Cleveland-Cliffs Inc.
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Good morning, ladies and gentlemen. My name is Shannon and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2015 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. At this time, I would like to introduce Lourenco Goncalves, Chairman, President and Chief Executive Officer.

[Lourenco Goncalves:]

Thanks, Shannon and thanks to everyone for joining us this morning. Before we start, I would like to introduce our new Executive Vice President and Chief Financial Officer, Kelly Tompkins. Many of the participants on the call today already know Kelly from Cliffs or from his previous experience as CFO of another publicly traded company. Since my first day at Cliffs, Kelly has been my most valuable player and second in command. With Kelly’s move to the CFO spot, Cliff Smith moved to Kelly’s previous position as Head of Business Development and the reductions of one executive level position in our organization charge, I feel very comfortable we have the right players in the right positions to execute our USIO centric strategy. With that, I will now turn it over to Kelly Tompkins for the financial overview portion of today’s call.

[Kelly Tompkins:]

Thank you, Lourenco and thanks to everyone for joining us on this morning’s call. As I take the helm as Cliffs’ CFO, I do so very mindful of the challenges ahead of us. Cliffs has shown resiliency throughout its long history and now that we are strategically focused and fully aligned on our financial and operating priorities, I am very confident we will manage through the current cycle. With that, let me remind you that certain comments made on today’s call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on our website. Today’s conference call is also available and being broadcast at cliffsnaturalresources.com. At the conclusion of the call, it will be archived on the website and available for replay. We will also discuss our results, excluding certain special items. Reconciliation for Reg G purposes can be found in our earnings release, which was published after the market yesterday. In addition to briefly reviewing the results of our first quarter financial performance, I will briefly recap our recently completed refinancing efforts. Beginning with our first quarter results, including coal, we achieved revenue of $574 million and adjusted EBITDA of $94 million. Despite significant decreases in pricing for iron ore, steel and metallurgical coal, we were able to generate positive EBITDA from all of our businesses. In the face of a tough macro environment, we have and will continue to respond aggressively by taking cost out of the business, methodically allocating capital, aligning corporate overhead with the changing footprint of our business and pushing to further reduce expenses wherever possible. Across all three of our reporting business segments, we achieved strong results for the quarter. In USIO, we generated $105 million of adjusted EBITDA. During the quarter, the USIO business achieved a realized price of $93 per ton. As expected, the blast furnace pellets we produce and deliver to our domestic clients and our long-term customer contracts continue to provide us with pricing stability in an otherwise volatile global iron ore market, with a spot price for sinter feeds that recently hit 10-year lows. Also as a point of clarification, it was also noted in last year’s first quarter in both Q1 of this year and last year our cash production costs were higher than our cash costs of goods sold. This is primarily due to inventory effects. Because our production costs are typically higher in Q1 due to seasonality, the product that we sell is at a lower cost than what we currently are producing at and that difference comes through in the non-cash production line as inventory effects. This amount should return to positive levels as we progress into the second half of the year. In Asia-Pacific iron ore, we were able to generate $6 million of adjusted EBITDA even with the extremely depressed seaborne pricing environment and a much lower realized pricing in the quarter of $43 per ton, APIO was still profitable in Q1. As seaborne iron ore pricing has declined, sales margins at APIO tightened which will have and continue to address with our relentless push to cut costs. Given the updated costs guidance that we provided last night, our objective will continue to be keeping this asset cash flow positive and what will likely be a depressed near-term pricing environment. And finally, our North American coal business outperformed in the first quarter reporting $6 million in adjusted EBITDA. This is a direct consequence of a very successful cost cutting plan implemented in our coal mines as well as good execution by our commercial team to sell the low-vol met coal produced in both Pinnacle and Oak Grove for the best prices we can get taking advantage of the high quality of our product. Nevertheless, North America coals realized price of $71 per ton shows that met coal prices remain under pressure which means cost discipline must remain a priority, so we continue achieving our EBITDA neutral objective for these operations. Let me remind everyone that while we reported coal in our earnings release, the business is now considered from an accounting standpoint to be non-core, non-strategic in an asset that the company expects to sell. Accordingly, all current and historical North American coal operating segment results are now included in the company’s financial statements, but classified within discontinued operations. In effect, going forward, our coal group’s financial results will be reflected in the discontinued operations’ line of the P&L. That said, let me be very clear that we are not shutting down these operations we will continue operating these mines throughout the sale process, which is well underway. Let us now turn to our capital expenditures and SG&A expenses during the first quarter, including our coal operations, capital spending dropped to $16 million for this quarter, an 85% reduction when compared to last year’s first quarter. Looking ahead, we are further reducing our capital expenditure budge range from – to $100 million to $125 million representing a $25 million reduction from our previous guidance. Our first quarter SG&A expenses were $29 million, down 22% from the prior year first quarter expense of $38 million. We continue to reduce staffing, minimize the use of outside services and consolidate office space at our corporate headquarters. During the first quarter, we further reduced our corporate headcount by 25%. Our peak headcount for the corporate office was 338 people. We are now operating with 139 people at our corporate office. Our updated SG&A outlook for 2015 is now $120 million, down from our previous expectation of $140 million. We will continue to adjust our overall SG&A expense to make sure it matches our U.S. iron ore strategy and operating footprint. A significant undertaking during the first quarter was the successful refinancing of the company. We established three overarching goals for the refinancing. First, we wanted to capture available market discounts on our various bonds to reduce our net debt by capturing some of the discount on our bonds with secured note exchange offers, we were able to reduce our net debt by $130 million, well above our original expectation when we launched the exchange. This discount capture from the exchange offers in addition to the $70 million of discount that we captured through open market repurchases executed during December and January gave us a total of over $200 million in proceeds from debt extinguishment in a 4-month period. At the end of the quarter, we had net debt of $2.5 million compared to $2.9 million of net debt at the end of the first quarter of 2014. The results of these debt reduction efforts are reflected on the balance sheet. And as we transition out of the cash consuming season for our USIO business, we expect to continue to reduce our net debt by increasing our available cash balances. Our second goal is to remove the onerous financial covenants previously tied to our old revolving credit facility by replacing it with the new asset-based lending facility. Because the ABL was substantially on our borrowing base of working capital, the size of the facility is smaller than the size of our previous revolver. That said our larger revolver geared to a far different irrelevant growth strategy of the past burdened with restrictive covenants is not as valuable as a flexible ABL that we can more readily access to enhance our available cash. The benefit of eliminating the revolver-based covenants, which were major source of unneeded management distraction for the last two years, was a key accomplishment. At the end of the first quarter and as of today, we have nothing drawn on the ABL facility, despite the first and second quarter challenges from a liquidity perspective due to the seasonality of our U.S. iron ore business. As the seasonal Great Lakes freeze comes to an end, cash receipts will be stronger and we intend to manage the business for the remainder of the year without tapping our ABL. Finally, our third goal is to supplement our ABL-based liquidity by putting additional cash on the balance sheet. Despite a very difficult debt market for the mining industry, we successfully completed a first lien note offering that netted us nearly $500 million in cash. With this new cash on our balance sheet, we have not needed to draw on the ABL even with about $240 million of net working capital usage in the first quarter when there are essentially no shipments on the Great Lakes. With this three-step refinancing completed and the beginning of the Great Lakes shipping season a pause, we are very comfortable with our current liquidity position, but we will continue to monitor it closely as industry conditions dictate. As Cliffs’ CFO, I can assure you my eye will be looking forward to next winter when cash flows are naturally tight and preserving liquidity is a must. With that, I will turn the call back over to Lourenco for his prepared remarks.

