Replies to post #5506 on The Rising Influence of Rising Affluence

[Democritus_of_Abdera]

CLF Investor Day Notes:

The slide set was provided by Dew (#msg-78037739). The webcast can be accessed at http://ir.cliffsnaturalresources.com/events.cfm .

Several items of interest to investors were discussed. Notably, there was extensive discussion regarding the Chrome project with details provided concerning what was accomplished during pre-feasibility and what expects to be accomplished during feasibility. It also became clear that the Chrome project is critical for CLF’s future in that it will allow CLF to segue from a reliance upon infrastructure dynamics to one driven by consumables.... CLF management reaffirmed that it will probably seek a partner to develop the Chrome project after permitting has been completed (probably in 2014-2015).

For me, the most important discussion revolved around CLF’s strategy to reduce costs at the Bloom Lake iron ore mine in Canada. Reducing costs at Bloom Lake is the critical controllable element needed to enhance near-term profitability (IMO). And, management’s explicit projections in this regard have put its credibility on the line (i.e. costs will need to be substantially reduced by the end of the year).

CLF’s expectation of reducing costs at Bloom Lake from the current $95/ton to $60-65/ton within 6 months was greeted with substantial skepticism by analysts during the question and answer session. CLF projects that it will obtain the $30 reduction in costs in the following manner:

a) increasing production volume to dilute fixed costs will generate an $18/ton saving,
b) transshipping will save $3/ton,
c) tailings management will save $4/ton,
d) reducing reliance on contractors will save the remainder; i.e. $5/ton.

Labor costs are the biggest unknown with a negative upside. On the other hand, management anticipates that freight costs will likely drop due to Vale’s introduction of the SuperMaxs (I’m assuming due to excess capacity among the traditional carriers).

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Selected quotes from the CC:

Laurie Brlas, CLF CFO in Prepared Remarks:
So, how do we get those costs down to $60 to $65? First off, we do need to get the volume up. And Dave and Jeff as a team have been working on the stability of operations and you are going to hear more about that. That’s getting us up to reliably running at 7.2 million tons, which is how we expect to exit the year in the month of December. We don’t expect to report that for the full fourth quarter, but we do expect to exit the year at 7.2 million tons. So what does that do in terms of our cash cost, we’re at about $95 right now. $18 of that comes off purely by volume, just volume, getting it up. We do have contractors, more contractors than we would like really working on increasing the stability, tying Phase I and Phase II together. There is a lot of things going on right now, and so we have more contractors on site trying to get through this process as quickly as possible. You’ll hear more from Dave about tailings management and how we’re going to improve that. That’s worth about $4 and then transshipping another $3 gets you down to the $60 to $65.

Unknown Questioner in Q&A:
Laurie, this chart of showing the $95 to $63 per ton, are these all – are these going to happen simultaneously or you can just get the $18 with the volume only and rest comes later or you have to do all these stages at the same time to get to that and what kind of timing you’re looking at to get to that level?
Laurie Brlas, CLF CFO in Q&A:
Okay. So to get to the $60 to $65 cash cost, that’s how we expect to exit 2012. So those are the numbers that you would see in 2013. I wouldn’t be so precise as to say the volume comes in a straight-line. It doesn’t work that way; Dave can tell you. But, over the course of the next six months, all of those things will be happening and we would expect to exit the year at that level.

Arun Viswanathan – Longbow Research in Q&A:
Thanks. I just have a question. So how much of the issues that you’ve faced I guess over the last year were new issues that came up as you expanded the mine, because initially when the mine was acquired, I guess, the aim was to bring the cost down to $40 million to $50 million – to $40, $50 per ton, so – and we’re at $100 or so. I’m just trying to understand what you’ve learned through that process and why you’re still confident in getting to $60 by the end of the year?
Joseph Carrabba CLF CEO in Q&A:
Well, I think we missed several things as we went through it. Certainly, the mine sequencing that I just talked about and described at length with that, I think the complexity – and you know it’s more of time than it is just working it out. I mean, if you think about our – why we’re so confident is, this is what we do. This is what we do in Michigan; this is what we do in Minnesota. Even in Australia while we don’t grind and have a concentrator, we have a series of very small pits that looks more like a gold mine than an iron ore mine. So the blending and staging and sequences of mines and the low grade iron ore deposits, which is what we work in, is what we do. And we’ve had many of Cliffs technical team up there working with this and it’s just a matter of developing now the block model with more drill holes and the metallurgical testing that takes place. So there’s sound science behind where we’re going and this isn’t a new venture for us. I think what we missed and we should have learned our lesson with Amapa, although we don’t manage and run Amapa and I think Anglo has done a very good job taking Amapa as far as they can. These concentrators are not green buttons and red buttons that you push and off they go. We are slowly learning that it takes a good 12 to 18 months on the ramp up to work out all of the small metallurgical details that comes with ramping up an iron ore concentrator.

