in Western Europe over the next few years, we have the ability to improve productivity, to de-bottleneck at very minimal cost, and maintain our cost performance in Western Europe to achieve that growth.

We have furnaces which are idled in our Eastern European operations. They're relatively small furnaces when you look at East Germany, Poland, and the Czech Republic. A significant portion of the idled furnaces are actually in Romania, which is in Galati, which has its own cost issues.

Again, in Eastern Europe, we have the opportunity to increase volumes as the market comes back. We have more flexibility in Eastern Europe, because that's just where we believe the growth will be stronger. We also have some opportunities in the medium term to improve the productivity of our Eastern European operations as we have not done the same asset optimization that we have done in the West.

In terms of Romania, we're making certain investments now to improve the cost position; and to the extent that that cost position improves some modifications to the one furnace operation that we have there, maybe it will allow us to start up a second furnace and then basically our footprint will be in balance based on what we believe is a good productive capacity. Lou?

If I turn to the US market, I think we all know there's a lot of factors that would drive prices and price differentials. I think we see more of a stable market in the US today and in North America in general for finished product prices. We do see some support for that particularly in terms of a key raw material there, and scrap prices going up -- I think the immediate expectation is at least $25 and maybe through the end of the year $50 up. So that would provide some support to that.

But I think we also all recognize that ultimately this is a global market and arbitrage opportunities are bid away and that the current spread between North American prices and those that you see in other major markets is wider than is typically the case. But there's two ways that that can be resolved. Over time, it will get resolved, but I think the most up-to-date information from China is that in fact prices have started to tick up there a little bit. So again, I think that that's a spread that's probably unsustainable as you put it; how it gets resolved, still an open question.

Thank you.

Great. We'll move on to the next question from Alessandro at JPMorgan.

Good afternoon to everybody. Congratulations on (technical difficulty). My two questions, the first one is related to the new management gain in saving. How much of the year-to-date savings is related to the efficiency improvement of your Mining division? And if there is any ongoing study on the table to exploit any further potential?

The second one is related to a comment that the CEO of Voestalpine made yesterday, saying that the order book for the automotive is full until March 2014, mostly for the luxury car segment. Can you add your comment on your own order book entering into 2014? Thank you.

Would you like to comment on automotives?

(inaudible) in Europe.

Sure. Alessandro, thank you for your message. In terms of your questions, we're not providing direct color on our order book. Clearly, we are seeing an improvement in Europe in 2014 versus 2013. As you know, we had negative apparent steel consumption in 2013 and 2014. We've not released a forecast, but our expectation is that it's clearly in positive territory.

In terms of the automotive landscape, I think I made some comments earlier. September was a strong month compared to what we've seen in the past, and if that's a good -- if that's a reflection of what we're going to see in the future, then clearly the automotive environment going forward will be stronger.

We have, as I said before as well, high utilization levels in our Western European facilities, both on the primary and the finishing, primarily because of the asset optimization work that we have done.

In terms of management gains, I think you can add some color and Bill can talk about the work that they've done on the mining space.

Yes, I think most of the management gains is proportional to the cost base of the segments that we have. So it's a comprehensive program that we're looking at as Mr. Mittal indicated, very bottom-up and very much driven by the extensive information that we have and data that we have from the many plants that we have operating to benchmark and identify improvement opportunities.

So I think proportionally, of course most of these gains are in fact coming from the steel side of the business, but as with any mining company, I think we have an even stronger focus on cost than was the case in, let's say, two years or three years ago and I think Bill can comment on the activities underway on that front.

Yes, thank you, Lou. Indeed, cost is very much on the agenda, I think, as with all mining companies and particularly with our steel colleagues. We'll get benefits that's coming through from the volume impact of the ramp-up, that will be coming through.

Furthermore we're also from our procurement activities, from some of the aggregation we're doing, we're starting to see some visibility, cost reduction coming through on things like tires, fuels, and so on. For contracted costs, it depends on location, but again, we see potentially some benefits in some areas coming through on that.

On the broader equipment items, lead times are starting to come down. We expect that will eventually lead through to improved pricing as well.

Thank you very much.

Okay, good. We'll take the next question from Rochus at Kepler Chevreux.

Yes, hi, everybody. One question is regarding your Flat Carbon Americas business, where you recorded a pretty strong crude production figure. Not sure whether you can strip out the North America portion. What I'm particularly interested in is, what was actually the timing of your Cleveland relining? When did it go out of the market and when is it likely to get back? It seems like this has been pushed back from the third quarter more towards in direction of the fourth quarter.

