Market Overview

Cleveland-Cliffs Inc. Reports Second-Quarter 2018 Results

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  • Earnings per share from continuing operations increases 171 percent to
    $0.76 per share
  • U.S. Iron Ore realized revenue rate increases 16 percent to $113 per
    long ton
  • Full-year U.S. Iron Ore pellet sales volume expectation increases to
    21 million long tons

Cleveland-Cliffs Inc. (NYSE:CLF) today reported second-quarter
results for the period ended June 30, 2018.

The Company reported consolidated revenues of $714 million, compared to
the prior year's second-quarter revenues of $471 million. Cost of goods
sold was $430 million compared to $327 million reported in the second
quarter of 2017.

The Company recorded income from continuing operations of $229 million
in the second quarter, or $0.76 per diluted share, compared to $84
million, or $0.28 per diluted share, in the second quarter of 2017. Net
income for the quarter was $165 million, which included a $64 million,
or $0.21 per diluted share, loss from discontinued operations, primarily
associated with the Company's Asia Pacific Iron Ore assets. This
compares to net income of $30 million in the second quarter of 2017. For
the six months ended June 30, 2018, net income was $81 million, compared
to $0.3 million during the same period in 2017.

For the second quarter of 2018, the Company reported adjusted EBITDA1
of $276 million, a 103 percent increase from the prior-year's second
quarter adjusted EBITDA1 of $136 million.

 
(In Millions)
Three Months Ended   Six Months Ended
June 30,   June 30,
2018   2017 2018   2017
Adjusted EBITDA1
U.S. Iron Ore $ 301.3 $ 161.5 $ 378.4 $ 225.6
Corporate/Other (25.6 ) (26.0 ) (50.4 ) (50.5 )
Total Adjusted EBITDA1 $ 275.7   $ 135.5   $ 328.0   $ 175.1  
 

Lourenco Goncalves, Cleveland-Cliffs' Chairman, President and Chief
Executive Officer, said, "Our second quarter is a definitive statement
about the new Cliffs and our earnings power. After almost four years of
consistent execution of a well-designed and thoroughly implemented
strategy, our company has become a very powerful cash-generating
enterprise. With the announced sale of the Asia Pacific Iron Ore
segment, we have now completed our multi-year transformation back to our
roots as a supplier of high-grade iron units to the Great Lakes steel
industry. This transformation has enabled us to take full advantage of
our unique position within the Great Lakes steel market and, with that,
the following quarters should be a continuation of this strong second
quarter, with the added positive contribution of the usual favorable
seasonality of warmer weather during the entire second half of the year.
As a consequence, we expect to generate in 2018 a level of free cash
flow that we have not seen in years." Mr. Goncalves added, "Going
forward, we expect 2019 to be a continuation of a great 2018, based on
the renewed strength of American manufacturing, the multi-year positive
impact of the tax reform implemented in 2018 in the United States, and
our strong position as the supplier of iron ore pellets within the Great
Lakes region." Mr. Goncalves concluded, "Our strategy is not only to
protect our strong market position in the Great Lakes, but to grow and
evolve with the continuously changing steel industry by supplying
high-performance ore-based metallics to Electric Arc Furnaces, starting
in 2020. This evolution should further improve our already tremendous
profitability in the coming years."

     

U.S. Iron Ore

 
Three Months Ended Six Months Ended
June 30, June 30,
2018   2017 2018   2017
Volumes - In Thousands of Long Tons
Sales volume 5,968 4,310 7,579 7,428
Production volume 5,512 4,691 10,012 8,968
Sales Margin - In Millions
Revenues from product sales and services $ 714.3 $ 471.3 $ 894.3 $ 757.5
Cost of goods sold and operating expenses 429.8   326.6   548.3   563.8
Sales margin $ 284.5   $ 144.7   $ 346.0   $ 193.7
Sales Margin - Per Long Ton
Revenues from product sales and services* $ 112.60 $ 96.75 $ 110.99 $ 89.43
 
Cash cost of goods sold and operating expense rate2 62.32 59.30 61.20 58.90
Depreciation, depletion and amortization 2.61   3.87   4.14   4.46
Cost of goods sold and operating expenses* 64.93   63.17   65.34   63.36
Sales margin $ 47.67   $ 33.58   $ 45.65   $ 26.07
 
*   Excludes revenues and expenses related to domestic freight, which
are offsetting and have no impact on sales margin. Revenues and
expenses also exclude venture partner cost reimbursements, where
applicable.
 