[Lourenco Goncalves:]

Thanks, Kelly and thanks to everyone joining the call this morning. Since we took office in the August last year and implemented a new USIO-centered strategy, we have been executing with discipline and making progress on all fronts. Among the several steps taken, the most relevant one was the CCAA filing by the Bloom Lake Group. Had we not stopped the bleeding at Bloom Lake, this Q1 conference call would certainly be a lot different. The CCAA process has so far developed very smooth and even predictable way. All of the expected disagreements, lawsuits, threats of lawsuits and general statements from creditors of the Bloom Lake entities are being addressed within the scope of the process under the supervision of the monitor and ultimately subject to the power of the court. The main highlights of this CCAA process are the following. Claims from the creditors of the Bloom Lake entities have been staged as part of the court process. Unfavorable contracts, including the take-or-pay rail contracts have been disclaimed. The sale of assets has been approved by the court and the process is well underway. The Bloom Lake Group currently has a cash balance of about $45 million and their average expected outflow per week is only a little over $1 million. Additionally, with the stay period going through the end of July and with the majority of the proceeds of the recently announced sale of the Chromite assets going to fund the CCAA process, we maintain our expectations that no additional finance will be needed. And last but not least, we confirm our previous statement that we do not anticipate any Cliffs’ exposure to the Bloom Lake creditors throughout the entire CCAA process. Our liability exposure number for such creditors, which was estimated to be $650 million to $700 million pre-CCAA, is indeed zero. Kelly and I will be more than happy to clarify any questions you still have regarding CCAA. Moving to our USIO business, we achieved a 38% EBITDA margin in the first quarter, driven by contract structure and a value added product that we sell. Our pellet business in the U.S. continues to prove its reliable profitability. Despite the irrationally low prices imposed by the two Australian majors to the seaborne trade of iron ore finds our USIO business realized price of $93 per ton in the first quarter. Now, why is that? First, we sell custom-made blast furnace-ready pellets, not sinter feed fines. Second, due to the lack of existence of sintering plants available in the United States and obvious environmental restrictions, sinter feed fines cannot be sold in the U.S. markets. And third, Cliffs has in place and in full force long-term contracts that substantially protect us from pricing volatility. None of this contracts will expire in the next seven quarters and we expect to renew the two contracts expiring in December 2016 and January 2017 with good terms for both Cliffs and the clients and way ahead of the expiration date, in what is always a seasonally cost heavy quarter due to weather conditions and increased major maintenance spend, we saw USIO Q1 cash production costs decrease 20% to $65 per ton compared to $80 per ton in last year’s first quarter. Also important, CapEx spend in the USIO during the quarter was only $8 million. Going forward, we have revised our 2015 sales tonnage guidance to 20.5 million tons from 22 million tons originally and adjusted our production accordingly. Even though this decision may prove itself too conservative in light of recent news surrounding other Great Lakes pellet producers and also because we expect a stronger still business for our clients in the second half of the year, we believe it is prudent to adopt our cautious attitude at this time. Despite the reduction in production tonnage, we are aggressively managing costs and are maintaining our previously guided cost expectations. Holding costs with lower volumes is always difficult, but just as the sales margins on our contracts are not all equal, all production tonnage is not create equal either. We have the ability to idle some higher cost reduction that we will offset some of the lost fixed cost leverage. We also continue to optimize our operating and maintenance practices as well as further reducing manpower and driving cost out of or three main energy components electricity, natural gas and diesel fuel. In sum, our USIO team under Terry Fedor’s leadership is comprised of an accomplished group of very experienced general managers and operators. And they have succeeded on every challenge I have given them so far. I have full confidence that this one will be no different. Again, as we maintain our unit cost guidance with the overall better customer mix from our remaining U.S. sales tons and other cost reduction initiatives, we expect a neutral to positive impact of this production reduction on our profitability. As unfairly traded imports ultimately certified and the steel production normalized for our clients, we will bring back our pellet production and adjust our sales volume guidance accordingly. Separately and very importantly, we continue to develop various entry options for the electric arc furnace market. Near-term, we are focused on securing a trial order for DR Pellets, to confirm under actual operating conditions what we have already demonstrated in a smaller best price. As a market leader in value-added iron ore pellets, these will open up a new opportunity for us to diversify our product mix and add new customers to USIO beyond the traditional blast furnace clienteles. Now, let’s discuss our Asia-Pacific iron ore business. In the first quarter, we reported cash production costs of $37 per ton, a 28% reduction from last year’s first quarter and a 14% sequential reduction from Q4 2014. Since I started with Cliffs, the APIO business achieved cash production cost per ton of $53 per ton in Q3, $43 in Q4 and $37 in Q1. With our very limited CapEx requirements of less than $1 per ton through the rest of APIO’s mine life, we believe we have been operating in the same breakeven zip code as the two Australian majors, when we add there very little cash cost to their very high CapEx needs. As one of the two Australian majors has already demonstrated with the recently announced postponement of a big CapEx investment, the two Australian majors we will have to make a decision in the next few quarters. Give up their massive CapEx deployment due to lack of funds or allow our ore prices to increase in order to generate the funds they need for CapEx deployment. While how to price the products is a difficult decision made by management, the deployment of billions of dollars is a Board decision and Board members are usually cautious about the decisions they make and the consequence of those decisions. In the long run, when real metrics come back to play like return on invested capital or return on assets, this story can be a lot different, especially in a country like Australia, which is so dependent on how well or how badly the natural resources are taking care of. If I were a Board member of either one of the two Australian iron ore majors, I would really think hard a lot more about the consequence of what they have been enabling their respective companies to do so far and how they will proceed going forward. Similarly, the Brazilian major, Vale will have to make the same decision as its two Australian peers. If iron ore prices don’t increase, it may not have the money for its multi-billion dollar, 90 million ton per year expansion. In sum, none of the three majors can continue to support their massive CapEx needs without allowing iron ore price to increase. And if they still decide to keep iron ore prices artificially low as they have been doing so far, their advertized massive capacity increases will not materialize due to insufficient cash flow generation. In the meantime, Cliffs continues to optimize the APIO operation and we continue to improve our cost position. One of the projects we are implementing the right now is the idling of one of our three pits. Our Koolyanobbing mine in Australia formally operated out of three pits, Koolyanobbing, Mount Jackson and Windarling. Because Windarling is higher Street rater and thus higher cost status in the portfolio, mining out of this pit has been discontinued and the operation is now concentrated on the remaining two pits Kooly and Mount Jackson. This will deliver us further savings on resources and has already led to a nearly 20% reduction on our fly-in, fly-out workforce. In addition, we have completely eliminated our exploration activity. We are confident that these actions will maintain Cliffs APIO as an EBITDA generator and as a free cash flow generator, not even considering any additional benefit we may see from the always helpful Australian dollar exchange rates. Finally, let’s discuss our North American coal business. As Kelly noted earlier, we will continue to operate the business during the sales process, but due to the accounting treatment as an asset held for sale, this will be the last quarter that we will be reporting and commenting on coal as a business segment. In the first quarter, North American coal achieved $6 million of EBITDA, which is a lot better than our EBITDA neutral goal. Our operational team under Dave Webb’s leadership continues to deliver impressive cost cutting results quarter-over-quarter. Until our sales finalize, we will continue to do all we can to operate safely and profitably. At this time, I would like to comment that North American coal operational and commercial teams for all their exceptional efforts in doing whatever it takes to keep this business achieving remarkable results to the point of attracting the interest of potential buyers. In conclusion, we are focused on executing our strategic plan, which will enable Cliffs to weather the current business climate and emerge from the cycle as a stronger company. I continue to be impressed by the team’s ability to deliver year-over-year cost savings during a challenging business environment. Looking ahead, we will continue to be focused on cost cutting, asset optimization, debt reduction and the sale of non-core assets as well as the conclusion of the CCAA process in Canada. We have really covered a lot on this call already, and Kelly and I very much look forward to answering any questions you may have. With that I will turn it over to the operator to direct the Q&A part of the call. Shannon?

