NOTE 21 - SUBSEQUENT EVENTS
We have evaluated subsequent events through the date of financial issuance.
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and other factors that may affect our future results. We believe it is important to read our MD&A in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015 as well as other publicly available information.
Overview
Cliffs Natural Resources Inc. is a leading mining and natural resources company in the United States. We are a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. We also operate the Koolyanobbing iron ore mining complex in Western Australia. Driven by the core values of safety, social, environmental and capital stewardship, our employees endeavor to provide all stakeholders operating and financial transparency.
The key driver of our business is demand for steelmaking raw materials from U.S. steelmakers, which is heavily influenced by the global steel market and, in particular, Chinese steel production. In the first nine months of 2016, the U.S. produced approximately 60 million metric tons of crude steel or about 5 percent of total global crude steel production, which is flat when compared to the same period in 2015. U.S. total steel capacity utilization was approximately 72 percent in the first nine months of 2016, which is also flat compared to the same period in 2015. Additionally, in the first nine months of 2016, China produced approximately 604 million metric tons of crude steel, or approximately 50 percent of total global crude steel production, which is flat when compared to the same period in 2015. Through the first nine months of 2016, global crude steel production is flat compared to the same period in 2015.
Through the first nine months of 2016, the Platts IODEX has, despite its volatility, remained at encouraging levels. We believe this is the result of improved sentiment about steel demand in China and signs of high-cost capacity closures. In addition, major supply additions from both Brazil and Australia anticipated to come online this year have experienced difficulties ramping up and completion dates have been further delayed. Furthermore, we believe the new management teams at the major Australian iron ore producers will show more supply discipline for the remainder of the year and through 2017, which could help maintain or even improve these current price levels.
The Platts IODEX price decreased
7 percent
to an average price of
$54 per metric ton
for the nine months ended
September 30, 2016
compared to the respective period of 2015; however, the average price of $54 per metric ton is up from the low of approximately $39 per metric ton we encountered in December 2015. The spot price volatility impacts our realized revenue rates, particularly in our Asia Pacific Iron Ore business segment because its contracts correlate heavily to Platts IODEX pricing, and to a lesser extent certain of our U.S. Iron Ore contracts.
While iron ore prices remained at encouraging levels during the third quarter, we did see a substantial decline in the price of hot-rolled coil in the United States. While still remaining at a level considerably higher than its lows in January 2016, the price of hot-rolled coil dropped over $100 per short ton during the third quarter. We believe this is a result of attempts by China to circumvent anti-dumping and countervailing duties by using other countries as an intermediary, most notably Vietnam. This issue was addressed in late September with a circumvention case against Vietnam made by the domestic U.S. mills, who are seeking to impose duties on these imports as well. We also believe the price weakness is attributable to normal seasonality of the business, as well as the uncertain political environment in the United States with respect to the November Presidential election. As these uncertainties subside and trade case enforcement continues, we believe the hot-rolled coil pricing environment in the United States will improve.
For the three months ended
September 30, 2016
, our consolidated revenues were
$553.3 million
and net loss from continuing operations per diluted share was
$0.11
. This compares with consolidated revenues of
$593.2 million
and net income from continuing operations per diluted share of
$0.19
for the comparable period in 2015. The net loss from continuing operations for the three months ended
September 30, 2016
, was impacted negatively by an
$18.3 million
loss on extinguishment of debt versus a gain on extinguishment/restructuring of debt of
$79.2 million
for the three months ended September 30, 2015.
For the nine months ended
September 30, 2016
, our consolidated revenues were
$1,355.0 million
and net income from continuing operations per diluted share was
$0.51
. This compares with consolidated revenues of
$1,537.3 million
and net income from continuing operations per diluted share of
$0.87
for the comparable period in 2015. Net income from continuing operations in the nine months ended
September 30, 2016
and September 30, 2015, were impacted positively as a result of gains on the extinguishment/restructuring of debt of
$164.1 million
and
$392.9 million
,
respectively. Results for the nine months ended September 30, 2015 were impacted negatively by income tax expense primarily due to the placement of a valuation allowance against U.S. deferred tax assets.
Strategy
The Company is Focused on our Core U.S. Iron Ore Business
We are the market-leading iron ore producer in the United States, supplying differentiated iron ore pellets under long-term contracts to the largest North America integrated steel producers. We have the unique advantage of not only being a low cost producer of iron ore pellets in the U.S. market, but also having the technical expertise to create custom-made pellets for the specific blast furnaces that we supply. Pricing structures contained in and the long-term supply provided by our existing contracts, along with our low-cost operating profile, positions U.S. Iron Ore as our most stable business. We expect to continue to strengthen our U.S. Iron Ore operating cost profile through continuous operational improvements and disciplined capital allocation policies. Strategically, we continue to develop various entry options into the EAF market. As the EAF steel market continues to capture a growing share of the United States steel market, there is an opportunity for our iron ore to serve this market by providing pellets to the alternative metallics market to produce direct reduced iron, hot briquetted iron and/or pig iron. In 2015, we produced and shipped a batch trial of DR-grade pellets, a source of lower silica iron units for the production of direct reduced iron. In early 2016, we reached a significant milestone with positive results from the successful industrial trial of our DR-grade pellets. While we are still in the early stages of developing our alternative metallic business, we believe the trial will open up a new opportunity for us to diversify our product mix and add new customers to our U.S. Iron Ore segment beyond the traditional blast furnace clientele. Additionally, during 2016, we commenced construction of the necessary assets and infrastructure required to produce a specialized, super-flux pellet called "Mustang" at United Taconite in order to provide a customized pellet that meets our customer's pellet specification requirements.
Maintaining Discipline on Costs and Capital Spending and Improving our Financial Flexibility
We believe our ability to execute our strategy is dependent on our financial position; therefore, we remain focused on improving the strength of our balance sheet and creating financial flexibility to manage through lower demand for our products and volatility in commodity prices. We have developed a highly disciplined financial and capital expenditure plan with a focus on improving our cost profile and increasing long-term profitability.
Recent Developments
On August 10, 2016, we issued approximately 44.4 million common shares at a public offering price of $6.75 per share. Net proceeds from the public offering were $287.6 million, including underwriter commissions and other expenses. On August 17, 2016, we announced that we would redeem the entirety of our outstanding 3.95 percent senior notes due 2018. The aggregate principal amount outstanding on these notes was $283.6 million. We made total payments to the holders of the senior notes in the amount of $301.0 million in aggregate, plus accrued and unpaid interest to date. The 3.95 percent senior notes were redeemed in full on September 16, 2016.
On March 23, 2016, we announced the indefinite idle of the Empire mine. We notified employees and government officials of layoffs resulting from the idle by issuing notices under the Worker Adjustment and Retraining Notification Act (WARN) on April 14, June 9, and August 15, 2016. The Empire mine continued to produce iron ore pellets until it was indefinitely idled on August 3, 2016. We plan to continue shipping Empire's remaining pellets into 2017. Empire's ongoing indefinite idle costs are now included in
Miscellaneous - net
within the
Statements of Unaudited Condensed Consolidated Operations
.
On September 29, 2016, the United Steelworkers ratified a new three-year labor agreement with the Company that covers employees at our Tilden and Empire mines in Michigan, and United Taconite and Hibbing Taconite mines in Minnesota. The new contract is retroactively effective from October 1, 2015 through September 30, 2018. The agreement included a signing bonus of $3.5 million, which is recorded within the
Statements of Unaudited Condensed Consolidated Operations
.
Business Segments
Our Company’s primary continuing operations are organized and managed according to geographic location: U.S. Iron Ore and Asia Pacific Iron Ore. As of March 31, 2015, management determined that our North American Coal operating segment met the criteria to be classified as held for sale under
ASC 205, Presentation of Financial Statements
. In the fourth quarter of 2015, we sold two low-volatile metallurgical coal operations, Pinnacle mine and Oak Grove mine, marking our exit from the coal business. The sale was completed on December 22, 2015. As such, all presented North American Coal operating segment results are included in our financial statements and classified within discontinued operations.
Additionally, as a result of the CCAA filing of the Bloom Lake Group on January 27, 2015, and the Wabush Group on May 20, 2015, we no longer have a controlling interest over the Bloom Lake Group and certain other wholly-owned subsidiaries, and we no longer have a controlling interest over the Wabush Group. The Bloom Lake Group, Wabush Group and certain of each of their wholly-owned subsidiaries were previously reported as Eastern Canadian Iron Ore and Other reportable segments. As such, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries as of January 27, 2015. Additionally, as a result of the Wabush Filing on May 20, 2015, we deconsolidated certain Wabush Group wholly-owned subsidiaries effective May 20, 2015. The wholly-owned subsidiaries deconsolidated effective May 20, 2015 are Wabush Group entities that were not deconsolidated as part of the deconsolidation effective January 27, 2015. Financial results prior to the respective deconsolidations of the Bloom Lake and Wabush Groups and subsequent expenses directly associated with the Canadian Entities are included in our financial statements and classified within discontinued operations.
Results of Operations – Consolidated
2016 Compared to 2015
The following is a summary of our consolidated results of operations for the
three and nine months ended
September 30, 2016
and
2015
:
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|
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|
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(In Millions)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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|
2016
|
|
2015
|
|
Variance
Favorable/
(Unfavorable)
|
|
2016
|
|
2015
|
|
Variance
Favorable/
(Unfavorable)
|
Revenues from product sales and services
|
$
|
553.3
|
|
|
$
|
593.2
|
|
|
$
|
(39.9
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)
|
|
$
|
1,355.0
|
|
|
$
|
1,537.3
|
|
|
$
|
(182.3
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)
|
Cost of goods sold and operating expenses
|
(467.9
|
)
|
|
(538.1
|
)
|
|
70.2
|
|
|
(1,147.2
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)
|
|
(1,344.1
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)
|
|
196.9
|
|
Sales margin
|
$
|
85.4
|
|
|
$
|
55.1
|
|
|
$
|
30.3
|
|
|
$
|
207.8
|
|
|
$
|
193.2
|
|
|
$
|
14.6
|
|
Sales margin %
|
15.4
|
%
|
|
9.3
|
%
|
|
6.1
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%
|
|
15.3
|
%
|
|
12.6
|
%
|
|
2.7
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%
|
Revenues from Product Sales and Services
Sales revenue for the three months ended
September 30, 2016
decreased
$39.9 million
, or
6.7 percent
, from the comparable period in
2015
, which primarily was attributable to the decrease in sales volume. Iron ore sales volumes from our U.S. Iron Ore operations decreased
313 thousand
long tons or a decrease of
$24.0 million
in revenue and our Asia Pacific Iron Ore operations decreased
127 thousand
metric tons or a decrease in revenue of
$5.3 million
, for the three months ended
September 30, 2016
. These decreases in sales volumes and revenue were mainly attributable to the termination of a customer contract in the fourth quarter of the prior year that was reinstated in June 2016, for nominations to begin in 2017 and customer dock space limitations, partially offset by additional short term contracts for fewer nominated tons. Additionally, during the three months ended
September 30, 2016
, iron ore revenues from our U.S. Iron Ore operations decreased
$15.8 million
due to unfavorable pricing compared to the prior-year period. This was offset partially by our Asia Pacific Iron Ore operations that had increased revenue of
$11.2 million
due to favorable pricing compared to the prior-year period. Our realized revenue rates during the third quarter of 2016 compared to the third quarter of 2015 decreased
3.9 percent
and increased
9.9 percent
for our U.S. Iron Ore and Asia Pacific Iron Ore operations, respectively.
