Replies to post #1318 on The Rising Influence of Rising Affluence

[DewDiligence]

Yes, CLF is a high-beta stock. However, I don't try to make calls on short-terms moves by the broad market. Regards, Dew

[DewDiligence]

Mining stocks are soaring today—e.g. CLF +7%. Not sure why.

[DewDiligence]

CLF Reports 2Q10 Results



[CLF is the most volatile stock I follow closely—the share price during the past two years has been as high as 122 and as low as 12. (The 2-year chart is shown above.) At the current share price of a bit more than 60, the P/E based on estimated 2010 EPS is a paltry 7x, which is shockingly low for a well-run company with a strong balance sheet and considerable buyout vig. Investors have been unduly scared by the volatility, IMO.

CLF provides very detailed information on results and forecasts in each of its three main business segments—North American iron, North American coal (mostly metallurgical), and Asian iron—as can be seen from the highlighted passages below. Please see the actual PR for the full financial tables.]

http://finance.yahoo.com/news/Cliffs-Natural-Resources-Inc-bw-4171672966.html?x=0&.v=1

›July 28, 2010, 5:10 pm EDT

• Revenue Increases 203% Over Last Year to a Second-Quarter Record of $1.18 Billion

• Net Income Reaches $260.7 Million, or $1.92 Per Diluted Share

• North American Coal Delivers Profitable Quarter with Over $23 Million Sales Margin Contribution

CLEVELAND--(BUSINESS WIRE)--Cliffs Natural Resources Inc. (NYSE: CLF) today reported second-quarter results for the period ended June 30, 2010. Consolidated revenues were up 203% for the second quarter to a record of $1.18 billion, from $390.3 million in the same quarter last year. The increase was driven by higher sales volume and pricing in each of Cliffs’ business segments, reflecting an improvement in demand for steelmaking raw materials from the comparable quarter in 2009.

Joseph A. Carrabba, Cliffs’ chairman, president and chief executive officer, said, “We believe the impressive results delivered in the second quarter mark a milestone for our Company. Each of our segments generated strong year-over-year profits, including a shift to profitability in North American Coal. The actions taken in recent years under our strategy to grow as a diversified mining company are contributing significant momentum to our earnings and cash generation potential. Our recently announced acquisitions of INR Energy’s coal operations and Spider Resources will continue to strengthen the Company as we gain additional exposure to high-growth markets.”

Operating income for the second quarter was $365.8 million, versus an operating loss of $17.3 million in the same quarter last year. The swing was driven by improved fundamentals in the markets for the Company’s products, reflected in increased volumes and profitability in all of Cliffs’ business segments.

Second-quarter 2010 net income increased to $260.7 million, or $1.92 per diluted share, from $45.5 million, or $0.36 per diluted share, in the second quarter of 2009.

North American Iron Ore

Second-quarter 2010 North American Iron Ore pellet sales volume was 6.6 million tons, a 185% increase from the 2.3 million tons sold in the second quarter of 2009. The increase in sales volume is attributed to a stronger demand for iron ore pellets, reflecting current North American steel industry capacity utilization of more than 70% compared to an average utilization rate of approximately 45% for the same period in 2009. Consistent with first-quarter results, the successful marketing of additional iron ore pellets available for sale from Cliffs’ acquisition of its former partners’ interests in Wabush Mines also contributed to second quarter’s increase in sales volume over prior year.

North American Iron Ore revenues per ton were $99.80 during the second quarter, compared to $98.88 in the second quarter of 2009. Cliffs indicated that the sales volume for the current quarter contained approximately 2 million “carry-over” tons from 2009 at significantly lower prices. In addition, Cliffs noted that revenue per ton in the second quarter of 2009 was much higher than its average full-year 2009 realization of approximately $83 per ton. This was due to an atypical combination of customer sales and very low sales volume in the year-ago quarter.

Cost per ton in North American Iron Ore was $68.22, down 19% from $84.39 in the year-ago quarter. The decrease was driven primarily by higher volume and resulting leverage over fixed costs, combined with lower energy-related expenses. This was partially offset by higher profit sharing-related expenses and the effect of Cliffs 100% ownership of Wabush Mines.