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Michael Gambardella of JPMorgan. Your line is now open.

[Michael Gambardella:]

Yes. Good morning, Lourenco.

[Lourenco Goncalves:]

Good morning, Michael.

[Michael Gambardella:]

I just want to say before I ask my question I just wanted to say congratulations on all the hard work in making all these tough decisions that are under your control. I know there is a lot of uncontrollable factors that have been going against you, but I applaud you for all your efforts to cut costs, make the hard decisions like up in Canada and so forth, so congratulations on the great work so far.

[Lourenco Goncalves:]

Thank you very much. I appreciate your kind words.

[Michael Gambardella:]

My question is you know with the seaborne price plummeting for the last year or so, the silver lining I think of lower seaborne prices is that you know a number of people were projecting that there would be increases in U.S. iron ore capacity to compete against you. And I would think with these low prices that all of those people have fallen by the wayside, whether it’s U.S. Steel, Essar and now Magnetation, which looks like it may seize operation soon. So, with that elimination of supply that some people had expected AK Steel will need – may need some more iron ore for their U.S. operations, ArcelorMittal, who had expected to get some material from Essar may need some more iron ore from you, because the alternative as everyone knows – display is just cost prohibitive with a $30 per ton freight rate on a $55 product. So, when you are approaching some of these contracts that are coming up at the end of next year, how do you balance trying to get a better price, because you know the premium that these people have to pay to go through the St. Lawrence Seaway and keeping them somewhat happy?

[Lourenco Goncalves:]

Again, thanks for your great comments and I appreciate your support and encouragement. Michael believe or not we have a lot more control over things that people say they don’t control. So, let’s – you gave me a lot of things here to work with and to answer your question about the context, but let me start bringing back things to the right size. People talk a lot about the world being flooded with iron ore. That’s a true statement at this point, but the biggest problem for iron ore price at this point is not even the fact that the world is being flooded with iron ore. It is the fact that the markets and the press and the investors are being flooded with that information about the expansion plans of three companies and these three companies are Rio Tinto, BHP and Vale. The current prices of iron ore fine sinter feed in the seaborne markets are being depressed at this point not by the fact that these guys produce a lot of iron ore sinter feeds, but by the fact that they are saying that they will produce a lot more. So, we have for example just to give you a good number, easy one to understand, you have Vale saying, we produced 310 million tons a year, but I am going to 460, so that’s another 40 SKU on top of what they have right now. You have currently Rio Tinto producing something like 250 million tons, but saying that they are going to produce 360. That’s two Roy Hills on top of the existing production. You have Roy Hill producing nothing, because the Roy Hill is Hancock property, they are just the landlord of Rio Tinto, but saying that we are starting September, we are going to add 55 billion tons to the trade. So these news are the ones that are destroying the future view of iron ore sinter feed fines in the world, but we have to consider this thing in the contest of how these things are being played, especially Rio Tinto and BHP, more Rio Tinto than BHP. They are playing the game of scaring everybody else. And some people are getting really scared, some others are not. Some others are acting. I put myself in Cliffs in the side of the ones that take these things as at face value that’s it is what it is, so this seaborne market is doomed, is cursed, is a place not to be in. I can’t wait to get out of Australia. That’s the bottom line, because I already shutdown completely in Canada and as soon as I get to the end of life of mine in Australia I am out of there. And now by shutting down Windarling, I am going to expedite that by a year, so instead of 4.5 years, I have 3.5 years of life of mine left in Australia. I can’t wait to get out of the seaborne trade and let the Australians take that horrible business on their own hands. Another point to consider is that there is not enough CapEx for these guys to do what they are doing other than current cash flow generation. I really would like to see analysis on that, where is the money coming from for the massive CapEx deployment that’s necessary for BHP, Rio Tinto and Vale. Serra Sul, the S11D project alone, we are talking of something like $20 billion. They don’t have that money, period, full stop. So, they are scrambling to make ends meet right now at Vale. I am a Brazilian guy as you know. I know what’s going on there, a lot more than they believe. So, they can talk a good gain, but the reality is completely different. So, long story short, these big projects are not coming. When the rubber meets the road, you are going to see a lot more of this BHP decision of postponing the de-bottlenecking project in this and that just to say meager $600 million, not billion, millions. So, they are starting to count their money. That’s a good thing. How long it will take for everyone to perceive the game? I don’t know. I am in the business of clarifying that as much as I can, because it’s affecting me. I could care less about that, but it’s affecting Cliffs. We are having to reduce our footprint in Australia because of that. I know that the Western Australian government is not happy with the way they are handling their natural resources over there. So, there is a lot going on and a lot can change between now and then and next yea, for example. As far as United States, look U.S. Steel, you mentioned the U.S. Steel. I have never seen U.S. Steel as a competitor. U.S. Steel is a steelmaker. They are integrated backwards and they have upstream pellet production. They produce a good product. U.S. Steel has been affected by own fairly traded imports to the United States. I hope this thing subsides and U.S. Steel recovers their business and goes back to produce pellets in Minnesota. They are a big player in the region. We look forward to see U.S. Steel coming back at full force and in full capacity. They are not a competitor of Cliffs Natural Resources. I do understand AK Steel’s investment in Magnetation. They were left by the old Cliffs’ management and board unattended. They were left under the rain. When they needed Cliffs badly, Cliffs turned their back to AK Steel and put them in ignore saying, my growth strategy is all about growing in the seaborne market, I don’t care about the United States, I don’t care about AK Steel. So, I even understand not only their investment with Magnetation, especially those crazy high iron ore prices of the time, but I even understand their reluctance in coming back to Cliffs and develop a solution together. They know that we will be here when they need us if they need us when they need us. If they never come back, I have a plan to take care of Cliffs without growing the business with the integrated use. I came to the Cliffs and we ousted the entire board with the support of their shareholders, because we had a plan to grow this business towards the electric arc furnace business. The electric arc furnace in this country is 60% of steel production, integrated is only 40%. So, we are just catering to the smaller portion of the business. I am going to the bigger portion. I am going to the electric arc furnace business. We are going to produce DR pellets depending on how the DR pellets think they span out, we may also pursue the production of DRI. We are working very closely with the state of Minnesota to put in place their first DRI facility in the state of Minnesota to supply the Midwest mini mills with DR pellets. So, we are not sitting still here. We are not just cutting costs. We are not just reducing the size of the footprint. We have a strategy. We have a plan. We are implementing the plan. How long it will take for us to receive recognition? I don’t know. What I know is that why we don’t get recognition? Why our bondholders trade my bond at a discount, I will be there to grab that discount and reduce our net debt. Why our shareholders are not given any credit in the stock price, I will be always ready to use any cash available that I have to buyback stock and we will continue to pursue every single point in our strategic plan one-by-one, we are not going to be derailed. My biggest surprise when I got to Cliffs is that this company has a very, very strong management team. It’s amazing how badly the Board was handling this company. This has been fixed. It was fixed nine months ago, since then we have been working hard and we will continue to work. I hope I answered your questions, did not talk about the stock, because I do not talk about Essar Minnesota, because I do not talk about the stocks that do not exist, I only talk about reality. Any other questions Michael?

[Michael Gambardella:]

No. That’s good. Thank you, Lourenco for that comprehensive...

[Lourenco Goncalves:]

Thanks a lot. Appreciate it.

[Operator:]

Your next question comes from the line of Aldo Mazzaferro of Macquarie. Your line is now open.

[Aldo Mazzaferro:]

Thank you. Good morning, Lourenco and Kelly.

[Lourenco Goncalves:]

Good morning, Aldo.

