Cliffs Natural Resources Inc. announced it has reached a negotiated settlement with ArcelorMittal USA Inc. Under the terms of the settlement, the two companies have agreed to specific pricing levels for 2009 and 2010 pellet sales and related sales volumes. Cliffs will receive a cash payment of about $250 - $270 million as a pricing "true-up" for pellet volumes delivered to certain ArcelorMittal steelmaking facilities in North America during both years.

The settlement involves replacing one of the existing ArcelorMittal contracts with a market-based pricing scheme beginning in 2011 through 2015. Mark Parr, CFA for KeyBanc Capital Markets Inc. estimates this “true-up” will be received in 2Q11 from 1Q11. This is estimated at about 3 million tons per year, consistent with Cliffs’ efforts to transition its North American Ore operations toward more of a market-based pricing scheme.

With the alteration in the contract, Parr estimates roughly 35% of its expected 2011 legacy shipments in North American Ore (28 million long tons) move directly with real time changes in the seaborne price of iron ore pellets with the remainder being a mix of global pellet pricing, changes in U.S. flat-rolled steel prices, and changes in other input costs. Cliffs’ stocks have gone up 20% year-to-date from these high seaborne iron ore prices.

Shipments for North American iron ore are expected to be roughly 28 million long tons, above previous guidance of 27 million. Much of the increase is related to the delay of 600,000 tons from the 4Q into the 1Q. Revenue per long ton should be between $140 and $145, which reflects the impact of the $300 arbitration payment likely to be reported in the 1Q. Excluding the one-time payment, KeyBanc estimates Cliffs’ guidance implies iron ore pricing of roughly $130-$135 per long ton. Cliffs’ forecast assumes a 35% year-over-year increase in the Eastern Canadian Pellet price settlement and average hot-rolled pricing of $650-$700/short ton. Costs per long ton guidance is at $65-$70.

Also, Cliffs has received approval for acquiring Consolidated Thompson Iron Mines Limited under the Investment Canada Act as long as the transaction will be a net benefit to Canada. Although Cliffs is still awaiting approval from the Chinese Ministry of Commerce's to close, Cliffs anticipates closing the acquisition early in the second quarter of 2011. This acquisition will add another 8 million metric tons destined for the seaborne market via Eastern Canada. The transaction will further increase the 2011 North American shipment mix priced on global metrics to 50%.

(Sources: Cliffs Natural Resources, Inc. & KeyBanc Capital Markets)