U.S. Iron Ore pellet sales volume in the second quarter of 2018 was 6.0
million long tons. The 38 percent increase from the second-quarter 2017
volume of 4.3 million long tons was driven by increased customer demand
and the impact of the previously disclosed adoption of the new revenue
recognition accounting standard.

Realized revenues per ton of $112.60 increased 16 percent from the
prior-year period, primarily as a result of increased steel pricing and
pellet premiums, which are magnified by favorable contract structures.

Cash cost of goods sold and operating expense rate2 in U.S.
Iron Ore was $62.32 per long ton, compared to $59.30 per long ton in the
prior year's second quarter. The increase was driven by higher costs
related to product mix, energy rates, repairs, and royalties, as well as
higher employee-related expenses.

Other Income Statement Items

During June 2018, Cliffs completed a sale of the mobile equipment in
Australia to a third party and entered into a definitive agreement to
sell substantially all of the remaining assets of the Asia Pacific Iron
Ore business to Mineral Resources Limited. The sale to Mineral Resources
Limited has not been completed due to the pendency of certain closing
conditions. As a result, for the period ended June 30, 2018 management
determined that the Asia Pacific Iron Ore operating segment met the
criteria to be classified as held for sale and a discontinued operation
under ASC 205, Presentation of Financial Statements. As such, all
current and historical Asia Pacific Iron Ore operating segment results
are classified within discontinued operations.

Miscellaneous-net expense of $4 million included, among other items, $5
million in charges related to the indefinite idle at Empire mine.

Outlook

   
2018 Outlook Summary
Per Long Ton Information   U.S. Iron Ore
Revenues from product sales and services (A) $105 - $110
 
Cost of goods sold and operating expense rate $68 - $73
Less:
Freight expense rate (B) $7
Depreciation, depletion & amortization rate $3
Cash cost of goods sold and operating expense rate2 $58 - $63
 
Sales volume (million long tons) 21.0
Production volume (million long tons) 20.0

 

(A)   This expectation is based on the assumption that iron ore prices,
steel prices, and pellet premiums will average for the remainder of
2018 their respective year-to-date averages.
(B) Freight has an offsetting amount in revenue and has no impact on
sales margin.
 

U.S. Iron Ore Outlook (Long Tons)

Based on the assumption that iron ore prices, steel prices, and pellet
premiums will average for the remainder of 2018 their respective
year-to-date averages, Cliffs would realize USIO revenue rates in the
range of $105 to $110 per long ton. This represents an increase from the
prior calculation based on the increase in hot-rolled coil steel prices,
partially offset by lower iron ore prices.

As a result of strong market demand for pellets in the Great Lakes,
Cliffs has increased its full-year sales volume expectation by 500,000
long tons to 21 million long tons. Its production volume expectation of
20 million long tons is being maintained.

Cliffs' full-year 2018 U.S. Iron Ore cash cost of goods sold and
operating expense2 expectation is being maintained at $58 -
$63 per long ton.

SG&A Expenses and Other Expectations

Cliffs' full-year 2018 SG&A expense expectation of $115 million is being
maintained. Cliffs also notes that of the $115 million expectation,
approximately $20 million is considered non-cash.

The Company's full-year 2018 net interest expense expectation is being
lowered by $10 million to $120 million, as income on short-term
instruments has increased in the current rate environment.

Full-year 2018 depreciation, depletion and amortization associated with
U.S. Iron Ore and Corporate/Other is expected to be approximately $80
million.

Capital Expenditures

Cliffs provided the following updates to its 2018 capital expenditures
budget:

  • the Toledo HBI Project spend expectation was reduced by $25 million to
    $200 million due to further development and refined timing of the
    project spending plan;
  • the sustaining capital expectation was reduced by $10 million to $75
    million; and
  • the Northshore Mine upgrade spend expectation of $50 million is being
    maintained.