[Kelly Tompkins:]

Good morning.

[Aldo Mazzaferro:]

Yes. I had two separate questions. First, if I could just about DRI for a second, Lourenco. If you had your success in penetrating that market, would you be able to supply at all out of the U.S. iron ore mining or would you need to expand your mines a little bit?

[Lourenco Goncalves:]

Actually, we have a plan here that works supplying DRI out of U.S. iron ore and working out of only four mines instead of five. So we cannot only supply from the USIO, but we can also optimize the footprint in order to further reduce costs while we are doing that.

[Aldo Mazzaferro:]

So how much I mean in your plan going forward, how much volume do you think you would be mining then compared to the $21 million or $22 million you do today, would it be much higher, a few million tons higher or would it be roughly the same, you think?

[Lourenco Goncalves:]

Look, it’s very premature to say that, because we do not have enough discussion with the potential buyers of DRI to know the depth of their needs. But you know, whenever we start digging, you will find interesting stuff. For example, one company that already buys HBI, we are talking about the same thing, HBI in the international market. And I believe I don’t know, but I believe I would have a serious chance to supply would be a case field, because as far as I know, they buy from Venezuela. And Venezuela is not a reliable supplier of absolutely anything. So AK Steel has integrated you will, they do have funds, so there is a lot of potential, a lot potential. So we may be talking initial moment about let’s say 5 million tons, but this 5 million tons can become 10 million tons very quickly. So, our target of 10 million tons in 3 years is the 10 million tons of DRI supply is not crazy, it’s not impossible.

[Aldo Mazzaferro:]

I like the idea, Lourenco, of the merchant facility. It’s a very novel idea. But I had a second question too just on your pricing trend. The $93 a ton was very impressive in the first quarter. And I am wondering there must be somewhat of a lag effect on what the IODEX is doing in future quarters, could you say roughly if iron ore prices were to say bottom out around here, would you think that your selling price stays around the $90 or $85 or so as you get through the middle of the year, what do you think the price outlook would be on in a flat IODEX environment?

[Lourenco Goncalves:]

Look, we give in our press release, we give that guidance on the price, so I would refer you to the table that we provided in the press release yesterday evening. So that’s a good guidance. The fact that we got $93 in Q1 is just because of the things are not as square as they look like on paper, some contracts had lagged, some contracts had carryovers, some of our clients did not take all the tonnage of 2014 contracts and then we got a carryover in Q1. So not that they are ahead of the game, so it’s a mix of a bunch of things. But a good middle of the road guidance is the table that we provided in our press yesterday.

[Aldo Mazzaferro:]

Okay, thank you. Any update on the timing of a coal sale?

[Lourenco Goncalves:]

We are getting a lot closer than we were last quarter. That’s the reason we moved coal to the category of assets held for sale and so we are getting close. We are not done yet, we are negotiating with the multiple buyers at this point. There is no assurance that any of one we will close before some other research analysts say that my credibility is in check because I am saying that I will sell coal. So for the record there is no assurance that I will sell coal, but also there is no assurance that you that say that we will be alive tomorrow, you can die tonight, so nobody knows the future. So we believe we are going to sell. We do believe we are going to sell as we sold Logan County, so we are working. Stay tuned.

[Aldo Mazzaferro:]

Right. Thanks very much, Lourenco.

[Lourenco Goncalves:]

And thank you for being the only research analyst with a buy recommendation on my stock. If there is a lot to know the history of a CEO and you know me for close to 17 years now, so I appreciate the vote of confidence on what we are doing here.

[Aldo Mazzaferro:]

It’s all you.

[Lourenco Goncalves:]

Thank you.

[Operator:]

Your next question comes from the line of Kevin Cohen of Imperial Capital. Your line is now open.

[Kevin Cohen:]

Good morning and thanks for taking the questions, very nice quarter overall. I guess, Lourenco, a couple of things. First as it relates to the Mittal contract renewals that you alluded to, you mentioned it would likely be on good terms from the perspective of both, Cliffs and Mittal. I am just wondering if you could elaborate a little bit on what that might mean for Cliffs, whether its relative to the first quarter ASP or anything sort of directionally that you could allude to on that?

[Lourenco Goncalves:]

Thanks Kevin. I appreciate the kind words. Regarding the two contracts with ArcelorMittal, we are talking about a total of close to 10 million tons of pellets. In theory, everything is possible. Everything is possible, though contract cannot be renewed, so we do not have a contract after December 2016. The contract can be partially renewed, so just half of the tonnage, then the other tonnage will come from somewhere else and for some other supply or we can renew the entire contract. We have been supplying these mills that are covered by this contract for several decades. Let’s face it, so that is our history of first glitter in Cliffs and the mills under other denominations. And now, there is a long history between Cliffs Natural Resources and ArcelorMittal, we would say. We are partners at Hibbing. We own Hibbing together among other mines, so we know each other costs extremely well. We know each other products extremely well. We know how the performance of the pellets go in blast furnace A, B, C, D, E, F, G. We know everything about each other. So when I say with a high degree of conviction that we are going to renew this contract in a way that will be good for Cliffs and good for us ArcelorMittal would say, I am basing my conclusion on what’s going on right now and what happened in the last several years. So there is absolutely no indication right now that anyone, including Cliffs or ArcelorMittal would say we will act in an unexpected way even because we all know that even though the world has a lot of sinter feed available, the world does not have a lot of pellets available. Let alone here in the United States. Here in the United States, we for some years we have been living with the perspective of newcomers, but at the end of the day these newcomers haven’t materialized yet and as the clock ticks and time goes by the likelihood of this competition to materialize diminishes by the date, so that’s pretty much what we have at this point. I do not know what else to say. The worst case scenario for us, Kevin is that this contract doesn’t get renewed. If this contract doesn’t get renewed, it will be a different ballgame for Cliffs Natural Resources. And certainly, it will be a different life for ArcelorMittal USA as well. I don’t see at this point, none of us backing the fund on this type of outcome. That’s the way I see it, but that’s an honest assessment, there is no track on that, there is no bad feelings, it’s all the way around. So, we actually – we feel very comfortable with the current management of ArcelorMittal USA and we believe that we worked very well together. We have Terry Fedor working for me. He is my Executive Vice President, U.S. Iron Ore. He used to work for Andy Harshaw at the predecessor company of ArcelorMittal and at ArcelorMittal. So, we have a lot more in common and a lot more goals to pursue together helping each other than trying to take a meager advantage of the small things here and there. That’s the way I see it. But again, this being said, I also understand, why ArcelorMittal, will say in the past embarked in his crazy experience with Essar Minnesota. Cliffs is the reason. Cliffs was the one that let ArcelorMittal USA down. Cleveland Cliffs, Cliffs Natural Resources was the one that told ArcelorMittal USA that they were not important. They were not the core business. They were not their main clients. They would like to pursue a different strategy to sell iron ore in the seaborne market. I am telling them exactly the opposite. We replaced the board. The shareholders put me here, because I believe in the U.S. iron ore business. I believe that supporting the clients in the United States is the reason why this business exists. So, as we are working day-by-day with ArcelorMittal USA to develop the product that will take us to the next 10 years. So, that’s what we are doing at this point.

[Kevin Cohen:]

And then two other really quick financial questions, I know in the past, the company has alluded to the desire to capture secondary markets discount. I guess to the extent you think about where we are today, there has been a nice rally in the bonds, but just how do you think about the 2018 at this point? I know that you did do an interview and did allude to those on March 26, I am just kind of where is your head out sort of on those today in the low 80s?