Coming toward the mining side, looking at your 18.5 million tonnes guidance for AMMC this year, it looks like that the 2.5 million tonnes from the expansion at AMMC is heavily due to the fourth quarter; and based on the third quarter run rate it probably points to some 2 million tonne coming from this new capacity. Is this something you can confirm?

And in terms of your production at Liberia, the first 0.1 million tonne production at Africa would still imply that the production at Liberia is not much bigger than the 4 million tonnes you initially targeted.

Just commenting on the production recovery in Flat Carbon Americas, this was, I think, overwhelmingly a story that we had a lot of coincident production challenges in the second quarter, primarily in the US, and that I think we've had quite a good recovery in most of our operations since then. In fact, we're at really very high levels of production at some of our facilities in October, for example.

So I don't think the Cleveland reline is a major part of that story. That has been on schedule. The furnace was taken down in the second half of August, and we expect that to be back sometime this month. So it's basically on schedule, and just to give you some rough numbers on that, it's probably around 100,000 net tonnes a month that you'd look at being out of production during that outage and in fact, when it comes back, it will be able to produce after the reline at a higher level than that.

Bill, on the mining?

Yes. On the minings, certainly the ramp up in Canada is going well. We are sticking to the 24 million tonnes run rate by the year-end, and we are confident of that.

On Liberia, it's been a very much improved year. We have done better in terms of both production and shipments. We are I think up around 50% in the quarter, year-on-year in production in Liberia. And looking at the fourth quarter, if we can get the shipping right, we'll be targeting close to 5 million tonnes for the year there.

I just want to add maybe that -- okay.

Go ahead.

Sorry to step in, but when I look at the Africa production, which is at current production at a run rate of 5.1 million tonnes, if I deduct the [Galian] part, it is probably over 1 million tonnes effectively. There's significant gap between the shipment level of 5 million tonnes and the production, which is probably closer to 4 million tonnes. Is that correct?

Yes, that's correct. I think we are targeting a slightly more than 4 million production rate. Shipments are higher because we had weaker shipments in 2012 in Liberia. So that assessment is right.

Also on Canada, I think the production level actually in the third quarter is higher than what you deduct, because the way we measure production is shippable production. So the actual material has to be on port level. And we had quite a lot of materials that's concentrated at the mine head, but not yet transported to the port.

So we should have a good quarter in the fourth quarter in Canada and Bill and his team have done an excellent job in terms of doing the ramp up in that project.

Okay. Thank you, Aditya.

Okay. So we'll move to the next question from Steve Benson at Goldman Sachs.

Thanks. I had two questions. Firstly, just back on the iron ore, it's just a clarification. In the notes to the report today on the iron ore production and in iron ore shipments in the back, it says you have own iron ore production 14.9 million tonnes, total shipments 16.2 million tonnes. Why the difference? Because looking back, shipments have always been lower.

The strategic contracts.

So if you look at all iron ore production on the appendices, you have to add the strategic contracts in iron ore. So if you look at, for example, third quarter, group iron ore production is 17.7 million tonnes.

Right, okay, thank you.

And if you look at it on a nine-month basis, the shipment levels are matching the production levels.

Okay. That's clear. And then, just looking into 2014, what are your expectations on iron ore price development from here as you go out into the first half of next year?

Yes, since we are the buyer and consumer of the iron ore, we do not like to give you any guidance on the pricing environment. What we have seen this year is a good indication that the demand for the iron ore has been strong; unexpectedly, the prices have been strong this year comparing with 2012. And the global growth is about 3%, 3.5%.

And if you look at WSA, World Steel Association, they are saying that next year steel demand will grow, say, at 3.5%, same like this year, which means there is some tension in the iron ore price. And if you look at the various analysts, they have also improved their consensus for 2014.

Okay, thanks very much.

Great. So we'll take our next question from Alex at Morgan Stanley.

Hi, good afternoon, it's Alex at Morgan Stanley. My first question is on Flat Carbon Americas, can you explain a little bit why cash costs have been so low at $760 per tonne even compared to the last couple of quarters? Is there anything particular here or can we expect this cash cost run rate more or less unchanged going forward? That's my first question.

My second question is on the bridge you showed year-over-year. If I would make the same bridge just for the steel business on a clean base, the improvement is around about $200 million in EBITDA, with volumes being up 1.2 million tonnes. Given the operating leverage you have, that pretty much explains this $200 million or even more. What has changed year-over-year? Was it more pricing weakness, given the cost savings you have from asset optimization and management gains? Thank you.