Conference Call Information

Cleveland-Cliffs Inc. will host a conference call this morning, July 20,
2018, at 10 a.m. ET. The call will be broadcast live and archived on
Cliffs' website: www.clevelandcliffs.com

About Cleveland-Cliffs Inc.

Founded in 1847, Cleveland-Cliffs Inc. is the largest and oldest
independent iron ore mining 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. By 2020,
Cliffs expects to be the sole producer of hot briquetted iron (HBI) in
the Great Lakes region with the development of its first production
plant in Toledo, Ohio. Driven by the core values of safety, social,
environmental and capital stewardship, our employees endeavor to provide
all stakeholders with operating and financial transparency. For more
information, visit http://www.clevelandcliffs.com.

Forward-Looking Statements

This release 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 release, 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 release include,
but are not limited to: uncertainty and weaknesses in global economic
conditions, including downward pressure on prices caused by oversupply
or imported products, reduced market demand and risks related to U.S.
government actions with respect to Section 232 of the Trade Expansion
Act (as amended by the Trade Act of 1974), the North American Free Trade
Agreement and/or other trade agreements, treaties or policies; continued
volatility of iron ore and steel prices and other trends, including the
supply approach of the major iron ore producers, affecting our financial
condition, results of operations or future prospects, specifically the
impact of price-adjustment factors on our sales contracts; our ability
to cost-effectively achieve planned production rates or levels,
including at our HBI production plant; our ability to successfully
identify and consummate any strategic investments or development
projects, including our HBI production plant; the impact of our
customers reducing their steel production due to increased market share
of steel produced using other methods or lighter-weight steel
alternatives; risks related to former international operations,
including our ability to successfully conclude the CCAA process
in Canada and to close our Asia Pacific business in a manner that
minimizes cash outflows and associated liabilities, including, among
other things, our ability to successfully complete the sale of the
assets of our Asia Pacific Iron Ore business and our ability to reach
negotiated settlements with other third parties in Australia; our
ability to successfully diversify our product mix and add new customers
beyond our traditional blast furnace clientele; our actual economic iron
ore reserves or reductions in current mineral estimates, including
whether any mineralized material qualifies as a reserve; our ability to
maintain appropriate relations with unions and employees; 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; problems or uncertainties with productivity, tons mined,
transportation, mine-closure obligations, environmental liabilities,
employee-benefit costs and other risks of the mining industry; our
ability to reach agreement with our customers regarding any
modifications to sales contract provisions, renewals or new
arrangements; our actual levels of capital spending; 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; availability of capital and our
ability to maintain adequate liquidity; changes in sales volume or mix;
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; 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; 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; and the potential existence
of significant deficiencies or material weakness in our internal control
over financial reporting.

For additional factors affecting the business of Cliffs, refer to Part I
– Item 1A. Risk Factors of our Annual Report on Form 10-K for the year
ended December 31, 2017. You are urged to carefully consider these risk
factors.