Sales revenue for the nine months ended
September 30, 2016
decreased
$182.3 million
, or
11.9 percent
, from the comparable period in
2015
, which primarily was driven from our U.S. Iron Ore Operations as a result of lower sales volumes of
1,448 thousand
long tons equating to a decrease in revenue of
$117.5 million
and from lower pricing for a decrease of
$45.1 million
. The decrease in volume mainly was attributable to the termination of a customer contract in the fourth quarter of the prior year that was reinstated in June 2016, for nominations to begin in 2017, lower demand for two major customer contracts and partially offset by additional short term contracts for fewer nominated tons. Lower pricing primarily was driven by the negative inflation of certain price indices, the reduction in the Platts IODEX price, and the impact of higher carryover pricing in the prior-year period than the 2016 period.
Refer to “Results of Operations – Segment Information” for additional information regarding the specific factors that impacted revenue during the period.
Cost of Goods Sold and Operating Expenses
Cost of goods sold and operating expenses
for the
three and nine months ended
September 30, 2016
were
$467.9 million
and
$1,147.2 million
, which represented a decrease of
$70.2 million
and
$196.9 million
, respectively, or
13.0 percent
and
14.6 percent
, respectively, from the comparable prior-year periods.
Cost of goods sold and operating expenses
for the three months ended
September 30, 2016
decreased as a result of operational efficiencies and cost cutting efforts across each of our business units which reduced costs by $25.4 million. Additionally, lower idle costs and lower iron ore sales volumes decreased costs by
$21.1 million
and $22.2 million, respectively, compared to the third quarter of 2015. These decreases in cost were offset partially by higher costs of
$4.5 million
for our Asia Pacific Iron Ore segment as a result of unfavorable foreign exchange rates.
Cost of goods sold and operating expenses
for the nine months ended
September 30, 2016
decreased as a result of operational efficiencies and cost cutting efforts across each of our business units which reduced costs by $106.3 million. Additionally, lower iron ore sales volumes and favorable foreign exchange rates decreased costs by $84.8 million and
$8.6 million
, respectively, compared to the nine months ended September 30, 2015. These decreases in cost were offset partially by higher idle costs of
$22.2 million
compared to the nine months ended September 30, 2015.
Refer to “
Results of Operations – Segment Information
” for additional information regarding the specific factors that impacted our operating results during the period.
Other Operating Income (Expense)
The following is a summary of
other operating income (expense)
for the
three and nine months ended
September 30, 2016
and
2015
:
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|
|
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|
|
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(In Millions)
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|
Three Months Ended
September 30,
|
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Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
Variance
Favorable/
(Unfavorable)
|
|
2016
|
|
2015
|
|
Variance
Favorable/
(Unfavorable)
|
Selling, general and administrative expenses
|
$
|
(31.1
|
)
|
|
$
|
(22.4
|
)
|
|
$
|
(8.7
|
)
|
|
$
|
(81.8
|
)
|
|
$
|
(82.2
|
)
|
|
$
|
0.4
|
|
Miscellaneous - net
|
(19.6
|
)
|
|
(3.5
|
)
|
|
(16.1
|
)
|
|
(16.9
|
)
|
|
15.8
|
|
|
(32.7
|
)
|
|
$
|
(50.7
|
)
|
|
$
|
(25.9
|
)
|
|
$
|
(24.8
|
)
|
|
$
|
(98.7
|
)
|
|
$
|
(66.4
|
)
|
|
$
|
(32.3
|
)
|
Selling, general and administrative expenses
during the
three and nine months ended
September 30, 2016
increased by
$8.7 million
and decreased by
$0.4 million
, respectively, from the comparable periods in 2015. The increase for the three months ended September 30, 2016 compared to the prior-year period was driven by increased external services costs of $2.5 million in addition to increased staff costs of $4.0 million, which included $3.5 million of union signing bonuses. The decrease for the nine months ended September 30, 2016 compared to the prior-year period was driven by decreased external services costs of $3.8 million partially offset by an increase of $2.1 million of rent and operating lease expenses.
The following is a summary of
Miscellaneous - net
for the
three and nine months ended
September 30, 2016
and
2015
:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
Variance
Favorable/
(Unfavorable)
|
|
2016
|
|
2015
|
|
Variance
Favorable/
(Unfavorable)
|
Foreign exchange remeasurement
|
$
|
(0.3
|
)
|
|
$
|
2.4
|
|
|
$
|
(2.7
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
15.2
|
|
|
$
|
(16.4
|
)
|
Insurance recovery
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.6
|
|
|
(7.6
|
)
|
Management and royalty fees
|
0.9
|
|
|
0.9
|
|
|
—
|
|
|
6.8
|
|
|
4.0
|
|
|
2.8
|
|
Empire idle costs
|
(8.2
|
)
|
|
—
|
|
|
(8.2
|
)
|
|
(8.2
|
)
|
|
—
|
|
|
(8.2
|
)
|
Michigan Electricity Matters accrual
|
(12.4
|
)
|
|
—
|
|
|
(12.4
|
)
|
|
(12.4
|
)
|
|
—
|
|
|
(12.4
|
)
|
Other
|
0.4
|
|
|
(6.8
|
)
|
|
7.2
|
|
|
(1.9
|
)
|
|
(11.0
|
)
|
|
9.1
|
|
|
$
|
(19.6
|
)
|
|
$
|
(3.5
|
)
|
|
$
|
(16.1
|
)
|
|
$
|
(16.9
|
)
|
|
$
|
15.8
|
|
|
$
|
(32.7
|
)
|
Miscellaneous - net
for the
three and nine months ended
September 30, 2016
decreased by
$16.1 million
and
$32.7 million
, respectively, from the comparable periods in 2015. For the three and nine months ended
September 30, 2016
there was an unfavorable consolidated impact of
$12.4 million
related to the FERC ruling on the Michigan Electricity Matters and
$8.2 million
of Empire idle costs related to the indefinite idle of the mine. Additionally, for the three months ended
September 30, 2016
, there was an incremental unfavorable impact of
$2.7 million
due to the change in foreign exchange remeasurement of cash and cash equivalents and remeasurement of certain obligations. These unfavorable impacts were offset partially by $7.1 million of bad debt expense related to one customer that was recorded in the third quarter of 2015.
For the nine months ended
September 30, 2016
, there was an incremental unfavorable impact of
$16.4 million
primarily driven by the gain of
$11.1 million
from the remeasurement of short-term intercompany loans during the nine months ended
September 30, 2015
. Additionally, the nine months ended
September 30, 2015
was impacted favorably by
$7.6 million
of insurance recovery related to the clean-up of the Pointe Noire oil spill that occurred in September 2013, which was not repeated during 2016. These unfavorable impacts were offset partially by $7.1 million and $3.3 million of bad debt expense and impairment of other long-lived assets, respectively, during the nine months ended September 30, 2015.
Other Income (Expense)
The following is a summary of other income (expense) for the
three and nine months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
Variance
Favorable/
(Unfavorable)
|
|
2016
|
|
2015
|
|
Variance
Favorable/
(Unfavorable)
|
Interest expense, net
|
$
|
(48.7
|
)
|
|
$
|
(61.7
|
)
|
|
$
|
13.0
|
|
|
$
|
(156.2
|
)
|
|
$
|
(168.2
|
)
|
|
$
|
12.0
|
|
Gain (loss) on extinguishment/restructuring of debt
|
(18.3
|
)
|
|
79.2
|
|
|
(97.5
|
)
|
|
164.1
|
|
|
392.9
|
|
|
(228.8
|
)
|
Other non-operating income (expense)
|
0.1
|
|
|
(0.1
|
)
|
|
0.2
|
|
|
0.4
|
|
|
(3.0
|
)
|
|
3.4
|
|
|
$
|
(66.9
|
)
|
|
$
|
17.4
|
|
|
$
|
(84.3
|
)
|
|
$
|
8.3
|
|
|
$
|
221.7
|
|
|
$
|
(213.4
|
)
|
Interest expense for the three and nine months ended
September 30, 2016
was impacted favorably by $11.2 million and $6.6 million, respectively, versus the comparable prior periods as a result of the debt restructuring activities that occurred during March 2015 and March 2016. These debt restructurings resulted in a net reduction of the outstanding principal balance of our senior notes. Additionally, there was a $2.7 million favorable impact due to the reduction of equipment loans and a $1.4 million favorable impact due to the reduction of capital lease interest for the nine months ended
September 30, 2016
compared to the prior-year to date period.
The loss on extinguishment/restructuring of debt for the three months ended
September 30, 2016
was
$18.3 million
, primarily related to the redemption of our 3.95 percent senior notes due 2018 compared to a gain of
$79.2 million
related to debt restructuring activities that occurred during the three months ended September 30, 2015. The gain on extinguishment/restructuring of debt for the nine months ended
September 30, 2016
was
$164.1 million
, primarily related to the issuance of 1.5 Lien Notes through the exchange offer on March 2, 2016 compared to
$392.9 million
related to the corporate debt restructuring that occurred during the nine months ended September 30, 2015.
Refer to NOTE 5- DEBT AND CREDIT FACILITIES for further discussion.