So you want to talk about the cost?

I can take that first, yes, that was the first question. On the cost at FCA, I think you have to look at -- again, we had pretty severe production disruptions in the second quarter and that not only affects your ability to ship, it affects your cost structure. So one of the things that you do in that quarter is, as you have those production problems, you take the inventories down quite a bit. That pulls the fixed costs from that inventory into the income statement. In Q3, then, we're rebuilding the inventory to some extent, which has the opposite effect.

So there is some -- it's difficult then to look from one quarter to the next when you have that kind of -- those production issues, but I do think we have seen margin expansion both on the price front and with some better input prices for us, so that's part of the story. The higher volume that we have then, we're absorbing more of the fixed costs that are in the business in any period.

And in addition, I think we have probably a bit lower maintenance costs in Q3 than we would have on average through the year just because of the timing of outages. Q4, for example, is typically a period when you do a bit more of the R&M that's required throughout the year. So I think there are some positives in the overall business in terms of better cost performance, but a lot of it is timing effects across Q2, Q3, Q4.

Just to clarify, it's the lowest cost since the second quarter 2010 basically. Taking this delta of $70, how much would you say is coming from basically overproduction versus the second quarter and the reversal basically of it?

I have a hard time giving you a hard number on that right now. Maybe, Daniel or the team can get back to you on that issue. I don't want to shoot from the hip on it.

No problem. Thanks.

Another way to think about it is, we're not seeing -- we're seeing some fixed cost increases in Q4 in FCA, but not dramatic. So I think this is a good reflection of -- maybe it's slightly lower right now in the third quarter, but it's not such a -- it's not an anomaly in terms of cost performance.

Okay, great.

At least that's what we hope. Just addressing your other question, in terms of bridging last year to this year, we haven't really done this bridge, so maybe we need to do it on a global basis and come back to you. I think there are positives and negatives, and I will list them out to you, and then I think the rest is the compression of the metal margins. I don't have an exact number for you.

But clearly, the positive is an increase in volumes. The other two positives are management gains, as well as the asset optimization that happened down in Europe.

The negative has been the operational disruptions, right? In the first half, we had issues in the US; and in the second quarter, we had issues in South Africa. We continue to have certain issues in Kazakhstan and our business in Ukraine.

Okay.

I think the delta of that, the rest of the delta is the compression in the metal margin.

Okay. Great. Thanks a lot. Thank you.

Okay. So we'll move quickly to the next question from Neil at Nomura.

All right. Just two questions from me. Firstly, I guess just a continuation of that question on the Flat Carbon America cost base. Can I just clarify? Earlier in the year, I think it was Q2, you mentioned that there was a $200 million impact of production disruptions in the US. So is it fair to say that the large part of that has been reversed in Q3? That's the first question.

And then, secondly, a bit more strategic. I mean, you said you've obviously started selective investments again in steel in Brazil on the long products side. Given you mentioned your long slab in Brazil, would flat rolling capacity be something you think about building out in Brazil? Would that be strategically interesting to you?

I think a loose comment is not that we have regained the $200 million, I mean there is a loss of volume and cost increase; we had to import slabs from some of our other facilities.

I think in the third quarter, perhaps, some of the R&M -- there is very low R&M that was done, because so much of R&M was focused in the second quarter, and some of that will come back into Q4. And that's all the story, as other than that, the US business did a good job of coming back from the operational disruptions they had in the second quarter, and that's what you're seeing in 3Q, and there is the inventory effect that we spoke about.

In terms of investments, I think we should put this all in context. The first context is that we intend to achieve our medium-term net debt target before we materially increase steel CapEx. Therefore, 2014 CapEx numbers are also similar to 2013.

The projects that we have announced today, some of these projects like Monlevade are -- a lot of the CapEx has already been spent. So almost half of the CapEx has already been spent. Incrementally, this is much lower CapEx on a going-forward basis.

At this point in time, we have not chalked out to the market what our long-term expectations are in Brazil. Clearly, another project which remains on hold is going our automotive capability in Brazil. So if there is anything we want to do on the flat side, I think, it's fair to say that the first investment would be to expand our core rolled and galvanizing operations at Vega.

Okay. And for a slight extension of that question, so you basically got another $1 billion or so of growth CapEx in your guidance and you've outlined a couple of the points. The steel investments look fairly low order. Is it fair to assume that the delta between the $1 billion and the few steel investments that you've outlined, that's Liberia expansion?

Yes, that's right.

Okay, thank you.