FINANCIAL TABLES FOLLOW

 
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED OPERATIONS
 
(In Millions, Except Per Share Amounts)
Three Months Ended   Six Months Ended
June 30,   June 30,
2018   2017 2018   2017
REVENUES FROM PRODUCT SALES AND SERVICES
Product $ 672.0 $ 417.0 $ 841.2 $ 664.3
Freight and venture partners' cost reimbursements 42.3   54.3   53.1   93.2  
714.3 471.3 894.3 757.5
COST OF GOODS SOLD AND OPERATING EXPENSES (429.8 ) (326.6 ) (548.3 ) (563.8 )
SALES MARGIN 284.5 144.7 346.0 193.7
OTHER OPERATING INCOME (EXPENSE)
Selling, general and administrative expenses (26.2 ) (26.6 ) (51.3 ) (51.7 )
Miscellaneous – net (4.1 ) (2.9 ) (10.2 ) 6.6  
(30.3 ) (29.5 ) (61.5 ) (45.1 )
OPERATING INCOME 254.2 115.2 284.5 148.6
OTHER INCOME (EXPENSE)
Interest expense, net (31.2 ) (30.1 ) (63.6 ) (71.5 )
Gain (loss) on extinguishment of debt 0.2 (4.9 ) 0.2 (76.8 )
Other non-operating income 4.4   2.5   8.8   5.0  
(26.6 ) (32.5 ) (54.6 ) (143.3 )
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 227.6 82.7 229.9 5.3
INCOME TAX BENEFIT (EXPENSE) 1.8   1.1   (13.9 )  
INCOME FROM CONTINUING OPERATIONS 229.4 83.8 216.0 5.3
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX (64.3 ) (53.7 ) (135.2 ) (5.0 )
NET INCOME 165.1 30.1 80.8 0.3
LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST   1.7     3.4  
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS $ 165.1   $ 31.8   $ 80.8   $ 3.7  
INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS –
BASIC
Continuing operations $ 0.77 $ 0.28 $ 0.73 $ 0.03
Discontinued operations (0.22 ) (0.18 ) (0.46 ) (0.01 )
$ 0.55   $ 0.10   $ 0.27   $ 0.02  
INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS –
DILUTED
Continuing operations $ 0.76 $ 0.28 $ 0.72 $ 0.03
Discontinued operations (0.21 ) (0.18 ) (0.45 ) (0.02 )
$ 0.55   $ 0.10   $ 0.27   $ 0.01  
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
Basic 297,618 296,070 297,442 280,617
Diluted 301,275 300,711 301,143 285,247
 
 
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED FINANCIAL POSITION
 
(In Millions)
June 30,   December 31,
2018 2017

ASSETS

CURRENT ASSETS
Cash and cash equivalents $ 802.5 $ 978.3
Accounts receivable, net 152.6 106.7
Inventories 256.4 138.4
Supplies and other inventories 88.6 88.8
Derivative assets 174.7 37.9
Current assets of discontinued operations 45.3 118.5
Loans to and accounts receivable from the Canadian Entities 51.6
Other current assets 26.8   24.4  
TOTAL CURRENT ASSETS 1,546.9 1,544.6
PROPERTY, PLANT AND EQUIPMENT, NET 1,081.3 1,033.8
OTHER ASSETS
Deposits for property, plant and equipment 85.7 17.8
Income tax receivable 219.9 235.3
Non-current assets of discontinued operations 20.3
Other non-current assets 117.7   101.6  
TOTAL OTHER ASSETS 423.3   375.0  
TOTAL ASSETS $ 3,051.5   $ 2,953.4  

LIABILITIES

CURRENT LIABILITIES
Accounts payable $ 119.0 $ 99.5
Accrued expenses 85.1 79.1
Accrued interest 43.1 31.4
Contingent claims 55.6
Partnership distribution payable 44.2 44.2
Current liabilities of discontinued operations 117.3 75.0
Other current liabilities 66.2   67.4  
TOTAL CURRENT LIABILITIES 474.9   452.2  
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES 245.0 257.7
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS 172.3 167.7
LONG-TERM DEBT 2,297.0 2,304.2
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS 10.3 52.2
OTHER LIABILITIES 158.3   163.5  
TOTAL LIABILITIES 3,357.8 3,397.5

EQUITY

CLIFFS SHAREHOLDERS' DEFICIT (306.3 ) (444.3 )
NONCONTROLLING INTEREST   0.2  
TOTAL DEFICIT (306.3 ) (444.1 )
TOTAL LIABILITIES AND DEFICIT $ 3,051.5   $ 2,953.4  
 
 
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED CASH FLOWS
 
(In Millions)
Six Months Ended
June 30,
2018   2017
OPERATING ACTIVITIES
Net income $ 80.8 $ 0.3
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation, depletion and amortization 49.4 44.8
Loss (gain) on extinguishment of debt (0.2 ) 76.8
Loss on deconsolidation 48.6
Gain on derivatives (123.5 ) (19.1 )
Other 12.6 10.8
Changes in operating assets and liabilities:
Receivables and other assets 61.8 68.3
Inventories (125.6 ) (106.6 )
Payables, accrued expenses and other liabilities (4.6 ) (56.1 )
Net cash provided (used) by operating activities (49.3 ) 67.8
INVESTING ACTIVITIES
Purchase of property, plant and equipment (42.1 ) (44.3 )
Deposits for property, plant and equipment (72.3 ) (5.1 )
Proceeds on sales of assets 14.6   1.1  
Net cash used by investing activities (99.8 ) (48.3 )
FINANCING ACTIVITIES
Proceeds from issuance of debt 500.0
Debt issuance costs (1.5 ) (8.5 )
Net proceeds from issuance of common shares 661.3
Repurchase of debt (15.3 ) (1,154.0 )
Distributions of partnership equity (8.7 )
Other financing activities (8.9 ) (13.9 )
Net cash used by financing activities (25.7 ) (23.8 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1.0 ) 2.4  
DECREASE IN CASH AND CASH EQUIVALENTS, INCLUDING CASH CLASSIFIED
WITHIN CURRENT ASSETS OF DISCONTINUED OPERATIONS
(175.8 ) (1.9 )

