Cliffs Natural Resources—the 900 Pound Gorilla

Cliffs reduced its USIO sales guidance to 17.5 million ton from 19 million ton due to cancellation of its contract with Essar Steel Algoma and lower demand from steel producers. APIO guidance was increased to 11.5 million tons from 11 million tons.

Cliffs is in the final stages of its CCAA proceedings on its Eastern Canadian iron ore assets. A court hearing in the first week of November will extend CCAA protection until early next year so sale of the assets can be completed. Creditors are being contacted for filing of claims.

Sale of the Pinnacle and Oak Grove coal business was set back by a rash of coal company bankruptcies that expanded the market for coal businesses. While suitable bids are found for the assets, Cliffs plans to maximize cash flow through cost cutting and cutbacks. Future Mine Development labor and operating costs will be eliminated as part of the cost savings and the notification process for reduction of employees at the mines is in process.

Cliffs CEO Lourenco Goncalves said during the earnings call that the bids received for the coal businesses were not good enough.

“So look, I’m a very emotional person, as you know. And I cry with them every day. But I’m not going to wait for them…. The asset’s for sale. The sales process is alive for us. But we are going to work to mine what we have and move on.”

A question was asked about the recent comments by Cliffs Natural Resources on Essar Minnesota and why Cliffs’ management team was invited to tour the pellet plant construction site.

Goncalves responded, “Because they’re not very smart. That was one of the most stupid things I have ever seen in this business. Inviting the enemy to take a look from the inside…”

Goncalves said that he does not expect Essar Minnesota to meet its completion target, perhaps not even by December 31, 2016. “Until they produce their first pellet they are just that, just a construction site in disarray, nothing else.”

Goncalves came down hard on Australian ore miners saying, “The big Australian iron ore miners’ misguided focus on market share at the expense of price continues to give the Chinese mills a cheap avenue to overproduce steel.” Cheap iron ore from Australia, he said, is allowing China to keep exporting steel from its weak economy.

Goncalves says he doing everything he can to “separate ourselves from China.”

He said, “I believe that China is a disaster. I believe that China will bring Australia down. But you know Australia is not very different from Minnesota. I think Australia will only believe that China is destroying Australia when they built an artificial island on the Great Barrier Reef that they can see from the shore. So it’s a matter of myopic approach to world scale politics and economics. The United States will survive. We are going to continue to be insulated.”

Goncalves said that Vale in Brazil is beginning to cut back and show some rationality, unlike Australia. With Australia a member of TPP it “is a friend at the same time that they supply China who becomes an enemy.”

The drop in steel import penetration to 25 percent in September is an “encouraging trend,” said Goncalves. Goncalves expects antidumping and countervailing duties imposed as a result of the trade cases will benefit U.S. steel mills and Cliffs’ blast furnace client order books.

In reaction to lower production by U.S. clients, Cliffs reduced production, temporarily idling the Empire mine in Michigan and then United Taconite in Minnesota in August. Empire is currently back in production.

Production of the first round of DR grade pellets at Northshore in Minnesota was completed and shipped to the customer. Trial utilization of the pellets is expected to occur during Q1 2016.

“With a very real prospect of demand growth that lies in serving the electric arc furnace markets, Cliffs will be able to supply both blast furnace and EAF to steelmakers in the United States,” said Goncalves.

Regarding the ongoing labor negotiations with the USW, Goncalves said, “We are on the same page as our USW union represented labor force, and we appreciate their recognition of the challenges this industry is facing. We remain optimistic that a new labor deal will emerge. But until then, we will let the negotiation teams do their work.”

Goncalves concluded the call with a summary of where Cliffs stands in the current challenging environment:

“What about Cliff in all this mess? At year-end a couple months ago we decided that we would just stay within the boundaries of the United States of America, the best country to be in, the best market to be and the most resilient. Good in times of peace, good in times of war, we are well positioned. We are the 900-pound gorilla. We are developing the pellets. We are preparing ourselves to supply the EAF markets. We continue to supply the existing blast furnace. We believe in the great steel business in the United States. We know that the current prices are temporary, things will get better. There are antidumping suits, countervailing suits will come soon. By January it will be a completely different ball game as far as imported steel. We’re going to be in much better shape.”