Great. So we will move to the next question from Rui of Espirito Santo.

Hi. Good morning, gentlemen. I have two questions. First, regarding market position, while it looks like you have gained some market share in the US during this quarter, and I'm excluding the negative effects of Q2 in Flat Americas and in Europe, we haven't seen that at least over this quarter, but I believe we may see some market share gains as long as you keep materializing and improving your cost structure and improving your pricing power. And the question is, if this is true, in which sectors, can we see or is more likely to see these market share gains? This is the first question.

The second question on sale of assets, well, after Erdemir stake sale there was some speculation that you would restart selling some non-core assets. Is there any chance that we can actually start seeing again a new round of sale of non-core assets? Things like China Oriental, Hunan Valin. Or are these things now strategic or it's simply not right, the time to do it? Thanks.

Okay, great. Maybe, I'll quickly answer these questions and then Lou can add. In terms of market share, the way we look at the market share data, our market share is more or less flat. I think in the US clearly we went down in the second quarter and we have restored our position; and in Europe, it's largely flat as well. Our focus clearly is price for our volume as long as we protect our market share.

So that's our strategy. So we're not intending to go out and gain share at the expense of driving down the whole market.

In terms of sale of assets, we have said that the lion's share of the sale of assets has been completed. We feel comfortable with the level of net debt that we have. We believe that we will achieve our medium-term net debt target through the generation of free cash flow. So at this point in time, we may still do some selective M&A, but the focus on reducing debt is through free cash flow.

Lou, you have any comment?

I think that Aditya described it correctly. We obviously took a hit on the market share as our shipments were affected by the production outages. But I think the share is basically stable with maybe over a few year period some increase to recover to where we were before the financial crisis hit.

Okay, very clear. Thank you.

Okay, so we'll take the next question from Philip at ABN Amro.

Yes, good afternoon, gentlemen. Most questions have been asked. I have one more question actually on AMMC. I was wondering if you can indicate at what level the cash costs is currently at your Canadian mines and at what level you expect them to be in 2014. And perhaps, you can also indicate -- if you could indicate what you expect for the additional shipping cost and perhaps the regions that you're planning to ship the incremental production to.

We are not actually giving our specific cost basis for individual mines. What you can really estimate that as we're increasing our volume, our cost position in Canada will continue to improve. I don't know whether we're giving any -- we're giving?

Yes, what I would add to that Mr. Mittal is that previously, we said we will be targeting around $38 a tonne for the iron ore in Canada, that was 2011 basis; so nominal terms would be higher. With the expansion, we're confident the cost will come down. We're still targeting that to be where we get to in the mine there.

And shipping cost and where -- regions?

The primary focus is of course Atlantic Basin, internal as well as external for the [plans] in this stage.

Okay, thank you.

Great, okay. Thanks for that. So we'll take the next question from Carsten at UBS.

Thank you very much. It's Carsten Riek from UBS. Just a question on the capacity. In the morning, you mentioned that one of the blast furnaces in Poland, I think in Dabrowa Gornicza is coming back in the fourth quarter. Can you remind me about the capacity here?

And the second question I have is on the Southern European market, have you seen any uptick in the market? Because after the second quarter, you hinted you could also see higher volumes in Spain and might ramp up another blast furnace in Spain.

Okay, Carsten. First of all, we don't have another blast furnace in Spain to ramp up. I think it's important for everyone to understand we're running all of our blast furnaces in Western Europe at high levels.

In terms of the DG furnace, that was down just for the quarter, or third quarter, that's not been down the whole year and that's going to come up. And that's roughly a 2 million tonne furnace and so you can see the impact in the third quarter of that, but that's going to come back in the fourth quarter. So that's not a furnace that was down that is being ramped up.

Okay, perfect. Thank you.

Just a maintenance shutdown, thank you.

Okay, good. So we'll move on to Bastian at Deutsche Bank.

Yes. Good afternoon, gentlemen. I just have one quick question left, which is on your operating cash flow. Can you help us to understand what is in the position of Others where you had virtually a $1.3 billion swing to the negative side in Q3 versus Q2? What has been driving this? And maybe you could give us also some guidance here on what we can expect for the fourth quarter.

Sure. In terms of the fourth quarter, I think the guidance we're providing is that our net debt level is going to come down, and so we're guiding you towards a level of $17 billion of net debt, and you can probably do the math, and see how much that is.

In terms of the free cash, clearly, we had an investment of $800 million in working capital. We saw iron ore prices move up and other -- and volumes also remained strong because normally, otherwise you tend to have a release in terms of working capital. We also reduced our TSR outstanding by about $400 million, and I think that basically captures the lion's share of that negative free cash.