LESS: INCREASE IN CASH AND CASH EQUIVALENTS CLASSIFIED WITHIN
CURRENT ASSETS OF DISCONTINUED OPERATIONS

  40.5  
NET DECREASE IN CASH AND CASH EQUIVALENTS (175.8 ) (42.4 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 978.3   312.8  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 802.5   $ 270.4  
 

1 CLEVELAND-CLIFFS INC. AND SUBSIDIARIES

NON-GAAP RECONCILIATION - EBITDA AND ADJUSTED EBITDA

In addition to the consolidated financial statements presented in
accordance with U.S. GAAP, the Company has presented EBITDA and adjusted
EBITDA on a consolidated basis. EBITDA and Adjusted EBITDA are non-GAAP
financial measures that management uses in evaluating operating
performance. The presentation of these measures is not intended to be
considered in isolation from, as a substitute for, or as superior to,
the financial information prepared and presented in accordance with U.S.
GAAP. The presentation of these measures may be different from non-GAAP
financial measures used by other companies. A reconciliation of these
consolidated measures to their most directly comparable GAAP measures is
provided in the table below.

 
(In Millions)
Three Months Ended   Six Months Ended
June 30, June 30,
2018   2017 2018   2017
Net Income $ 165.1 $ 30.1 $ 80.8 $ 0.3
Less:
Interest expense, net (32.3 ) (31.4 ) (65.8 ) (74.2 )
Income tax benefit (expense) 1.8 (2.6 ) (13.9 ) (0.8 )
Depreciation, depletion and amortization (25.5 ) (21.6 ) (49.4 ) (44.8 )
EBITDA $ 221.1   $ 85.7   $ 209.9   $ 120.1  
Less:
Impact of discontinued operations $ (54.7 ) $ (45.4 ) $ (117.8 ) $ 6.5
Foreign exchange remeasurement (0.1 ) 0.5 (0.5 ) 15.3
Gain (loss) on extinguishment of debt 0.2   (4.9 ) 0.2   (76.8 )
Adjusted EBITDA $ 275.7   $ 135.5   $ 328.0   $ 175.1  
 

2 CLEVELAND-CLIFFS INC. AND SUBSIDIARIES

NON-GAAP RECONCILIATION EXPLANATIONS

The Company presents cash cost of goods sold and operating expense rate
per long/metric ton, which is a non-GAAP financial measure that
management uses in evaluating operating performance. Cliffs believes the
presentation of non-GAAP cash cost of goods sold and operating expenses
is useful to investors because it excludes depreciation, depletion and
amortization, which are non-cash, and freight and venture partners' cost
reimbursements, which have no impact on sales margin, thus providing a
more accurate view of the cash outflows related to the sale of iron ore.
The presentation of this measure is not intended to be considered in
isolation from, as a substitute for, or as superior to, the financial
information prepared and presented in accordance with U.S. GAAP. The
presentation of this measure may be different from non-GAAP financial
measures used by other companies.

 
(In Millions)
U.S. Iron Ore
Three Months Ended June 30,   Six Months Ended June 30,
2018   2017 2018   2017
Cost of goods sold and operating expenses $ 429.8 $ 326.6 $ 548.3 $ 563.8
Less:
Freight and reimbursements 42.3 54.3 53.1 93.2
Depreciation, depletion & amortization 15.6   16.7   31.4   33.1
Cash cost of goods sold and operating expenses $ 371.9   $ 255.6   $ 463.8   $ 437.5
 

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