The Rising Influence of Rising Affluence

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More on CLF’s outlook for the seaborne iron market…

http://www.thestreet.com/_yahoo/story/11014578/1/cliffs-ceo-predicts-years-long-iron-boom.html

›Cliffs’ CEO Predicts Multiyear Iron Boom

By Scott Eden
02/17/11 - 04:11 PM EST

NEW YORK (TheStreet) -- The bosses at Cliffs Natural Resources(CLF), the Cleveland-based mining concern, think the ongoing boom in industrial-metals will ride along steadily for the next four years.

In an interview the morning after the company reported blockbuster fourth-quarter results lifted high by buoyant iron-ore prices, Cliffs CEO Joseph Carrabba was confident that demand for the crucial steelmaking ingredient would overrule supply for the foreseeable future.

That's especially the case, he said, since U.S. steel mills have indicated recently that they'll continue to bring blast-furnace capacity back into production this year -- capacity they had idled amid the recession.

Those blast furnaces, of course, require iron ore to smelt into steel. As such, Carrabba said, "We still believe we'll be in a sold-out position -- and that the situation won't change much through the rest of the year." On Wednesday, the company guided analysts and investors with a sales forecast of 28 million tons for 2011, up from about 26 million in the previous year.

Pricing, in other words, likely won't be a problem for the icon of the industrial Great Lakes region, which got its start as an iron miner for the steel furnaces that fed the U.S. automobile industry.

The company indicated as much in its fourth-quarter earnings release after the bell Wednesday. (Steelmakers, in turn, will likely keep passing their rising costs onto to their customers -- a middleman in the inflationary chain reaction.) Cliffs said it expects to glean $140 to $145 in revenue-per-ton of iron ore in 2011, well above the approximate $110 per ton that the company had been fetching.

According to one analyst, KeyBanc Capital's Mark Parr, those per-ton revenue projections imply 2011 earnings of $14.50 to $15.50 a share for Cliffs. As of now, the Wall Street consensus target stands at $10.73.

Investors ate up the company's guidance. Shares of Cliffs were surging 8% Thursday to $100.35, broaching the century mark for the first time since August 2008.

Carrabba attributed much of the iron-ore price strength to the seaborne trade -- the stuff that the Big Three global miners, BHP Billiton (BHP), Rio Tinto (RTP) and Vale (VALE), ship in dry-bulk freighters to the enormous steel mills of China, Japan and Korea. The pricing system used by these buyers and sellers underwent a tectonic shift last year, moving from an annual benchmark contract to a shorter-term one that's linked to the spot market [#msg-48543418], where prices are quoted on daily indexes.

"Everything drives off of that," Carrabba said. "The Platt's pricing, for instance, just continues to move up. It's above $190 [a ton] right now."

For the most part, Cliffs Natural Resources mines its iron ore in Minnesota and Canada and sells it to North American steelmakers. But the pricing in its own supply contracts, based on complex formulas, derives partly from the going rate for seaborne iron ore.

Everyone knows what's been driving rates for that seaborne iron ore higher: China and its robust steel industry, which now produces more than half the steel manufactured in the world. Earlier this year, Cliffs made a $4.5 billion move to gain exposure to the lucrative Chinese trade by acquiring the early-stage Canadian iron-ore producer Consolidated Thompson [#msg-58708254].

Carrabba and his team believe Chinese demand for iron ore, despite recent economic curbs put in place by inflation-anxious government authorities, will continue to grow this year, thus continuing to drive the commodities boom.

Cliffs, of course, isn't alone in this line of thinking. BHP, Rio and Vale have all started immense billion-dollar mine expansions in their respective iron-ore fields in a bid to take advantage of demand. "We only have one economist," Carrabba said. "They must have a couple floors' worth of economists, so they must feel pretty good about the outlook as well."

But how long can it all last?

"That's always the million-dollar question in this business," Carrabba said. "Eventually, it is a commodity, it is a cyclical market, it [a downcycle] will happen. Our best guess? We put things out to 2015 or 2016 before we see any crossovers [i.e. a downturn]."

He added, "Barring some outside shock that can't be anticipated, if you look at just within the industry, if you look at the industry fundamentals, we're quite comfortable going out the next few years."

Carrabba said that the company will spend the rest of 2011 digesting its recent acquisition of Consolidated Thompson, which just began iron ore production in northern Ontario at a mine called Bloom Lake, not far from a mine already operated by Cliffs. The deal is expected to close in the second quarter. The plan is to double production at Bloom Lake to 16 million tons by 2012.

Consolidation across the basic materials sector has heated up since late last year, but don't look for Cliffs to do any more deals in the immediate future.

"We have a nice organic growth pattern right now," Carrabba said. "Certainly you'll see us back into the M&A space in '12 and beyond, but this year we're going to stay home and work it pretty hard."

On Wednesday, Cliffs reported earnings for the fourth quarter of $384 million, or $2.82 a share, more than triple the numbers from the year-ago period.‹