Cliffs Natural Resources Inc. (CLF) posted net earnings of $408 million or $2.92 per share in the second quarter up 56.3%, above last year’s $261 million or $1.92 per share. Earnings missed the Zacks Consensus Estimate of $3.72 per share.
Quarterly revenues came in at $1.2 billion, up 52% year over year and also missed the Zacks Consensus Estimate of $1.8 billion. The increase was driven by several factors, including higher pricing in each of Cliffs' iron ore business segments and increased sales from Cliffs' recently acquired Bloom Lake operations in Eastern Canada.
Operating income in the quarter increased 68.6% year over year to $616.9 million.
During the reported quarter the company completed the acquisition of Consolidated Thompson and remains on track to quickly integrate the operations. As a result of the acquisition of Consolidated Thompson, Cliffs reorganized its reportable business segments into: U.S. Iron Ore, Eastern Canadian Iron Ore, Asia Pacific Iron Ore and North American Coal.
Cliffs also announced a third-phase expansion at Bloom Lake, which is expected to increase annual production capacity to 24 million tons by 2015 to 2016.
Segment Performance
U.S.Iron Ore: U.S. Iron Ore pellet sales volume was 5.8 million tons versus 5.9 million tons sold in the second quarter of 2010. Revenues per ton jumped 47% year over year to $137.80 in the quarter driven by stronger iron ore pricing.
Cash costs per ton declined to $57.39 from $59.61 in the year ago quarter due to lower maintenance costs in the reported quarter.
Eastern Canadian Iron Ore: Sales volume was 1.7 million tons in the quarter significantly higher by 122% from 756,000 tons sold in second-quarter 2010. The increase was led by approximately 900,000 tons of incremental sales volume of iron ore concentrate from the Bloom Lake Mine acquired in May 2011.
Revenues per ton for the segment soared 21% year over year to $177.25. The increase was attributable to stronger year-over-year seaborne pricing for iron ore and the successful marketing of iron ore concentrate from Bloom Lake Mine.
Cash costs per ton were down 3% year over year to $89.70. The decrease was driven by lower cash costs from Bloom Lake Mine, partially offset by higher spending, stripping costs, transportation rates and royalties. During the quarter the company incurred a non-cash, non-recurring step-up expense of approximately $48 million related to Bloom Lake Mine's inventory.
Asia Pacific Iron Ore: Sales volumes of the segment remained flat at 2.2 million tons versus the comparable year-ago quarter.
In the second quarter of 2011, revenues per ton were $173.38, an increase of 41% from $123.06 in the prior-year quarter. Stronger year-over-year seaborne pricing for iron ore and 2011 pricing mechanisms that are more reflective of current-market prices led to the increase in revenues.
Cash cost per ton in Asia Pacific Iron Ore increased 56% to $68.92 in second-quarter 2011 from $44.04 in last year's comparable quarter. The increase was driven by unfavorable foreign exchange rates, accelerated mining costs related to expansion, increased stripping requirements and higher royalty expenses from the year-ago quarter.
North American Coal: Revenues increased 76% to 1.3 million tons from 719,000 tons sold in the prior-year quarter, driven by 770,000 tons of incremental sales volume from the West Virginia coal operations of INR Energy, which Cliffs acquired in mid-2010. Partially offsetting the increase was lower sales volumes from Cliffs' longwall mining operations, Pinnacle and Oak Grove mines.
Revenue per ton decreased 18% year over year to $118.75. The decline in revenues in the quarter was due to product sales mix. Second-quarter 2011 revenue rate comprised a mix of low-volatile and high-volatile metallurgical coal, along with thermal coal. Cost per ton increased 18% year over year to $114.00, driven by lower fixed-cost leverage as the result of the production challenges of approximately $30 per ton incurred in the quarter.
During the quarter the segment faced significant damage to its Oak Grove Mine's preparation plant and overland conveyor system due to severe weather, including a tornado. Cliffs anticipates sales to customers will resume in the latter part of fourth-quarter 2011.
Also carbon monoxide was detected in a section of Pinnacle Mine. Mine Safety and Health Administration (MSHA) and other regulators denied a submitted plan designed to address the detected levels of carbon monoxide. Cliffs does not expect longwall operations to resume at Pinnacle Mine prior to the fourth quarter. However, it expects to begin continuous mining operations and mine development work in early August.
