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Goncalves: The Past is Over

Written by Sandy Williams

Cliffs Natural Resources reported a net loss of 5.9 billion for third quarter. Consolidated revenue fell by 16 percent year over year to $1.3 billion due primarily to significantly lower prices for iron ore and metallurgical coal. Adjusted EBITDA for third quarter was $233 million, 45 percent below third quarter 2013.

Cliff’s has had a myriad of problems but new CEO Lourenco Goncalves spoke with confidence during the earnings conference call on his ability to turn the company around.

“For most of the 167 years of Cliffs’ history, the company has primarily been an operator of iron ore mines on the Great Lakes,”said Goncalves. “Today, Cliffs Great Lakes regional mines remain our biggest strength. Over the past decade, prior management teams moved away from this core, diversifying into different products and geographies in an attempt to replicate the big three global mining companies. It was a mismatch of capital investments and where we make money. As evidenced by our recent impairment announcement, it is now quite clear that these attempts to expand and diversify were misguided and resulted in the destruction of several billions of dollars in shareholder value.”

Goncalves told analysts during the call that the company has two assets that contribute positively to EBITDA, one neutral non-core asset and three sources of negative EBITDA that contribute to the challenges that Cliffs is facing.

Cliffs’ core business is U.S. Iron Ore, generating $249 million of adjusted EBITDA in Q3. Asia-Pacific Iron Ore (APIO), a non-core asset, contributed $46 million during the quarter.

The neutral asset is North American Coal that broke even for the quarter with $6 million adjusted EBITDA. Goncalves considers the segment a “zero EBITDA player until we find a buyer.”

The three drains on profitability are Wabush Scully mine, corporate overhead, and Bloom Lake Mine. Wabush has been idled since first quarter 2014 and will be completely closed by the end of the year.

Staff reductions, office closures and dispensation of irrelevant activities has brought SG&A down to $39 million for the quarter. The target for full year 2014 is $165 million and less than $150 million for 2015.

The Bloom Lake Mine in Canada produces excellent ore but pricing and volume constraints make it unprofitable. Goncalves hopes to attract three investors, at 10 percent ownership each, to develop Phase II of the mine in order to become cost competitive. Currently Cliffs owns 82.8 percent of Bloom Lake and Wisco Canada owns 17.2 percent.

“We have a goal of securing these commitments before the end of 2014,”said Goncalves during the call. “If developed, Bloom Lake Phase II would produce an estimated 13.5 million tons of high quality iron ore with a 66% iron content at a cash production cost in the low $50 per ton range. This would be truly outstanding. And with this cost profile and equity fusion, we would surely want to continue to want and operate that. However, if we’re not able to achieve this option, closure or other permanent option will be immediately considered as running only Phase I is not a feasible possibility over the long-term. Simply put, we will not continue producing at Bloom Lake and selling at a loss in 2015 and beyond.”

Goncalves told analysts Phase II will not be built to compete in the seaborne market but will “displace new capacity in the iron ore seaborne market.”

“By December 31, we are going to be announcing the construction of Phase II or going to Phase 0, let’s call like that. Phase I doesn’t exist,” said Goncalves.

Cliffs’ APIO Koolyanobbing mine in Australia can produce competitive iron ore product at a low total CapEx of $50 million over the six years remaining in the life of the mine. Goncalves, however, says, as a non-core asset, he would sell it to a buyer for a fair price. Barring a sale, Cliffs will continue to operate it until the ore runs out.

The Cliffs CEO revealed his determination to bring profitability back to Cliffs and showed little tolerance for analysts who refused to look forward with optimism.

“This is my first investor conference call at Cliffs,” said Goncalves. “But it’s not my first conference call with several of you. We appreciate the support of the vast majority of Cliffs’ shareholders which voted for real change in this company in late July. Several of these investors have made a lot of money with Lourenco Goncalves before. And we will make money together one more time.”

“Some others will lose a lot of money for trying to continue predicting the past with complete disregard for a well-thought out business plan being implemented with discipline by a CEO with a track record of success.

“The past is over in this company. And the present is a lot of work to bring a profitable future for Cliffs.”

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