Income Taxes
Our effective tax rate is impacted by permanent items, such as depletion and the relative mix of income we earn in various foreign jurisdictions with tax rates that differ from the U.S. statutory rate. It also is affected by discrete items that may occur in any given period, but are not consistent from period to period. The following represents a summary of our tax provision and corresponding effective rates for the three and nine months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
2016
|
|
2015
|
|
Variance
|
Income tax benefit (expense)
|
$
|
7.1
|
|
|
$
|
3.4
|
|
|
$
|
3.7
|
|
|
$
|
1.7
|
|
|
$
|
(169.9
|
)
|
|
$
|
171.6
|
|
Effective tax rate
|
22.1
|
%
|
|
(7.3
|
)%
|
|
29.4
|
%
|
|
(1.5
|
)%
|
|
48.8
|
%
|
|
(50.3
|
)%
|
A reconciliation of the statutory rate to the effective tax rate for the nine months ended September 30, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Tax at U.S. statutory rate of 35 percent
|
$
|
41.1
|
|
|
35.0
|
%
|
|
$
|
121.9
|
|
|
35.0
|
%
|
Increases/(Decreases) due to:
|
|
|
|
|
|
|
|
Percentage depletion
|
(21.9
|
)
|
|
(18.7
|
)
|
|
(35.6
|
)
|
|
(10.2
|
)
|
Worthless stock deduction
|
(45.4
|
)
|
|
(38.7
|
)
|
|
—
|
|
|
—
|
|
Impact of foreign operations
|
(0.9
|
)
|
|
(0.8
|
)
|
|
1.5
|
|
|
0.4
|
|
Non-taxable income related to non-controlling interest
|
(4.3
|
)
|
|
(3.7
|
)
|
|
(4.2
|
)
|
|
(1.2
|
)
|
Valuation allowance build (reversal) on current year operations
|
28.4
|
|
|
24.2
|
|
|
(76.7
|
)
|
|
(22.0
|
)
|
Other items - net
|
3.5
|
|
|
3.1
|
|
|
0.4
|
|
|
0.1
|
|
Provision for income tax and effective income tax rate before discrete items
|
0.5
|
|
|
0.4
|
|
|
7.3
|
|
|
2.1
|
|
Discrete Items:
|
|
|
|
|
|
|
|
Tax uncertainties
|
0.7
|
|
|
0.6
|
|
|
0.3
|
|
|
0.1
|
|
Prior year adjustments made in current year
|
21.0
|
|
|
17.9
|
|
|
3.8
|
|
|
1.1
|
|
Valuation allowance (reversal) on prior year assets
|
(23.9
|
)
|
|
(20.4
|
)
|
|
158.5
|
|
|
45.5
|
|
Provision for income tax expense and effective income tax rate including discrete items
|
$
|
(1.7
|
)
|
|
(1.5
|
)%
|
|
$
|
169.9
|
|
|
48.8
|
%
|
Our tax provision for the nine months ended
September 30, 2016
was a benefit of
$1.7 million
and a negative
1.5 percent
effective tax rate compared with an expense of
$169.9 million
for the comparable prior-year period. The decrease in the expense is due to the prior year recording of valuation allowances against existing deferred tax assets.
For the three and nine months ended
September 30, 2016
, we recorded discrete items that resulted in an income tax benefit of
$2.9 million
and
$2.2 million
, respectively. These items primarily relate to prior year adjustments due to a change in estimate of the 2015 net operating loss and corresponding reversal of valuation allowance and quarterly interest accrued on reserves for uncertain tax positions. For the three and nine months ended September 30, 2015, there were discrete items that resulted in an income tax benefit of
$4.5 million
and an income tax expense of
$162.6 million
, respectively. The year-to-date amount was largely related to the recording of valuation allowances against existing deferred tax assets as a result of the determination that they would no longer be realizable.
Our 2016 estimated annual effective tax rate before discrete items is 0.4 percent. This estimated annual effective tax rate differs from the U.S. statutory rate of 35 percent primarily due to deductions for percentage depletion in excess of cost depletion related to U.S. operations, a deduction for worthless stock and the placement of valuation allowance from operations in the current year.
Income (Loss) from Discontinued Operations, net of tax
During the nine months ended
September 30, 2016
, we recorded a loss from discontinued operations of
$0.6 million
, net of tax, attributable to a net loss of
$3.8 million
, for the nine months ended
September 30, 2016
, primarily from certain disputes related to the sale of our North American Coal segment. This loss was offset partially by a gain from foreign currency remeasurement of our
Loans to and accounts receivable from the Canadian Entities
of
$3.2 million
in the
Statements of Unaudited Condensed Consolidated Financial Position
.
As of March 31, 2015, management determined that our North American Coal operating segment met the criteria to be classified as held for sale under ASC 205,
Presentation of Financial Statements
. As such, all current year and historical North American Coal operating segment results are included in our financial statements and classified within discontinued operations. The loss from discontinued operations, net of tax related to the North American Coal segment was
$1.8 million
and
$3.8 million
, for the three and nine months ended
September 30, 2016
, respectively, compared to
$29.8 million
and
$137.0 million
in the comparable prior periods.
In January 2015, we announced that the Bloom Lake Group commenced CCAA proceedings. At that time, we had suspended Bloom Lake operations and for several months had been exploring options to sell certain of our Canadian assets, among other initiatives. Effective January 27, 2015, following the CCAA filing of the Bloom Lake Group, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising substantially all of our Canadian operations. Additionally, on May 20, 2015, the Wabush Group commenced CCAA proceedings which resulted in the deconsolidation of the remaining Wabush Group entities that were not previously deconsolidated. The Wabush Group was no longer generating revenues and was not able to meet its obligations as they came due. As a result of this action, the CCAA protections granted to the Bloom Lake Group were extended to include the Wabush Group to facilitate the reorganization or divestiture of each of their businesses and operations. Financial results prior to the respective deconsolidations of the Bloom Lake and Wabush Groups and subsequent expenses directly associated with the Canadian Entities are included in our financial statements and classified within discontinued operations. The impact of discontinued operations, net of tax related to the deconsolidated Canadian Entities was a loss of
$0.9 million
and a gain of
$3.2 million
for the three and nine months ended September 30, 2016, respectively, compared to a loss from discontinued operations, net of tax of
$14.1 million
and
$732.0 million
, for the three and nine months ended September 30, 2015, respectively.
Noncontrolling Interest
Noncontrolling interest primarily is comprised of our consolidated, but less-than-wholly-owned subsidiary at our Empire mining venture and through the CCAA filing on January 27, 2015, the Bloom Lake operations. The net loss attributable to the noncontrolling interest of the Empire mining venture was
$2.0 million
for the three months ended
September 30, 2016
and net income attributable to the noncontrolling interest of the Empire mining venture was
$23.5 million
for the nine months ended
September 30, 2016
. This is compared to net loss attributable to the noncontrolling interest of $4.6 million and net income attributable to the noncontrolling interest of $6.2 million for the three and nine months ended September 30, 2015, respectively. There was no net income or loss attributable to the noncontrolling interest related to Bloom Lake for the three months ended September 30, 2016 and September 30, 2015. There was no net income or loss attributable to the noncontrolling interest related to Bloom Lake for the nine months ended September 30, 2016 compared to net loss attributable to the noncontrolling interest of $7.7 million for the nine months ended September 30, 2015.
Results of Operations – Segment Information
We have historically evaluated segment performance based on sales margin, defined as revenues less cost of goods sold, and operating expenses identifiable to each segment. Additionally,
we evaluate segment performance based on the key indicators of EBITDA, defined as net income (loss) before interest, income taxes, depreciation, depletion and amortization, and Adjusted EBITDA, defined as EBITDA excluding certain items such as impacts of impairment of other long-lived assets, discontinued operations, extinguishment/restructuring of debt, severance and contractor termination costs, foreign currency remeasurement, and intersegment corporate allocations of SG&A costs. These measures allow management and investors to focus on our ability to service our debt, as well as, illustrate how the business and each operating segment is performing. Additionally, EBITDA and Adjusted EBITDA assist management and investors in their analysis and forecasting as these measures approximate the cash flows associated with operational earnings.
EBITDA and Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net Income (Loss)
|
$
|
(27.8
|
)
|
|
$
|
6.0
|
|
|
$
|
118.5
|
|
|
$
|
(690.5
|
)
|
Less:
|
|
|
|
|
|
|
|
Interest expense, net
|
(48.7
|
)
|
|
(62.3
|
)
|
|
(156.2
|
)
|
|
(170.7
|
)
|
Income tax benefit (expense)
|
7.1
|
|
|
4.8
|
|
|
1.7
|
|
|
(167.3
|
)
|
Depreciation, depletion and amortization
|
(26.8
|
)
|
|
(35.6
|
)
|
|
(88.9
|
)
|
|
(99.1
|
)
|
EBITDA
|
$
|
40.6
|
|
|
$
|
99.1
|
|
|
$
|
361.9
|
|
|
$
|
(253.4
|
)
|
Less:
|
|
|
|
|
|
|
|
Impairment of other long-lived assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3.3
|
)
|
Impact of discontinued operations
|
(2.7
|
)
|
|
(44.8
|
)
|
|
(0.6
|
)
|
|
(865.9
|
)
|
Gain (loss) on extinguishment/restructuring of debt
|
(18.3
|
)
|
|
79.2
|
|
|
164.1
|
|
|
392.9
|
|
Severance and contractor termination costs
|
—
|
|
|
2.2
|
|
|
(0.1
|
)
|
|
(9.3
|
)
|
Foreign exchange remeasurement
|
(0.3
|
)
|
|
2.4
|
|
|
(1.2
|
)
|
|
15.2
|
|
Adjusted EBITDA
|
$
|
61.9
|
|
|
$
|
60.1
|
|
|
$
|
199.7
|
|
|
$
|
217.0
|
|
|
|
|
|
|
|
|
|
EBITDA:
|
|
|
|
|
|
|
|
U.S. Iron Ore
|
$
|
61.1
|
|
|
$
|
69.2
|
|
|
$
|
196.6
|
|
|
$
|
239.6
|
|
Asia Pacific Iron Ore
|
21.2
|
|
|
11.1
|
|
|
69.6
|
|
|
38.7
|
|
Other
|
(41.7
|
)
|
|
18.8
|
|
|
95.7
|
|
|
(531.7
|
)
|
Total EBITDA
|
$
|
40.6
|
|
|
$
|
99.1
|
|
|
$
|
361.9
|
|
|
$
|
(253.4
|
)
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
U.S. Iron Ore
|
$
|
65.3
|
|
|
$
|
72.3
|
|
|
$
|
208.6
|
|
|
$
|
254.6
|
|
Asia Pacific Iron Ore
|
23.7
|
|
|
9.7
|
|
|
73.2
|
|
|
32.8
|
|
Other
|
(27.1
|
)
|
|
(21.9
|
)
|
|
(82.1
|
)
|
|
(70.4
|
)
|
Total Adjusted EBITDA
|
$
|
61.9
|
|
|
$
|
60.1
|
|
|
$
|
199.7
|
|
|
$
|
217.0
|
|
EBITDA for the
three and nine months ended
September 30, 2016
decreased
$58.5 million
and increased
$615.3 million
, respectively, on a consolidated basis, from the comparable periods in 2015. The period-over-period change primarily was driven by the impact of our discontinued operations in addition to the impact from debt restructuring/extinguishment activities for the nine months ended
September 30, 2016
and 2015. Adjusted EBITDA increased
$1.8 million
and decreased
$17.3 million
for the
three and nine months ended
September 30, 2016
from the comparable period in 2015. The increase for the three months ended September 30, 2016 from the comparable period primarily was attributable to the higher consolidated sales margin. The decrease for the nine months ended September 30, 2016 from the comparable period primarily was attributable to an incremental unfavorable impact from foreign exchange remeasurement and Empire idle costs included within
Miscellaneous - net
within the Statements of Unaudited Condensed Consolidated Operations. See further detail below for additional information regarding the specific factors that impacted each reportable segments' sales margin during the three and nine months ended
September 30, 2016
and 2015.