I was actually referring to the Others item. So working capital is clear; but then if I look at the Others item, I think it was positive, I think roughly plus $700 million last quarter; now, it's negative $800 million, which is not including the working capital. So wondering what has caused this swing.

Yes. There was a TSR effect of $400 million in there, and then apart from that, that reflects payments that we make for employee benefits, VAT, and other such non-working capital liabilities. If you look at it on an annual basis, the swings are not so much.

Okay, thank you.

Okay, thanks, Bastian. So we'll move on to the next question from Alex of MainFirst.

Thank you. Two questions. First of all, what's the situation [in the fallout] on European steel market, and especially what's the impact from rebar currently? Difficult situation for your business in the region.

And the second question, could you elaborate a bit more in detail about the price level expectations for spot iron ore and coal, which are underlying your guidance here, and maybe also an indication for Q1? Thank you.

Okay. So, we don't comment on our competitors. So I can't really talk about rebar.

In terms of iron ore, our guidance framework is based on an average of $130 for the year. To the extent that iron ore prices for the year are higher than that, then as a business, we should do better than that guidance framework.

We have not provided with the coal framework. But clearly, pricing of coal is down second to third quarter; that has had some impact on our mining business as we do ship coal, but clearly that has been more than offset by the positive price movement in iron ore.

Okay. Thank you.

Okay. So we'll move to the next question from Luc Pez with Exane.

Hi, gentlemen. Two questions if I may. First of all, a small one. With regards to Dofasco, you've not quantified or I haven't heard the CapEx that is involved with the expansion in galvanizing. So happy to hear the number.

Secondly, with regards to market outlook, could you provide a bit more color with regards to how you see demand evolving next year? Are you in line with what the WSA is saying, or would you see a bit more growth? Thank you.

Okay. In terms of Dofasco, I think there is a reason why you've not heard the CapEx number. We have not disclosed it. In terms of market outlook, are we similar to WSA or not?

Yes, we are not giving the -- we have not finalized our market outlook for 2014. We are still in the process of finalizing our business plan for 2014. Maybe when we meet up in February, we'll have a much better sense of market outlook.

But how we're -- I was in the World Steel Association meeting in Brazil, and I think they are in the right direction of thinking. Only surprise which we saw this year was China's demand; we all expected 3%, 3.5%, and we see that we are ending around 6%, 7%.

But basically, when I look at these numbers of World Steel Association, they are in the right direction. But we are not able to confirm that this is our forecast at this time.

If I recall correctly, at the start of the year, you had low growth expectations with regards to China, I would argue like WSA; but you had also very higher expectations with regards to the US. Therefore, wondering to what extent destocking has led you to change the numbers and you've been cutting them again today.

No. In the first half of this year, US declined by 6%; and the second half, we are seeing positive 6%. So by the year, we're expecting US to be positive 1%, 1.5% and our forecast for US was around 2%, 2.5%.

Okay, yes.

We are forecasting negative for the US for the year, negative 1% and we were in positive territory when we started the year. And real demand is still in positive territory in the US and so there's some destock which has occurred in the market. Maybe there is some impact of the sequester because the US federal government has spent less money in 2013. But we are expecting, as we said earlier, positive ASC, apparent steel consumption, growth in the US.

Thank you.

Okay, thanks, Luc. So we'll move to the next question from Jeff at Macquarie.

Yes. Hi, good afternoon. Just two questions, the first is just going back to understanding the third quarter result. If I look at the EBITDA reported by each segment, you sum about $1.85 billion of EBITDA, but it looks like there was a larger than usual say hit from Others in eliminations. So I was just curious if that number was just a little bit bigger than usual, and maybe what was in that number, the negative $1.44 billion if I do the math. And then, I mean, well, maybe you want to answer that, and then I have a second question.

Sure, Jeff, how are you? You're right, the Others in eliminations was larger. We had a lower income from our shipping business and captive insurance and more stock margin elimination than we had previously as volumes increased. I would expect that in fourth quarter, that number would come back to a more normalized level of about $70 million or $60 million.

Okay, that's helpful. And the second question I guess is just looking at capacity utilization rates, and -- I mean, I get the question quite often as to what's underpinning strength of, say, the US steel price. Secondly, we've seen some pretty good price movements in the second half of this year for the European price. Is there a disconnect that we're not understanding? That actually in terms of like flat rolled products, the market is really actually tighter than we think it is, because if you think about what you're doing in Western Europe, you're running full out in terms of your blast furnaces.