North American Coal

North American Coal sales volume in the second quarter of 2010 reached 719,000 short tons, a 149% increase from the 289,000 tons sold in second-quarter 2009, as customers in the United States and Europe began increasing coke production rates to support higher year-over-year steelmaking utilization rates.

Revenue per ton in the business segment increased to $144.65, a 54% increase over 2009. Cost per ton declined 30% to $112.66 from $159.86 in the second quarter last year. As a result, the North American Coal business segment reported $23.0 million in sales margin for the second quarter, its best performance since Cliffs acquired the business in mid-2007.

Asia Pacific Iron Ore

Second-quarter 2010 Asia Pacific Iron Ore sales volume was 2.2 million tonnes, a 43% increase over the sales volume of 1.6 million tonnes in second-quarter 2009.

In the Company’s first-quarter 2010 results Cliffs recognized revenue assuming certain lagging quarterly pricing mechanisms being adopted by major Australian producers. Pricing mechanisms discussed with customers for the seaborne iron ore market continued to change through the second quarter of 2010. The Company settled final first-quarter prices, resulting in a $37 million favorable adjustment to record the additional revenue collected in excess of the first quarter assumed price increase.

Adjusting for the $37 million in revenue related to first-quarter shipments, second-quarter revenue per tonne in Asia Pacific Iron Ore was $123.06, compared with $59.04 in 2009, or up over 100% from last year.

Per-tonne cost of goods sold increased 5% in the second quarter of 2010 to $62.23 from $58.97 in the second quarter of 2009. The increase in expenses was primarily driven by utilization of higher-cost long-term stockpiles.

Sonoma Coal and the Amapá Iron Ore Project

In the second quarter of 2010, Cliffs’ share of sales volume for its 45% economic interest in Sonoma Coal was 380,000 tonnes. Revenues and sales margin generated for Cliffs were $43.8 million and $14.8 million, respectively. Revenue per tonne at Sonoma was $115.20 with costs of $76.24 per tonne.

Cliffs has a 30% ownership interest in the Amapá Iron Ore Project. During the second quarter, Amapá produced a total of approximately 900,000 tonnes. The project produced equity income of $9.1 million for Cliffs’ share of the project. The project was essentially break-even for the quarter, but benefited from a reversal of a debt guarantee and certain other accruals.

Capital Structure, Cash Flow and Liquidity

At quarter-end, Cliffs had $527.5 million of cash and cash equivalents and $725 million in long-term debt. Cliffs had no borrowings on its $600 million revolving credit facility. At Dec. 31, 2009, Cliffs had $502.7 million of cash and cash equivalents, $525 million in long-term debt and no borrowings on its credit facility.

Subsequent to the end of the quarter, Cliffs announced its entry into a definitive agreement to acquire INR’s coal operations for $757 million. In addition, Cliffs indicated that after completing its tender offer, it now owns approximately 85% of junior exploration company, Spider Resources, and intends to proceed with a “squeeze-out” transaction to acquire the remaining shares. The total cash outflow to acquire Spider Resources is expected to be approximately $120 million. Both transactions are expected to be financed in the near term with available liquidity, including cash on hand and the Company’s $600 million credit facility.

Depreciation, depletion and amortization in the second quarter was $88.5 million. Year-to-date, Cliffs has generated approximately $235.7 million in cash from operations.

Outlook

Cliffs’ 2010 outlook assumes steel utilization rates will remain static for the remainder of the year. The ongoing changes in pricing mechanisms replacing the historic benchmark systems for iron ore and metallurgical coal are resulting in a more fluid and uncertain near-term pricing environment for these commodities. Cliffs remains in discussions with customers regarding how its current supply agreements will take into account these new mechanisms. In addition, pricing mechanisms closer to spot rates appear to be developing in Asia Pacific. These discussions may result in changes to the pricing mechanisms currently used with various customers and could impact sales prices realized in current and future periods. This could have a material effect on the Company’s results of operations. Accordingly, the outlook below is subject to change based on these and other factors.