2016
Compared to
2015
U.S. Iron Ore
The following is a summary of U.S. Iron Ore results for the three months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
|
|
Changes due to:
|
|
|
|
|
Three Months Ended September 30,
|
|
Revenue
and cost rate
|
|
Sales volume
|
|
Idle cost/production volume variance
|
|
Freight and reimburse-ment
|
|
Total change
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Revenues from product sales and services
|
|
$
|
428.3
|
|
|
$
|
471.0
|
|
|
$
|
(15.8
|
)
|
|
$
|
(24.0
|
)
|
|
$
|
—
|
|
|
$
|
(2.9
|
)
|
|
$
|
(42.7
|
)
|
Cost of goods sold and operating expenses
|
|
(361.8
|
)
|
|
(422.3
|
)
|
|
19.3
|
|
|
17.2
|
|
|
21.1
|
|
|
2.9
|
|
|
60.5
|
|
Sales margin
|
|
$
|
66.5
|
|
|
$
|
48.7
|
|
|
$
|
3.5
|
|
|
$
|
(6.8
|
)
|
|
$
|
21.1
|
|
|
$
|
—
|
|
|
$
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Per Ton Information
|
|
2016
|
|
2015
|
|
Difference
|
|
Percent change
|
|
|
|
|
|
|
Realized product revenue rate
1
|
|
$
|
73.50
|
|
|
$
|
76.52
|
|
|
$
|
(3.02
|
)
|
|
(3.9
|
)%
|
|
|
|
|
|
|
Cash production cost
2
|
|
55.69
|
|
|
48.99
|
|
|
6.70
|
|
|
13.7
|
%
|
|
|
|
|
|
|
Non-production cash cost
2
|
|
1.68
|
|
|
13.85
|
|
|
(12.17
|
)
|
|
(87.9
|
)%
|
|
|
|
|
|
|
Cost of goods sold and operating expenses rate
1
(excluding DDA)
|
|
57.37
|
|
|
62.84
|
|
|
(5.47
|
)
|
|
(8.7
|
)%
|
|
|
|
|
|
|
Depreciation, depletion & amortization
|
|
3.56
|
|
|
4.98
|
|
|
(1.42
|
)
|
|
(28.5
|
)%
|
|
|
|
|
|
|
Total cost of goods sold and operating expenses rate
|
|
60.93
|
|
|
67.82
|
|
|
(6.89
|
)
|
|
(10.2
|
)%
|
|
|
|
|
|
|
Sales margin
|
|
$
|
12.57
|
|
|
$
|
8.70
|
|
|
$
|
3.87
|
|
|
44.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales tons
3
(In thousands)
|
|
5,287
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
|
Production tons
3
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
5,722
|
|
|
5,716
|
|
|
|
|
|
|
|
|
|
|
|
Cliffs’ share of total
|
|
3,857
|
|
|
4,099
|
|
|
|
|
|
|
|
|
|
|
|
1
Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. Revenues also exclude venture partner cost reimbursements.
|
2
Cash production cost per long/metric ton is defined as cost of goods sold and operating expenses per ton less depreciation, depletion and amortization; as well as idle costs, period costs, costs of services and inventory effects per long/metric ton. Non-production cash cost per long/metric ton is defined as the sum of idle costs, period costs (including royalties), costs of services, and inventory effects per long/metric ton.
|
3
Tons are long tons (2,240 pounds).
|
Sales margin for U.S. Iron Ore was
$66.5 million
for the three months ended
September 30, 2016
, compared with sales margin of
$48.7 million
for the three months ended
September 30, 2015
. The increase compared to the prior-
year period is attributable to a decrease in cost of goods sold and operating expenses of
$60.5 million
partially offset by lower revenue of
$42.7 million
. Sales margin per long ton increased
44.5
percent to
$12.57
per long ton in the third quarter of 2016 compared to the third quarter of 2015.
Revenue decreased by
$39.8 million
, excluding the decrease of
$2.9 million
of freight and reimbursements, in the third quarter of 2016 over the prior-year period, predominantly due to:
|
|
•
|
Lower sales volumes of 313 thousand long tons which resulted in lower revenues of
$24.0 million
due to:
|
|
|
◦
|
A termination of a customer contract in the fourth quarter of the prior year that was reinstated in June of 2016, to begin in 2017, offset partially by fewer nominated tons on short term contracts with the customer in the interim; and
|
|
|
◦
|
Space limitations at a third party and customer locations for different ore grades which limited that customer's ability to take iron ore pellets in the quarter.
|
|
|
◦
|
These decreases were offset partially by additional sales in the third quarter of 2016 that resulted from a short-term contract with a customer that we made no sales to in 2015.
|
|
|
•
|
The realized product revenue rate declined by
$3.02
per long ton or
3.9
percent to
$73.50
per long ton in third quarter of 2016, which resulted in a decrease of
$15.8 million
. This decline is a result of:
|
|
|
◦
|
Changes in customer pricing negatively affected the realized revenue rate by $2 per long ton driven primarily by the negative inflation projections of certain price indices and lower full-year world pricing than the 2015 period;
|
|
|
◦
|
An unfavorable variance of $1 per long ton due to overall net lower contracted pricing terms for two customers which were based on stated negotiated rates compared to the prior-year period; and
|
|
|
◦
|
A decrease in revenue rate of $1 per long ton due to lower projected hot-rolled coil pricing for one customer compared to the prior-year period.
|
|
|
◦
|
Partially offset by an increase in service revenue from increased rail activity for approximately $1 per long ton.
|
Cost of goods sold and operating expenses in the third quarter of 2016 decreased
$57.6 million
, excluding the decrease of
$2.9 million
of freight and reimbursements from the same period in the prior-year period, predominantly as a result of:
|
|
•
|
Lower idle costs of
$21.1 million
as a result of the Empire mine idle during the third quarter of 2015 and due to the United Taconite mine which started production again in August of 2016 versus the idle that began in August 2015. Additionally, our Northshore mine was in full production during the third quarter of 2016 versus the one idled production line at Northshore during the third quarter of 2015;
|
|
|
•
|
Decreased sales volumes as discussed above that decreased costs by
$17.2 million
compared to the prior-year period; and
|
|
|
•
|
Lower costs in the third quarter of 2016 in comparison to the prior-year period primarily driven by the reduction in maintenance and repair spend due to cost reduction initiatives and condition based monitoring, year-over-year reduction in energy rates and lower employment costs.
|
The following is a summary of U.S. Iron Ore results for the nine months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
|
|
Changes due to:
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Revenue
and cost rate
|
|
Sales volume
|
|
Idle cost/production volume variance
|
|
Freight and reimburse-ment
|
|
Total change
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Revenues from product sales and services
|
|
$
|
975.5
|
|
|
$
|
1,152.5
|
|
|
$
|
(45.1
|
)
|
|
$
|
(117.5
|
)
|
|
$
|
—
|
|
|
$
|
(14.4
|
)
|
|
$
|
(177.0
|
)
|
Cost of goods sold and operating expenses
|
|
(825.8
|
)
|
|
(974.8
|
)
|
|
72.2
|
|
|
84.6
|
|
|
(22.2
|
)
|
|
14.4
|
|
|
149.0
|
|
Sales margin
|
|
$
|
149.7
|
|
|
$
|
177.7
|
|
|
$
|
27.1
|
|
|
$
|
(32.9
|
)
|
|
$
|
(22.2
|
)
|
|
$
|
—
|
|
|
$
|
(28.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
Per Ton Information
|
|
2016
|
|
2015
|
|
Difference
|
|
Percent change
|
|
|
|
|
|
|
Realized product revenue rate
1
|
|
$
|
76.82
|
|
|
$
|
80.85
|
|
|
$
|
(4.03
|
)
|
|
(5.0
|
)%
|
|
|
|
|
|
|
Cash production cost
2
|
|
50.02
|
|
|
57.25
|
|
|
(7.23
|
)
|
|
(12.6
|
)%
|
|
|
|
|
|
|
Non-production cash cost
2
|
|
7.87
|
|
|
4.11
|
|
|
3.76
|
|
|
91.5
|
%
|
|
|
|
|
|
|
Cost of goods sold and operating expenses rate
1
(excluding DDA)
|
|
57.89
|
|
|
61.36
|
|
|
(3.47
|
)
|
|
(5.7
|
)%
|
|
|
|
|
|
|
Depreciation, depletion & amortization
|
|
5.74
|
|
|
5.60
|
|
|
0.14
|
|
|
2.5
|
%
|
|
|
|
|
|
|
Total cost of goods sold and operating expenses rate
|
|
63.63
|
|
|
66.96
|
|
|
(3.33
|
)
|
|
(5.0
|
)%
|
|
|
|
|
|
|
Sales margin
|
|
$
|
13.19
|
|
|
$
|
13.89
|
|
|
$
|
(0.70
|
)
|
|
(5.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales tons
3
(In thousands)
|
|
11,343
|
|
|
12,791
|
|
|
|
|
|
|
|
|
|
|
|
Production tons
3
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
16,622
|
|
|
20,019
|
|
|
|
|
|
|
|
|
|
|
|
Cliffs’ share of total
|
|
11,059
|
|
|
14,978
|
|
|
|
|
|
|
|
|
|
|
|
1
Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. Revenues also exclude venture partner cost reimbursements.
|
2
Cash production cost per long/metric ton is defined as cost of goods sold and operating expenses per ton less depreciation, depletion and amortization; as well as idle costs, period costs, costs of services and inventory effects per long/metric ton. Non-production cash cost per long/metric ton is defined as the sum of idle costs, period costs (including royalties), costs of services, and inventory effects per long/metric ton.
|
3
Tons are long tons (2,240 pounds).
|
Sales margin for U.S. Iron Ore was
$149.7 million
for the nine months ended
September 30, 2016
, compared with
$177.7 million
for the nine months ended September 30, 2015. The decline compared to the prior-year period is attributable to a decrease in revenue of
$177.0 million
partially offset by lower cost of goods sold and operating expenses of
$149.0 million
. Sales margin per long ton decreased
5.0 percent
to
$13.19
in the first nine months of 2016 compared to the first nine months of 2015.
