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Lower Pricing Hurts Cliffs in 3Q

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Cliffs Natural Resources Inc. (CLF - Free Report) posted earnings of 59 cents per share in the third quarter of 2012, down 85.8% from $4.15 reported in the year-ago quarter. Declining iron ore prices and higher costs led to the slump in earnings. Earnings from continuing operation came in at 61 cents a share in the quarter. By that measure, it largely missed the Zacks Consensus Estimate of $1.05.

Sales for the quarter came in at $1,544.9 million, down 26% from $2,089.1 million in the prior-year quarter, missing the Zacks Consensus Estimate of $1,742 million. The decline in revenues resulted from a 36% year-over-year drop in seaborne iron ore pricing and higher labor, mining and maintenance costs.

Segment Performance

U.S. Iron Ore: U.S. Iron Ore pellet sales volume decreased to 6.6 million tons in the quarter from 7.9 million tons in the third quarter of 2011. The timing of vessel shipments and lower demand for iron ore were responsible for the decrease.

Revenues per ton plunged 20% year over year to $110.51. The decline was due to lower pricing of sea borne iron ore and changes in customer mix. Cash costs per ton fell 8% to $67.81.

Eastern Canadian Iron Ore: Sales volumes decreased 24% to 2.4 million tons in the quarter, mainly due to timing of vessel shipments related to iron ore concentrate and a lack of iron ore pellet availability. Revenues per ton for the segment declined 36% year over year to $106.57, hurt by lower pricing of iron ore.

Cash costs per ton jumped 21% to $106.06, attributable to higher cash costs at Wabush Mine higher labor, maintenance, and repair costs. Higher fuel, contract labor, and maintenance and supply costs at the Bloom Lake Mine also led to the increase in cash costs.

Asia Pacific Iron Ore: Sales volumes in the segment increased 28% to 3 million tons as Koolyanobbing Complex expansion project was completed in the quarter. Revenues per ton were $84.79, down 50% from $170.26 in the prior-year quarter, due to weaker year-over-year pricing for seaborne iron and low grade iron ore in the company’s sales mix.

Cash cost per ton in the Asia-Pacific Iron Ore segment  jumped 13% to $76.65, on the back of higher mining costs, partially offset by lower royalty expenses.

North American Coal: Sales Volumes increased 157% to 1.7 million tons, led by significantly higher sales and production volumes from Cliffs' low-volatile metallurgical coal mines. Revenues per ton jumped 30% to $128.88, driven by higher proportion of premium low-volatile metallurgical coal sales, but partly offset by lower pricing of coal products. Cash cost per ton decreased 15% to $114.56.

Sonoma Coal and Amapa: Cliffs entered into a definitive share and asset sale agreement to sell its 45% economic interest in Sonoma Coal. The transaction is expected to close in the fourth quarter of 2012. Upon completion, Cliffs anticipates roughly AUD$141 million in cash proceeds from the transaction.

During the third quarter of 2012, Cliffs reported a loss of $2.7 million, net of tax, from Sonoma Coal, which has been classified as a discontinued operation.

Cliffs has a 30% ownership interest in Amapa, an iron ore operation in Brazil. During the quarter, Amapa produced approximately 1.6 million tons and posted an equity loss of $14 million for Cliffs' share of operation.

Financial Position

Cliffs had $36.3 million in cash and cash equivalents as of September 30, 2012, compared with $519.3 million as of December 31, 2011. Long-term debt stood at $3,514.3 million as of September 30, 2012, compared with $3,608.7 million as of December 31, 2011.


According to Cliffs, iron ore prices were depressed in the last few months due to the lack of a strong recovery in steel demand in China, the world's largest producer and consumer of steel and a persistently oversupplied market. Based on the destocking activities within China's steel industry and the recent decline in its annualized crude steel production, Cliffs lowered its full-year 2012 expectation for Chinese crude steel production to approximately 715 million tons from its previous expectation of 730 million tons. Cliffs also decreased its average full-year 2012 seaborne iron ore spot price forecast to approximately $128 per ton from its previous expectation of $145 per ton.

Cliffs also lowered its forecast for selling, general and administrative expenses for 2012 to $275 million from its previously stated outlook of $300 million. The company’s focus on tightening its corporate expenses and the timing of spending for certain corporate projects led to the reduced guidance.

The company reiterated its full-year cash outflow forecast of approximately $165 million. The company lowered its expectation of cash flow from operations to roughly $600 million from its previous expectation of $1.3 billion. Cliffs reiterated its earlier forecast for capital expenditures of roughly $1 billion for 2012.

U.S. Iron Ore Outlook

The company reaffirmed its U.S. Iron Ore revenues expectations of $115–$120 per ton. Cash cost is expected to be in the range of $60–$65 per ton.

Eastern Canadian Iron Ore Outlook

The company lowered its revenues per ton target in the range of approximately $110–$115 from its previous expectation of $130–$135 per ton. Cliffs, however, reiterated its cash cost per share guidance of $100–$105.

Asia Pacific Iron Ore Outlook

For 2012, the company lowered its revenues per ton guidance to the range of $100–$105 from $120–$125 projected earlier. Cash cost expectation was maintained in the range of $65–$70 per ton.

North American Coal Outlook

For 2012, the company reduced its guidance and expects revenues per ton to be in the range of $120 - $125, down from its previous expectation of $130 - $135. Cash cost is expected to be in the range of $105 - $110, down from its previously announced outlook of $110-$115 per ton.

Sonoma Coal and Amapa Outlook

Cliffs expects a $25 million equity loss for its interest in Amapa, primarily driven by lower expected pricing for seaborne iron ore.

Cliffs, which competes with CONSOL Energy Inc. (CNX - Free Report) and Alpha Natural Resources, Inc. , currently retains a Zacks #5 Rank, reflecting a short-term (1 to 3 months) Strong Sell rating. Currently, we have a long-term (more than 6 months) Neutral recommendation on the stock.

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