Arun Viswanathan – Longbow Research in Q&A:
And some of those things you probably knew though I mean just like on logistics ... So I’m just trying to understand are there things that you’re potentially now missing going forward or do you think like could be – or do you foresee any delays to getting to that $65 or could you end up at $80 for some reason or --?
David Blake Senior VP CLF North American Iron Ore Operations:
I think if there’s any delays, no, I don’t see it going to $85. If there’s any delays, it’s just timing. Is it – do we miss it by a quarter or not we don’t think so, but I think it’s more of the delays in the timing. I think the opportunities we may miss and come back and I don’t think you can have any regrets on it, but they are opportunity driven and that is this ore body just continues to grow. If you think about we bought it at 500 and some million tons, we’re now over a billion and the guys are still drilling and still coming up with more ore. As we’re in the middle of a Phase III scoping study that we announced last year at our Investor Day to go up another 8 million or 7.2 million tons, and what we’re really starting to question now is, is that enough? If the ore is there, should we be doubling that in this scoping phase or not? So we’re going to finish the scoping study that we’ve already got almost we’re in the final phases of it and it would be kind of crazy right now not to finish that. But, we’re also going to take a step back so that we don’t miss the opportunity. Maybe we should upsize this thing given the ore reserve we have and we should double that once again and what would that look like so.

Arun Viswanathan – Longbow Research in Q&A: Is there any cushion in those numbers i.e. is – do you really think you can you’ll get to $40 or $50 and you’re just saying potentially you’ll be at $65 or--
Joseph Carrabba CLF CEO in Q&A:
No, we don’t.
Laurie Brlas, CLF CFO in Q&A:
No. No, we don’t. We think this is the right number and I think on the logistics side, we knew, I mean Dave and the team knew that there was work to do to get the logistics up to the volumes that we’re talking about. We knew that walking in that when we took over Consolidated Thompson that that wasn’t doable with what they had in place and I think we all forget that that was a startup operation. They had not been running for a year and producing volume at a consistent cost basis. We walked into something that was really just – they just turned on the switch essentially and we’ve had decades to get our U.S. operations to the consistency that you see and Dave and Jeff are the guys who did that. So I think that we’re going to get there and they’re confident in that.
David Blake Senior VP CLF North American Iron Ore Operations:
I think the confidence is for myself and the team is once – like the logistics, we knew we had to go from 4.5 million to 5 million tons to 20 million tons. So we had some upfront design in thinking and you see some of the results in the presentation. Once we got to the point last year that some of the mine sequencing was not going to be sustainable, once we realized that then we took a step back, redesigned it, re-looked at it, that and the tailings. So now with the proper design and the mine planning, we have that same level of confidence going into the – how we’ll process this. The processing facility has been running very well with 90% plus availabilities in the grinding line. We expect to sustain and get better at that as well. The recovery, we had a recovery curve, you’ll see the growth of the recovery even with the lower silica levels recovery is still getting better. So the operators are doing a fantastic job with continually improving the existing operations. So that and once we know what’s ahead of us, we’re making the right decisions and using the technical team to help us out.

Brian Yu – Citigroup Global Markets:
And then just a last one on costs here; with this pie chart on page 33 where we’ve got the components broken out, which one of these has that highest risk from inflation escalation standpoint?
Laurie Brlas, CLF CFO in Q&A:
Labor
Joseph Carrabba CLF CEO in Q&A:
Labor I would think, yeah, yeah. As Canada is, if you will, being rediscovered as a great natural resource country and as you look at the projects that have been discussed in the Labrador Trough, labor is certainly on our minds, which is why we are – the fly-in, fly-out is very, very attractive to go with it to get the right people and again we put in very good housing to attract people and our cafeterias and food services and all of those other services; after hours for the employees are done right. So labor would be the biggest at risk, I think TransCanada because of the success of Canada.

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Nathan Littlewood Credit Suisse (Australia) Ltd. in Q&A:
Okay. And could you talk about the timing of strategic partners, when you would think about bringing them in?
Joseph Carrabba CLF CEO in Q&A:
Well, as you know, as we go up from pre-feasibility to feasibility as permits come in line, this project just becomes more and more valuable, Nathan, as that. We’ve certainly had exploratory talks already. We have our list that’s ready to go. It’s not like we haven’t done anything at this point in time, but we don’t have to pull the trigger yet and we think it will become more valuable as we go into the more stages of feasibility and permitting. So we’ve got some time on that and we’re going to take some time.
Laurie Brlas, CLF CFO in Q&A:
Yeah, I think we’ve fairly consistently said that right before you go into the big construction spend, is really ideal because you’ve generated the most value at low cost. Here what we’ve done getting out of pre-feasibility into feasibility, finishing feasibility, that’s when you generate a lot of value compared to the cost you’re spending. Getting somebody on board before we start that big roughly $3 billion capital spend, that would certainly, from a timing standpoint, we would want to do it before that.
Joseph Carrabba CLF CEO in Q&A:
Yeah.