Revenue decreased by
$162.6 million
, excluding the freight and reimbursements decrease of
$14.4 million
, from the prior-year period, predominantly due to:
|
|
•
|
Lower sales volumes of
1.4 million
long tons, which resulted in lower revenues of
$117.5 million
due to:
|
|
|
◦
|
A termination of a customer contract in the fourth quarter of the prior year that was reinstated in June 2016, to begin 2017, offset partially by fewer nominated tons on short term contracts with the customer in the interim; and
|
|
|
◦
|
Lower demand from two customer locations primarily due to their inventory levels which resulted from idled blast furnaces at the customer's facilities.
|
|
|
◦
|
These decreases were offset partially by additional sales in 2016 that resulted from a short-term contract with a customer that we made no sales to in 2015.
|
|
|
•
|
The average year-to-date realized product revenue rate declined by
$4.03
per long ton or
5.0 percent
to
$76.82
per long ton in nine months ended September 30, 2016, which resulted in a decrease of
$45.1 million
, compared to the prior-year period. The decline is a result of:
|
|
|
◦
|
Changes in customer pricing negatively affected the realized revenue rate by $4 per long ton driven primarily by the negative inflation of certain price indices, the reduction in Platts IODEX price and the impact of higher carryover pricing in the prior-year period than the 2016 period; and
|
|
|
◦
|
An unfavorable variance of $1 per long ton due to overall net lower contracted pricing terms for two customers that were based on stated negotiated rates compared to the prior-year period.
|
|
|
◦
|
These decreases were offset partially by an increase in realized revenue rates of a $1 per long ton as a result of one major customer contract with a pricing mechanism tied to the full-year estimate of their hot-rolled coil pricing. The estimate in 2016 has increased since the beginning of the year, compared to 2015 when the estimate was revised lower.
|
Cost of goods sold and operating expenses in the first nine months of
2016
decreased
$134.6 million
, excluding the freight and reimbursements decrease of
$14.4 million
from the same period in the prior year, predominantly as a result of:
|
|
•
|
Decreased sales volumes as discussed above that decreased costs by
$84.6 million
compared to the prior-year period; and
|
|
|
•
|
Lower costs in comparison to the prior-year period primarily driven by the reduction in maintenance and repair costs resulting from cost reduction initiatives and condition based monitoring, year-over-year reduction in energy rates, and lower employment costs.
|
|
|
•
|
Partially offset by increased costs of
$22.2 million
from the United Taconite mine idle that began in August 2015 and continued until the last week of August 2016 and the Northshore mine full idle that began in November 2015 through May 2016 versus the one idled production line during the first nine months of 2015.
|
Production
Cliffs' share of production in its U.S. Iron Ore segment decreased by
5.9 percent
during the third quarter of
2016
when compared to the same period in
2015
. The decrease in production volumes primarily is attributable to idled mining operations, our election to take additional incremental production tons from Tilden in the third quarter of 2015 and timing of maintenance.
Cliffs' share of production in its U.S. Iron Ore segment decreased by
26.2 percent
in the first nine months of
2016
when compared to the same period in
2015
. The decrease in production volumes primarily is attributable to the idled mining facilities. Our United Taconite operation was idled until August 2016 versus operating at full production for most of the comparable period in 2015, until it was idled at the beginning of August 2015, causing a decrease in production volume of 2.7 million long tons. Secondly, our Northshore mining operations were fully idled, including all four furnaces until May 2016 compared to running a three furnace operation through September 30, 2015, causing a decrease in production of 1.7 million long tons. These decreases were offset partially by higher production at Empire of 1.4 million long tons excluding tolled tons for the nine months ended September 30, 2016 compared to the prior-year period, due to the plant idle that started at the end of June 2015 and ended in October 2015, versus the indefinite idle that began in August 2016.
Asia Pacific Iron Ore
The following is a summary of Asia Pacific Iron Ore results for the three months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
|
|
Change due to:
|
|
|
|
|
Three Months Ended
September 30,
|
|
Revenue
and cost rate
|
|
Sales volume
|
|
Exchange rate
|
|
Freight and reimburse-ment
|
|
Total change
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Revenues from product sales and services
|
|
$
|
125.0
|
|
|
$
|
122.2
|
|
|
$
|
12.2
|
|
|
$
|
(5.3
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
2.8
|
|
Cost of goods sold and operating expenses
|
|
(106.1
|
)
|
|
(115.8
|
)
|
|
6.1
|
|
|
5.0
|
|
|
(4.5
|
)
|
|
3.1
|
|
|
9.7
|
|
Sales margin
|
|
$
|
18.9
|
|
|
$
|
6.4
|
|
|
$
|
18.3
|
|
|
$
|
(0.3
|
)
|
|
$
|
(5.5
|
)
|
|
$
|
—
|
|
|
$
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
Per Ton Information
|
|
2016
|
|
2015
|
|
Difference
|
|
Percent change
|
|
|
|
|
|
|
Realized product revenue rate
1
|
|
$
|
42.87
|
|
|
$
|
39.00
|
|
|
$
|
3.87
|
|
|
9.9
|
%
|
|
|
|
|
|
|
Cash production cost
2
|
|
26.10
|
|
|
26.87
|
|
|
(0.77
|
)
|
|
(2.9
|
)%
|
|
|
|
|
|
|
Non-production cash cost
2
|
|
7.77
|
|
|
7.85
|
|
|
(0.08
|
)
|
|
(1.0
|
)%
|
|
|
|
|
|
|
Cost of goods sold and operating expenses rate (excluding DDA)
1
|
|
33.87
|
|
|
34.72
|
|
|
(0.85
|
)
|
|
(2.4
|
)%
|
|
|
|
|
|
|
Depreciation, depletion & amortization
|
|
2.25
|
|
|
2.08
|
|
|
0.17
|
|
|
8.2
|
%
|
|
|
|
|
|
|
Total cost of goods sold and operating expenses rate
|
|
36.12
|
|
|
36.80
|
|
|
(0.68
|
)
|
|
(1.8
|
)%
|
|
|
|
|
|
|
Sales margin
|
|
$
|
6.75
|
|
|
$
|
2.20
|
|
|
$
|
4.55
|
|
|
206.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales tons
3
(In thousands)
|
|
2,799
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
|
Production tons
3
(In thousands)
|
|
2,968
|
|
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
1
The information above excludes revenues and expenses related to freight, which are offsetting and have no impact on sales margin.
|
2
Cash production cost per long/metric ton is defined as cost of goods sold and operating expenses per ton less depreciation, depletion and amortization; as well as idle costs, period costs, costs of services and inventory effects per long/metric ton. Non-production cash cost per long/metric ton is defined as the sum of idle costs, period costs (including royalties), costs of services, and inventory effects per long/metric ton.
|
3
Metric tons (2,205 pounds).
|
Sales margin for Asia Pacific Iron Ore increased to
$18.9 million
during the three months ended
September 30, 2016
compared with
$6.4 million
for the same period in
2015
and sales margin per metric ton increased
206.8 percent
to
$6.75
per metric ton in the third quarter of 2016 compared to the third quarter of 2015. The increase compared to the prior-year period primarily is attributable to a decrease in cost of goods sold and operating expenses of
$9.7 million
in addition to higher revenue of
$2.8 million
.
Revenue increased
$5.9 million
in the third quarter of
2016
over the prior-year period, excluding the decrease of
$3.1 million
of freight and reimbursements, primarily as a result of:
|
|
•
|
The average year-to-date realized product revenue rate increased by
$3.87
per metric ton or
9.9 percent
to
$42.87
per metric ton in third quarter of 2016 compared to the prior-year period, which resulted in an increase of
$11.2 million
, including the impact of foreign exchange. This increase is a result of:
|
|
|
◦
|
Changes in benchmark pricing positively affected the realized revenue rate by $4 per metric ton driven by the increase in Platts IODEX price;
|
|
|
◦
|
A favorable variance of $3 per metric ton improvement due to a $8.5 million hedging impact in 2015 that was not repeated in 2016, due to the suspension of the hedging program that protected against volatility in exchange rates; and
|
|
|
◦
|
Lower average Australia to Asia freight rates in the third quarter compared to the prior-year period, which is a component in the formula pricing, favorably affected the revenue rate by $1 per metric ton.
|
|
|
◦
|
Partially offset by a decrease in revenue rate of $4 per metric ton due to price adjustments to meet market competition to compensate for varying quality ores and a reduction in iron content.
|
|
|
•
|
The sales volume decreased by 127 thousand metric tons, or 4.3 percent, to 2.8 million metric tons in the third quarter of 2016 compared to the prior-year period. The decrease in tons sold resulted in decreased revenue of
$5.3 million
for the three months ended September 30, 2016 and was due to one less shipment or 16 total shipments during the period compared to 17 total shipments during the three months ended September 30, 2015. Adverse weather conditions delayed the loading of the last scheduled shipment for the third quarter of 2016.
|
|
|
•
|
Cost of goods sold and operating expenses in the three months ended
September 30, 2016
decreased $
6.6 million
, excluding the decrease of
$3.1 million
of freight and reimbursements, compared to the same period in
2015
primarily as a result of:
|
|
|
◦
|
A reduction in production costs in the current period that were lower compared to the weighted average cost of inventory for a favorable change of $10.4 million;
|
|
|
◦
|
Decreased costs of
$5.0 million
as a result of lower sales volumes as discussed above compared to the same period in the prior year; and
|
|
|
◦
|
A reduction in transportation costs and administrative costs of $4.0 million from reduced rail freight rates, employment costs and contractor fees also reduced costs.