Sonoma Coal and Amapa: Cliffs has a 45% economic interest in Sonoma Coal and sales volumes in the reported quarter were 481,000 tons. The segment generated revenues of $83 million. Revenue per ton at Sonoma was $171.80, with cash costs of $93.86 per ton.
Cliffs has a 30% ownership interest in Amapa, an iron ore operation in Brazil. During the second quarter of 2011, Amapa produced approximately 1.2 million tons and earned equity income of $7.7 million for Cliffs' share of the operation.
Financial Position
At the end of June 30, 2011, Cliffs had $238 million of cash and cash equivalents, $3.9 billion in long-term debt and no borrowings were drawn under its $600 million revolving credit facility.
For the quarter, Cliffs reported depreciation, depletion and amortization of $105 million and generated $618 million in cash from operations.
Outlook
Cliffs expects demand for its products to remain steady through the remainder of 2011 driven by continued growth in Chinese steel production and steady blast furnace utilization rates in Europe and North America. With a growing production profile, Cliffs is well positioned to generate significant cash flows through 2011 and beyond.
Cliffs increased its SG&A expenses expectation as a result of additional expenses incurred from the Consolidated Thompson acquisition. SG&A expenses are anticipated to be around $240 million up from its previous expectation of $200 million.
For 2011, Cliffs expects to generate $2.6 million in cash from operations.
Cliffs maintained its 2011 capital expenditures budget of approximately $1 billion, comprising approximately $300 million in sustaining capital and $700 million in growth and expansion capital.
U.S. Iron Ore Outlook
Sales volumes are expected to be of approximately 25 million tons in 2011. U.S. Iron Ore revenue per ton is expected to be in the range of $130 – $135. Production volume to be approximately 23 million tons and cash cost per ton of $55 – $60. For 2011, depreciation, depletion and amortization is expected to be $3 per ton.
Eastern Canadian Iron Ore Outlook
For 2011, the company expects sales volume to be approximately 9 million tons and production volume to be 8.8 million tons in Eastern Canadian Iron Ore. Cliffs' 2011 Eastern Canadian Iron Ore revenue-per-ton outlook is $170 – $175.
Cash cost per ton is expected to be approximately $85 – $90. Cliffs anticipates non-cash inventory step-up costs of approximately $5 – $10 per ton and depreciation, depletion and amortization of approximately $15 per ton for full-year 2011.
Asia Pacific Iron Ore Outlook
Cliffs reduced its 2011 Asia Pacific Iron Ore sales volume expectation to 8.8 million tons from 9 million tons based on recently resolved labor disputes at the Port of Esperance. The company reiterated its full-year 2011 production volume expectation of 9 million tons. Revenue-per-ton outlook is estimated in the range of $160 – $165.
Full-year 2011 Asia Pacific Iron Ore cash cost per ton is expected to be approximately $60 – $65. Cliffs anticipates depreciation, depletion and amortization to be approximately $12 per ton for full-year 2011.
North American Coal Outlook
Sales volume is expected to be about 4.5 million tons in 2011 reduced from the previous expectation of 5.1 million tons. Sales volume mix is anticipated to be 1.4 million tons of high-volatile metallurgical coal and 1.8 million tons of low-volatile metallurgical coal, with thermal coal making up the remainder of the expected sales volume. Full-year 2011 production volume is expected to be 5.4 million tons.
Cliffs also revised its North American Coal 2011 revenue-per-ton expectation to $120 – $125 and cash cost per ton expectation to approximately $110 – $115. Full-year 2011 depreciation, depletion and amortization is expected to be approximately $20 per ton.
Sonoma Coal and Amapa Outlook
For 2011, the company is reaffirmed its sales volume expectation of 1.2 million tons at Sonoma Coal. The approximate product mix is expected to be two-thirds thermal coal and one-third metallurgical coal. Cliffs increased its full-year 2011 production volume expectation to 1.4 million tons from its previous expectation of 1.2 million tons. Cash cost per ton is expected to be $90 – $95. For 2011, depreciation, depletion and amortization are expected to be $14 per ton.
Cliffs expects Amapa to contribute over $35 million in equity income in 2011.
Cliffs faces stiff competition from CONSOL Energy Inc. (CNX) and Peabody Energy Corp. (BTU).
We maintain our Neutral recommendation on Cliff with a short-term Zacks #3 Rank (Hold) on the stock.
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