[Lourenco Goncalves:]

Look, we continue to pursue the debt reduction through liability management exercise. It is one thing that I believe that I brought to this company that I can do very well. I have done before, especially at Metals USA. We took advantage of the opportunities that the leverage finance market gave us and we took advantage of that. We bought bonds at a discount. This 2018, we will be taking care of at the right time. I haven’t done that. I know you have a different opinion. I respect your opinion as a very knowledgeable high yield person, but we decided not to take care of the 2018 yet, because we are waiting for the right moment with the right transaction. It’s coming. We are not going to ignore the 2018. We will take care of those bonds.

[Kevin Cohen:]

And then a last question Lourenco as it relates to the tax receivable on the balance sheet, any update in terms of how much cash that should convert into late this year?

[Lourenco Goncalves:]

I will let Kelly Tompkins reply that to you, Kevin.

[Kevin Cohen:]

Yes, thanks.

[Kelly Tompkins:]

I think Kevin you would see on the balance sheet reflected about $165 million and we would expect – certainly expect to get that before year end. We are pushing to get it in mid to late Q3, but certainly by Q4. So, it’s a significant component of our anticipated cash this year.

[Kevin Cohen:]

That’s very helpful. Thanks and good luck as always guys.

[Lourenco Goncalves:]

Thank you so much.

[Operator:]

Your next question comes from the line of Brian Yu from Citi. Your line is now open.

[Brian Yu:]

Alright, great. Thanks. Lourenco, just on the U.S. volume, if I annualize the first quarter production, it’s coming in about 21.5 million tons. And I know you have cut the numbers there. Can you speak to one, does that mean you are going to have to slow down production? Then two, does the volume part relate to customers having revised your nomination or are you taking down numbers in anticipation of that?

[Lourenco Goncalves:]

Look, I am based Brian throughout the information and I am based on our decision here on the information that they have available and the input that the clients are giving to us. So, at this point, without putting any optimism into our forecast, I am assuming that none of the blast furnaces that are now shutdown will come back to operation. So, with that, we will reduce our output accordingly. So, we will be especially in Q2 and Q3. We are going to reduce production. That’s for sure. As we speak right now and my guys informing the folks in Michigan that we are going to take one mine down, so that’s the consequence of the current requirements of the clients. This being said, I do believe that they are being too conservative, but I have to act on the information that I have. As soon as they revise up their intentions in terms of production, we will revise ours accordingly and we will be ready, but that’s what we have so far. Did I miss something in your question, Brian?

[Brian Yu:]

No, you did answer it. So, let’s say that things improve and we talked about earlier maybe AK in the innings of additional tons, how quickly can you turn the volume back up?

[Lourenco Goncalves:]

It’s quick. It’s quick. We – the comparison would be – our pellet plants like ours would react as quickly as an electric arc furnace at steel mill. So, we basically can turn on and off very quickly.

[Brian Yu:]

Okay. Can I yield one more question in on reclamation?

[Lourenco Goncalves:]

Please go ahead.

[Brian Yu:]

Yes, you called in the end-of-life for Australia, are there any cash expenses towards the tail end of that? And then a similar question with Bloom Lake, I don’t know if there was accident or not, but you didn’t mention reclamation at Bloom Lake as part of the CCAA, would that be fully covered too?

[Lourenco Goncalves:]

Yes. I will let Kelly answer the reclamation questions, but just a clarification based on what you wrote in your report that you said that you believe that we are going to idle APIO. We are not going to idle APIO, okay, Brian. We are going to continue to pursue the costs adding cash cost to CapEx. We are going to pursue BHP and Rio. If they continue to go down or continue to go down, the difference is that I have no commitment to stay in Australia. And they have the full commitment to stay in Australia. So, everything that they do will have consequences. Everything that we will do I will only do to replicate what they are doing. So, I would be there worse nightmare, because I know that their game plan is not to shutdown Cliffs’ Koolyanobbing. They could care less about Cliffs’ Koolyanobbing. The game plan is to shutdown Fortescue, which they will not be able to accomplish based on what I have seen so far. But what I am saying is that I will be like that parasite that we will continue to be there sucking their blood through the very end. We are not going to shutdown APIO. We continue to drive costs down, because we know how to do it. We know how to push the buttons. Three quarters I am here. That’s exactly what I have been doing. I will drive costs until everyone will give up, say, yes this guy knows how to drive cost down. So, until everyone say that I will be relentless. So, APIO is not going to shutdown. You can continue to say that, but you should know that you are wrong on that. Kelly, please.

[Kelly Tompkins:]

Yes. The other consideration relating to APIO that I had alluded to and then I will comment on Bloom Lake, not only the merits of continue to run APIO given the aggressive cost reduction we have already done and we will continue to do is that it also plays into our ABL borrowing capacity as well. So, that’s a consideration, but absolutely, the focus is running, not idling and at the end of mine life we will deal with whatever reclamation or closure costs would be there. Secondly, in Bloom Lake reclamation is part of the overall CCAA equation. So, just consider that part of the package and liabilities that are being addressed as part of the CCAA process.

[Lourenco Goncalves:]

Did you…

[Brian Yu:]

Yes. If you have reclamation estimate because you pulled in the mine life now that three-and-a-half years left, I know you said, you would address when you get there, but the time line has come in, I am just curious if you – what that might be?

[Kelly Tompkins:]

Yes. At this point, we are not in a position to provide that kind of estimate. As we get closer, we would certainly we will see that kind of detail reflected in our SEC filings, but not at this point.

[Brian Yu:]

Okay, thanks.

[Lourenco Goncalves:]

Thank you.

[Operator:]

Your next question comes from the line of Nathan Littlewood from Credit Suisse. Your line is now open.

[Nathan Littlewood:]

Thank you very much. I appreciate the opportunity, guys and the clarification on APIO just now was certainly useful. I had a couple of questions on USIO pricing. It was my understanding that Essar Algoma had a pre-fixed price last year, if I remember it was $114 or $117 a ton or something, but they carried over some tons into the beginning of this year and if you were selling tons to Essar Algoma today they would be somewhere in the $50 a ton range, so there is a pretty big difference in the price you realized between the two, just wondering if you might be able to help us with what the magnitude of that was in the March quarter numbers?

[Lourenco Goncalves:]

Nathan, I don’t discuss pricing client-by-client. The fact that you know our price or you believe you know our price is very – a matter of a serious concern for me, because this would be a violation of the confidentiality clause of the contract between Cliffs Natural Resources and Essar Algoma. And you just mentioned that you know the price, so you will eventually be subpoenaed in the lawsuit that I am moving against Essar Algoma based on breach of confidentiality, so I am not going to discuss this subject. What will be your next question?

[Nathan Littlewood:]

No problem. Fair enough, Lourenco. The other one was just on the embedded guidance. I believe that at least your public disclosure in the past has been fairly clear that the HRC price is the driver of the inland steel contracts that you have with Mittal, could you clarify what HRC price is embedded in the current USIO pricing guidance?

[Lourenco Goncalves:]

Well, when we thought about hot-rolled prices, the prices are not linked to the any index. They are based on the actual prices that the clients execute with their clients. So our relationship with these clients, and I am not nominating any specific ones, is so open that we have access to their actual hot-rolled prices, realized prices and they are checked and included into the price going forward. That’s the way it works, so of course the indexes are illusively guidance for that, but the actual prices that they practice are much higher than the spot or the index or anything that you may use as a general number for HRC prices.

[Nathan Littlewood:]

Yes. Absolutely, and I was aware of that Lourenco, but I guess when I look at what AK Steel and U.S. Steel have done recently or reported recently I should say they have obviously got a lot of contracts in their order book and the analysis that we have done suggest that those guys are kind of realizing HRC prices, which might be sort of $50 or $60 above the actual spot price, so eventually the contract price of these customers are selling at is going to have to catch up to kind of spot price reality, and I am just wondering sort of what the embedded expectations are on that curve, be it either the index price or Mittal’s average realized price?