|
|
|
◦
|
Partially offset by increased mining and maintenance costs of $4.8 million which were driven by increased mining activities during the three months ended September 30, 2016, and an environmental reserve adjustment of $3.1 million that benefited the prior-year period and was not repeated in 2016; and
|
|
|
◦
|
Partially offset by unfavorable foreign exchange rate variances of
$4.5 million
.
|
The following is a summary of Asia Pacific Iron Ore results for the nine months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
|
|
Change due to:
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Revenue
and cost rate
|
|
Sales volume
|
|
Exchange rate
|
|
Freight and reimburse-ment
|
|
Total change
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Revenues from product sales and services
|
|
$
|
379.5
|
|
|
$
|
384.8
|
|
|
$
|
4.0
|
|
|
$
|
(0.3
|
)
|
|
$
|
(4.0
|
)
|
|
$
|
(5.0
|
)
|
|
$
|
(5.3
|
)
|
Cost of goods sold and operating expenses
|
|
(321.4
|
)
|
|
(369.3
|
)
|
|
34.1
|
|
|
0.2
|
|
|
8.6
|
|
|
5.0
|
|
|
47.9
|
|
Sales margin
|
|
$
|
58.1
|
|
|
$
|
15.5
|
|
|
$
|
38.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
4.6
|
|
|
$
|
—
|
|
|
$
|
42.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
Per Ton Information
|
|
2016
|
|
2015
|
|
Difference
|
|
Percent change
|
|
|
|
|
|
|
Realized product revenue rate
1
|
|
$
|
41.99
|
|
|
$
|
42.01
|
|
|
$
|
(0.02
|
)
|
|
—
|
%
|
|
|
|
|
|
|
Cash production cost
2
|
|
27.16
|
|
|
32.62
|
|
|
(5.46
|
)
|
|
(16.7
|
)%
|
|
|
|
|
|
|
Non-production cash cost
2
|
|
5.95
|
|
|
5.42
|
|
|
0.53
|
|
|
9.8
|
%
|
|
|
|
|
|
|
Cost of goods sold and operating expenses rate (excluding DDA)
1
|
|
33.11
|
|
|
38.04
|
|
|
(4.93
|
)
|
|
(13.0
|
)%
|
|
|
|
|
|
|
Depreciation, depletion & amortization
|
|
2.21
|
|
|
2.19
|
|
|
0.02
|
|
|
0.9
|
%
|
|
|
|
|
|
|
Total cost of goods sold and operating expenses rate
|
|
35.32
|
|
|
40.23
|
|
|
(4.91
|
)
|
|
(12.2
|
)%
|
|
|
|
|
|
|
Sales margin
|
|
$
|
6.67
|
|
|
$
|
1.78
|
|
|
$
|
4.89
|
|
|
274.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales tons
3
(In thousands)
|
|
8,705
|
|
|
8,710
|
|
|
|
|
|
|
|
|
|
|
|
Production tons
3
(In thousands)
|
|
8,575
|
|
|
8,655
|
|
|
|
|
|
|
|
|
|
|
|
1
The information above excludes revenues and expenses related to freight, which are offsetting and have no impact on sales margin.
|
2
Cash production cost per long/metric ton is defined as cost of goods sold and operating expenses per ton less depreciation, depletion and amortization; as well as idle costs, period costs, costs of services and inventory effects per long/metric ton. Non-production cash cost per long/metric ton is defined as the sum of idle costs, period costs (including royalties), costs of services, and inventory effects per long/metric ton.
|
3
Metric tons (2,205 pounds).
|
Sales margin for Asia Pacific Iron Ore increased to
$58.1 million
for the nine months ended
September 30, 2016
compared with
$15.5 million
for the same period in
2015
and sales margin per metric ton increased
$4.89
per metric ton or
274.7 percent
for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase compared to the prior-year period primarily is attributable to a decrease in cost of goods sold and operating expenses of
$47.9 million
partially offset by lower revenue of
$5.3 million
.
Revenue decreased
$0.3 million
in the nine months ended
September 30, 2016
over the prior-year period, excluding the freight and reimbursements decrease of
$5.0 million
, primarily as a result of:
|
|
•
|
The year-to-date realized revenue from product and services increased by
$4.0 million
, excluding the impact of foreign exchange rates, during the nine months ended September 30, 2016, compared to the prior-year period. This increase is a result of:
|
|
|
◦
|
A $3 per metric ton improvement due to a $28.8 million hedging impact in 2015 that was not repeated in 2016, due to the suspension of the hedging program that protected against volatility in exchange rates; and
|
|
|
◦
|
Lower average Australia to Asia freight rates compared to the prior-year to date period, which is a component in the formula pricing, favorably affected the revenue rate by $2 per metric ton.
|
|
|
◦
|
Partially offset by changes in benchmark pricing which negatively affected the realized revenue rate by $3 per metric ton driven by the reduction in Platts IODEX price; and
|
|
|
◦
|
Lower lump premiums of a $1 per metric ton due to lower average spot pricing and required discounts on those premiums.
|
|
|
•
|
The increase in average year-to-date realized product revenue rate was offset partially by unfavorable foreign exchange rate variances of
$4.0 million
.
|
Cost of goods sold and operating expenses in the nine months ended
September 30, 2016
decreased
$42.9 million
, excluding the freight and reimbursements decrease of
$5.0 million
, compared to the same period in
2015
primarily as a result of:
|
|
•
|
A reduction in mining costs of $12.2 million from mining efficiencies and transportation costs of $13.6 million due to decreased hauling volumes and reduced freight costs as a result of a revised mine plan;
|
|
|
•
|
Reduced administration and employment costs of $17.2 million due to lower headcount and contractor fees; and
|
|
|
•
|
Favorable foreign exchange rate variances of
$8.6 million
.
|
|
|
•
|
Partially offset by the impact of depleting our finished goods stock piles which has a weighted average cost of inventory that is higher than current production costs, for increased expense of $7.6 million.
|
Production
Production at our Asia Pacific Iron Ore mining complex during the
three and nine months ended
September 30, 2016
remained fairly consistent when compared to the same periods in
2015
and varied only slightly due to inclement weather during 2016.
Liquidity, Cash Flows and Capital Resources
Our primary sources of liquidity are cash generated from our operating and financing activities. Our capital allocation process is focused on improving the strength of our balance sheet and creating financial flexibility to manage through current demand for our products and volatility in commodity prices. We are focused on the preservation of liquidity in our business through the maximization of cash generation of our operations as well as reducing operating costs, limiting capital investments to those required to meet the current business plan, including regulatory and permission-to-operate related projects and lowering SG&A expenses. During the quarter, we issued common shares in a public offering, which provided net proceeds of $287.6 million that we used to fully redeem our senior notes due 2018. As demonstrated in prior periods, we will continue to seek more opportunities to reduce our debt, including, without limitation, through further repurchases or exchange of our debt securities, including in exchange for our common shares. Despite the improving conditions we experienced during the first nine months of 2016, we believe these efforts, which have been ongoing and will continue for the foreseeable future, remain a priority.
Based on our outlook for the next twelve months, which is subject to continued changing demand from steel makers that utilize our products and volatility in iron ore and domestic steel prices, we expect to generate cash from operations sufficient to meet our anticipated capital expenditures and cash requirements to service our debt obligations for the next 12 months. Furthermore, we maintain incremental liquidity through the cash on our balance sheet and the availability provided by our ABL Facility.
Despite improving conditions, if we see reduced demand from our customers and/or iron ore or steel prices deteriorate significantly, we would face pressure on our available liquidity. If this was the case, we would need to consider the sale of assets, further expense reductions and the possibility of issuing the remaining capacity under our senior secured notes. There is a possibility that these further actions would not be sufficient to maintain adequate levels of available liquidity particularly if industry conditions deteriorated severely.
Refer to “Outlook” for additional guidance regarding expected future results, including projections on pricing, sales volume and production.
The following discussion summarizes the significant activities impacting our cash flows during the nine months ended
September 30, 2016
and
2015
as well as known expected impacts to our future cash flows over the next 12 months. Refer to the
Statements of Unaudited Condensed Consolidated Cash Flows
for additional information.
Operating Activities
Net cash provided by operating activities was
$72.1 million
for the nine months ended
September 30, 2016
, compared to net cash used by operating activities of
$59.5 million
for the same period in
2015
. The increase in operating cash flows in the first nine months of 2016 primarily was due to lower operating costs previously discussed and improved cash flows from working capital. The most significant driver in the working capital changes was a result of effectively managing our inventory levels and matching those levels to meet our customers' demand. This can be seen by a decrease in finished goods inventory during the first nine months of 2016 of $7.0 million compared to the $120.2 million build of finished goods inventory that occurred during the same period in 2015. Additionally, we have responsibly managed our costs and remained focused on reducing our liabilities, as can be seen by the overall decrease in current liabilities to
$323.5 million
as of September 30, 2016 down from $669.9 million as of September 30, 2015.
Through the first nine months of 2016, the Platts IODEX has, despite its volatility, remained at encouraging levels. We believe this is the result of improved sentiment about steel demand in China and signs of high-cost capacity closures. Furthermore, major supply additions from both Brazil and Australia anticipated to come online this year have experienced difficulties ramping up and completion dates have been further delayed. In addition, we believe the new management teams at the major Australian iron ore producers will show more supply discipline for the remainder of the year and through 2017, which could help maintain or even improve these current price levels.
While iron ore prices remained at encouraging levels during the third quarter, we did see a substantial decline in the price of hot-rolled coil in the United States. While still remaining at a level considerably higher than its lows in January 2016, the price of hot-rolled coil dropped over $100 per short ton during the third quarter. We believe this is a result of attempts by China to circumvent antidumping and countervailing duties by using other countries as an intermediary, most notably Vietnam. This issue was addressed in late September with a circumvention case against Vietnam made by the domestic U.S. mills, who are seeking to impose duties on these imports as well. We also believe the price weakness is attributable to normal seasonality of the business, as well as the uncertain political environment in the United States with respect to the November Presidential election. As these uncertainties subside and trade case enforcement continues, we believe the hot-rolled coil pricing environment in the United States will improve.
We believe we have sufficient capital resources for the next 12 months to support our operations and other financial obligations through cash generated from operations, our financing arrangements augmented by our efficient tax structure that allows us to repatriate cash from our foreign operations, if necessary. Our U.S. cash and cash equivalents balance at
September 30, 2016
was $78.7 million, or approximately 59.5 percent of our consolidated total cash and cash equivalents balance of
$132.2 million
.
