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Cliffs Natural returns to profit in Q1; CEO sees 'reasonable pricing environment' ahead

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Cliffs Natural returns to profit in Q1; CEO sees 'reasonable pricing environment' ahead

Cliffs NaturalResources Inc. on April 28 reported first-quarter net income attributableto shareholders of US$108 million, or 62 U.S. cents per share, swinging from a lossof US$772.6 million, or US$4.26 per share, recordedin the first quarter of 2015.

The company also recorded a US$179 million gain on restructuringand extinguishment of debt, which was primarily related to discount captured onoutstanding notes from the company's exchange offers completed during the quarter.

The NYSE-listed company returned to positive EBITDA of US$216.4million in the quarter, from an EBITDA loss of US$509.5 million booked in the comparableyear-ago quarter.

Consolidated revenues, meanwhile fell 32% year over year to US$306million as cost of goods sold decreased by 25% to US$275 million.

Total U.S. iron ore production volume was 3.0 million long tons,down from 5.4 million long tons recorded a year ago, while iron ore pellet salesvolume in the quarter fell 35% on a yearly basis to 1.9 million tons due to thetermination of a customer contract and lower demand from U.S. mills.

Cash production cost per long ton was 26% lower to US$47.88 fromUS$64.98 in the 2015 period driven by efficiencies gained from predictive maintenanceinitiatives, decreased energy rates and lower employment costs.

At the company's Asia Pacific division, production volume wason nearly the same level with the year-ago figure at 2.8 million tonnes, while salesdropped 8% to 2.8 million tonnes due to the timing of shipments related to portmaintenance activities.

Cash production cost per tonne, meanwhile, was 27% lower at US$36.77,driven by reduced mining and haulage costs, lower headcount and favorable foreignexchange rate variances of US$2 per tonne.

At the end of March, the company's net debt stood at US$2.4 billion,compared to US$2.5 billion at the same period last year. The decrease was drivenby the reduction of US$304 million in principal amount of senior notes during thequarter, partially offset by lower cash balances due to the seasonality of the U.S.iron ore segment and repayment of equipment loans.

For the remainder of 2016, Cliffs is maintaining its full-yearsales and production volume forecasts for its U.S. and Asia pacific iron ore businesses.The cash production cost per ton guidance was also maintained for the U.S. businesswhile at the Asia Pacific division, the cash production cost per tonne and cashcost of goods sold per tonne will come in at US$25 to US$30 and US$30 to US$35,respectively.

Cliffs anticipates consolidated full-year depreciation, depletionand amortization to be about US$120 million.

In addition, Cliffs is increasing its 2016 CapEx guidance toUS$75 million from its earlier estimate of US$50 million. The increase is due tothe capital spend required to produce a specialized, super-flux pellet at mine to meeta customer's pellet specification requirements.

Commenting on the results, Cliffs' Chairman, President and CEOLourenco Goncalves said the U.S. steel market has started showing consistent signsof a real recovery, with direct positive impact on the company's steel clients'order books.

The executive also sees a reasonable pricing environment forsinter feed fines in the international market for iron ore following the announcementof a newly adopted supply discipline going forward by the two Australian majorsand their Brazilian peer.

"With Northshoreback in operation in thesecond quarter, United Taconite restartinglater this year, and a very efficient and cost competitive APIO business, Cliffsis well positioned to … deliver a strong financial performance this year,"Goncalves noted.

In an earnings call, Goncalves also said the company has beenworking with ArcelorMittalto develop a super-plug pellet called Mustang, which will replace the Viceroy pelletsproduced at the company's Empiremine.

"The CapEx involved to retool, if you will, to do the modificationsat United Taconite to produce the Mustang pellets are around [US]$65 million. Webooked [US$25 million]. And that is what we would spend if we start deploying thecapital later this year," he said.

Meanwhile, Executive Vice President and CFO Kelly Tompkins saidthat in line with the seasonality of the company's business, shipments are startingto pick up this quarter.

"We expect to ship about 3.5 million long tons in the secondquarter with the shipping seizing hitting full stride in the third and fourth quartersto fill out our 17.5 million long ton order book for the full year."