[Lourenco Goncalves:]

Look, the expectation that prices will continue to go back up, because my expectation is that imported steel is unfairly traded into the United States, will go away and the steel mills AK Steel, included ArcelorMittal included, the U.S. Steel included, the Essar Algoma included, we will be able to recover their sales prices to a decent level, because that’s just fair and just, so that is my expectation at this point.

[Nathan Littlewood:]

Okay. And I would certainly agree with that too, but just at the beginning of the year you had talked about I think an embedded assumption of 570 or 580 or somewhere in that neighborhood, I assume that we are a bit lower than that now, is it possible to give us that number or is that not something you want to discuss?

[Kelly Tompkins:]

Nathan, we are a bit lower, but at this point we are not trying to provide that detail. You will see further disclosure in our Q, but it is slightly lower than what you embedded in your assumption.

[Nathan Littlewood:]

Okay. No problem. Thanks guys. Appreciate it.

[Lourenco Goncalves:]

Nathan, before you go, just a reminder, you have an EBITDA target for Cliffs Natural Resource for the year of $170 million, in Q1 alone and Q1 is the frozen quarter, is the quarter that we are not shipping, because you can walk between here and your home country Canada, you know that.

[Nathan Littlewood:]

Australia, but yes.

[Lourenco Goncalves:]

Even with these difficulties, we are able to generate $94 million in Q1, so now based on your EBITDA target, I am $76 million away from reaching your EBITDA target and I have three quarters to do it, just a reminder.

[Nathan Littlewood:]

Sure. No problems. We will take another look at the model. Thanks for the feedback, Lourenco.

[Lourenco Goncalves:]

Yes. Take a look at your price target as well, because you went from 10 to 1, baked into your report the assumption that Cliffs Natural Resource by now would be bankrupt, so you were wrong. I am not bankrupt. I am not heading to bankruptcy. Your assumptions are all wrong and the outcome has been bad so far.

[Nathan Littlewood:]

Thanks Lourenco. I appreciate the feedback.

[Lourenco Goncalves:]

You are very welcome.

[Operator:]

Your next question comes from the line of Jeremy Sussman from Clarkson. Your line is now open.

[Jeremy Sussman:]

Yes. Thank you very much for taking my question. I just have one follow-up on coal. Lourenco, in terms of Oak Grove and Pinnacle, is this something that you want to sell together or would you consider selling each separately?

[Lourenco Goncalves:]

I would – Jeremy, thank you very much for the question. I would take any deal and we have different parties right now and we will disclose that, not all of the ones that are bidding at this point and negotiating with us are buying all the assets altogether. We have different transactions being considered right now. Our only goal is to optimize the results and get to Cliffs the best you can get.

[Jeremy Sussman:]

Thank you very much and it sounds like we have something to look forward to soon on that front?

[Lourenco Goncalves:]

Yes, you are right about that. Thank you.

[Operator:]

Your next question comes from the line of Jorge Beristain from Deutsche Bank. Your line is now open.

[Jorge Beristain:]

Good morning, Lourenco and again congrats on a strong quarter. My question really was two-fold. If you can just clarify a little bit what’s going on with the unit cost, because you admitted it’s hard given lower fixed cost absorption to lower cost sequentially, but there was some mention about freight costs being lower, could you just kind of walk us through how the lower freight costs helped your unit cost, sequentially?

[Lourenco Goncalves:]

Directionally, the USIO costs are being cut, because we are working towards improving the utilization of our lower cost operation basis, that’s the bottom line. You guys all know that we have one mine that has higher costs and that’s Empire. Empire for the one that have [indiscernible] we now that Empire is right now a big hole in the ground, it’s at the end-of-life of mine. We are approaching the end-of-life of the mine, we actually, we are working over time over there that mine should have been shutdown 2 years ago. If I were here 2 years ago, I would have shutdown that mine at the time and I would have not brought that mine back. It has been a very good operation over the course of several decades, but it’s coming to an end. So we refocusing our operations and refocusing our ability to produce the products that we produce out of four mines instead of five, that’s the main thing. The next big thing is that based on my background as an operator in the steel mill side and I was in the service center side and tied together with 30 doors extremely deep expense doing more or less the same thing that I have been doing through my entire career, we are working very seriously in expanding maintenance cycles and optimizing the utilization of equipment and changing the practice on the supply chain of spare parts, we are cutting costs in serious things. And it goes without saying that we are applying to the salary to workforce at the mine sites, this same logic that we are applying here at the headquarters in Cleveland. If you are not really doing something that will bring EBITDA to the company, chances are that your position is relevant. So, we continue to cut people at the top of the organization in our operations. So, our cost targets are achievable, are challenging, but very much achievable. And I have every single person involved in the effort completely committed to get it done and they know why they are doing that. On top of that, we have the energy rates that we continue to work very seriously to bring those costs down. We just finished recently to renegotiate our entire energy electricity situation initiative with extremely helpful work together with the office of the Michigan governor. And I believe we have got an excellent long-term deal. We are back to buying electricity from the Presque Isle – WI Energy, WI is Wisconsin Energy, the utility supply in the Upper Peninsula. We also in the meantime resolved the problem of the electricity rates in the entire Upper Peninsula even for the households over there, so creating a lot of goodwill within the community and again with invaluable support from Governor Snyder. So, we are working on all fronts to cut this cost and we will continue to accomplish all of our goals.

[Jorge Beristain:]

Great. And then second question I had was just on the volume outlook, how should we think about the optionality now on the outlook of some of your clients, AK Steel, particularly with the problems of Magnetation. Is this something that you are already in discussions with them about possibly supplying volumes that they would have otherwise taken in-house, could you comment about that and if you have the optionality to meet that demand?

[Lourenco Goncalves:]

Look, we have so few clients here at Cliffs at this point that we are always talking to the clients. We have only four. I do not know how much you followed me at Metals USA, I don’t remember anymore, I think you did, but you had thousands of clients already. I still used to talk to clients. So, here we have only four. I talk with clients all the time. And so we talk about a lot of things. So, yes, we are talking, but it doesn’t mean a thing, because it takes two to dance and there is a lot of history – recent history between AK and Cliffs. And we believe that the right things will always happen at the right time. So, we were not at an issues guy, I tend to plan ahead, I tend to execute in a very disciplined way. I always had my own thoughts about Magnetation. I had always understood why AK initiated the Magnetation investment and I can’t say that I was surprised with the outcome. This being said, if AK will buy these labs, if AK will buy pellets from Timbuktu Corporation, I have no idea. It’s AK’s decision. If they come to Cliffs, they know what they will get and they even know how much they will pay and they even know how good the quality of our product is, how superior our product is in compares not only with their in-house supplier, but with any pellet supplier in the world.

[Jorge Beristain:]

Okay, thank you.

[Lourenco Goncalves:]

You are welcome.

[Operator:]

Your next question comes from the line of Evan Kurtz from Morgan Stanley. Your line is now open.

[Evan Kurtz:]

Hey, good morning, guys.

[Lourenco Goncalves:]

Good morning.

[Evan Kurtz:]

I just had a question if you kind of look at a few years from now, it seems like Cliffs will be a U.S. only business. It will be involved in one commodity. It’s much more simple than the business that you have today. And you have cut SG&A at about $120 million this year. Where do you think you could go if we kind of look at a few years? What do you think the sustainable long-term SG&A cost will be for a USIO-only company?