Investing Activities
Net cash used by investing activities
was
$39.5 million
for the nine months ended
September 30, 2016
, compared with
$57.2 million
for the comparable period in
2015
. We spent approximately $31.0 million and $58.0 million globally on expenditures related to sustaining capital during the nine months ended September 30, 2016 and 2015, respectively. Sustaining capital spend includes infrastructure, mobile equipment, environment, safety, fixed equipment, product quality and health.
We are maintaining our full-year 2016 capital expenditures expectation of $75 million, which includes approximately $30 million in capital spend required to produce a specialized, super-flux pellet called "Mustang" at United Taconite in order to meet a customer's pellet specification requirements.
In alignment with our strategy to focus on allocating capital among key priorities related to liquidity management, and business investment, we anticipate total cash used during the next twelve months of $60 million on capital expenditures related to constructing necessary infrastructure to produce the Mustang pellet. During the first nine months of 2016, we incurred capital expenditures of $15 million for this project.
Financing Activities
Net cash used by financing activities in the first nine months of
2016
was
$186.0 million
, compared to
$98.2 million
provided by financing activities for the comparable period in
2015
. Net cash used by financing activities included paying off the remaining balance of our equipment loans, which resulted in cash outflows of
$95.6 million
. Additionally, we redeemed all of our outstanding senior notes due 2018 for
$301.0 million
, which was offset partially by net proceeds from the issuance of common shares of
$287.6 million
. We made further cash outflows related to financing activities attributable to distributions of partnership equity of
$52.5 million
and we anticipate approximately $29 million in partnership equity will be distributed within the next 12 months. Net cash provided by financing activities in the first nine months of 2015 included issuance of First Lien Notes, which resulted in net proceeds excluding debt issuance costs of
$503.5
million
, which was offset partially by the redemption of senior notes of
$225.9 million
and debt issuance costs of
$33.6 million
. Cash used by financing activities in the first nine months of 2015 included payments on our equipment loans of
$36.9 million
. Additionally, in the first nine months of 2015 cash dividends of
$38.4 million
were paid on Preferred Shares and
$31.7 million
was attributable to distributions of partnership equity.
Capital Resources
We expect to fund our business obligations from available cash, operations and existing borrowing arrangements. We also may pursue other funding strategies in the equity and/or debt markets to strengthen our liquidity. The following represents a summary of key liquidity measures as of
September 30, 2016
and
December 31, 2015
:
|
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|
|
|
|
|
|
|
|
(In Millions)
|
|
September 30,
2016
|
|
December 31,
2015
|
Cash and cash equivalents
|
$
|
132.2
|
|
|
$
|
285.2
|
|
Available borrowing base on ABL Facility
1
|
355.7
|
|
|
366.0
|
|
ABL Facility loans drawn
|
—
|
|
|
—
|
|
Letter of credit obligations and other commitments
|
(108.8
|
)
|
|
(186.8
|
)
|
Borrowing capacity available
|
$
|
246.9
|
|
|
$
|
179.2
|
|
|
|
|
|
1
The ABL Facility has a maximum borrowing base of $550 million, determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.
|
Our primary sources of funding are cash on hand, which totaled
$132.2 million
as of
September 30, 2016
, cash generated by our business and availability under the ABL Facility. The combination of cash and availability under the ABL Facility gives us approximately $379.1 million in liquidity entering the fourth quarter of 2016, which is expected to be adequate to fund operations, letter of credit obligations, sustaining capital expenditures and other cash commitments for at least the next 12 months.
As of
September 30, 2016
, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0 was not applicable. We believe that the cash on hand and the ABL Facility provide us sufficient liquidity to support our operating, investing and financing activities. We have the capability to issue additional 1.5 Lien Notes and additional Second Lien Notes, both subject to compliance with the Fixed Charge Coverage Ratio and other applicable covenants under our ABL Facility. Available capacity of these secured notes could however be limited by market conditions. If demand for our products and pricing deteriorates and persists for a continued period of time, we believe our ability to maintain the required Fixed Charge Coverage Ratio of 1.0 to 1.0 would be difficult, and we may have to seek a waiver from the lenders under our ABL Facility, which we may not be able to obtain.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain arrangements that are not reflected on our
Statements of Unaudited Condensed Consolidated Financial Position
. These arrangements include minimum "take or pay" purchase commitments, such as minimum electric power demand charges, minimum coal, diesel and natural gas purchase commitments, minimum railroad transportation commitments and minimum port facility usage commitments; financial instruments with off-balance sheet risk, such as bank letters of credit and bank guarantees; and operating leases, which relate primarily to equipment and office space.
Market Risks
We are subject to a variety of risks, including those caused by changes in commodity prices, foreign currency exchange rates and interest rates. We have established policies and procedures to manage such risks; however, certain risks are beyond our control.
Pricing Risks
Commodity Price Risk
Our consolidated revenues include the sale of iron ore pellets, iron ore lump and iron ore fines. Our financial results can vary significantly as a result of fluctuations in the market prices of iron ore. World market prices for these
commodities have fluctuated historically and are affected by numerous factors beyond our control.
The world market price that most commonly is utilized in our iron ore sales contracts is the Platts IODEX pricing, which can fluctuate widely due to numerous factors, such as global economic growth or contraction, change in demand for steel or changes in availability of supply.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore and Asia Pacific Iron Ore customer supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the provisionally agreed-upon price and the estimated final revenue rate is characterized as a freestanding derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through
Product revenues
each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined.
At
September 30, 2016
, we have recorded
$0.4 million
as derivative assets included in
Other current assets
and
$2.7 million
as derivative liabilities included in
Other current liabilities
in the
Statements of Unaudited Condensed Consolidated Financial Position
related to our estimate of the final revenue rate with our U.S. Iron Ore and Asia Pacific Iron Ore customers. These amounts represent the difference between the provisional price agreed upon with our customers based on the supply agreement terms and our estimate of the final sales rate based on the price calculations established in the supply agreements. As a result, we recognized a net
$4.5 million
and
$22.9 million
decrease in
Product revenues
in the
Statements of Unaudited Condensed Consolidated Operations
for the three and nine months ended
September 30, 2016
, respectively, related to these arrangements.
Customer Supply Agreements
A certain supply agreement with one U.S. Iron Ore customer provides for supplemental revenue or refunds based on the customer’s average annual steel pricing at the time the product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as a freestanding derivative, which is finalized based on a future price, and is adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. The fair value of the instrument is determined using an income approach based on an estimate of the annual realized price of hot-rolled coil at the steelmaker’s facilities.
At
September 30, 2016
, we had a derivative asset of
$28.0 million
, representing the fair value of the pricing factors, based upon the amount of unconsumed tons and an estimated average hot-rolled coil price related to the period in which the tons are expected to be consumed in the customer’s blast furnace at each respective steelmaking facility, subject to final pricing at a future date. This compares with a derivative asset of
$5.8 million
as of
December 31, 2015
. We estimate that a $75 positive change in the average hot-rolled coil price realized from the
September 30, 2016
estimated price recorded would cause the fair value of the derivative instrument to increase by approximately $36.4 million and a $75 negative change in the average hot-rolled coil price realized from the
September 30, 2016
estimated price recorded would cause the fair value of the derivative instrument to decrease by approximately $30.7 million, thereby impacting our consolidated revenues by the same amount.
We have not entered into any hedging programs to mitigate the risk of adverse price fluctuations; however certain of our term supply agreements contain price collars, which typically limit the percentage increase or decrease in prices for our products during any given year.
Volatile Energy and Fuel Costs
The volatile cost of energy is an important issue affecting our production costs at our iron ore operations. Our consolidated U.S. Iron Ore mining ventures consumed approximately 13.3 million MMBtu’s of natural gas at an average delivered price of $2.85 per MMBtu inclusive of the natural gas hedge impact or $2.87 per MMBtu net of the natural gas hedge impact during the first nine months of
2016
. Additionally, our consolidated U.S. Iron Ore mining ventures consumed approximately 13.2 million gallons of diesel fuel at an average delivered price of $1.57 per gallon inclusive of the diesel fuel hedge impact or $1.52 per gallon net of the diesel fuel hedge impact during the first nine months of
2016
. The hedging of natural gas and diesel is further discussed later in this section. Consumption of diesel fuel by our Asia Pacific operations was approximately 7.1 million gallons at an average delivered price of $1.53 per gallon for the same period.
In the ordinary course of business, there may also be increases in prices relative to electrical costs at our U.S. mine sites. Specifically, our Tilden mine in Michigan has entered into large curtailable special contracts with Wisconsin Electric Power Company. Charges under those special contracts are subject to a power supply cost recovery mechanism that is based on variations in the utility's actual fuel and purchase power expenses.
Our strategy to address increasing natural gas and diesel rates includes improving efficiency in energy usage, identifying alternative providers and utilizing the lowest cost alternative fuels. An energy hedging program was implemented in order to manage the price risk of diesel and natural gas at our U.S. Iron Ore mines during the first quarter of 2016. We will continue to monitor relevant energy markets for risk mitigation opportunities and may make additional forward purchases or employ other hedging instruments in the future as warranted and deemed appropriate by management. Assuming we do not enter into further hedging activity in the near term, a 10 percent change in natural gas and diesel fuel prices would result in a change of approximately $2.0 million in our annual fuel and energy cost based on expected consumption for 2016. Based on our electrical contracts with our suppliers we are not susceptible to risks associated with fluctuations in electricity rates.
Valuation of Other Long-Lived Assets
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the assets may not be recoverable. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in market pricing; a significant adverse change in legal or environmental factors or in the business climate; changes in estimates of our recoverable reserves; unanticipated competition; and slower growth or production rates. Any adverse change in these factors could have a significant impact on the recoverability of our long-lived assets and could have a material impact on our consolidated statements of operations and statement of financial position.
A comparison of each asset group's carrying value to the estimated undiscounted future cash flows expected to result from the use of the assets, including cost of disposition, is used to determine if an asset is recoverable. Projected future cash flows reflect management's best estimates of economic and market conditions over the projected period, including growth rates in revenues and costs, estimates of future expected changes in operating margins and capital expenditures. If the carrying value of the asset group is higher than its undiscounted future cash flows, the asset group is measured at fair value and the difference is recorded as a reduction to the long-lived assets. We estimate fair value using a market approach, an income approach or a cost approach.