If you think about the US, I mean, yes, there were some competitors who had outages, but essentially, I think there's been good discipline from the main producers of flat-rolled product. I mean is that -- I mean, if we take that in isolation, I mean, yes, I know you have scrap pricing moving up, which is good; we've got elevated iron ore prices, which is good for underpinning. But I guess on the demand front, is it something that we're missing that like I said, the market is actually maybe a little tighter than say the headlines would lead us to believe?

Lou.

If I could talk about the US market, I think people do cite operating statistics that are -- the capacity utilization rates that probably understate the actual rate in the flat rolled market. Because those figures are typically cited for the entire market and I think the long products market is much more construction oriented; construction, as you know, is still the segment in North America and the US that has the furthest to go to get back to the pre-crisis levels.

We are running our facilities at a very high rate in North America. I do think that as I mentioned, we're relining one of our Cleveland blast furnaces now. As a blast furnace reaches the end of its campaign, it can produce less, so we'll see some boost in capacity back towards the reported level after that repair and we've got several other furnaces over the next three years or four years that will face similar situations.

So I don't want to overstate it. But I do think the number in the high 70%s that people sometimes talk about covering the entire industry, it's arithmetically correct, let's say, but simply understates the operating rate in at least the flat rolled part of the market.

Okay, that's helpful. Is there any sort of commentary that can be provided the same way for, say, Western Europe?

Sure. In terms of Western Europe, I think the levels are lower than the US. Fundamentally, we have not seen the type of recovery we've had in the US marketplace over the last two years, right. We have had negative apparent steel consumption growth in Europe in 2012 as well as 2013 and the prognosis for growth remains flat. Hence, the asset optimization, which clearly does help.

In terms of Europe, nevertheless, I would say that the headline numbers that you see in terms of crude steel capacity utilization are probably more conservative than the reality. For people to bring back some of these furnaces, you need to bring back crews, you need to make some nominal CapEx, you need to set up your raw material linkages. And you only do that if you see a step change in the market, and you believe that step change in the marketplace will not impact the overall profitability, because you don't want to bring down the prices of the remaining steel that you're selling. So in that sense, I think capacity utilization levels are slightly healthier than the numbers that we all see.

All right. Great. That's helpful.

Sure.

Thanks, Jeff. So I think we've got about five more minutes, so time for two more questions and we'll take the first from Chuck Bradford at Bradford Research.

Hello. Good morning.

Good morning.

Hi, maybe a year ago, you signed a contract with Minnesota Iron & Steel for pellets. But they apparently delayed their project a year. What's your current status with them and where do you stand now with Cliffs?

I think, Chuck, we have a contract with that subsidiary of Essar and I know that they're working on lining up the funding they require to complete that project. My understanding is they are investing funds in the fourth quarter now. So we expect to have that material and expect that contract to be honored.

I think with Cliffs, we have a good relationship with them. They are a very important supplier to us. We have contracts that -- two contracts basically, one of which runs out, the smaller one, in the end of January 2015. The other one, which is more substantial volumes, runs out the end of 2016. So 23 months later. And they are still far enough away that I think we haven't really initiated any serious discussions, let's say, about how we would resolve those or continue or adapt those contracts going forward.

Thank you.

Okay, good. So we'll now move to the last question from Alain William at SocGen.

Yes. Hi, everybody. Actually, I just had a quick question regarding the shipments to crude steel ratio which was unusually low for Flat Carbon Europe. I just wondered if there was a specific reason there. That was the question.

So what do you mean it was --

Shipments were low but production remained high.

Yes. So clearly, we are building inventory, we tend to do that. If you looked at last year, after we did the AOP, we want to run stable operations, and part of the strategy of running stable operations is that we maintain the level of steel production throughout the year.

Levels of shipments are higher normally in the first half than second half. So we build inventory in the second half, which we release in the first half.

Okay. That's fair.

So that's all.

Okay. Fair, thanks.

So before we close the session, I'd like to make two comments. One that I see the low point in our EBITDA is behind us, and all of our efforts and focus of the past couple of years are delivering. We can see the benefits of assets optimization, we can see the volume growth in our mining business, and we have fixed the issues in South Africa and Algeria. We are now in a position to restart some focused CapEx to support our steel franchise. And finally, the improvement in economic indicators give reasons for cautious optimism on the prospects for 2014.

With this, I look forward to updating you on the progress at our yearly results in February. Have a good day.