[Lourenco Goncalves:]

Yes, they were 120. It still has the influence of people and work that’s done related to both APIO that if you are probably to stay for the next 3.5, 4 years and also North American coal, so we can further reduce these numbers going forward. How much? I don’t know at this point, Evan. I don’t have the number here from the top of my head. At the right time, we will inform. At the right time, you will be able to plug in your model. And maybe at that time, my numbers will look a little better in your mind, because you are the guy that has a low price stock price estimate, but you always have the higher estimate in terms of our profitability. So, you will always challenge me a lot, but I got a modest beat, right? You said that I got a modest beat. So, modest beat in Q1 is a very good thing in our model like yours that is designed for me to lose. So, as much as I permit to beat, I still beat. So, that was not a bad thing.

[Evan Kurtz:]

Okay. Well, believe it or not I am actually waiting for you, Lourenco. So, hopefully, you continue to do so. A similar question actually on the CapEx side, you have cut pretty significantly here. How sustainable is that if you go out three years again? Is there some CapEx that has to come back into the equation to keep those four mines running optimally or some of the other businesses falloff? How do we think about where that number moves to?

[Lourenco Goncalves:]

Yes, look if we materialize and I believe – fully believe that we will do materialize our production of DRI in Minnesota. If we do that, of course at DRI, a new DRI facility in Minnesota is not baked into our CapEx numbers. On the other hand, there is more investments that we need to deploy in order to give Northshore the capability to produce DR pellets are not only baked into the number, but they are also being authorized. They are in the process of being deployed. So, it’s a mix. At this point, we have our CapEx number that is limited to the footprint that we have and the short-term plan that we have ahead of us. Of course, as we go bigger into the electric arc furnace side of the business, I am fully confident that we will – we are going to revise these CapEx numbers up. And all of these numbers will be calculated based on return on assets, return on investment capital in the right metrics, will not be decisions taken based on how our stock price is doing. Actually, because if I used the stock price as a reference, I will be in trouble, I can’t buy lunch, I have to sell lunch to buy dinner, but I used the real metrics. We have got to really use the real returns and the ones that payoff over time. There was that payoff to real investors and that’s the way we do business here.

[Evan Kurtz:]

Great. Thanks for that, Lourenco.

[Lourenco Goncalves:]

You are welcome.

[Operator:]

Your next question comes from the line of Timna Tanners of Bank of America. Your line is now open.

[Timna Tanners:]

Yes. Hey, good morning.

[Lourenco Goncalves:]

Good morning, Timna.

[Timna Tanners:]

So, gosh, every single question I was going to ask has been addressed and with great answers really thorough details. So, I thought I could just – the only thing I thought might be helpful is really to hear a little bit more on the really nice cost saving in USIO and just making sure we are confident or give them as much detail as possible on the sustainability. If we do forecast longer term prices recovering, should we assume that this cost structure is permanent or there are variables that would have to go up over time? Thanks.

[Lourenco Goncalves:]

Alright, Timna. Let me introduce you to a person that you don’t know yet. That’s Mr. Kelly Tompkins, my second in command, my most valuable player here at the company, and I am extremely happy that I finally have my management team all placed with the players in the right spot, so Kelly, please? Timna Tanners is a research analyst of Bank of America Merrill Lynch.

[Timna Tanners:]

Nice to meet you.

[Kelly Tompkins:]

Yes. Likewise, but I think we have met at on one of my other capacities, Timna, but...

[Timna Tanners:]

Okay.

[Kelly Tompkins:]

But I think Lourenco touched on some of these earlier. He talked about the maintenance practices that we are implementing and now there has been some question are we just simply deferring maintenance, no we are improving our maintenance practices, so it’s sustainable. We are continuing to rationalize solid workforce, for example, irrespective of what we might do to idle and taking out rank and file, we have been equally disciplined with the management team. Lourenco talked about the aggressive work we have done on the energy side. So there is a constant pursuit of our operational improvements, productivity initiatives and when we reaffirmed our cost guidance for USIO that was not Lourenco and I sitting in a room making that up ourselves. This is the operating guys, a completed buy in from the top-down to the bottom of the organization. So we feel very confident. As we mentioned before, we have got a very experienced team that knows exactly how to stay out there, so we are very confident these are sustainable.

[Timna Tanners:]

Okay, that’s helpful. And then Lourenco I know when I saw you last time, you had just come from the conference in Australia and you were saying that the Australians seem to have a different view than the Chinese about steel production and they were targeting a higher number, but maybe your tone has changed a little bit and you seem to be – you stand a little bit more confident at least that maybe there is change in their view point, they are going to produce little less, can you give us a little bit more color around your change in thinking?

[Lourenco Goncalves:]

Sure. I will be glad. In order to deploy massive amounts, billions of dollars of CapEx, you need two things. One is, return on invested capital; two, our market to sell the products. If you have the return on invested capital, you have a chance. If you have a market for your product, then you will put one plus one together to get a two and it will grow. In the case of the deployment of CapEx from Australia, it’s a lot more of lip services and empty threats and bad advertisement and the [indiscernible] out of everybody than anything else. Think about the port bottlenecking of BHP. They said that they could optimize without the bottleneck without deploying the money. They said whatever they would like to say, but at the end of the day they did not only have $600 million of investment just to go from $270 million for $290 million in 2017, so there is a lot of that that money talks and other stuff walks. So there is a lot of false story going on over there trying to take big one out of the picture, because you are not part of the original party. Remember through 2009, iron ore prices were negotiated with the Japanese and then with the Chinese and also with the Europeans. Based on the benchmark negotiations and the benchmark negotiations used to be more or less like Vale speaking on behalf of the three with the Europeans and Rio Tinto is speaking on behalf of the three – with the Japanese and then the Chinese became bigger and the Chinese said I am not going to follow the Japanese, I am going to do my own thing and then Vale Steel negotiated on behalf of the Chinese and then Stern Hu went to jail in 2009, the guy that was the head of the Rio Tinto office. In Shanghai, he was arrested and accused of taking bribes and he was accused of stealing government secrets or steel company secrets in order to sell positions based on the allocation of iron ore under the benchmark system. Then the benchmark system was replaced with the IODEX, which is an index that is very easy to move around not by Cliffs, not by Fortescue, not by Mount Gibson, not by ferrous natural resources [ph] in Brazil or not by Samarco, but easily manipulated by Rio Tinto, BHP and Vale. So in other words, if one of the three decides that they will sell iron ore this afternoon, $10 a boat the IODEX, with the tonnage that they sell already, they can move the IODEX. So when the board members of these three companies realized that, and I promise you, very few of them if any know that when they realize that that these three companies can move the IODEX around, you are going to see a lot of Monday morning quarter backing going on in these companies. And these Board members who will not have the ability or the courage or the craziness to approve the deployment of billions of dollars just to bury money, good money in a market that can’t pay for their return – pay any return for their investment of capital. That’s my thesis. My thesis is, that.

[Timna Tanners:]

Okay.

[Lourenco Goncalves:]

No, I am not okay. I am not done yet.

[Timna Tanners:]

Thank you.

[Lourenco Goncalves:]

My thesis is that they are strengthening capital expansion that they are not planning to deploy because I cannot believe. I do believe in stupidity, but I do not believe in this stupidity for a long period of time. Example, Cliffs Natural Resources, here in this company they buried close to $9 billion in debt investments and I am sure that during that time that the previous Board was deploying billions and billions of dollars of capital here using as they the only metric the share price, they were extremely happy and they were tapping each other on the back and telling each other how great they were until the outcome was a disaster. So I do not think that BHP and Rio Tinto or Vale will do the same thing. I believe that common sense will come back and we are going to start looking at the size of that things really have. So and the size that things really have is Rio Tinto is the bigger supplier of Australia with 200 and something million tons and that’s pretty match it. And Vale is the biggest one among all with close to 300 million tons and BHP is a 200 million tons supplier and Fortescue is 125 million tons and Roy Hill may come and may not, they would be 55 million tons, they will come, but maybe 55 million tons or 40 million tons or 25 million tons or and Hancock Properties will continue to collect a lot of rights from Rio Tinto, that is good. They will naturally go to the right direction, because the way IODEX is an index that can be moved by three companies Vale, BHP and Rio Tinto. If they do not move, the IODEX is because they do not want, but if these three companies do not want to move the IODEX, they are basically taking money away from their shareholders and their Board members need to know that. Did I answer your question?