Foreign Currency Exchange Rate Risk
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia, which could impact our financial condition. With respect to Australia, foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because our reporting currency is the U.S. dollar, but the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore sales and incur costs in Australian currency.
At
September 30, 2016
, we had no outstanding Australian foreign exchange rate contracts for which we elected hedge accounting. Our last outstanding Australian foreign exchange rate contract held as a cash flow hedge matured in October 2015. We have suspended entering into new foreign exchange rate contracts for the remainder of 2016. We have waived compliance with our current derivative financial instruments and hedging activities policy through December 31, 2016. In the future, we may enter into additional hedging instruments as needed in order to further hedge our exposure to changes in foreign currency exchange rates.
Interest Rate Risk
Interest payable on our senior notes is at fixed rates. Interest payable under our ABL Facility is at a variable rate based upon the base rate plus the base rate margin depending on the excess availability. As of
September 30, 2016
, we had
no
amounts drawn on the ABL Facility.
Supply Concentration Risks
Many of our mines are dependent on one source each of electric power and natural gas. A significant interruption or change in service or rates from our energy suppliers could impact materially our production costs, margins and profitability.
Outlook
We provide full-year expected revenues-per-ton ranges based on different assumptions of seaborne iron ore prices. We indicated that each different pricing assumption holds all other assumptions constant, including customer mix, as well as industrial commodity prices, freight rates, energy prices, production input costs and/or hot-rolled coil prices (all factors contained in certain of our supply agreements).
The U.S. Iron Ore table further assumes full-year hot-rolled coil pricing of approximately $470 per short ton. We note that this estimate is based on our customers’ realized prices and not an index or spot market price, valid through the end of 2016. This represents a $10 decrease from the previous full-year price estimate of $480 per short ton. For every $50 per short ton change in the customers’ full-year hot-rolled coil prices, our U.S. Iron Ore revenue realizations per long ton in 2016 would be expected to increase or decrease $2.00 if steel prices increase or decrease, respectively.
The table below provides certain Platts IODEX averages for the remaining three months of 2016 and the corresponding full-year realization for the U.S. Iron Ore and Asia Pacific Iron Ore segments. The estimates consider actual Platts IODEX rates and our actual revenue realizations for the first nine months of 2016.
|
|
|
|
|
|
|
2016 Full-Year Realized Revenues-Per-Ton Range Summary
|
Oct. - Dec. Platts IODEX (1)
|
|
U.S. Iron Ore (2)
|
|
Asia Pacific Iron Ore (3)
|
$40
|
|
$75 - $77
|
|
$38 - $40
|
$45
|
|
$75 - $77
|
|
$39 - $41
|
$50
|
|
$75 - $77
|
|
$40 - $42
|
$55
|
|
$75 - $77
|
|
$41 - $43
|
$60
|
|
$75 - $77
|
|
$42 - $44
|
$65
|
|
$75 - $77
|
|
$43 - $45
|
$70
|
|
$75 - $77
|
|
$45 - $47
|
(1)
|
The Platts IODEX is the benchmark assessment based on a standard specification of iron ore fines with 62% iron content (C.F.R. China).
|
(2)
|
U.S. Iron Ore tons are reported in long tons of pellets. This table assumes full-year hot-rolled coil pricing of approximately $470 per short ton, which is based on customer realizations and not a public index.
|
(3)
|
Asia Pacific Iron Ore tons are reported in metric tons of lumps and fines, F.O.B. the port.
|
U.S. Iron Ore Outlook
(Long Tons)
We are maintaining our full-year sales volume expectation of 18 million long tons. Our 2016 production volume guidance of 16.5 million long tons is also maintained.
We are maintaining our cash production cost per long ton
2
expectation of $50 - $55 and the cash cost of goods sold per long ton
2
expectation of $55 - $60.
We anticipate depreciation, depletion and amortization to be approximately $5 per long ton for full-year 2016.
Asia Pacific Iron Ore Outlook
(Metric Tons, F.O.B. the port)
We are maintaining our full-year 2016 Asia Pacific Iron Ore sales and production volume forecast of approximately 11.5 million metric tons. The product mix is expected to contain 50 percent lump and 50 percent fines.
Based on a full-year average exchange rate of $0.75 U.S. Dollar to Australian Dollar, we are maintaining our full-year 2016 Asia Pacific Iron Ore cash production cost per metric ton
2
expectation of $25 - $30. The cash cost of goods sold per metric ton
2
is also unchanged at $30 - $35. We indicated that for every $0.01 change in this exchange rate for the remainder of the year, our full-year cash cost of goods sold is impacted by approximately $2 million.
We anticipate depreciation, depletion and amortization to be approximately $2 per metric ton for full-year 2016.
The following table provides a summary of our 2016 guidance for our two business segments:
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|
|
|
|
|
|
|
|
2016 Outlook Summary
|
|
|
U.S. Iron Ore (A)
|
Asia Pacific
Iron Ore (B)
|
Sales volume (million tons)
|
18
|
|
11.5
|
|
Production volume (million tons)
|
16.5
|
|
11.5
|
|
Cash production cost per ton
2
|
$50 - $55
|
|
$25 - $30
|
|
Cash cost of goods sold per ton
2
|
$55 - $60
|
|
$30 - $35
|
|
DD&A per ton
|
$5
|
|
$2
|
|
|
|
|
|
|
|
(A)
|
U.S. Iron Ore tons are reported in long tons of pellets.
|
(B)
|
Asia Pacific Iron Ore tons are reported in metric tons of lumps and fines.
|
2
|
Cash production cost per long/metric ton is defined as cost of goods sold and operating expenses per ton less depreciation, depletion and amortization; as well as period costs, costs of services and inventory effects per long/metric ton. Cash cost per long/metric ton is defined as cost of goods sold and operating expenses per ton less depreciation, depletion and amortization per long/metric ton.
|
SG&A Expenses and Other Expectations
Our full-year 2016 SG&A expenses expectation is $104 million, a $4 million increase from the previous expectation, primarily driven by the un-forecasted $4 million USW labor contract signing bonus.
We are decreasing our full-year 2016 interest expense expectation to be approximately $200 million. Of the $200 million expectation, approximately $170 million is considered cash and $30 million is considered non-cash.
Consolidated full-year 2016 depreciation, depletion and amortization is expected to be approximately $120 million.
Capital Budget Update
We are maintaining our full-year 2016 capital expenditures expectation of $75 million.
Forward-Looking Statements
This report contains statements that constitute "forward-looking statements" within the meaning of the federal securities laws. As a general matter, forward-looking statements relate to anticipated trends and expectations rather than historical matters. Forward-looking statements are subject to uncertainties and factors relating to Cliffs’ operations and business environment that are difficult to predict and may be beyond our control. Such uncertainties and factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements. These statements speak only as of the date of this report, and we undertake no ongoing obligation, other than that imposed by law, to update these statements. Uncertainties and risk factors that could affect Cliffs’ future performance and cause results to differ from the forward-looking statements in this report include, but are not limited to:
|
|
•
|
trends affecting our financial condition, results of operations or future prospects, particularly the continued volatility of iron ore prices;
|
|
|
•
|
availability of capital and our ability to maintain adequate liquidity;
|
|
|
•
|
our level of indebtedness could limit cash flow available to fund working capital, capital expenditures, acquisitions and other general corporate purposes or ongoing needs of our business, which could prevent us from fulfilling our debt obligations;
|
|
|
•
|
continued weaknesses in global economic conditions, including downward pressure on prices caused by oversupply or imported products, including the impact of any reduced barriers to trade, recently filed and forthcoming trade cases, reduced market demand and any change to the economic growth rate in China;
|
|
|
•
|
our ability to reach agreement with our iron ore customers regarding any modifications to sales contract provisions, renewals or new arrangements;
|
|
|
•
|
uncertainty relating to restructurings in the steel industry and/or affecting the steel industry;
|
|
|
•
|
our ability to maintain appropriate relations with unions and employees;
|
|
|
•
|
the impact of our customers reducing their steel production or using other methods to produce steel;
|
|
|
•
|
our ability to successfully execute an exit option for our Canadian Entities that minimizes the cash outflows and associated liabilities of such entities, including the CCAA process;
|
|
|
•
|
our ability to successfully identify and consummate any strategic investments and complete planned divestitures;
|
|
|
•
|
our ability to successfully diversify our product mix and add new customers beyond our traditional blast furnace clientele;
|
|
|
•
|
the outcome of any contractual disputes with our customers, joint venture partners or significant energy, material or service providers or any other litigation or arbitration;
|
|
|
•
|
the ability of our customers and joint venture partners to meet their obligations to us on a timely basis or at all;
|
|
|
•
|
the impact of price-adjustment factors on our sales contracts;
|
|
|
•
|
changes in sales volume or mix;
|
|
|
•
|
our actual levels of capital spending;
|
|
|
•
|
our actual economic iron ore reserves or reductions in current mineral estimates, including whether any mineralized material qualifies as a reserve;
|
|
|
•
|
events or circumstances that could impair or adversely impact the viability of a mine and the carrying value of associated assets, as well as any resulting impairment charges;
|
|
|
•
|
the results of prefeasibility and feasibility studies in relation to projects;
|
|
|
•
|
impacts of existing and increasing governmental regulation and related costs and liabilities, including failure to receive or maintain required operating and environmental permits, approvals, modifications or other authorization of, or from, any governmental or regulatory entity and costs related to implementing improvements to ensure compliance with regulatory changes;
|
|
|
•
|
our ability to cost-effectively achieve planned production rates or levels;
|
|
|
•
|
uncertainties associated with natural disasters, weather conditions, unanticipated geological conditions, supply or price of energy, equipment failures and other unexpected events;
|
|
|
•
|
adverse changes in currency values, currency exchange rates, interest rates and tax laws;
|
|
|
•
|
risks related to international operations;
|
|
|
•
|
availability of capital equipment and component parts;
|
|
|
•
|
the potential existence of significant deficiencies or material weakness in our internal control over financial reporting; and
|
|
|
•
|
problems or uncertainties with productivity, tons mined, transportation, mine-closure obligations, environmental liabilities, employee-benefit costs and other risks of the mining industry.
|
For additional factors affecting the business of Cliffs, refer to
Part I – Item 1A. Risk Factors.
You are urged to carefully consider these risk factors.
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Information regarding our Market Risk is presented under the caption
Market Risks
, which is included in
our Annual Report on Form 10-K for the year ended December 31, 2015 and in the Management's Discussion and Analysis section of this report.