North American Iron Ore Outlook

Cliffs said it is maintaining its 2010 North American Iron Ore sales volume expectations of approximately 27 million tons and revenue per ton of $107 - $112 [but this figure could be reduced by $15/ton if the arbitration described below does not work out]..

As the replacement of what has historically been the annual benchmark settlement evolves, Cliffs continues to work with customers individually to determine final 2010 pricing. Currently the Company has determined pricing mechanisms or final pricing for approximately 45% of its 2010 expected sales volume. In addition, the Company has market-indicative provisional pricing in place for approximately 20% of the 2010 expected sales volume, with pricing for the remaining tons subject to arbitration processes [see discussion below]. A significant amount of the provisionally priced volumes are priced at an average increase of 90% for blast furnace pellets from the 2009 seaborne price. The Company believes it will ultimately achieve this 90% increase or better and continues to work with those customers to finalize pricing.

In addition, the outlook of $107 - $112 per ton assumes the following:

• A 90% average annual increase in blast furnace pellets from the 2009 seaborne price; and

• A range for hot band steel pricing of $600 - $700 per ton.

This expectation also considers various contract provisions, lag-year adjustments and pricing caps and floors contained in certain supply agreements. Actual realized average revenue per ton for the full year will ultimately depend on the percentage increase for blast furnace pellets from the 2009 seaborne pellet settlement price, sales volume levels, customer mix, production input costs and/or steel prices (all factors in the Company’s formula-based pricing in the North American Iron Ore business segment).

Cliffs also said the following approximate sensitivities would impact its actual realized price:

• For every 10% change from a 90% price increase for blast furnace pellets in 2010, Cliffs would expect its average realized revenue per ton in North American Iron Ore to change by approximately $3; and,

• For every $25 change from the estimated 2010 hot rolled steel prices noted above, Cliffs would expect its average revenue per ton in North American Iron Ore to change by $0.60.

During the quarter, Cliffs became a party to arbitration with two of its North American Iron Ore customers. [The two customers are Arcelor Mittal and Essar.] The Company indicated that one of these arbitrations could pose a risk to the revenue per ton outlook above, should it not settle prior to year end. The resulting negative impact on 2010 revenue recognition is estimated to be approximately $11 per ton [because incremental revenue contingent on an arbitration outcome cannot be booked under GAAP]. Despite the timing, the Company strongly believes that the tons currently subject to the arbitration process will ultimately be settled in its favor and the additional revenue would be recognized upon settlement.

Cliffs indicated it expects North American Iron Ore 2010 production of approximately 26 million tons, up from its previous expectation of 25 million tons. At this production level, 2010 cost per ton is expected to be $65 - $70, with approximately $5 per ton comprised of depreciation, depletion and amortization. [I.e. the N.A. iron-ore segment will have an operating profit on a GAAP basis of $37-47/ton and a cash operating profit of $42-52/ton.]

North American Coal Outlook

The Company said it is maintaining its 2010 North American Coal sales and production volume expectations of approximately 3.4 million tons in 2010.

Cliffs currently has approximately 80% of this volume priced and under contractual obligation, 10% contracted awaiting pricing and plans to sell the remaining uncommitted production on a spot basis, primarily in the fourth quarter of 2010. As a result, and assuming current market prices for all spot sales, Cliffs expects revenue per ton in North American Coal to reach $140 - $145 f.o.b. mine.

In 2010, Cliffs anticipates cost per ton of approximately $110 - $115, with approximately $13 per ton comprised of depreciation, depletion and amortization. [I.e. the N.A. coal segment will have a GAAP operating profit of $25-35/ton and a cash operating profit of $38-48/ton.]

As stated above, subsequent to the close of second quarter, Cliffs entered into a definitive agreement to acquire all of the coal operations of privately owned INR Energy, LLC, a producer and exporter of high-volatile metallurgical and thermal coal. These assets are expected to increase Cliffs’ total production capacity to over 7 million tons in 2011. Cliffs anticipates closing this transaction by July 30, 2010. Given the timing of closing, the Company expects the contribution from INR’s operations to have a minimal impact on full year consolidated results.