[Timna Tanners:]

Yes, thanks. I just was wondering incrementally it sounds like if things remain difficult you are more convinced that rational behavior given it’s the rationalized market will prevail, is that what you are saying?

[Lourenco Goncalves:]

I am convinced that as soon as the board members of the Rio Tinto, BHP and Vale realize that they are enabling their management teams to do something that goes against their shareholders at least one or two or three or five, we will get scared because their fiduciary doing is associated to that. That’s what I believe. I also believe that ACCC, the antitrust authority is fair competition authority in Australia should be taking a serious look about their behavior already instead of looking about what Mr. A, or Mr. B, or Mr. C said on this or that circumstances, because what people say is not as important as what people do. I believe what they are doing is on purpose and I believe that what they are doing is not right. And I believe that they are generating a lot of unemployment in Australia and that should have serious consequence for the years to come.

[Timna Tanners:]

Okay, thank you for sharing that. That’s interesting.

[Lourenco Goncalves:]

Good. One more question, then we are done Shannon.

[Operator:]

Your final question then comes from the line of Gordon Johnson from Wolfe Research. Your line is now open.

[Gordon Johnson:]

My question and Lourenco congratulations on the execution thus far, impressive execution.

[Lourenco Goncalves:]

Thanks.

[Gordon Johnson:]

I guess the first question is just on I guess the rationality of the large iron ore producers. I remember back in 2012, when kind of some of these plans were announced we had heard a lot that a lot of the plans are going to be delayed and indeed these guys executed on the ramp plans. So I guess just given where their cash costs and manufacturing costs are, at least that they are reporting, can you comment on how long you think it will take them to be more rational, could it be a year, could it be 2 years or do you think it will happen sooner. And then secondly, could you just comment on your operating cash flow this quarter, it looks like it was the lowest it’s ever been, is that something that we should expect as a one-time kind of dynamic, was there something maybe that happened this quarter that caused it to be so low versus where your net income was? Thank you.

[Lourenco Goncalves:]

Everything related to the cash flow is related to seasonality, Gordon. You haven’t been in this business long enough. And there is a lot of things that you do not know. I am looking forward to our dinner tomorrow here in Cleveland, when I really plan to spend time explaining you that Cliffs is not a high cost producer. We are actually a producer of value added products called pellets and pellets go into blast furnaces and not sinter feed slides that go into sinter plant, but we will talk about that tomorrow. But the cash flow thing is all about the seasonality. And the Q1 is completely different from Q2 and Q3 and Q4. And even Q2 and Q3 and Q4 are not exactly the same, but there is a lot of seasonality associated to our business. As far as rational behavior, I do not believe in rational behavior. I really believe in Board members when they really – it’s a kind of term that come to Jesus thing, a moment of truth, when the Board member say oh my god what have I been doing, because it happened here at Cliffs. So it has happened here at Cliffs, but then the guys were so committed with their bad strategy. They did not know how to get out of their hole. So I was the guy that helped them out at the end of the day. And they went out a lot better than for example their former present CEO of Rio Tinto that was after January of 2013 that left with no severance after a write-off of $14 billion. So things in this business, Gordon, they are not exactly the way they look like. Of course they are big. Of course, they have a lot of capacity. But that’s not the point, because they always had a lot of capacity, they always were big, but they never really went on a rent to basically terrorize, everyone else say, well I produce a lot, but I will produce a lot more and that’s what’s pushing prices down. Prices are not going down because Rio Tinto is big or Vale is big or BHP is big, prices are going down or price are not going down is not because they are doing expansion, because they are in their rights to do that. But prices are going down because they advertise everyday that they are doing the expansion. It’s the tactics of scaring everyone else. It’s the tactics that plays well for the future markets that are based on the IODEX and that is manipulation of an index. If it were the LIBOR, people would go to jail, but because it’s the IODEX, people do not go to jail. But shareholders that realized what’s going on they may take action. And that’s what I am talking about. So when are they going to be rational, when they get scared. When are they going to get scared, I do not know. Did I answer your question?

[Gordon Johnson:]

That does answer my question. That’s very helpful. I guess, one more question if I could, and it goes to I guess the rationality question somewhat. In Q1 if you look at the big four producers, Rio, Vale, BHP, SMG, their overall production of iron ore was down I think more than a lot of people expected, I think it was down roughly 30 million metric tons, yet iron ore prices fell Q4 to Q1 roughly 12% on average. And I think for the first time since, I think 1990s in Q1 demand actually for iron ore in China was down, so could it possibly be if demand in China is down this year, which would mark the first time since the 80s that maybe demand is also having an effect on iron ore prices? And thanks again for the questions.

[Lourenco Goncalves:]

Look, Gordon that’s actually my point. You nailed on this one, because demand is down. If demand is down, there is no point in announcing expansions. Even if you are doing, if you believe that with your expansions you are going to displace in the future, you are going displace while you call the higher costs producers when you compare bananas-with-banana of course you are not compared with the Cliffs USIO. We produce pellets here. We will address that tomorrow at dinner. But when you are talking about producers of sinter feed fines, displacing producers of sinter feed fines that’s exactly what happens. So you are completely right. Demand is going down, so that’s the wrong moment to be trying to create or trying to announce more capacity, because that would have a dilatory effect. On the other hand, at a very minimal announcement that or we are not doing. We are not deploying this capital, we are not doing this thing, that what’s happened when the BHP in a very sympathetic way told everyone that they are not willing for deploy $600 million in CapEx, because that was not the right decision to make. So the only factor, the simple fact that they announced that and iron ore price went up despite of the Chinese demand that’s going down, despite of everything that you said, so it’s all about perception. It’s not about reality, it’s not about what Cliffs – I am sorry about what Vale or Rio Tinto or BHP or Fortescue are producing now. The market is okay for what they are producing now. What the markets is not okay is for this thing, you know what, I am going to double this. I am going produce a lot more ore, but China is going down production, I do not care. I am going to flood China with more products, that’s wrong. That’s absolutely wrong. It cannot end up well and the consequences will be all paid, all of them will be paid in Australia, it’s already started, especially in WA. WA is Western Australia is where the iron ore basically is, so the consequences there are unbearable. I am not talking about Cliffs’ Koolyanobbing. We are small. We are in the paper today, because we changed our fly-in, fly-out, because we are no longer exploring the Windarling Peak, so we are in the newspaper over there. And I gave the number of unemployment there. We are talking down 170 people. Fortescue in the paper as well, they didn’t give the number. BHP is firing people, Rio Tinto is firing people. So they think there is thinking. And I am not talking about the guys that already shutdown like Aereo, or Mount Gibson, like several others, Atlas. So what they are doing with Australia is something that they will be responsible for. And they are doing that on purpose. They are basically terrorizing the market with the prospect of CapEx that at the end of the day will not be deployed. Do you know why it will not be deployed, because Board members are a lot more responsible than CEOs, they are not bullish, they have fiduciary duties and they are responsible for what actions they take, if they do, they will responsible. Alright?

[Gordon Johnson:]

Very helpful. Thank you.

[Lourenco Goncalves:]

Thank you, Gordon. Thank you very much for joining the call and to stay with me for so long. Kelly and I are looking forward to continue our conversation with each of you and we will speak again in three months. Thanks a lot. Bye now.

[Operator:]

This concludes today’s call. You may now disconnect.