Asia Pacific Iron Ore Outlook

Asia Pacific Iron Ore 2010 sales volume is expected to increase to 8.8 million tonnes, up from the prior outlook of 8.5 million tones. In addition, production volume is expected to increase to 8.8 million tonnes, up from the prior outlook of 8.6 million tonnes. This is primarily the result of earlier-than-anticipated production and sales volume from the Company’s Cockatoo Island joint venture in Western Australia. As indicated above, Cliffs reached final pricing with its customers for the first and second quarter pricing. The Company is in negotiation with customers for third quarter pricing using a variety of pricing mechanisms, including in some cases shorter pricing periods resembling spot market prices. Considering this and assuming spot prices as of July 15, 2010 for all remaining 2010 volumes, Cliffs now expects to achieve higher 2010 revenue per tonne in Asia Pacific Iron Ore of $110 - $115. Costs per tonne are expected to be approximately $55 - $60, consistent with previous guidance. [I.e. GAAP operating profit in the Asian iron-ore segment will be $50-60/ton. (Due to the complexity of various JV’s, CLF does not forecast DD&A/ton or cash operating profit per ton for this segment.)]

Outlook for Sonoma Coal and the Amapá Iron Ore Project

Cliffs has a 45% economic interest in Sonoma Coal. In 2010, the Company expects equity sales and production volume of approximately 1.6 million tonnes, with an approximate 65%/35% mix between thermal and metallurgical coal, respectively. As a result of additional coking coal yields and marginally improved pricing expectations, Cliffs increased its average revenue per tonne expectation to $110 - $115, up from a previous expectation of $105 - $110. Per-tonne costs are expected to be $80 - $85.

Cliffs has a 30% interest in the Amapá Iron Ore Project. Assuming a 90% increase in prices for iron ore concentrate products, Cliffs expects the project to be modestly profitable in 2010.

SG&A Expenses and Other Expectations

SG&A expenses are anticipated to be approximately $180 million in 2010, up from a previous expectation of $165 million. The increased expectation is primarily driven by increased Sonoma performance-related royalties.

In addition, Cliffs has previously stated it expects to incur costs of approximately $25 million to $30 million related to global exploration efforts, as well as $10 million related to its acquired chromite project in Ontario, Canada.

The Company anticipates a full-year tax rate of approximately 30% for 2010. Depreciation and amortization are expected to be approximately $300 million.

2010 Capital Budget Update and Other Uses of Cash

Based on the above guidance, Cliffs expects to generate more than $1.5 billion in cash from operations in 2010, which assumes all arbitrations are resolved and final pricing is reached in North American Iron Ore by year end. The Company expects capital expenditures of approximately $250 million.

As indicated above, Cliffs expects cash outflows of nearly $900 million related to its acquisitions of INR’s coal operations and Spider Resources.

Cliffs will host a conference call to discuss its second-quarter 2010 results tomorrow, July 29, 2010, at 10 a.m. ET. The call will be broadcast live on Cliffs’ website: www.cliffsnaturalresources.com. A replay of the call will be available on the website for 30 days.

About Cliffs Natural Resources Inc.

Cliffs Natural Resources Inc. is an international mining and natural resources company. A member of the S&P 500 Index, we are the largest producer of iron ore pellets in North America, a major supplier of direct-shipping lump and fines iron ore out of Australia and a significant producer of metallurgical coal. With core values of environmental and capital stewardship, our colleagues across the globe endeavor to provide all stakeholders operating and financial transparency as embodied in the Global Reporting Initiative (GRI) framework. Our Company is organized through three geographic business units:

The North American business unit is comprised of six iron ore mines owned or managed in Michigan, Minnesota and Canada and two coking coal mining complexes located in West Virginia and Alabama. The Asia Pacific business unit is comprised of two iron ore mining complexes in Western Australia and a 45% economic interest in a coking and thermal coal mine in Queensland, Australia. The Latin American business unit includes a 30% interest in the Amapá Project, an iron ore project in the state of Amapá in Brazil.

Other projects under development include a biomass production plant in Michigan and Ring of Fire chromite properties in Ontario, Canada. Over recent years, Cliffs has been executing a strategy designed to achieve scale in the mining industry and focused on serving the world's largest and fastest growing steel markets.‹